Chipotle Mexican Grill Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2022

There are 15 speakers on the call.

Operator

Good day, and welcome to the Chipotle Mexican Grill Second Quarter Fiscal 2022 Earnings Conference Call. All participants will be in a listen only mode. 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 with Investor Relations.

Operator

Please go ahead.

Speaker 1

Hello, everyone, and welcome to our 2nd By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website atir.chipotle.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 outlook and our actual results could differ materially from the projections in the forward looking statements. Please see the risk factors contained in our annual report on Form 10 ks and in our Form 10 Qs for a discussion of risks that may cause our actual results to vary from these forward looking statements.

Speaker 1

On our discussion today, we 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 Niccol, Chairman and Chief Executive Officer and Jack Hartung, Chief Financial Officer, after which we will take your questions. Our entire executive leadership team is available during the Q and A session. And with that, I will turn the call over to Brian.

Speaker 2

Thanks Cindy and good afternoon everyone. We are pleased with our 2nd quarter performance during a period of inflation and consumer uncertainty. For the quarter, sales grew 17 percent to reach $2,200,000,000 driven by a 10.1% comp. In store sales grew by 36% over last year. Digital sales represented 39% of total sales.

Speaker 2

Restaurant level margin was 25.2 percent, an increase of 70 basis points year over year. Adjusted diluted EPS was $9.30 representing 25% growth over last year and we opened 42 new restaurants including 32 Chipotlanes. I would like to spend a couple of minutes providing insight into current trends and our outlook. Regarding Q2 through mid May comparable sales were on track to The top end of our guidance range. Since then, the underlying trend has decelerated and we anticipate mid to high single digit comps for Q3 with planned pricing in August.

Speaker 2

There are a couple key things we have learned during the quarter. Our pricing power is strong and the brand is resilient. Our culinary and food with integrity commitment is a key point of difference. Our restaurants are staffed with terrific people despite a difficult hiring and retention environment And our people are still getting up to speed on running a growing multimillion dollar digital business as well as a growing multimillion dollar in restaurant business. To accelerate this learning curve, we are instituting an ops initiative focused on being brilliant at the basics.

Speaker 2

We did this in 2019 and saw a positive impact on the business right up to the pandemic in 2020. I will discuss this in more detail later. And finally, we are focused on the right strategies. It is as important as ever that we remain focused on our 5 strategies that help us to win today while we create the future. Now let me provide a brief update on each of these strategies in restaurant and digital experiences.

Speaker 2

Number 2, amplifying technology and innovation to drive growth and productivity at our restaurants and support centers. Number 3, sustaining world class people leadership by developing and retaining diverse talent at every level. Number 4, expanding access and convenience By accelerating new restaurant opening and number 5, making the brand visible, relevant and loved to improve overall guest engagement. Let's start with discussing running successful restaurants. I'm happy to say that I've seen lines out the door and mobile pickup shelves full in Boston, Philadelphia, Denver, Austin, Ann Arbor, Dallas, Cincinnati, London, Paris and Los Angeles.

Speaker 2

I think everybody gets the point. Fortunately, we were staffed with terrific employees and growing in restaurant business. However, customers were waiting on digital orders and the frontline was moving, but it could have been quicker. I know we can be better. This is why we have launched an ops initiative focused on retraining our crew members on the fundamentals of our business.

Speaker 2

These fundamentals include having great culinary prepared and ready to serve, open to close, in a food safe environment, ensuring that restaurants are staffed and appropriately deployed across both the digital make line and front make line, improving order accuracy and timing for the digital business and increasing throughput in hospitality for the in store business. Additionally, we completed the rollout of our new labor management tool that helps put the right people in the right place at the right time. We believe the combination of being brilliant at the basics with a new labor management tool will drive meaningful productivity in our restaurants. Along with our labor management tool, our technology roadmap remains robust. I think it is worth highlighting how we are investing in technology to We've deployed a new learning management system that enables immersive ways for employees to experience training and provides digitally enhanced e learning courses, videos and resource materials.

Speaker 2

We also are in the process of updating our POS hardware across the system, which should be completed by this year and we have made DML enhancements that aid accuracy and throughput. These recently completed or in flight programs will all be positive for our restaurant teams and guest experience. Additionally, we will continue to invest in possible technology for the future like Chippy, The autonomous robot we are testing that integrates culinary traditions with artificial intelligence to help our teams make tortilla chips, bringing up their time to serve and support our guests. And we are exploring an automated real time kitchen production system that ensures high quality food is always available to meet the needs of our guests. We are interested in a breadth of innovations including sustainable farming, supply chain advancements, restaurant operating efficiencies and ways to elevate the employee and guest experience.

Speaker 2

We've received a lot of interest with over 200 inquiries for investments. And as you may have heard last week, we announced our first investments in Hyphen and Meaty. ICEN is a food service platform that automates the assembly of meals on a make line and could help fulfill our promise to deliver on time accurate orders for our digital guest. We We look forward to sharing more investments in the future that will help us drive meaningful change at scale. I do want to take a moment to discuss our people.

Speaker 2

Despite a challenging labor market, I am proud to say our staffing levels remain above 2019 levels. Our purpose of cultivating a better world with food with integrity has created a brand that people are proud to represent and be part of. We continue to offer a world class employee value proposition that includes industry leading benefits, We believe these efforts along with our growth and purpose are helping to attract and retain great employees. And our people development program is important in order to accelerate our new restaurant openings. The real estate pipeline remains strong and supports our target of 8% to 10% new restaurants per year with more than 80% including the Chipotle lane.

