Operator:

Good afternoon, and welcome to the Chipotle Second Quarter Fiscal 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being record. I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead.

Brian Niccol:

Thanks Cindy and good afternoon everyone. Before I begin discussing our results, I need to recognize and congratulate Jack Hartung on his nearly 25 years with Chipotle and roughly 80 earnings calls with all of you. I want to thank him for being a great friend, a terrific leader and a champion for our purpose and brand. I'll say a few more words about Jack and Adam before I hand it over to him. Now, turning to our results. The second quarter was outstanding as successful brand marketing, including the return of Chicken Al Pastor as a limited time offer drove strong demand to our restaurants. Additionally, our focus and training around throughput paid off as we were able to meet the stronger demand trends with terrific service and speed in -- driving in – driving over an 8% transaction comp in the quarter. For the quarter, sales grew 18% to reach nearly $3 billion, driven by an 11.1% comp. In-store sale grew by 24% over last year. Digital sales represented 35% of sales. Restaurant level margin was 28.9%, an increase of 140 basis points year-over-year. Adjusted diluted EPS was $0.34, representing 36% growth over last year, and we opened 53 new restaurants, including 46 Chipotlanes. Before I give an update on our five key strategies, I want to take a minute to address the portion concerns that have been brought up in social media. First, there was never a directive to provide less to our customers. Generous portion is a core brand equity of Chipotle. It always has been, and it always will be. With that said, getting the feedback caused us to relook at our execution across our entire system with the intention to always serve our guests delicious, fresh, custom burritos, and bulls with generous portions. To be more consistent across all 3,500 restaurants, we have focused in on those with outlier portion scores based on consumer surveys, and we are reemphasizing training and coaching around ensuring we are consistently making bowls and burritos correctly. We have also leaned in and reemphasized generous portions across all of our restaurants as it is a core brand equity of Chipotle. Our guests expect this now more than ever, and we are committed to making this investment to reinforce that Chipotle stands for a generous amount of delicious, fresh food at fair prices for every customer, visit. The good news is that we are already beginning to see our actions positively reflected in our consumer scores and our value proposition remains very strong. We believe our focus on operations, including throughput as well as terrific marketing and menu innovation, have strengthened the brand and our value proposition. And we will continue to listen to and treasure our guests to earn every transaction. I will turn to our five key strategies that help us to 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 an 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 love to improve overall guest engagement, amplifying technology and innovation to drive growth productivity at our restaurants, support centers and in our supply chain and expanding access convenience by accelerating new restaurant openings in North America and internationally. First, I will start with running successful restaurants. As I mentioned, the improvements we have seen in throughput positions us well to meet the strong demand we experienced in the second quarter, driven by what we call burrito season or our peak seasonality as well the success of Chicken al Pastor. We often are asked why throughput is such an important operational KPI for Chipotle. So I thought I would begin by expanding on this. It is the outcome of a strong operational engine that delivers a great experience for our teams and our guests. In order to deliver exceptional throughput, restaurants need to be fully staffed and properly deployed. Our crew needs to complete all food prep on time and they need to be well trained execute the four pillars. This results in a better overall experience for our crew, which leads to more stability and, therefore, more experienced teams that execute better every day. And for our guests, faster lines with hotter, fresher food. This type of guest experience strengthens our value proposition and drive incremental transactions. Over the last year, we have improved our tools and training to deliver exceptional throughput. This included rightsizing the cadence of digital orders during peak periods and enabling our restaurants to see in real time at the point of sale, the number of entrees in each 15-minute interval. This has received tremendous feedback from our restaurant teams. It has helped to accelerate momentum as it creates excitement and allows our teams to celebrate in a moment when they achieve their goal. And our GMs can coach in the moment when they fall short. In fact, one of our field leaders in New York have 5 five of his eight restaurants achieved their throughput goal in the second quarter, which compares to just one of his restaurants a year ago. While we are seeing progress, we still have a lot of opportunity to increase the percentage of restaurants executing the four pillars. Expo is a great example as it is the most impactful pillar. As a reminder, Expo is the crew member between Salsa and Kash, who helps expedite the bagging and payment process. restaurants within Expo in Expo in place are averaging five incremental entrees in their peak 15 minutes, yet we only see a little over half of our restaurants with place during peak periods. This is certainly better than where it was a couple of quarters ago, but it should be a lot higher. The good news is that I strongly believe we have the right leaders in training in place to keep the momentum going as we continue to gather the data on the execution of the four pillars and provide feedback and coaching on a weekly basis, I am confident throughput can go much higher. This brings me to world-class people leadership. As we mentioned last quarter, crew and GM turnover is at some of the best levels I've seen since I joined the company. And the stability is allowing us to develop and grow our people pipeline to achieve our goal of promoting over 90% from within. We have many inspiring stories at Chipotle of crew members who have grown with the company to become some of our top leaders. In fact, our recently promoted regional Vice President started as a crew member 25 years ago. She moved to the United States at 14 years old without knowing English. At 19, she started working at Chipotle and has moved her way up, including spending time in a language development role, supporting other employees at Chipotle to learn English as a second language. Her people-first mentality is what has made her so successful at hiring, developing and retaining many of our best leaders. And she has two sisters that have each been with Chipotle for over 15 years and our top-performing field leaders. With the addition of her role, we now have three of our 10 regional vice presidents who started as crew members and have made their way up to leading a region and managing over a $1 billion business. These stories really do inspire our entire organization, as the opportunity to develop and grow within Chipotle, along with our industry leading benefits and pay, enables us to attract and retain exceptional people. In fact, as we look to expand to 7,000 restaurants in North America, we will be adding an RVP nearly every year along with hundreds of restaurant leadership roles. Finally, our 50-to-1 stock split

Operator:

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from David Tarantino with Baird. Please go ahead.

Jack Hartung:

Thanks David.

Brian Niccol:

Why don't I start and then Jack can fill in. The -- look, first of all, David, I would tell you the quarter was really spectacular. And when we look at brand metrics, they've never been stronger. So, value, food scores all the key metrics to make sure that the brand is in a good spot really continue to improve throughout the quarter. And then from an operating standpoint, I don't know if you've been to our restaurants recently, but I think the teams are doing a terrific job on continuing to deliver quick culinary grade throughput. And then, obviously, we mentioned in our earlier comments, we've doubled down on making sure we're also providing great portions, which is, I think, a key equity for this business as well. One of the things we've seen, which is consistent with what we saw last year, is this kind of seasonal move with kind of the summer change of behaviors. And so obviously, we're trying to understand what that looks like because it appears to be new trends since coming out of COVID. So, that's one piece of the puzzle. And then obviously, we're trying to understand if there are any macro things going on as well. But the one thing we know for sure is the feedback on the business from our customers has been great value, great culinary and improving speed. And those are the things we can control, and those are the things we're going to forward. Jack, I don't know if you want to add anything.

David Tarantino:

Great. Thank you very much.

Sara Senatore:

Thank you. First of all, congratulations to both Jack and Adam. I've enjoyed working with both of you, but the question I have first is just a quick follow-up. If you could just maybe talk a little bit about the composition of the price mix and how you're thinking about that going forward, given some of the reinvestments that you are making? And then also wanted to get a sense of store growth and how that is progressing. Just I know there have been endemic problems across the industry, but the goal was to get the growth rate higher and perhaps into that 10% range next year. So, any updates there? Thanks.

Sara Senatore:

Got it. Thank you. And just pricing for the rest of the year?

Sara Senatore:

Thank you.

Dennis Geiger:

Great. Thanks very much, and Jack and Adam, congratulations to you both. Just wanted to ask Jack a little bit more on the margin commentary that you made, specifically as it relates to some of that pressure over the coming quarters. If you could dive in a little more to some of the moving pieces there, and maybe some of the efficiency offsets that you spoke to? Thank you.

Dennis Geiger:

Just to move from Chicken Al Pastor.

Dennis Geiger:

Yes.

Dennis Geiger:

Make sense. Thanks and congratulations.

Peter Saleh:

Great. Thanks. I did want to ask about labor, if I could. I think, Brian, I think you mentioned a little over half of the units with an expeditor during peak hours. What's the holdup in terms of expanding the expeditor to more units, because it feels like that's a key driver of throughput? Is labor just really tight? Is there a lot of turnover? Just any thoughts around that would be helpful. Thank you.

Operator:

The next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Brian Niccol:

Yes. So, look, there's a lot there. But I'll start with -- I think I've said this over and over again. The thing that we need to make sure we do really well is great culinary, great burritos and bulls and treasure every single guest that comes into our restaurants, whether it's in-line or online. And when we do that, we see our value scores our brand become more loved. And one of the things that I keep an eye on closely is, are we gaining market share? And what's great to see is we're gaining market share every month, okay? So as we stay focused on executing Chipotle's core business, we see the results not only in the comp and transactions that we're delivering, but also the market share gains that we're making. And I've said this before Chipotle is not built on this idea of promotional footballing prices, okay? Chipotle is built on this idea of great culinary, exactly how you want it and with great speed. And look, we’ve had a simple idea. Great food done fast. We keep executing against that simple idea. I think we'll continue to get market share. And I think our value scores will continue to go up and our team will continue to be successful. And -- obviously, we've got to let other people play how they want to play. We're going to play our offense throughout process.

