Chipotle Mexican Grill, Inc.

Good day, and welcome to the Chipotle Mexican Grill second quarter 2025 results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a 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 second quarter fiscal 2025 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 projections, 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 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 Scott Boatwright, Chief Executive Officer, and Adam Reimer, Chief Financial Officer, after which we will take your questions. Our entire executive leadership team is available during the Q&A session. And with that, I will turn the call over to Scott.

Thanks, Cindy, and good afternoon, everyone. In the second quarter, our restaurant teams did an extraordinary job of executing in a challenging environment, including delivering exceptional food, throughput, and hospitality, as well as managing their controllable costs. Additionally, we are beginning to see some of the benefits of our back-of-house initiatives as we complete the rollout of the produce slicer. Now let me review our second quarter results. Sales for the second quarter grew 3% to reach $3.1 billion, including a negative 4% comp. Digital sales were 35.5% of total sales. Restaurant level margin was 27.4%, a decline of 150 basis points year over year. Adjusted diluted EPS was 33 cents, a decline of 3% over last year. And we opened 61 new restaurants, including 47 Chipotle lanes. I will start with an update on our current trends. While we experienced a slowdown in our underlying trend in May, we did see momentum build as we rolled out our summer marketing initiatives and leaned into hospitality. And exiting the quarter, we returned to a positive comp and transaction trends, which have continued into July. However, considering the ongoing volatility in our trends in the consumer environment, we now anticipate comparable sales to be about flat for the full year. With that said, we have a strong plan to build on our industry leading value proposition and accelerate transactions. The fact is most markets for around $10 before taxes and fees, you can get a handcrafted chicken bowl or burrito filled in abundance with the best ingredients made fresh in our restaurants using classic culinary techniques at a speed at which you cannot find anywhere else. This is a 20 to 30% discount to comparable fast casual meals and often below comparable meals at many quick service restaurants. Going forward, we will roll out new and creative ways to emphasize our value proposition while improving the benefit of our offering through better execution, menu innovation, and amplifying our rewards program, which we'll get to in just a few moments. First, I will review our five key strategies that will help win today while we grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences, making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement, amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and our supply chain, expanding access and convenience by accelerating new restaurant openings in North America and internationally, and sustaining world-class people leadership by developing and retaining top talent at every level. I want to reiterate that we have a lot of opportunity to drive consistent transaction growth over the upcoming years as we execute against the first three of our five key strategies, or our flywheel of operations, marketing, and digital experience. Starting with operations, we recently appointed Jason Kidd as Chief Operating Officer. He's off to a tremendous start and brings a wealth of knowledge and vast operational experience at large-scale multi-unit retail. I have no doubt that he is the right person to lead and inspire the 130,000 people that make up our restaurant teams and that he will also bring new strategic thinking to our executive teams. This quarter, I am pleased to say that we continue to make progress around throughput execution as the percentage of restaurants with an expo in place is now over 70%. In addition to coaching and training around the four pillars of throughput, we just completed the rollout of the produce slicers across all restaurants, and we are starting to see back-of-house benefits as it enables our teams to complete prep on time and be properly deployed for their peak periods. In addition to the slicer, we have begun rolling out the high-efficiency equipment package, which includes the dual-sided plancha, the three-pan rice cooker, and the high-capacity fryer. We anticipate this rollout will create a more scalable Chipotle with many benefits, including an improvement in the consistency and quality of our culinary and an increase in prep efficiencies that will help our teams be properly deployed for peak, driving faster throughput. This will lead to a better team member and guest experience and potentially could unlock additional growth platforms for our business like catering. For the rollout, we plan to do a phased stage gate approach and we anticipate by the end of year, the high efficiency equipment targets will be in hundreds of restaurants, including the sub region where we plan to introduce our catering test in the fall and all new restaurant openings beginning in the fourth quarter. Based on our learnings, we can accelerate the rollout later this year, and we estimate it will take around three years to complete across all existing restaurants. We also recently opened a new restaurant innovation space where we have a team working on emergent technology that rethinks our tools and processes holistically rather than as bolt-on additions. Currently, this includes a high-efficiency equipment package, our augmented digital make line, avocado, and a vision system. Ultimately, we aim to identify the ideal technology and operating model to enhance culinary standards, improve the team and guest experience, and drive higher returns in our restaurants. The next pillar of our comp flywheel is marketing, or making Chipotle more visible, more relevant, and more loved. Over the last two summers, we have experienced a slowdown in trends as our guests typically step out of their routine and our marketing spend seasonally slows. To increase visibility and drive engagement, we made the decision to ramp up our summer marketing strategy and meet our guests where they are by doubling our reach in social and streaming, adding incremental menu innovation, and launching our first ever seasonal program for rewards members called Summer of Extras. This has been successful in driving an acceleration in our underlying trends. In terms of menu innovation, Chipotle Honey Chicken has the highest incidence rate of all of our limited time offers and is included in one out of every four orders. The guest feedback has been very positive. It will certainly be another LTO that we will bring back in the future. We also introduced Adobo Ranch last month, which is our first dip in five years. This is our smoky, spicy twist on classic ranch, made fresh