Speaker 2

We now have 430 Chipotlanes and results continue to exceed our expectations with Chipotlanes generating higher average unit volumes and higher restaurant level margins. In fact, a recent opening of a Chipotle in a small town in California had one of the highest opening day sales in the company's history. In addition to the U. S, we are also excited about our progress in both Canada and Europe. Canada has hit its stride with AUVs and returns that are at the same level as the U.

Speaker 2

S. And Canadian comparable sales trends remain strong. We currently have 29 locations in Canada and longer term we see room for several 100, which is included in our target of 7,000 restaurants in North America. And Europe continues to move through the stage gate process. We have made significant progress in improving the economics in Europe driven by operational efficiencies, adding our digital systems and opening smaller formats that resemble the U.

Speaker 2

S. Restaurants. We have opened 5 new restaurants in the UK over the last 18 months and results have been strong. We are gaining confidence that Europe could be another layer to our growth story in the future. This brings me to making the brand visible, relevant and loved everywhere we operate.

Speaker 2

Our Real Food for Real Athletes campaign focuses on helping athletes across all levels perform their best by providing proper nutrition through real food and real ingredients. As an official sponsor of the NHL, we activated this relationship through traditional media and creative promotions to that showcases how Rose Lavelle and Sophia Smith overcame the challenges of competing at the highest level of women's soccer. And later this year, We will follow the U. S. Men's national team via our sponsorship and with advertising during the World Cup.

Speaker 2

We also continue to appear in non traditional channels to drive difference, And ultimately a purchase. We recently launched Burrito Builder on Roblox on National Burrito Day. The first 100,000 players to successfully roll a virtual At a virtual Chipotle earned a free entree on our app. This led to one of our best digital sales days and marks the first time A brand enabled Roblox player to earn and exchange virtual Roblox currency for real world items. Okay.

Speaker 2

Moving on to the menu, our pipeline remains robust. Building upon the brand's recent success with menu innovations, Including smoked brisket and pollo asado, we have tested and successfully validated garlic cojillo steak and this steak is ready for rollout in the future. Shifting to our digital experience, we now have a digital business tracking toward $3,500,000,000 in sales and we currently have over 29,000,000 rewards members. We are mining the data every day for insights while leveraging the information to influence behavior and drive greater frequency. We're also working aggressively on greater personalization across the customer journey and obtain valuable insights on which incentives provide the greatest ROI.

Speaker 2

Additionally, we're excited about the recent launch of the rewards program in Canada, which will provide another way for Canadian guests to engage with the brand and provide Chipotle with the ability to further delight its Canadian Rewards members. Finally, our digital ecosystem is rolling out in the UK and France will follow shortly thereafter. To conclude, there is much uncertainty we are all dealing with, but what I am certain about is Chipotle and its people will remain committed to leading I'm certain that over time we have the ability to grow our average unit volumes and achieve at least 7,000 restaurants across the U. S. And Canada.

Speaker 2

I'm certain that we will move our purpose of cultivating a better world forward in a meaningful way. I'm certain that Chipotle provides one of the best value propositions Industry, I'm certain that we have the right teams with the right focus to navigate whatever comes our way and that our culture We'll continue to offer our crews terrific career opportunities. Finally, I'm certain that we are well positioned for long term growth. Lastly, and very importantly, I want to thank our restaurant teams for their hard work and contributions to making Chipotle one of the best restaurant brands in the world. With that, here's Jack to walk you through the financials.

Speaker 3

Thanks, Brian. Sales in the 2nd quarter grew 17% year over year Earnings per share adjusted for unusual items was $9.30 representing nearly 25% year over year growth. 2nd quarter had unusual expenses related to certain legal proceedings, Our previously disclosed 2018 performance share modification, transformation costs as well as restaurant asset impairment and closure Mostly offset by an unrealized gain on investments, which negatively impacts our earnings per share by $0.05 leading to GAAP earnings per share of $9.25 Regarding our sales trends, as Brian mentioned, we were on track for comparable sales to reach the upper end of our guidance range for the first half of the quarter. Since then, we've experienced a step down due to a combination of macro pressures, our ability to handle the growth with relatively new workforce and And return to normal summer seasonality for college based restaurants. For perspective, about 15% of our restaurants are in college towns and we've not seen normal seasonality in 3 years.

Speaker 3

Looking ahead to Q3, with pricing from last year rolling off, our current trends in July are running in the mid single digit range. Assuming current sales trends continue, we expect our comp to be in the mid to high single digit range, which includes our planned August pricing increase of about 4% to help offset incremental inflation pressures, especially in dairy, tortillas and packaging, as well as pockets of wage pressure throughout the country. I'll now go through the key P and L line items beginning with cost of sales. Cost of sales in the quarter were 30.4%, about flat to last year. The benefit of menu price increases offset elevated costs across the board, most notably in avocados, packaging, dairy, beef and chicken.

Speaker 3

In Q3, we expect our cost of sales to be about 30% of sales as the benefit from the menu price increase will be partially offset by the higher cost of dairy, tortillas and packaging. Labor costs for the quarter were 24.8 percent, an increase of about 30 basis points from last year. This increase was driven by our decision to take a meaningful step up in wages last May, which is partially offset by menu price increases. In Q3, we expect our labor cost to be about 25% due to leverage from our menu price increases, offsetting pockets of wage pressures across the country. As Brian also mentioned, we have now completed rollout of our labor management tool.