Sharon Zackfia:

Hi. Good afternoon. Thanks for taking my question. I guess just following up on that. I think in the prior few quarters, you had talked about kind of outperforming amongst lower-income consumers. And I apologize if you mentioned that, it's a really choppy connection on my end. But are you still seeing that kind of strength across income cohorts? And on the Brisket, is that something we should expect, Jack, to impact the fourth quarter as well? Thanks.

Jack Hartung:

Yes, Sharon, what I can tell you is there will be an impact, but there's other things going on as well. So, our food costs -- we expect our food cost to be similar in Q4 as Q3. So, not another up.

Operator:

The next question comes from John Ivankoe with JPMorgan. Please go ahead.

Jack Hartung:

Yes, and thanks for the question. Obviously, we're really excited about Python and the automated digital make line. We will have that in a restaurant probably here at the end of August, early September, somewhere around there, which will be really exciting to see. Look, obviously we want to stay after consistency and speed. Those are two equities of the brand that are really important. The good news is we've got a bunch of different initiatives in the stage gate process. So, look, I never like to have all my eggs in one basket, right? And what I'm really delighted about is we've got things that make us more efficient with prep, whether it's avocado, a veggie slicer, a dual sided grill, looking at modifications to our rice cooker, our fryer equipment. So, there's a lot of things going on back at house to make us more effective culinary-wise, prep-wise, which then sets us up to be successful consistently on the front line and the digital make line. I've talked about these things also where we're also experimenting with AI and vision to ensure that our teams get the support. I'm actually reading a great book right now, it's called Co-Intelligence, it talks about how you use AI as a partner. And that's really what, you've heard us talk about this, is co-biotics, right? I think now this is, I like this term co-intelligence, to help our teams be more effective with forecasting, executing every single bowl correctly, bringing things up exactly correctly. So, look, I'm really excited about all the things we have in the pipeline. Obviously, we've spent a lot of time talking about hyping because it's probably the most visible, it looks pretty darn cool too. But I just want to make sure it's important we talk about, we've got a lot of things from an innovation standpoint that really understand the operating model to make us more efficient, better culinary every single time, consistent every single time, and frankly, makes the job easier for our team members to be successful, which then results in, I think, great outcomes for our customers. So, a bit more answer to your question, but I think it's important to just highlight hyping's a great tool, but there's a lot of tools we're working on that I think are going to make us better in the future.

Jack Hartung:

Thanks John.

Andrew Charles:

Great. Thank you. And just like everyone else, congrats to both Jack and Adam. Jack, what a ride it's been. Jack, curious just with the guidance, why keep the mid-single-digit part just given the blowout from 2Q as well as the fact that it sounds like July spotty, but around that 6% trend. That mid-single-digit piece suggests a pretty wide range of outcomes for the back half of the year and implies some deceleration potentially coming. So, can you just talk more about the guidance philosophy?

Andrew Charles:

That's helpful. And in past years, before the inflation issue, we saw that there was typically about a 2% price increase, 2.5% price increase taken in December. What's the likelihood we see that again for next year? I know you're seeing some temporary margin headwinds. But as we think about pricing levels for next year, I mean what's the likelihood we see something coming in December?

Andrew Charles:

That’s helpful. Thank you.

Lauren Silberman:

Thanks a lot. I wanted to ask on the LTO strategy. You have one in spring, one in fall. It just seems like you generally comped the LTO comp for lack of a better phrase pretty consistently. What enables you to keep growing LTOs year-over-year incidence rates growing each year? And do you tend to see like during the periods of LTOs that comps actually accelerate even though it's off a higher base?

Lauren Silberman:

Great. Thanks. If I could just do a quick follow-up on the 3Q guide. I understand a lot of noise, but can we -- is it safe to assume that the 25% restaurant level margin guide implies about a 6% underlying comp for the quarter?

Lauren Silberman:

Thank you very much.

Jon Tower:

Great. Thanks for taking the questions and congrats, Jack and Adam. Maybe just a quick follow-up and then a question. First, you had mentioned earlier the generous portion stuff that you're going to be doing in the short-term. Are you doing anything to message that to the consumer maybe something beyond what Brian you've already done on social media? And then I guess my question is more along the lines of -- there's obviously been a fairly significant price increase in California because of the wage rate hikes. Any sort or change in consumer behavior in that market that you're seeing at your stores or perhaps more broadly across the industry that you could speak to?

Jack Hartung:

Yes. And then -- and then on California, so I'll make a comment or two. So yes, what we've seen is really across the entire state, we've seen a step down in the industry we've seen individual data points within the individual restaurants. And we've seen reports that there really has been a pullback in spending we've seen it as well. We've also seen that when we've seen individual restaurants. There's not a correlation between the step back in the spending versus the major price increase that was taken. And so it looks like there's just kind of a macro impact of less spending in the restaurant. We saw the same thing. Unfortunately, we raised prices by 100 basis points. We normally don't see much resistance. We still resistant to the point where we didn't get the 100 basis points at all. So, saw a pullback that equal the effect of menu price increase that we took. And it looks like that's about equal to what the pullback in the industry is.

Jack Hartung:

Sure.

Brian Harbour:

Thanks. Yes. Good afternoon and Jack and Adam, congratulations as well. The Barbacoa kind of marketing initiative, could you just comment on that? Was it kind of a pretty material driver? Did people respond as you expected? Are there kind of other opportunities to do that sort of thing?

Brian Harbour:

Okay, great. And Brian, your comments on automation but also some of the other kind of initiatives that you mentioned. How fast do you think some of those can show up? Is this the sort of thing where we start to see it in a year or two? Or are some of these longer-term? Do we see it in the form of kind of continued margin upside? Or like how should we kind of assess some of those as outsiders?

Operator:

The next question comes from Danilo Gargiulo with Bernstein. Please go ahead.

Brian Niccol:

Yes, sure. So, obviously, we saw our biggest improvement in throughput during the month of April, which was great to see. And we continue to see great throughput execution from folks. The thing that's going to push the throughput forward even further is ultimately the deployment being done correctly, right? So if we get that expo number to a higher percentage, not surprisingly, that expo position is the biggest impact on throughput gains. And so that's why you hear us talking about that position is kind of like the key metric of, are we deployed correctly to execute great throughput during peak? So, I'm optimistic that we're going to move that 50% number up, and I'm optimistic that we'll be able to move from the mid-20s to the high-20s in the not too distant future.

Brian Niccol:

Yes, look, I'm really excited about the progress that our team has made over in Europe, in really short order. They've taken a lot of the tools in the U.S. We put them into place in Europe. I think we're managing food better. We're managing the supply chain better, managing deployment better. The culinary, I think, has really improved. So not surprising, you're seeing -- we're seeing nice improvements both in top line and bottom-line. So, I'm optimistic that we're going to be proving those as investable markets to kind of go even faster down the road, similar to what happened in Canada. So, the team has made nice progress. I'm sure they'll be busy in Paris with Olympics coming up, but I'm really, really delighted with Brian have done in kind of short order.

Chris O'Cull:

Thanks and congratulations Jack and Adam. I just wanted to ask, Brian, do you see any signs that the increases in value promotions by the QSR chains have had any impact on the company's results?

Chris O'Cull:

That's helpful. And just as a follow-up. You talked a lot about product innovation, obviously, that has been very successful. And one of the factors, I think, Jack, you mentioned benefiting April sales was the marketing activation event. And I'm just wondering, can you help us understand how impactful these events can be and whether this is something the company could consider using more frequently if the consumer spending environment were to become more challenging?

Chris O'Cull:

Great. Thanks, and congratulations guys.

Operator:

This concludes our question-and-answer session. I would like to turn the conference back over to Brian Niccol for any closing remarks.

Jack Hartung:

Thank you.

Operator:

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

Operator:

Good day and welcome to the Chipotle Mexican Grill First Quarter 2024 Conference Call. [Operator Instructions] Please note, this event is being recorded.

Cynthia Olsen:

Hello, everyone, and welcome to our first quarter fiscal 2024 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.chipotle.com.

John Hartung:

Thanks, Brian, and good afternoon, everyone. Sales in the first quarter grew 14.1% year-over-year to reach $2.7 billion as sales comp grew 7% driven by over 5% transaction growth. Restaurant-level margin of 27.5% increased about 190 basis points compared to last year. Earnings per share adjusted for unusual items was $13.37, representing 27% year-over-year growth. The first quarter had unusual expenses related to an increase in legal reserves.