in our restaurants, and featuring only real ingredients. It is delicious, easy to execute, and off to a great start driving incremental transactions. We see more opportunity in sides and dips in the future, and we'll have more to share as they make their way through the StageGate process. In social, we leverage user-generated content to launch a tatted like a Chipotle bag BOGO, which is one of our best performing BOGOs ever. despite only being available for one hour as it drove more than double the sales of a normal 3 p.m. to 4 p.m. timeframe. Additionally, while the BOGO was only in store, the over 100 million social impressions had a media halo effect, driving more guests into our digital channel, making it a highly incremental promotion. Based on the learnings and success of the recent marketing initiatives, and as we start to think about 2026 and beyond, I believe we have a lot more opportunity to increase visibility, highlight our value proposition, and add incremental menu innovation that drives consumer relevance and love for the brand all year long. Finally, as I mentioned earlier, we will be testing a new catering platform this fall in a sub-region of about 60 restaurants. The test will include the high efficiency equipment package to help expedite prep and increase capacity. It will also include a new technology stack to help load balance orders across restaurants, as well as a full marketing push to drive demand into catering. Our goal is to scale the catering business within our restaurants without disrupting the core operations. With catering at just about 1% to 2% of sales versus our peers, who are at 5% to 10%, we think this could be a big opportunity longer term. Shifting to the final piece of the flywheel, the digital experience. We continue to find ways to enhance our app functionality to provide a seamless experience for our guests. This includes a recent update to the app providing the ability to personalize multiple message offerings such as rewards, reminders, and menu suggestions. Within rewards, about 20 million members are active or have transacted at least once in the last year. To drive more people into our loyalty program, we are ramping up our enrollment campaigns and signage, both in restaurant and digitally. We also recently launched Summer of Extras, a three-month gamified experience with extra points, badges, and prizes as our rewards members reach milestones. Results have been very encouraging as we drive more people into the rewards program and increasing their frequency and spend year over year. We have another exciting program planned for the fall targeting the college cohort, and we will continue to find creative ways to drive enrollment and improve engagement. When you layer all these opportunities within the flywheel, we are confident in getting back to mid single digit comps and surpassing $4 million in AUVs longer term. And our 40% flow through remains intact with the potential for additional margin opportunities as we continue to improve the back of house experience. Now moving to expanding access. In the U.S. and Canada, we opened 61 new restaurants, which marks our record for the second quarter. We now have 61 restaurants in Canada, and over the last five years, we have nearly tripled the business with economics on par with the U.S. In the U.S. and Canada, we remain on track to open between 315 and 345 new restaurants this year, with 80% concluding at Chipotle. We are also confident in our ability to grow new restaurant openings between eight and 10% and to reach 7,000 restaurants longer term. We are also establishing a solid foundation in other international markets, which will enable Chipotle to extend its growth runway for decades. In Europe, economics continue to progress with positive consumer feedback on the improvement in the experience, including the quality of the culinary. Our head of Europe and Canada is doing an excellent job of building the team and culture to be able to scale, similar to what she did in Canada several years ago. In the Middle East, our restaurant in the Avenues Mall in Kuwait completed its first year of operations, with revenue surpassing the average unit volume in the United States. We have five restaurants open in Kuwait and Dubai, and Al Shaya Group plans to accelerate growth in the back half of the year. We remain on track to open our first restaurant with Alsea in Mexico early next year and continue to evaluate other potential partnerships in different parts of the world. Based on our progress in our current markets and discussions with partners, we have a lot of confidence that Chipotle's fresh, craveable culinary, served fast will resonate around the world. Finally, moving to sustaining world-class people leadership. We are often asked if there are parts of the Chipotle story that are underappreciated. And I believe there are two, our purpose of cultivating a better world and our culture of people development. Not only does our purpose give our teams pride in what they do every day, but with around 80% internal promotions, our teams can visualize their own growth within the organization, which is critical as we scale and build the brand. The growth of our Canadian business is a notable example. Our team director in Canada has been with Chipotle for 23 years. She started as an apprentice general manager in Texas and then moved to Canada to become the first field leader in the country. Her deep connection with her teams and her ability to develop and grow future leaders stood out, which led to her becoming Canada's first team director about five years ago. She decided to accelerate growth in the country. She has now developed eight of our 10 field leaders within the region and is an inspiration to our Canadian restaurant teams who see her path as achievable. This is what Chipotle is all about, cultivating a better world by not only expanding access to our delicious fresh food, but by creating life-changing opportunities for our people along the way. To close, I want to thank our teams for all their hard work bringing the Chipotle culinary experience to life each and every day. I am optimistic about our operational improvements and early results and learnings from our summer marketing initiatives, which we will use to enhance our value proposition moving forward. I continue to see so much opportunity ahead by leveraging our flywheel of operations, marketing, and digital to drive our EVs north of $4 million longer term. Additionally, we will continue to invest in our restaurants and back house initiatives to create a more scalable Chipotle as we grow to 7,000 restaurants in the US and Canada and making our way to becoming a global iconic brand. This will require an exceptional team of people committed to paying homage to our culinary beginnings and our purpose while focusing on our long runway of growth ahead. I am confident that we have the right team and a clear strategy to achieve this ambitious goal. With that, I will turn it over to Adam.