Speaker 3

While our teams are still learning how to use the tool, we believe it has the potential to lead to better deployment to both make lines during peaks, which we think will eventually lead to better throughput on our front serve line and better on time results for the DML. Other operating costs for the quarter were 14.3%, a decrease of about 90 basis points from last year. This decrease was driven by menu price increases as well as a decline in delivery expenses, partially offset by higher costs across several expenses, most notably utilities, including natural gas. Marketing and promo costs for the quarter were 2.5%, 10 basis points above last year. In Q3, we expect marketing costs to remain in the mid-two percent range with the full year to average right around 3%.

Speaker 3

In Q3, other operating costs are expected to be in the mid-fourteen percent G and A for the quarter was $141,000,000 on a GAAP basis or $130,000,000 on a non GAAP basis, Excluding $7,000,000 due to the settlement of certain legal matters, dollars 3,000,000 related to the previously disclosed modification to our 2018 performance shares and $1,000,000 related to transformation expenses. Ginnie also includes $106,000,000 in underlying G and A, We expect our underlying G and A to be around $111,000,000 in Q3 and continue to grow slightly thereafter As we make investments in technology and people to support ongoing growth, we anticipate stock comp will be around $25,000,000 in Q3, Although this amount could move up or down based on our performance, bringing our anticipated total G and A in Q3 to around $136,000,000 Appreciation was $70,000,000 and we expect it to remain at this level for the rest of the year. Our effective tax rate for Q2 was 25.3 percent For GAAP and 25.1 percent for non GAAP. For fiscal 2022, we estimate our underlying effective tax rate to be in the 25% to 27% range, though it may vary based on discrete items. Our balance sheet remains healthy as we ended the quarter with $1,200,000,000 in cash, restricted cash and investments with no debt along with a $500,000,000 untapped revolver.

Speaker 3

During the Q2, we repurchased $261,000,000 of our stock at an average price of 13.50 We increased our level of stock repurchases during the quarter when our share price fell with the market overall and we'll continue to opportunistically repurchase our stock. During the quarter, the Board authorized an additional $300,000,000 to our share authorization program. At the end of the quarter, we had $320,000,000 remaining. We opened 42 new restaurants in the quarter, of which 32 headed Chipotlane. The performance of our Chipotlane continues to be strong, maintaining record high new store productivity.

Speaker 3

In terms of development, we continue to navigate various challenges, including construction and permitting delays and material shortages. However, our team has done an outstanding job of anticipating these challenges and mitigating delays where possible, and we still anticipate opening Once we move beyond these development challenges, we expect to be able to accelerate openings and get closer to the high end of the 8% to 10% opening range. In closing, I've experienced Chipotle's resiliency over the past 20 years through both great times and challenging times, and I share Brian's confidence in our ability to navigate the current environment. Looking forward, I'm excited about the growth opportunity ahead of us with a runway to more than double our restaurant base and grow AUVs beyond $3,000,000 with a 40% flow through. I I want to thank our 100,000 employees in our restaurants and in support roles for their continued effort and commitment to Chipotle.

Speaker 3

With that, we're happy to take your questions.

Speaker 2

Thank you.

Operator

We will now begin the question and answer session. And the first question will be from Nicole Miller with Piper Sandler. Please go ahead.

Speaker 4

Thank you. Good afternoon. Hoping you could talk a little bit more about labor in terms of staffing. In the context of AUVs being up Versus 2019, well, more than 20%, just because you had mentioned that in regards Staffing levels in regards to 2019 today, are you suggesting that it needs to be more efficient in terms of labor or that You need more bodies in terms of staffing, like how does it compare to the context of the AUV increase, if that's applicable?

Speaker 2

Yes. Hi, Nicole. The way to think about it is, obviously, our labor model reflects our increase in transactions and sales. So we look at it as, is the restaurant staffed at model given the volume and transactions that the restaurant has. What we're referring to is the percentage of restaurants that are staffed correctly is better than what we where we were in 2019.

Speaker 2

That's what we're referring to. And then what we're talking about is obviously a lot of the people that have joined our company over the last 2 years, They really haven't experienced the frontline and what it means to grow that in restaurant business, while also growing the digital business. And That's why Scott and the operators are focused on ensuring that everybody is brilliant at the basics to execute our growing two lines business.

Speaker 4

Okay. And then just can you briefly discuss in terms of last year's 15% comp, How things tracked in July, August September, so we can understand a little bit about what to think about compares from the prior year period?

Speaker 3

Yes, Nicole, this is Jack. You'll remember that in the Q2 of last year, we did have a staffing challenge That's when we took the significant increase. So we did compare during part of the quarter to a little bit of a softer Comparison, but as soon as we announced in May, I think it was like around mid May that we were increasing wages. And right at that moment, we started paying the higher rates as new people were coming in. And the announcement that we made at that time Was also a signal to our existing teams that you're going to get a raise in early June.

Speaker 3

So we saw staffing stabilize and then we saw Our sales recover. So we did have a several week period during the quarter, but we did have a little bit softer compares.

Speaker 4

Okay. And how about July, August September of last year? The comp was 15% last year, right, in the Q3. Is there anything how did that look?