David Tarantino:

My question is on speed of service. And Brian, I think you mentioned that you improved in Q1 by 2 transactions, which I think is the biggest improvement we've seen in quite some time. So I guess the first question is, could you maybe elaborate on the factors that drove such a sharp improvement? And then secondly, could you maybe give us an update on where you think you are exiting the quarter, entering the first -- or the second quarter versus where you ultimately want to be? How much progress, I guess, relative to the ultimate goal that you make in the last 3.5 months?

David Tarantino:

And just maybe a quick follow-up on that. So the last year you made this type of progress on throughput that I can remember was all the way back in 2014, and it was a very big comp driver that year. And I just wonder, could this become a big comp driver as you look at the rest of this year and into the next few years? I mean is it possible that this is a big driver as we think about how the next several years plays out? Or is this more of a we're starting to get closer to where you want to be, and maybe it plays out this year, and you normalize versus that base?

David Tarantino:

Great. Congrats on a great start to the year.

Operator:

The next question comes from Lauren Silberman with Deutsche Bank.

Operator:

My apologies, it looks like we've lost connection with our speakers. Please hold while we reconnect.

Brian Niccol:

Yes. Sure. So this is Brian. I'll get started, and Jack, feel free to chime in. The good news is, obviously, we had some weather in January, and then we had the timing of the Easter holiday in March and April. But consistently, what we saw was a step-up from that bad weather. And then really our transactions have been running kind of in this mid-single-digit range, which has been, I think, a real testament to the work that's been going on both in the restaurant around throughput and then obviously some of the marketing work that we've got going on both with barbacoa and Chicken al Pastor.

John Hartung:

And then, Brian, the only thing to add was transactions were up almost 5.5% during the quarter, and that was offset by check increase by about 1.5%. That was driven by part check and then offset by a little mix -- a little negative mix mostly due to group size.

Brian Niccol:

Yes. Yes, that's exactly right. I think we've talked about this in the past. When you know the line moves quickly, you're willing to get in line. And also what happens is the experience is just all that much better, right? The culinary moves faster, and then you get to your experience faster. So our teams run more efficiently. The food, I think, comes across even better prepared. And then you as a customer move through the line faster. So it is one of those things where kind of speed begets speed is the way to describe it.

Lauren Silberman:

Great. Congrats on the quarter.

Operator:

The next question comes from Andrew Charles with TD Cowen.

John Hartung:

Yes. Andrew, it's -- so it's hard to parse out the transactions and say how much is due to things like Chicken al Pastor, how much is due to things like barbacoa. Barbacoa, we think, drove some transactions as well and then throughput -- how much is driven by throughput specifically.

Brian Niccol:

Obviously, this comes up every once in a while, people bring it up. And the thing I would say is, right now, we're much more focused on just turning Chipotle into an iconic brand that I think it can be not just in the U.S. but outside the U.S. Obviously, if the opportunity presents itself, where it would make sense for us to do something outside of the brand, I never want to say never, but it's just not a focus area for us right now.

Operator:

The next question comes from Sara Senatore with Bank of America.

John Hartung:

Yes. Sara, you're right. Pricing in the quarter was like 2.7%, 2.8%. The only change going into next quarter and the next couple of quarters is we've got the California pricing. That's somewhere around 100 basis points or a little bit less. So Q2 and Q3 will be somewhere in that 3.5% range, and then Q4 will fall off and be more in that 1.5% range because we'll compare against last year's pricing.

John Hartung:

Yes. It's a good question, Sara. We're actually seeing within the, call it, 1.5% of negative -- or it's a 1.5% positive with a mix impact of, call it, about 100 basis points or so. What's happening is the group size is more like declining by about 2%. We actually do have side -- additional side attachment. But we're seeing the side attachment grow in both digital and in in-restaurant, and we are seeing the side attachment increase faster in restaurants than the side. So there is a positive factor there.

Sara Senatore:

Okay. Got it. So kind of the opposite of the check management that we're seeing elsewhere?

Operator:

The next question comes from Jon Tower with Citigroup.

Brian Niccol:

Yes. I don't know how to think about our frequency relative to some competitive opportunities out there. What I can tell you is the folks that are in our Rewards program, we see -- with their high engagement, we see higher spend and more frequency. And then also what we're seeing in the business, which I think is really nice to see as a result, I think the efforts both in better operational execution and I think our advertising around just the base business, this idea of real ingredients, real culinary, fast customization. We're just seeing the base business grow.

Jon Tower:

Great. Maybe just pivoting a little bit on you. Can you talk about the Canadian market and specifically about the potential you think for that over the long term? And then expanding, I think you had mentioned earlier the idea that Europe looks a lot like Canada 5 years ago. But do you feel like you can, given everything you've learned in Canada, implement a lot of what you've taken there and apply it to Europe such that the time line around getting growth in Europe will be a lot faster versus what you saw in Canada?

Operator:

The next question comes from Dennis Geiger with UBS.

Brian Niccol:

No, not really. I mean the good news for us is it's pretty broad based, right? It's coming across all income cohorts. It's coming across lunch and dinner and the afternoon. So it's not like there's one thing that I would identify as like this change in consumer behavior.

Brian Niccol:

No, no real shift. I mean I think we like this cadence of 1 or 2 items a year. The good news is we've got now a great proven group of menu news that we can provide. And the good news is we've got a really talented culinary team and a talented marketing team that continues to help us find, I think, new flavors that make sense that can be executed correctly at Chipotle.

Dennis Geiger:

Congratulations.

Operator:

The next question comes from John Ivankoe with JPMorgan.

Brian Niccol:

Yes. Sure. So obviously, all this stuff is really exciting. The dual-sided grill, we've expanded to a few more restaurants, specifically our high-volume restaurants. We think that's not only a great unlock for consistency in the culinary of our proteins and meats, but it's also a nice unlock for high-volume restaurants because you can cook the chicken faster. It allows the teams then to start prep closer to when we want to serve customers, which is really exciting. So we're continuing to test and learn on that front. We've also made some nice progress on the energy usage associated with it, which was something that was a bit of a barrier.

Operator:

The next question comes from Sharon Zackfia with William Blair.

John Hartung:

Yes, Sharon. So the average ticket in California is similar to the rest of the country. Until this increase, our menu prices in California were very similar to the averages throughout the country, even though the cost of doing business out in California tends to be higher. After the increase, we still have burritos that are going to be reasonably priced. The chicken burrito is going to be around $10. It's very early, as you mentioned. It's too early to tell. We're not seeing any kind of change in consumer behavior yet, but it's only been a matter of a few weeks so far. So we'll keep a close eye on it.

Sharon Zackfia:

Okay. Great. I wanted to ask another question, too, as it relates to Chipotlanes, which obviously have been great. But as you look at kind of the automation and the initiatives you're working on, do you think there's anything that you're looking at or that could come down the pike that would open up kind of the opportunity for a nondigital drive-through, just a regular drive-up and order drive-through? Or is there not something from a robotic assembly standpoint that could answer that for you?

Brian Harbour:

I had a question just on your comments about the Rewards program. Obviously, you continue to add people to that. But the effort to kind of drive engagement on a same-user basis, I know you've worked on personalization of offers and such. Have you seen that kind of showing? Have you seen pretty nice improvements in frequency? Or anything you can say just about what you've observed kind of from the same-user base of Rewards members?

Brian Niccol:

Yes, definitely. Look, I think one of the things that's happening is because we're getting better at forecasting, better at deploying, better at the scheduling, the job is becoming a better job, right? And one of the ways you see it is in our turnover numbers, right? Our turnover numbers are the lowest they've ever been. We've got some regions well below 100% turnover at the crew level, which I've never seen in my time in this industry. I think some of the lowest numbers I've ever seen, frankly, at Chipotle.

Operator:

The last question today comes from Chris O'Cull with Stifel.

Brian Niccol:

Yes. So to answer your first question, it is a new tool that we rolled out in January that gave them real-time visibility, which has been hugely powerful. It's great because now when I visit restaurants and ask people, "Hey, how are you doing?" They can tell me what their best 15 has been so far. And a lot of them now are so well aware like, hey, I know we can do better than that. So like we might have did 25 in the last 15, but I think we're going to do 35 in the next 15, which is really exciting to hear them have that type of visibility and have kind of clarity so that as a team, they know what they're all working towards. What was your other question?

Brian Niccol:

Oh, the range to the top and bottom?

Christopher O'Cull:

Great. Congratulations on a great start to the year.

John Hartung:

Thank you.

Brian Niccol:

Okay. Thank you. And thanks, everybody, for the questions. Obviously, I appreciate the kind words of recognizing how we're off to a great start. Very proud of the momentum that the business has and really proud of what our operators are doing in our restaurants.

Operator:

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

Operator:

Good afternoon, and welcome to the Chipotle Fourth Quarter and Fiscal Year End 2023 Earnings Conference. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead.

Brian Niccol:

Thanks, Cindy, and good afternoon, everyone. We delivered outstanding results this year, driven by our focus on exceptional people, exceptional food and exceptional throughput. This is driving a much better experience for our teams and our guests and resulted in accelerating transaction growth throughout 2023. For the year, sales grew 14% to reach $9.9 billion driven by a 7.9% comp. Digital sales represented 37% of sales. Restaurant level margin was 26.2%, an increase of 230 basis points year-over-year. Adjusted diluted EPS was $44.86 representing 37% growth over last year and we opened a record 271 new restaurants including 238 Chipotlanes. We also ended the year with a lot of momentum as demonstrated by our fourth quarter results. Our restaurant teams are making terrific progress in building a strong foundation around throughput and the return of Carne Asada as a limited time offer outperformed our expectations. For the quarter, sales grew 15% to $2.5 billion driven by 8.4% comp. Digital sales represented 36% of sales. Restaurant level margin was 25.4%, an increase of 140 basis points year-over-year. Adjusted diluted EPS was $10.36, representing 25% growth over last year. And we opened a record 121 new restaurants, including 110 Chipotlanes. As a reminder, we are returning to our pre-pandemic practice of only providing annual comp guidance. While January was impacted by weather throughout much of the country, as weather has normalized, our sales trends have strengthened. For the full year, we anticipate comps in the mid-single digit range, as we continue to focus on the same five key strategies that help us to win today while we grow our future. Now let me provide an update on each of these strategies, which include, number one, sustaining world-class people leadership by developing and retaining diverse talent at every level. Number two, running successful restaurants with a people-accountable culture that provides great food with integrity, while delivering exceptional in-restaurant and digital experiences. 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 of our restaurants, support centers, and in our supply chain. And number five, expanding access and convenience by accelerating new restaurant openings in North America and internationally. Starting with our world class people, I'm excited to share that Ilene Eskenazi joined my executive leadership team in November as our Chief Human Resources Officer, with over 25 years of experience in leading human resources and legal functions across a wide range of industries. I am confident Ilene will be instrumental in helping Chipotle develop and retain talent at every level of the organization and enhance the support we provide to our people, both in our restaurants and at our support centers. Strengthening Chipotle as a best-in-class employer. As I've said in the past, we want to attract and retain the best people that we can develop and grow. Part of this includes listening to their needs and investing in ways that will help our employees thrive both professionally and personally. This is why we recently added new benefits to our industry-leading benefits platform, like enhanced mental health care, a student loan retirement match, and additional financial wellness tools for our workforce. In addition to our benefits, our long-term growth opportunity and promote from within culture provides a path for team members to advance quickly within Chipotle. In fact, in 2023, we promoted over 24, 000 people, and over 90% of all restaurant management roles were internal promotions. This includes 87% of field leader positions, which is one of the biggest jumps for our teams, going from running one restaurant to an average of eight restaurants. The ability to achieve this rate of internal promotions is a result of our strong restaurant leaders, many of whom started as crew members and who are committed to training and developing our future leaders. A great example is one of our field leaders in New York who has been with Chipotle for over 16 years. He helped to develop and promote over 40 team members who have grown within Chipotle and have gone on to become some of our best general managers, field leaders, team directors, and even one of our regional vice presidents. This is the type of person who will help us to deliver on our goals of running great restaurants, delivering industry leading economics, and expanding to 7, 000 restaurants in North America longer term. Great people executing great culinary and throughput results in a terrific guest experience and drives performance. And this brings me to our operations. Strong leadership is the key to running successful restaurants with fast throughput. So it is no surprise that the restaurants with the most tenured general managers are executing the best. The good news is our GM turnover is at some of the lowest levels that I have seen since I joined Chipotle. And over the last couple quarters, we have put the building blocks in place to deliver great throughput. As we mentioned last quarter, we have adjusted the cadence of orders on the digital make line to achieve a better balance of labor between the two lines. Additionally, we began collecting data on the execution of the four pillars of throughput in our restaurants and providing feedback and coaching on a weekly basis. This is allowing our restaurant teams to see progress, which is energizing and motivating as the experience of winning catches momentum. And finally, our teams now have real time access to their Max 15 throughput results in the moment. So our GMs can coach and recognize great throughput while it is happening. Since we put these coaching tools in place in the third quarter, we have seen the number of restaurants with at least four crew members on the front line during peak periods improve from 30% to around 50%. This is driving an acceleration in our throughput performance as the number of entrees in our peak 15 minutes improved by a full point in the fourth quarter compared to last year. I am thrilled to see the progress we are beginning to make and continuing this momentum is critical as we approach our peak burrito season in mid-March. We will also further strengthen our industry leading value proposition, which consists of delicious culinary, made with real ingredients, that is customizable, convenient, serve quickly, and an accessible price point. When we were executing on all parts of our value proposition, we were providing a great customer experience that would help all other drivers of sales perform better, such as menu and innovation. And last year, Chicken al Pastor and Carne Asada, both surpassed our expectations in drove incremental transactions. This is a testament to the cross-functional effort by our marketing, culinary, supply chain, and restaurant teams that do an outstanding job innovating, as well as bringing back past favorites that are more delicious each time and are executed seamlessly. 2024 will be another exciting year for menu innovation, including one to two limited time offers and rolling out creative ways to shine a spotlight on our core menu throughout the year. As part of highlighting the core, we recently launched our latest lineup of lifestyle bowls, which shows how the customization of our real ingredients allows Chipotle to embrace all interpretations of wellness, whether it be plant-based, high protein, keto, paleo, and more. In connection with the launch, we announced a partnership with Strava, the leading digital community for active people with more than 120 million athletes, to encourage and reward healthy habits with a chance to earn free lifestyle goals. This is giving our fans the right tools to sustain healthy habits in 2024 and beyond. In addition to menu innovation, our marketing team continues to do a fantastic job of making the Chipotle brand more visible, more relevant, and more loved to drive difference, culture, and drive a purchase. Our Behind the Foil campaign is a great example as it highlights key differentiators of Chipotle. This includes our restaurant teams preparing our real ingredients, made fresh every day using classic culinary techniques, such as dicing onions and jalapenos, hand-mashing our signature guac, and grilling our adobo chicken, steak, and fajita veggies on the Plancha. We will continue to evolve the Behind the Foil campaign in 2024, and it's really exciting to see that our best performing ads are an authentic, behind the scenes look into a day in the life of a Chipotle team member. This certainly demonstrates one of our core values, which is authenticity was here. Our food is real, and so are we. Shifting to amplifying technology innovation, we have made a lot of progress this year on improving the digital experience. We made several enhancements to our app functionality, including order readiness messaging, wrong location detection, reminders to scan for points to check out, prior order history and more. This has helped to reduce friction points and improve the overall experience for guests. We also launched Freepotle for our rewards members, which was successful in driving engagement and enrolling new members as we were able to surprise and delight our guests with free rewards such as guac, a beverage, or double meat. From the Freepotle drops, we were able to learn more about our rewards members to improve our ability to deliver relevant experiences in the future. Finally, we recently rolled out suggestive upsell on our app at checkout, based on data we have on our rewards members including prior order history. Going forward, I believe we are on a multiyear path to commercializing our customer data and insights into more targeted marketing campaigns and improving the overall digital experience that will drive increased frequency and spend over time. I also wanted to spend a few minutes providing an update on our Cultivate Next Fund which launched two years ago with an objective of making early-stage investments into strategically aligned companies that further our mission to cultivate a better world and accelerate our strategic priorities. Since launching this fund, the amount of innovation that we have seen across the food tech landscape has surpassed our expectations and encompasses everything from farming to supply chain to alternative proteins and oils to in-restaurant automation and more. We have reviewed hundreds of innovative companies and have made seven investments of which there are many opportunities for commercial engagements. This includes Hyphen, which we are partnering with to develop our automated digital make line and Vebu which we are partnering with to develop Autocado that cuts cores and scoops avocados. Both Hyphen and Autocado could help to improve the overall experience for our teams by removing less favorable tasks and for our guests by providing on time accurate and delicious food. We continue to work on iterations of each technology at our Cultivate Center. And the good news is that we plan to pilot the automated digital make line and Autocado in a restaurant in 2024 as part of our stage gate process. Last month, we announced two more investments in Greenfield Robotics and Nitricity. Greenfield Robotics provides regenerative agriculture solutions without chemicals using fleets of autonomous robots to weed fields. And Nitricity uses technology to tackle greenhouse gas emissions by creating natural fertilizer products that are better for fields, farmers, and the environment. We believe both Greenfield Robotics and Nitricity could play an important role in ensuring a more sustainable future for farms within our supply chain. Our suppliers are a key enabler of Chipotle's growth and help us to further our purpose of cultivating a better world. We will continue to find innovative ways to support their ability to grow, harvest, and supply the high quality, sustainably raised real ingredients that Chipotle serves. Our final strategic pillar is expanding access and our development team has done an incredible job of meeting our development targets despite the timeline challenges we continue to see. In the fourth quarter, we opened 121 new restaurants and for the full year, we opened 271 new restaurants, which is the highest number of openings in the company's history in a single quarter and in a single year. We have now surpassed 800 Chipotlanes and continue to see very strong results with Chipotlanes driving higher new restaurant productivity, margins, and returns. Additionally, this year, we had some fantastic openings in new markets with our first restaurant in Calgary breaking an opening day record and sustaining very high volumes post opening day. When we serve delicious food with exceptional operations and execute great local marketing, our brand gains traction quickly, and Canada is a testament to this. We will continue to accelerate our growth in Canada in 2024, with 10 to 14 new restaurant openings planned, representing 25% to 35% growth for the country, and in total we continue to target 285 to 315 new restaurant openings in 2024, mostly in North America, with over 80% including at Chipotlane. So, to conclude, I want to thank our 115, 000 employees for their hard work which drove strong results in 2023. We hit some big milestones, including surpassing 3, 400 restaurants, 800 Chipotlanes, $3 million in AUVs, and forming our first international partnership. As I look forward, I see the opportunity longer term to more than double our restaurants in North America, increase our penetration of Chipotlanes, surpass $4 million in AUVs, expand our industry leading margins and returns and further our purpose of cultivating a better world globally. As I mentioned in the beginning, this ambitious plan will require exceptional people, exceptional food, and exceptional throughput. The good news is that I am certainly at the right people and the right strategy to achieve it. So with that, I will turn it over to Jack.