Speaker 3

Those were I would call those normal comparisons. By then, our staffing had stabilized. And Yes. Those are tougher comparisons.

Speaker 4

Okay. So each month was kind of 15%, there was no notable difference between the months?

Speaker 3

Yes. Listen, they vary month to month, but there was nothing during the quarter that I would tell Makes that comparison, I would say if anything, Nicole, just compared to Q2, it's just a little tougher of a comparison Overall,

Speaker 2

but each month was fairly

Speaker 3

£18,000 all over the place.

Speaker 2

£18,000 all over the place. Okay.

Speaker 4

Thank you.

Operator

And the next question is from David Tarantino from Baird. Please go ahead.

Speaker 5

Hi, good afternoon. I wanted to ask you a couple of questions about the comp trend. I guess, I first wanted to understand How you're thinking about the slowdown you saw towards the end of the quarter? And I know you rolled over some pricing, so maybe had some less Pricing contribution, but you seem to be also pointing out some operational challenges that may have caused that. And I guess, how do you determine whether it's that versus maybe just a general slowdown in consumer spending, if you will?

Speaker 2

Yes. Hey, David. Obviously, it's hard to tease out some of the macro pressures versus What we're seeing as far as people peeling off the line for potentially not being happy with Additional order time, but what we've definitely seen, as I've been out visiting, Scott's been out visiting restaurants, and when we talk to our Leaders in the field is we've got a lot of new people that are still getting trained up on frankly The basics of great throughput. And I feel like this is rinse and repeat, but that's what our business is a little bit, which is We got to have our aces in places. You got to have the expediter.

Speaker 2

You got to have the linebacker. You can't Work around those things to try and service the business. And we just have a lot of new people that don't understand how important some of those roles are, as well as general managers too. Like A lot of these managers have gotten promoted over the last 18 to 24 months. So we know there is upside in Taking the combination of this new labor tool, deploying people correctly and then ensuring that those people are trained and actually experience what grade throughput looks like.

Speaker 2

That's the other biggest thing. A lot of these folks haven't experienced what how fast the line can move. So I think in some cases, Folks think they're moving pretty quick when in fact we could be moving a lot faster.

Speaker 5

Got it. And Jack, could you help us understand what your transaction levels or growth was In the Q2 and what your Q3 guidance implies on that metric?

Speaker 3

Yes, David. The transactions were up in Quarter between 3.5% 4%. We also had a mix shift. We didn't talk about that for a number of quarters now. As our business has moved more towards in restaurant, the average group size, well, the mix shift was about a negative 6%.

Speaker 3

The average group size dropped by about 4.5% and that drop is mostly a drop from the business moving from digital into in restaurant. So, as we move to Q3, we do expect that because of the downturn that we saw the macro effects in the second quarter, We do think that transaction comp will ease a bit, but we also think that the negative mix shift should ease a bit as well.

Speaker 5

And Jack, one clarification. When you say ease, do you think it will stay positive, I guess, or does your guidance Assume it's positive or are you thinking

Speaker 3

David, it's going to be right around slightly positive or right around flattish, right around in that range.

Speaker 5

Okay. Thank you very much.

Speaker 3

Thanks, David.

Operator

The next question comes from John Glass from Morgan Stanley. Please go ahead.

Speaker 6

Thanks very much. My first question is just to maybe clarify a little bit more, why seek more pricing now? It seems like your margins are where you thought they should be. You're sort of balancing the inflationary impact versus pricing and you're also now confronting a weaker consumer. So Why now versus maybe letting some pricing lapse and maybe waiting longer and just out of the abundance of caution?

Speaker 6

Maybe your thoughts on that, please. Yes.

Speaker 2

What we've seen is, unfortunately, a lot of things have stuck versus Gone away as far as inflation. And then we've got some key items that have frankly continued to be inflationary. And I I think Jack highlighted it right. We've got avocados, we've got dairy, tortillas, some packaging. So unfortunately, we were hoping we'd see some of the stuff pull back.

Speaker 2

We We haven't seen

Speaker 3

that, but there are other parts of

Speaker 2

the business that we have seen plateau, which gives us optimism that hopefully We won't have to continue to pull the pricing lever. And I think you've seen this with us. We really do try to wait Until we truly understand what feels like is something that's an ongoing cost that we need to handle with pricing Versus, hey, we're going to wait this one out and see if it pulls back. So we figured best to share where our heads are on this one now.

Speaker 6

I appreciate that. On thinking about your softness that you experienced post May, Was there any particular part of the business that it showed up in first? I'm thinking, did the delivery channel, for example, exhibit weakness? What Piece of the business decelerated more than others and was there any signal in that in terms of the behavioral change of the consumer? Yes.

Speaker 2

I think what we saw was probably not all that different from what people have been saying. The low income consumer definitely has pulled back their purchase frequency. Fortunately for Chipotle, That is not the majority of our customers. The majority of our customers are the higher household income consumer. We've actually seen their frequency Increase and potentially not experience, I'm guessing, some trade down from other areas where they were Choosing to get their meeting occasion.

Speaker 2

So probably the first indicator was in our, I'll call it, our rewards data, Where we saw some of these low income consumers starting to slow down on purchase frequency.

Speaker 6

And not necessarily impacting the delivery channel specifically, which One might think of as being an expensive Yes.