Operator:

[Operator Instructions] The first question comes from Andrew Charles with TD Cowan.

Brian Niccol:

Yes, thanks for the question. Look, I do believe at the end of the day the thing that will get us to $4 million and probably beyond that is going to be great execution in the restaurant meaning focusing on great culinary, great people and great throughput. I think we're very fortunate that it doesn't require another day part, it doesn't require something that we aren't currently doing today to achieve that result. I do think things like automation like Hyphen and Autocado and continuing to do things with our rewards program, the menu innovation, the marketing will obviously be things that push us further and further but one thing I think that we demonstrated this last quarter is when we perform better on the operation front all those things I just listed off, have a, I would call it almost like a multiplying effect. So the good news is we still have a lot of headroom to go on operational execution, and I think we've got the right things in place for the long term to get us to that $4 million and beyond.

Jack Hartung:

Yes, Andrew, it's really hard to predict over a long period of time into the future what comps are going to do. I think for the foreseeable future, our guidance next year in the mid-single digit I think makes sense. But if you look at our history, we have a history of having outsized comps when the economy is going well, I think makes sense. But if you look at our history, we have a history of having outsized comps when the economy is going well, when our operations are going well. I would argue even the acceleration we saw in the fourth quarter was we had a great combination of demand being created by Carne Asada, what's become a favorite of our customers, and throughput allowing those sales to flow through. Those are the -- and I would expect those things to happen in the future that are very hard to predict how and when they're going to happen, Andrew. But those are the things that Chipotle has seen in the past, and I think that will likely happen in the future as well. So the $4 million while it's in a mid-single -digit is something we think we definitely will get there. From the margins, I would expect margins to continue to expand. We still expect to see a pass-through every time we grow our transaction, grow our sales through additional customers. About a 40% flow-through, as that 40% gets averaged in against the 26% we delivered last year, I would expect the margins to go up. And as we get up to $4 million, I would expect we'd be in the high 20%, maybe even in a 30% range. Again, you're talking about predicting something over a very long period of time, but our margins will definitely get stronger over time, which means our returns will get stronger as well as we move from $3 million to $4 million.

David Tarantino:

Hi. Good afternoon. And congratulations on a great 2023. My question is really about the unit growth, and I've got two parts to that. I think you've been talking about 7, 000 restaurants in North America for a while, and as you build more and more Chipotlanes and see the returns you're getting, I'm just wondering if that number could prove low in your mind. Is there upside to the 7, 000 over time? And then I guess the second part of the question is I know you want to grow faster and Jack, you mentioned getting to 10% unit growth next year is a goal. I'm just wondering what line of sight you have to that at this point that you can share with us. Thanks.

Jack Hartung:

Yes, then David, on how do you get to 10 %? Our visibility is quite good. Our inventory building that the teams have been doing is really, really strong. In fact, the team has had to build more inventory than we normally would need to basically offset these timelines. These timelines have really delayed everything so that you're talking about instead of 15, 16 months, from when you get a deal to open. It's not more like 21, 22 months or so. But each year the team builds a stronger inventory. The result of the new openings has been outstanding. So the quality has been very, very high. So the inventory itself looks really, really good. And if we get any break in terms of timelines with the quality has been very, very high. So the inventory itself looks really, really good. And if we get any break in terms of timelines with developers moving a little bit faster with local authorities in terms of utilities, in terms of permitting, if that was a little bit faster, we actually can get to that clip even a little sooner. But we built in the exact same extended timeline that we're seeing today with the current very robust inventory. And that will get us, if not all the way, very close to that 10% figure.

Jack Hartung:

Not anything sustained, David. So, I mean, our teams are working really, really hard at it. The most recent challenges been developers with high interest rates. They're pausing a little bit. I do think if interest rates improve this year, I do think that will help. But nothing that I would bank on right now. We're certainly working hard at it, though.

Lauren Silberman:

Thank you. So, I wanted to ask too, one on throughput, clearly a big area focus driver of traffic this year. Can you talk about how you see the potential traffic opportunity in ‘24 driven by throughput and just the priorities to get there to further unlock that opportunity?

Lauren Silberman:

Great. Thank you. And if I could ask on quick one on menu innovation, how you're thinking about it. I know you mentioned one to two this year. I know you typically do an LTO on chicken and this spring and then beef later in the fall. Any change to how you're thinking about cadence, especially as you consider sort of throughput and operations?

Operator:

The next question comes from Brian Harbour with Morgan Stanley.

Brian Harbour:

Yes, look, I think one of the things that's been really nice to see is the incidence of our sides has continued to go up, like queso and chips and salsa, we're continuing to see people adding onto their entrees. And I think that has a lot to do with what we're able to do digitally, both at the point of checking out as well as how we communicate with people through our rewards program, right? So, the suggestive sell example I'm talking about, we've now turned that into a smart suggestive sell. So I'll give you the best example, or a really simple one. Historically, you get a Mexican Coke with your order. When you get to check out it, if you don't have Mexican Coke in your basket, we will serve you a suggestive sell off, hey, you forgot your Mexican Coke. Versus before, we might have just been saying, hey, maybe you should think about chips and queso. So what we're seeing is that type of insight into the individual results in more commercialization or higher check as they check out, because we're serving a lot of things that they historically have usually added to their ticket. So we're seeing that make great progress. And then obviously I think our queso, chips, and guac are pretty darn special. So the more people learn and experience it, the more they want to add it to their check.

Jack Hartung:

Yes, Q1 will be similar. Call it in that 2.5% to 3% range in Q1. We haven't made a final decision, in terms of pricing with a FAST Act. We know we have to take something as a significant increase when you talk about a 20 percent-ish increase in wages. And I think we talked in the past that there's one approach where you would cover the profitability. So you would breakeven from a profitability standpoint, but not protect margins. So another word, margins would go down, profitability would not, or you could take a higher price increase and you protect margins as well. We haven't decided within that range. We'll wait and see just what the landscape looks like, what the consumer sentiment is, what other companies are going to do. So I would say in terms of the impact California represents about 15% of our restaurants. So depending on where we end up, there'd probably be an extra 80-ish, 90-ish basis point to maybe something over 100 base point in terms of additional menu price across all of our 3, 400 restaurants just to give you kind of an order of magnitude.

John Ivankoe:

Hi, thank you. I was thinking about the amount of time, attention, labor hours that you spend in morning prep every day at the store level. And as the system grows, gains scale, potentially benefits from more equipment, more technology, more automation, maybe some more centralization. I was wondering for you to talk about opportunities to maybe reallocate some of this prep labor that you may have longer term, how big of a bucket is that? And obviously, Autocado is one identified solution. How much more is there and how much more could that mean to the overall business model of the future?

Operator:

The next question comes from Sara Senatore with Bank of America.

Brian Niccol:

Yes. So great question. Here's what I'll tell you is for sure you've got to be staffed. You've got to have stability in the teams, right? That's how we get the reps so that we execute better every time. The other thing I'll say is when we looked back and we were doing maybe our best throughput, these numbers can easily go from 50% to 60%, 70%, some odd percent in execution. So it's not unrealistic for us to believe we can get better than where we are today. And I think the teams know that. The other thing that I think is also helping the teams is to have the visibility. So they know how they performed in their 15 minutes, allows them to course correct real time versus finding out what happened that day. And then they kind of missed out on being able to course correct for a later part of lunch or dinner time. How it contributes to the comp. Here's one thing I'll tell you is we're executing better. And when we're executing better, people feel better about the food, they feel better about the brand. We just got back some brand metrics that frankly are just terrific. And I think that shows up in our value scores. And then it shows up in the way that people are feeling about the brand. So the brand has got really strong perceptions. I think our team members feel really good about the success they're having, which is also really important, right? When the crew feels like they're going fast or giving people what they want, they feel better. Which then I think in result turns into like kind of this ongoing system where everybody believes they're now achieving and getting what they want. So our customers are happier, the team members are happier, the brand is stronger. And I think these are all the things that contribute to seven points of transaction growth or said it another way really strong value proposition that we've gotten in today's environment.

Brian Niccol:

Yes, look, I think our teams executed Carne Asada, better than we ever have. I thought the experience of Carne Asada was terrific. I also do think the advertising and the communication around it was really good. So I think our ads are communicating what makes Chipotle special, which is this team member that's committed to doing great culinary in the restaurant. And then when you layer in a great product like Carne Asada that gets executed with excellence, good things happen. And, it was kind of, I think Jack mentioned this earlier, great demand generation with the advertising and the Carne Asada initiative. And then the folks in our restaurants were doing a really terrific execution so that people got down the line faster, they experienced great culinary and they got exactly what they wanted. So I think it's the combination of really having compelling menu news with great advertising and our operations team executing the fundamentals really well.

Danilo Gargiulo:

Thank you. Can you please provide maybe some color on the key drivers of the traffic comp being procured by income cohort or maybe by channels? And if you can also comment on the average check, how much was the contribution from pricing versus contribution from mix and what's your expectation given that the delivery mix impact should be normalizing at this point?

Jack Hartung:

The channels and in-store with by far strongest channel which supports the throughput that we saw.

Jack Hartung:

And then, Danilo, just on the check, the check impact was a 1%, plus 1%. That's about 2.5% price offset by about 1.5 on the mix and the mix is driven by group size.

Brian Niccol:

Yes, look, I appreciate you taking notice. It's really important to us to make sure that we surround our employees with the right pay, the right growth opportunities and the right benefits. And I do think some of the things that we've added, like being able to help people or incentivize people to pay off student loans and then match them with a 401-K contribution, I think is a really good idea for the generation of people that we are hiring, the Gen Zs. And also the growth opportunity. Folks can join our company in crew and in three, four years, quickly find themselves leading one team and in some cases, being a multi-unit leader. So I just had the opportunity to meet a young lady. I think she was like 24 field leaders, newly promoted. She was at one of our cultivated university sessions and the young lady's very ambitious. I guarantee she'll be a TD the next time I see her. So I'm excited to have these growth opportunities for people surrounding them with great benefits and I think a great culture. How does that play out in stability? We're seeing some of the best stability we've seen, frankly, in my time at Chipotle. If you go back and look, the fact that we've got General Manager turnover in the low 20s, crew turnover kind of in the low 100s, that's really good. And relative to the industry, I think that's ahead of the industry, but I don't know those numbers for sure. But what I do know is we're getting more stability; we're seeing less turnover. And what we hear back from people is they love the purpose; they love the culture and they love the growth opportunity. And that's what we're going to continue to provide people.

John Tower:

Great, thanks for taking the question. I'm just trying, you mentioned earlier, the idea that the suggestive selling is starting to work pretty well within the app in terms of getting some incremental attach for orders. But I'm curious if you're doing anything within the stores coaching people up to kind of work that as well, especially it looks like your digital sales mix, while not slowing remarkably is coming down quite a bit. So thinking about kind of the check growth from this point forward, are there means for you to be able to encourage greater attach for consumers in the store? Is there anything you're doing now?

John Tower:

Got it. And then just, further the delivery a little bit. It looks like that might be moving lower as a percentage of sales as well. And I'm just curious if from your perspective, you're getting any indication from those consumers that this is the way that they're better managing their own spend at the store, effectively trading that higher cost channel for a lower cost channel going directly to you. And actually, could you provide the delivery mix as well?

Jack Hartung:

The one thing, Brian, we have is Chipotlane. Chipotlane is one example where when you offer the convenience of Chipotlane and then the value that Chipotlane and the customization that Chipotle, you normally would expect to get. You do see that the delivery will drop like 10 points. So it'll drop to the low, call it 10%, 12% something like that, several to 10 points. And then our order ahead and pick up will move open at high 20s. So to us that's a clear indication that if we offer extreme convenience along with the value that you Chipotle have that people will choose that access channel as opposed to delivery.

Dennis Geiger:

Great. Thank you. Brian, just wanted to follow up on sort of the strength across income cohorts and the strength in the brand's value scores. Any other commentaries sort of on how you think that the strength in those value scores maybe is having, I don’t know, an outsized impact perhaps on the customer, on traffic that you're seeing particularly in this environment where we're hearing about some softness in various parts of the consumer cohort? Any commentary on that based on data that you guys have related to those value scores?

Dennis Geiger:

That's great. Thank you. And then just quick, Jack, anything more on mix on kind of looking ahead to ‘24, even at a high level, how to think about the mix component of the check and how that might trend? Thank you.

Operator:

The next question comes from Brian Bittner with Oppenheimer & Company.

Brian Niccol:

Well, they're already having that impact. But to your point, it's relatively small because 800 is still, what is that maybe a quarter of our system. But it's hundreds of basis points of higher margin. If you compare it to our non-Chipotlane, the volumes have actually come pretty close. They're still a little bit higher for the Chipotlane versus non-Chipotlane, they close the gap a little bit. It was much, much higher during the pandemic. But when you combine volumes that are a little bit higher with margins that are hundreds of base points higher and the investment costs are virtually identical, it's a much higher return. So from a shareholder value standpoint, as we open up, as we grow from the 3, 400 towards 7, 000, the cash on cash returns we're getting from, the 80% or 85% of our new restaurants that have Chipotlane is much, much, much higher. So it does have an accretive impact on our margin. It has an even more meaningful accretive impact on our returns. And you'll just see it every time we open up new restaurants, you'll see that our margins are going to, they're going to continue to expand as long as our existing comp transactions grow and these new restaurants coming out board are just going to add fuel to the fire.

Jack Hartung:

Yes, no. Really the thing that happens when you turn the calendar, you have taxes because you have people that are hitting tax levels. So you kind of reset, this happens every year where our tax in Q4 is lower than they step up in Q1. So that's the only deleverage that you're saying. The leverage that we saw in the fourth quarter is a couple of things. One, when our volumes do, when our -- or comp accelerate, we do leverage that line as we saw leverage on that line. Two, the ops teams did a good job of managing labor. And then the third thing is our teams did a better job of managing through dealing with like sick time and vacation time at the end of the year. That was a little bit of a negative surprise to us the year before, and our team did a much better job this year of just getting ahead of that. So those are the three contributors, but you should expect that as we grow transactions next year, as long as wage inflation stays relatively benign, we should still continue to be able to delever the labor line.

Sharon Zackfia:

Hi, just under the wire. I guess I wanted to talk about how your most loyal customers are using Chipotle at this point, maybe if there's a way to contrast the frequency of those customers versus five years ago when rewards even, didn't exist or was very nascent. And then by the same token, we kind of talk about how new customers today are entering the Chipotle ecosystem and how they progress in frequency, maybe relative to what you would have seen pre-pandemic?

Sharon Zackfia:

Can I ask a follow-up on LTOs? Do those overarch towards kind of improving existing customer frequency, or are they a real driver of new customers coming into Chipotle?

Operator:

This concludes our question and answer session. I would like to turn the conference back over to Brian Niccol for any closing comments.

Operator:

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

Operator:

Good day, and welcome to the Chipotle Mexican Grill Third Quarter 2023 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead.

Brian Niccol:

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 Chipotlanes. 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 the 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 guests engagement; amplifying technology and innovation to drive growth and productivity at our restaurants and support centers; and expanding access 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 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 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're 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, they 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 in 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 o'clock or 7 o'clock in the morning to be able to serve our delicious food by the time we open at 10.30. 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 is one of the best performing sub regions across the company. He truly believes in Chipotle's purpose and wants the position [ph] 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 an amplifying technology, we're making progress on a couple of 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 can 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 prototype. 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 that in freshly chopped onions, jalapenos and cilantro, seasoned with some citrus and salt and hand mash or signature guac. While we still have some iterations to make the 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 stage gate 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 Chipotlanes this quarter. As we look out to 2024, we anticipate opening between 285 to 315 new restaurants with at least 80% having a Chipotlane. 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's clear there's 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. AUVs 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 were building brand awareness in Europe to 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 Alshaya 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. With that, I'll turn it over to Jack.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Sara Senatore with Bank of America. Please go ahead.