Speaker 2

No, no. Actually, that's been pretty stable You're out.

Speaker 3

Okay. Thank you.

Operator

And the next question is from David Palmer with Evercore ISI. Please go ahead.

Speaker 7

Thanks. Just a question, a follow-up question on the topic of mix and The impact of essentially number of people per order, one casual dining company out there said that Family seem to be getting back to pre COVID summer behaviors. So perhaps that family orders that happened last summer are going away as they get back to doing Some of those other activities, do you think is it possible for you to see that in the numbers or in any of your insights data that Perhaps there's almost a seasonal headwind that's going to be particularly bad here over the summer and it coincided with that, not just economics?

Speaker 3

I mean, David, there is the other thing that we saw was even a group size in restaurant Did decline a little bit. It didn't decline as much. Overall, the decline was in that 4.5% range and it was bigger. The bigger piece of that is a shift from digital to in restaurant, but even within the in restaurant customers, the group size did shrink a little bit. So I don't know if I would connect those dots, but if you're seeing other evidence that families are returning to the way that they would dine 3 years ago where they're not all getting together and dining together, that could be at play.

Speaker 3

We also for the first time in 3 years saw A normal college seasonality, meaning the college restaurants really performed exceptionally well during the school year because they were all in person. And then we saw a normal kind of seasonality that we haven't seen in 3 years where the college students go back home and they tend to eat less. I don't know if that's more mom's home cooking, but they When we track the individual customers, they tend to visit Chipotle to a lesser degree when they're away from college than at college. So we are definitely seeing some normalization under the overall trends.

Speaker 7

And in the past, you've talked about an incremental Margin framework, maybe something like 35% to 40% would be normal. Obviously, the first half has been below that, particularly in the Q1, Maybe catching up to it a bit here in the Q2. With the four points of price you're talking about, do you feel like you're going to be getting back to that sort of incremental margin from here on out?

Speaker 3

That's right, David. In fact, that's exactly why we did what we did. We still have some additional Inflation that we're going to see carry into Q3 for tortillas, dairy, packaging and some known increases related to beef We've known for a while. All those rolled into Q3 and really what this allows us to do is when we get up to this, we've talked about a $3,000,000 average volume and then our Margin should be somewhere in the 27% range. That gets us back to that kind of a situation and the pass through for every Incremental sales dollar we get in to be right back to that 40% -ish flow through that we talked about in the past.

Speaker 8

Thank you.

Operator

The next question will be from Sara Senatore with Bank of America. Please go ahead.

Speaker 9

Thank you. I wanted to ask about throughput, and I know a lot has changed as we think about transaction baskets. But historically, you've given some estimates about peak hour throughput. And I just wanted to see if you could give some context around Where you are now, especially now that you have a second make line, whereas previous peak would have been mostly the front make line. And is there a way to kind of quantify what Improving throughput could do for transactions, to your point about not losing people off the end of the line, is there sort of a framework we can think about that says Yes.

Speaker 9

One transaction per hour is equal to a point of comp or something like that. I'm just trying to understand if as we think going forward, The guidance for transaction contemplates any improvement in throughput.

Speaker 2

Yes. I mean, so here's one of the things that we have done Because you point out that we've now got this multi $1,000,000,000 digital business, multi $1,000,000,000 in restaurant business, we've separated out The metrics for the frontline and the digital make line. And we've got very specific on the digital make line is about being on time and accurate. On the front line, it's about throughput. And we believe on that front line, we can get back to where we were, Let's check like 2014, 2013, where we were in the high 20s, low 30s.

Speaker 2

On a 15 minute On a 15 minute basis, that's what we're going back after. And that's why it's so important. We really kind of did this exercise back in 2019, and we were starting to see it pay dividends in kind of early 2020, and then unfortunately, COVID hit. And so we're confident that if we can get our team members to understand what it means to be, call it, rush ready In their places and ready to go, there's no reason why we can't get back to those high 20s, low 30s on a perfect team in a basis. I don't know if we've Talked about exactly how the transactions translate into sales.

Speaker 2

I don't know if you want to jump in.

Speaker 3

Well, here's what I would say about that, Sarah. It's hard to tease through and find out when you increase. Let's say you move from like 22 to 27, okay, that's a 5 Entre increase. As a perspective, each 5 trends every time you add 5 transactions, that's percent of comp, Okay, for that day. We're measuring the fastest 15 minute period.

Speaker 3

So what we believe is that when you go faster in 1 15 minute period, you're going to go faster in multiple 15 So the opportunity to add quite a bit of comp is there. But to Brian's point, we just need to get more reps. We have a lot of folks that Really haven't been on the front line. They haven't even managed a restaurant when we had the in store business coming back the way it is today. So but we believe that there's definitely the opportunity To add some meaningful comp here.

Speaker 9

That's super helpful. Thank you. Sorry, just one follow-up on mix. Was there any sort of Lower attachment or anything like that or it's strictly the sort of lapping the order aggregation?

Speaker 3

No, I mean the only thing I would clarify And that Sarah is, there is a higher attachment rate to digital. And so when you see people move from digital to an in restaurant Visit, then you also see a return to less attachment. We're also by the way, we are seeing higher drinks. The fact that we've got We are seeing more drinks. And just to give you a perspective, about 40% of our transactions In restaurant included a drink, only about 20% or slightly less than that of a digital transaction.