Jack Hartung:

Yes. Sara, I'll start within the U.S. When we talk about getting to the high end of the 8% to 10% range by 2025, that actually assumes that we don't get better in terms of the timeline. It assumes that things stay as they are. What that tells you is just every year, our teams are doing a great job of building a very robust pipeline. And so that pipeline is really filling up. And as these timelines have been extending, that pipeline just keeps getting bigger. And so if you just assume we have the same timelines going forward for the next couple of years, we should get close to that 10% range. Now having said that, we've also challenged our teams. We challenge our teams to take a look at what is causing some of the delays. What can we do from a mix standpoint? Are there simpler deals that we can go after that would shorten the timeline? Can we work with developers if developers are getting way too far [ph], but there are things that we can do from an economic standpoint that might accommodate that? So we challenge our teams to shorten the timeline. But in terms of us getting to 10%, frankly, our pipeline we think can get us there even if the timeline stay the same? And then, Brian, I don't know if you want to comment on Europe?

Sara Senatore:

Great. Thank you very much.

David Tarantino:

Hi. Good afternoon. My question is about the traffic performance you’re seeing. I think Brian, you mentioned that it accelerated as the quarter went on and stayed strong in October. And we've been hearing I guess more broadly that the consumer spending environment may have done the opposite. So I was wondering if you could maybe unpack the drivers that you think drove the divergence that you're seeing? And specifically, was hoping that you could talk about the comparison related to Garlic Guajillo Steak and also what you're seeing on the throughput side as a contributor to that? Thanks.

Jack Hartung:

Yes. And the only thing I would add Brian to that is we’re reading the same things David that you are and the consumer is clearly under pressure with inflation over the past year and pretty much everything with gas and groceries and really across the board higher interest rates. We continue to do well not just across our income levels, but with the lower income. They're holding up really well. They're really hanging in there at about the same level as our medium and high income levels. So I think the Chipotle value where we haven't raised prices in over a year until this latest action I think is coming through and people are choosing to dine at Chipotle because we are very affordable.

David Tarantino:

Great. Thank you very much.

Dennis Geiger:

Great. Thank you. Wondering if there's anything else to highlight on the strength of the margins in the third quarter? And I guess more importantly, how that's shaping how you're thinking about next year and specifically, Jack, if 27% margin is at $1 trillion AUV, if that's kind of still the right way to think about the margin AUV dynamic?

Dennis Geiger:

That's great. Thanks for that. And then I appreciate the strong traffic number in the third quarter. Can you just provide the price and mix breakdown in the third quarter, Jack, and if you care to talk at all about how to think about those components into the fourth quarter level thinking about that mix in particular? Thank you very much.

Dennis Geiger:

Thank you.

Andrew Charles:

Great. Thanks. Jack, a simple clarification, do you consider the recent 3% price increase to brace yourselves for AB 1228 next year? Or are you planning a separate California targeted price increase to be utilized sometime around April to help mitigate the impact of the higher California wages?

Andrew Charles:

Got you. Okay, that's helpful. And then, Brian, a question on innovation, it looks like there's no innovation in the stage gate process as obviously you're prioritizing operations and projects square one [ph]. I'm curious, what do you need to see to resume your new menu innovation, in particular, if it's reaching a number of transactions per peak 15 minute or some other measure looking at to resume new menu innovation piloting?

Andrew Charles:

Awesome. Looking forward to it. Thank you.

David Palmer:

Thanks. A question on labor productivity. I'm wondering how you're thinking about the drivers on getting back to something like you've done in the past, that 23% or so labor margin, what are the key unlocks from here? You're obviously finding some traction on just paying attention to how you deploy labor and some of the things you're doing even with computer vision and whatnot. But then there's the other side, which might be the bigger leap stuff with equipment. So I'm wondering how you're thinking about the timing of these things, and how I'm really obviously thinking about 2024 and what drivers you see there?

David Palmer:

Yes. If it makes you feel any better, I don't think anybody has 23% in their models or anything, but --

David Palmer:

When you mentioned the four to five entrees in that peak 15 minute window improvement, what is the benefit to same-store traffic and/or just labor productivity you're getting from that? Can you put that into perspective?

David Palmer:

Thank you.

Lauren Silberman:

Thank you. I also want to ask about throughput. So one of the key initiatives being the right cadence of digital orders, to what extent have you rolled out that specific initiative across the system or what percentage of the system do you see opportunity to improve that labor allocation?

Lauren Silberman:

Great. And just you've historically I believe talked about peak throughput being high 20 or low 30 orders per peak 15 minute period. Have you worked to return to those levels? Is there room to exceed prior peak throughput as you now utilize a second make line for a much greater level? Are there any constraints at that high 20, low 30 order level across the restaurant? Thank you.

Lauren Silberman:

Great. Thanks so much.

John Ivankoe:

Hi. Thank you very much. The question is related to throughput, but I think it's more specifically on unmet demand. And I was wondering if your data specifically on the digital make lines side showed how much unmet demand that you actually may have based on the wait times that are quoted to customers? In other words, they get to the end of the transaction, they see a wait time and they just don't complete the transaction. Is that something you can measure? And related to that, do you have a sense of how many stores actually are at capacity, maybe still in midtown Manhattan and in some other places where people do walk by a line that has 15 or 20 people in it perhaps and just go to a place that's less. Is there a way to kind of quantify as you see it today the amount of unmet demand that you would serve if you could serve? In other words, if you were kind of fast or if you order time to less, what have you, just the opportunity on your current store base?

John Ivankoe:

Do you know that on the digital side? Your transactions that kind of get to the final like percentage of transactions that maybe aren't just completed that are right at the point of payment. I don't know if that's exactly the way to look at it, but there must be a leading indicator to some degree?

John Ivankoe:

Okay. And clearly you can see the faster you are the more customers you serve this current set of [indiscernible] proved that once again. Thank you so much.

Brian Mullan:

Thank you. Just a question on loyalty. Could you talk about some of the key near-term objectives the team is focused on with the program over say next 12 to 24 months on the path towards I think the ultimate long-term goal of greater personalization over time, which Brian I think you've referred to in the past is still a big opportunity?

Brian Mullan:

Okay. Thank you. And just wonder if you could just update us on the dual sided grills, maybe how many locations that have been rolled out to? And are the benefits proven to be what you might have hoped inside the stores? And if so, when could this be rolled out more broadly?

Brian Mullan:

Thank you.

Brian Harbour:

Yes. Thank you. Could you maybe just comment on the delivery channel, and then also just kind of mobile order and pickup and some of the things you're doing with timing or orders per 15 minutes, if that's kind of affected volumes at all?

Brian Harbour:

Okay. To just Chipotlanes, are you still seeing kind of the same unit volume uplift that you've previously talked about for those kind of the same impact on returns? Is it in fact going up? Any comments on how we think about the Chipotlane impact, especially as we kind of think about next year?

Brian Harbour:

Thank you.

Sharon Zackfia:

Hi. Good afternoon. I guess going back to throughput, I know in the past you've quantified kind of where you are relative to 2019 on peak throughput. I was hoping perhaps we could get an update on that. And then I guess I'm also wondering is 2019 really the right benchmark anymore just given how the business has shifted? You're doing double digital versus 2019 and we know that's causing some tension between the front and back line. So is that the right bogey? Do you have a slice of restaurants that have exceeded 2019 peak throughput or is that not the right answer anymore?

Sharon Zackfia:

Okay. And then I guess the question on the guidance for the quarter on comps. I know you had kind of some weather and some disappointment around the holidays last year. Jack, are you factoring that in to the guidance for this year or are you just kind of steady stating?

Sharon Zackfia:

Okay, great. Thank you.

Operator:

The next question comes from Danilo Gargiulo with Bernstein. Please go ahead.

Jack Hartung:

Yes, that's correct, Danilo. In a Chipotlane, the margins are better and then the incremental margins are better. So you should see a few ticks up when we have incremental transactions in Chipotlane definitely.

Brian Niccol:

What we center on is providing a great experience. And what we've seen is that results in superior value. And unfortunately, we aren't doing it through price promotion, rather we're doing it through great culinary, lots of customization, terrific speed. And that's where our value for the consumer really shines through. And then given the scale that we have, we're able to buy ingredients and provide people with a clean eating experience that frankly you can’t get anywhere else for the price at which we charge it. So very affordable, very customizable, super high quality is resulting in really strong value scores from consumers. And then when we look at our relative price position to competitors, right now we're anywhere from 15% to 30% discount on an everyday standard. It’s also kind of interesting that the team did just to kind of dimensionalize this. They took a look at 18 to 34 year olds that actually have student debt. And what we found is Chipotle was the best value proposition among that universe. So one of the things we're seeing is whatever situation you're in, whether it's low income, higher income with some student debt, we continue to be a strong value proposition, regardless where you look across the consumer segments.

Operator:

Our next question comes from Jeffrey Bernstein with Barclays. Please go ahead.