Speaker 3

So as we've seen this shift, there's been a positive Shift as well, but not enough to offset the lower group size.

Speaker 9

Thank you so much.

Operator

The next question is from Jared Garber from Goldman Sachs. Please go ahead.

Speaker 10

Thanks for the question. I wanted to just ask about menu innovation. Brian, I know you mentioned that the guajillo steak is sort of past its It's a stage to be processed and ready for launch whenever that may be. But wanted to also get a sense if you could update us on the other item that's in test, The Mexican cauliflower rice and how you think about maybe more permanent menu item as a plant based base For consumers over time?

Speaker 2

Yes. Obviously, we're very interested in that New way of eating. And I think we mentioned this in our earlier comments, we've invested in A plant based company called Meaty. And the idea is how can we continue to find Plant based items that are consistent with our food ethos that also are delicious from a culinary standpoint. We've obviously done the cauliflower rices.

Speaker 2

We have the sofritas that's on our menu all the time. I'm optimistic that hopefully we can find Another center of play or call it center bowl solution that's plant based, which we haven't done to date, right? It's really been The plant based to read so the cauliflower, these things have been more perceived as, I would say, a piece of your bowl versus the centerpiece of your bowl. And so That's what we're working towards and I'm excited to see what we learn as we partner up with Meaty and actually our culinary team continues to work aggressively in the space.

Speaker 10

Thanks. That's helpful. And then just one follow-up on the throughput, which seems to be a little bit of the topic of the day. Is there anything similar across maybe either geographies or store basis that you're seeing Throughput as more of a challenge, maybe that's an urban thing or a suburban thing. Just curious what you guys are seeing in terms of Any read across or tie ins across the geography?

Speaker 10

Thanks.

Speaker 2

Yes. No, really you're not seeing that. I'd say probably The experience is where we see the biggest difference. We have restaurants That are doing $6,000,000 $7,000,000 that team has been together for years. And When as soon as kind of all the COVID restrictions went away, they went right back to running Chipotles really successfully.

Speaker 2

And that's why we're so confident in so much opportunity and just getting people, the reps, Getting them trained up on the basics and then frankly just for them to experience the success that they'll have by following these basics. So ultimately, what we're really after is the better throughput actually results in a better employee experience as well. We probably should talk about that a little bit more because our employees then are more successful. And then obviously they give a great experience to our guests. But Yes.

Speaker 2

I'd say the biggest thing and fortunately, we have experienced managers all over the country, so we don't see any variability from like region or Suburban, urban. It's more along the lines of we just got to get more people trained up.

Speaker 10

Great. Thanks for the color.

Operator

Next question is from Andrew Charles with Cowen. Please go ahead.

Speaker 8

Great. Thanks. Brian, can you talk a little bit more about how Chipotle plans to flex value in the menu in the current consumer backdrop as you run double Pricing while lapping what looks like about 10% price in the back half of twenty twenty one. I know early in your career snacking and looking at the shoulder period between 2 and 5 p. M.

Speaker 8

Was an opportunity. Is that something that you think applies to Chipotle just given the background for lower income consumers?

Speaker 2

I really believe The value proposition in what we sell today is our strongest proposition. We look really hard at this. When you look at A chicken burrito, steak burrito and you compare that to your alternatives, the value is there. And so if I think we execute great accuracy and being on time and we execute great throughput, That's our winning formula. That is the value proposition that wins.

Speaker 2

And that's why we're very much focused on executing our basics. The basics drive our value. So great culinary, customized And then with food with integrity is a winning value proposition for all income levels.

Speaker 8

And my follow-up question is just on another one on culinary. Just talking a little bit more just around Pollo Asado and the ability to keep that on the menu. I know it's a higher margin, Obviously tested very well and it's done very well for you guys. Is the plan to keep that permanently? It's gone a little bit longer than a typical limited time offer would run.

Speaker 2

No, the plan is not to keep it permanently. I think we've talked about this. Ideally, we like having menu news 2 to 3 times a year. And if we get some that can carry longer, we stay with them longer. But That will eventually be coming out here in the next couple of months and hopefully we'll have some other menu news that gets people equally as excited.

Speaker 8

We look forward to it. Thank you.

Operator

Next question is from Lauren Silverman from Credit Suisse. Please go ahead.

Speaker 11

Thank you for the questions. On unit growth, so on track to accelerate unit growth 8% to 10%. Can you talk about what you expect with respect Cannibalization and just the trade off between unit growth and comp?

Speaker 3

Yes, Lauren. We measure The impact and we don't see we've never seen impact go above a 1% comp impact. We've seen it kept 0.7, 0.8 something like that. So it's still very, very manageable. And so every time we do a deal, We go through a routine where we have an algorithm where we measure what we think the impact is going to be.

Speaker 3

Our team does a really good job Measuring that is still an estimated part science, but we look to do deals that are going to give us a superior after impact Return. So we're not looking to put restaurants right on top of each other and cause excessive impact, but there's just a lot of white space out there Phil, we with this idea of getting from 3000 to 7000 restaurants, we've modeled that after our 3 or 4 or 5 Most dense markets and those are markets that we already have the density that represents what we would be on a national basis at 7,000 restaurants. Those restaurants are very high volume and very high return restaurants.

Speaker 11

Great. Thank you for that. And then just On potential AUVs, AUVs are now running at $2,800,000 high end of restaurant peers. You've talked about the opportunity for increased throughput, 40% of sales going through the secondary digital make line. How are you thinking about peak AUV levels and where that can go?

Speaker 11

Is there a level where it makes more sense to open another

Speaker 2

Restaurant. Yes. Look, I think one of the things that's truly special about Chipotle is We are not capacity constrained with our frontline or digital make line. So I mentioned, right, there's restaurants doing $5,000,000 $6,000,000 $7,000,000 And obviously, it presents an opportunity for us to build a lot more restaurants without having really meaningful impact, but I think it also just demonstrates the 4 walls that were already running Chipotle has tremendous upside as well. So I'm feeling really confident we're going to get past $3,000,000 and I'm sure we'll probably be talking about how we get to $4,000,000 at some point.

Speaker 2

But I'd first like to get past the milestone of $3,000,000 We can celebrate that milestone. And the good news is,

Operator

And the next question is from Dennis Geiger from UBS. Please go ahead.

Speaker 12

Thank you. Brian, a quick follow-up on throughput question again. Is there anything else to share on sort of that opportunity to get back 2030 and throughput for 15 minutes. Can you do that in the current staffing environment? And is it really more about training The ops initiative that you mentioned as well as the experience I think of the teams working there.

Speaker 12

Just trying to get a sense for how generally quickly Gains can happen across the large system as we think about through, any way to kind of frame that up for us?

Speaker 2

Yes. Look, I think the good news is we have lots of opportunity to execute what we know Are the basics of great throughput, right. Like unfortunately, I've gone into a lot of restaurants and we don't have our expediter in place. That is a key piece of the puzzle. And the good news is our operation leadership It's very much focused on explaining to people how important that expediter goal is.

Speaker 2

Because if you're new, you can see why you would think, oh, maybe I can flex that person, When in fact that's the last person you want to be flexing if you want to

Speaker 13

really achieve great, great throughput.

Speaker 2

So look, the good news is Staffing is not a barrier. Frankly, the barrier we have to get we have to overcome is getting people to experience what it's like to run a restaurant With everybody in the right place doing the right role through a peak. And obviously, it will take a little bit of time, but That's something that we can train, people can experience. And like I mentioned, we saw a lot of progress on this when we did this back in 2019. So I'm confident we can get focused and get the reps and then get the execution that then results in the comp growth.

Speaker 12

That's great. And then you spoke to this some, but I just wanted to ask a little bit more on resiliency, sort of your expectations for resiliency, Increasingly difficult macro environment, the brand meaningfully outperformed in 2008,000,000 and 9. Obviously, you've been extremely resilient and brand strength over the last several years. But anything you could kind of highlight maybe differences or similarities now versus Prior tough economic periods where the brand has outperformed and just broadly anything additional that you could add on sort of resilience for the brand from here? Thank you.

Speaker 2

Yes, sure. Well, look, I think probably the thing that's common when you look back to what we're seeing right now is the strength of our higher income That's a common factor. So even though the lower income consumer is slowing down, We've not seen that happen with our higher income consumer. And fortunately for Chipotle, we over index with higher income consumers. And then I think the other piece of the puzzle too is now we've got a database of probably 29,000,000, 30,000,000 people where we can hopefully be on the front end of what is happening out there so that we can Hopefully pivot and communicate correctly with our customers.

Speaker 2

And what we've heard over and over again is our value proposition is Our greatest strength, meaning terrific food or terrific culinary, unbelievable customization. If you want it digitally, it's on Time, right, and it's accurate. And if you come into our restaurant, you love the customization and the speed at which you can get. So Good news is, it's a lot of similarities of what we've seen in the past. The one thing I know for sure is something will be different.

Speaker 2

So That's why I think it's important to talk about just how resilient the organization is to also handle whatever unexpected headwind we'll deal with.

Speaker 12

Thank you very much.

Operator

The next question is from John Ivankoe from JPMorgan. Please go ahead.

Speaker 14

Hi, thank you. Hopefully a slightly different take on the throughput question. Is your throughput is it constrained at the 12 to 1 and 6 to 7 kind of classic times That you used to be busy or are there kind of pockets throughout the day, I guess is kind of the first main question. And secondly, If there are just certain hours where your throughput constrained because of staffing, I guess what does the store manager, what does the system do? I mean people obviously don't want Coming in work for an hour shift or even a 2 hour shift, does the brand have the flexibility?

Speaker 14

Does the model have the flexibility To bring people in for 4 to 8 hours to maybe cover a couple of busy hours. So just kind of walk us through, I guess, the practicalities of actually staffing That store that front make line or the second make line during those 15 minute windows or those hour windows as it were where you really are Capacity constrained.

Speaker 2

Yes. Well, first, just so you know, we're not capacity constrained at 12 to 1 or 6 to 7 or 1 to 130. The good news is we've got capacity in every 15 minute increment. Now your question about how do you best deploy so that you have the right amount of people in place ready to go, That's really the reason why we've implemented this new labor tool. It's going to do just that, right?

Speaker 2

So it's going to go ahead and take a look at like this restaurant It's slammed from 11 to 11:45. This restaurant is slammed from 12 to 12:30. This restaurant has a really big dinner business. So It takes into that account so that we deploy the right amount of people against those peaks. We're not Capacity constraints, so if we can get the people at the right time in the right position, our throughput is going to go up.

Speaker 2

For a second there, John, I thought you worked for Cronos.

Speaker 14

And Brian, and just so by capacity constraint, it's capacity constraint For the given number of employees that you have on that given shift, not for the overall box itself, I get that.

Speaker 2

Okay. Okay. Yes, yes. And that's exactly what this is supposed to help us address. So that you don't end up with You're understaffed from 11 to 11:45 and you're overstaffed from 12:45 to 130.

Speaker 2

The idea is We get our people in the right places at the right time. So and that's the tool that we just rolled out and now we're training against the tool to ensure people are in their place So that we execute the maximum throughput we can in each of those 15 minutes.

Speaker 3

And just to add on, Brian, the tool also recognizes like where is the business, how much is digital, how much is the frontline? Yes, 2.2. Our old tool wasn't that sophisticated. And so if one restaurant had a 20% digital, another has Our Chipotlanes have 55% to 60% digital. The staffing model is very different for those two things.

Speaker 3

So our ability to really put Exactly the right people with the right skills at the right times throughout the day to drive throughput has never been better. Now this is a brand new tool. It's like learning how to drive a Ferrari. When you first get in the car, there's it's a very, very highly sophisticated Tool, and so we're learning how to use that, but the capabilities are much higher than what our previous tool allowed.

Speaker 14

And No, thank you for that. And if I can, obviously, this wouldn't be rolled out in the system unless it obviously went through the extensive operational stage gate System, I mean, how big of a pilot did you do for the system before you decided on the system wide rollout? And how effective Was it in that collection of pilot stores?

Speaker 2

Yes. So look, we've been piloting this for over 2 years And we did really the bulk of the rollout for the last, probably, 6 months across our restaurants. It's a new tool for our teams. The good news is it's not a new tool for our organization to manage, train against and Get people to use it to its best ability. Look, there is a change management process though in anything.

Speaker 2

No matter how good it is, Sometimes people really like the old approach better even though the new approach is going to help them perform So we're going through the change management process as any organization would. But the good news is we've done the due diligence on the front end So that as we learn things, and we're dealing with 100,000 people, so I'm sure we will learn some things even beyond our pilot. We have the know how though to pivot

Operator

will be from Chris O'Cull from Stifel. Please go ahead.

Speaker 13

Thanks. Good afternoon, guys. I had a follow-up on the value question That was raised earlier. It seems like a potential scenario could be where commodity prices start to ease, traffic continues to soften for the industry and that would cause some Change to be more aggressive with either price led value promotions or even maybe new value menus to kind of reset their pricing. I'm just wondering how Chipotle might respond If discounting or menu resets like that were to start to impact that value gap it has with the competitive set?

Speaker 2

Yes. Look, obviously, if our value proposition changes dramatically, we have to reevaluate How we're providing our customers value. I haven't seen it happen yet. And when you go back and look at the 20 plus years of Company, the thing that drives the best value with our customers is this commitment to food with integrity, It is this commitment to culinary and then it's this commitment to getting you exactly what you want. So I'd be hard pressed to believe We would want to abandon what makes us Chipotle.

Speaker 2

And my experience as well as what I've seen in the company is Our value proposition is very strong. So long as that is the case, we're going to keep doing what we know drives value with our customers.

Speaker 13

Fair point. Jack, I apologize if I missed this in the presentation, but can you speak to the level of inflation you're seeing in construction cost? And maybe describe some of the most common challenges you're seeing with hitting project timeline?

Speaker 3

Yes. The timeline, it's a myriad Challenges, sometimes it's permitting, sometimes it's contractor labor, like if somebody has call outs or exclusions because of COVID exposures, That will slow down a deal as well. And then materials as well. I mean some of the electronics like for some of our HVAC, walk in coolers, Things like that have been a real challenge. So it's been a myriad of challenges.

Speaker 3

The pipeline is really, really strong. That's what gives me great confidence that not only will we It's between the range this year, but when these things ease, our pipeline is still there and we'll be able to accelerate from there. In terms of the inflation, it's at least in the several percent range, maybe even more than that. The deals have varied throughout the country, But definitely our investment costs this year are much higher than they have been in the past and higher than we expected them to be.

Speaker 13

Great. Thanks, guys.

Operator

Ladies and gentlemen, this concludes our question and answer session. Would like to turn the conference back over to Brian Niccol for any closing remarks.

Speaker 2

All right. Thank you. And thanks everybody for joining and all the questions. Obviously, we're very proud of our results. I think it speaks again to the resiliency of both the Chipotle brands, All of our employees out in every restaurant, their ability to execute great culinary, great throughput.

Speaker 2

And I also think it speaks to the strength of our value proposition. So I know there's a lot of uncertainty out there. I said this in my earlier remarks. The thing we spend our time on are the things that we can control, the things that we're certain about. And what I am certain about is Chipotle has got great people running Restaurants that do food in a different way.

Speaker 2

And we continue to give people great access through digital And great throughput on the front line with good hospitality. I think we'll continue to be rewarded with more business. And we're proud of where we are and we're really excited about where we're going. Obviously, we'll see what comes next, but I think we're ready and we'll continue to do what we know how to do best, which is make great burritos, great bowls and Hopefully, we continue to delight our customers so that they come back over and over again. So thank you for taking the time, and we'll talk to you all in 3 months.

Operator

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may

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Earnings Conference Call
Chipotle Mexican Grill Q2 2022
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