Brian Niccol:

Sure. So yes, that's right. We've not seen any material impact from it. And as I understand the drug and when I've spoken to people that know a whole lot more about the drug than I do, our food is a good solution. Because it's clean, it's not fried. It allows people then to customize meal that would fit their diet that they're trying to achieve, whether they're on GLP-1 drugs or whether they're on a keto diet or a Whole30 diet or insert the lifestyle diet that they're on, or the lifestyle drug that they might be on, the good news is we're positioned to be able to customize that diet for you with clean food done in a very healthy way. So longer term, I think we're positioned really well. We'll see how this continues to unfold. But today, we've seen no real impact. And the best thing we can do is make sure that we stay committed to food with integrity and providing those customized solutions at speed.

Jack Hartung:

Yes. Jeff, you know that’s predicting anything, especially inflation in the last few years has been very, very difficult. Right now, it looks like inflation is settling for both our ingredients and for labor in that call it 3%-ish, maybe between 3% and 4%, something like that. That's a very normal environment. If it stays at that 3% to 4% range, I think that's just fine. We can operate very effectively in that environment. Would we be able to get all the way to 27% without taking any additional pricing? That'd be tough unless our transactions accelerate, and we can leverage -- throw some more leverage along our fixed line items. But if it's in that 3% to 4% range, we just took a 3% price increase, I think we'll be just fine. But if it continues at a higher level, obviously, that'd be a little tougher. But anyway, if it ends up in that 3% to 4% range and people keep their jobs and people still want to dine out, we'd like our chances that they'll keep coming to Chipotle, especially based on the most recent trends that we've seen.

Operator:

Our final question comes from Peter Saleh with BTIG. Please go ahead.

Brian Niccol:

Yes, so thanks for the question. So we had our first prototype at our Cultivate Center. And the team did a great job of kind of pressure testing all aspects of it. We learned a lot, right? There's work to be done on how you expo things, there's work to be done on how you clean it, there's work to be done on how we actually provide portions. And the good news is this is why we use the stage gate process so that we learn, we iterate and then hopefully we get to a faster solution. So I'm excited to see what the next prototype holds. But the team is working on some of those key things that we learned on. But yes, look, all signs are really promising that as we continue to work on this in the stage gate, what we're after is accuracy, speed and then the ability for the team member to execute this both at the expo station and then keep it clean and food safe. So we're working through those things. But for a very first prototype, the team did a great job. And I loved everybody's passion to learn so that we get to an even better second generation prototype.

Jack Hartung:

Yes, the comps have gotten a lot closer. The urban still outperformed the suburban by about 100 basis points or something like that. So it's much, much, much closer. But I would say the central business districts are still behind. In terms of an absolute sales basis if you look at pre-pandemic and where we are today, the central business districts are still behind. But from a comp standpoint, they're performing in the same general range.

Jack Hartung:

Thank you.

Brian Niccol:

Thank you. And thanks everybody for the questions and joining the call. Obviously, we're very proud of our teams and the results that we've delivered in the third quarter. It's very exciting to see our efforts on throughput driven by having the team's staff trained and deployed correctly, continuing to make progress and then with our strong value proposition, seeing that show up in transactions as the driver of growth. We're going to continue to stay focused on executing great throughput. We're going to continue to stay focused on great culinary. We're going to continue to stay focused on having great people that are trained and know exactly what they need to do in their position. So very excited about the results we've achieved but very optimistic about our future, both in building new units and continuing to drive average unit volumes and margins. So thank you for taking the time and we'll see you in a couple months. Thank you.

Operator:

Good afternoon, and welcome to the Chipotle Mexican Grill Second Quarter 2023 Results Call. All participants will be in listen-only mode. [Operator Instructions] 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 Olsen, Head of Investor Relations and Strategy. Please go ahead.

Brian Niccol:

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 Chipotlanes. 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 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 Kurt 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 and in 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 this in certain restaurants. I was recently in New York at 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 the same restaurant exactly a year ago. The improvement in throughput was certainly noticeable as the employment 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 like 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 outcomping 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’ve 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 and 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 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 it glimpses 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’ve launched Freepotle 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. Freepotle has been successful in driving enrollments in the first half of the year as we surpassed 35 million reward members. With each strategic Freepotle 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 four minutes versus 12 minutes on the plancha and can cook the steak in under one minute versus four 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 stage gate 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 [Veedu], and together we are exploring collaborative robotics that will drive efficiencies and [easy paying] 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 co-botic 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 as 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 are 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 on the 7,000 restaurants we were targeting longer term in North America, and we were laying the foundation for further international growth. For 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’ve recently announced our first ever development agreement with the Alshaya Group to open restaurants in the Middle East, which will further accelerate our international efforts. The Alshaya 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 standards of excellence in 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.

Operator:

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Andrew Charles from TD Cowan. Please go ahead.

Brian Niccol:

Yes Andrew, this is Brian. Our approach on pricing has been obviously, it's a lever that we will pull as kind of the last thing we like to pull, but I think we've proven 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 Jack's comments. We're seeing some inflationary pressure both on the labor line and in some of the food areas when you pull on avocados. It's something that we're looking hard at, and as we get closer to that fourth quarter, we'll make a decision on exactly what we want to do on the pricing front. I don't know if you want to add anything there, Jack.

Andrew Charles:

Okay, that's helpful. Then just on the 3Q guidance, I know that you guys call it out that you're seeing about five-year 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. They were seeing some strength in that consumer. I just wanted to know what you guys have seen in recent months to relate to that consumer.

Andrew Charles:

Very helpful. Thanks, guys.

David Tarantino:

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?

David Tarantino:

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.

David Tarantino:

Great. Thank you.

Sara Senatore:

Great. Thank you. I just wanted to talk about throughput in the context of that sounds like the traffic's fairly stable. You talked about new equipment. I understand that cooktimes are down pretty dramatically. Could you translate that into, 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, the capacity is one side, but then making sure that, you have enough demand there 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.

Sara Senatore:

And then just to sort of clarify as to follow-up is even through or again throughput and we've seen some really nice improvement in the last couple of quarters and transaction and traffic growth here it sounds like that anticipation as that'll be fairly stable. I understand the comparisons I entered that like would you expect a 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 to understand how to translate throughput.

Sara Senatore:

Great. Thank you, very much.

Danilo Gargiulo:

Thank you. So, with the low-to-mid single-digit expected comp since 3Q, what is giving you the confidence to meaningfully accelerate a 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 versus from pricing action. What actions are you contemplating to sustain the momentum?

Danilo Gargiulo:

Thank you. And maybe beyond this year or thinking a bit more multi-year on a multi-year basis, historically you have it secured it a more constant international roll out across Canada and Europe. So, what drove you to on the statement sizing and specifically why are you starting with the Middle East. So, can we expect a combination of co-op and concise mixing international market or is this more in a monetary step to fine tune your international expansion plans going forward?

Operator:

The next question comes from David Palmer from Evercore ISI. Please go ahead.

Brian Niccol:

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. So, the excitement around the new cooking equipment is terrific you see because that means we're going to get the execution that we want. To rule this out this product a year plus project, and the good news is the manufacturers have the capability to scale to what we need once we give them the green line. So, we're pretty excited about this because 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 to pull in they come back. So, and we're still dialing through all the components of the puts and calls on this but it looks very promising based on where we are in the first 10 stores.

Brian Niccol:

Yes, sure. 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 and as far as recommendations go to add the 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 do this across our 35 million rewards customers and now has meaningful scale where the customization results in loyalty that results in obviously additional sale. So, the most visible space, probably you'll see it in the app at the web, and then it's probably more new launched in how we communicate awesomely 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. 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.

Operator:

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

Brian Niccol:

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 yes, it definitely frees up the capacity, 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 and when the restaurant opens at 10.30, you don't have to start cooking chicken at eight 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 have a really big, 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 I think are going to be really powerful for us going forward. And then also the simplicity at 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.

Brian Niccol:

Yes, 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 hopefully we'll get closer to the higher end of that age to 10% once kind of we work through a little bit of the bottleneck that we have on development. But 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're in that $20 to $28 billion range. So 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?

Brian Niccol:

We said we were going to maybe do 3000 restaurants. So here we are. We're at 3000 restaurants. I'm sure as we continue to grow both the AUVs will go up and the store council will go up. But yes, it's pretty fun to think about we're closing it on $10 billion and then I'm sure we'll be talking about $20 billion and then probably from there we'll be talking about $30 billion. So I don't see a cap on this business anytime soon.

Operator:

The next question comes from Brian Mullan from Piper Sandler. Please go ahead.

Brian Niccol:

Yes, 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. But we'll know a lot more as we get closer to when we roll it out.

Operator:

The next question comes from Chris O'Cull from Stifel. Please go ahead.

Brian Niccol:

Yes, sure. So we have an inter-cultivate center right now. It's fun to see it actually producing bulls and the team has done a phenomenal job of taking this from, a concept 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 bulls, per 10 minutes, how accurate can it do the bulls, and then obviously our ability to expedite those bulls, meaning getting it to the customer in the correct order. So 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. But conceptually, and what it looks like right now, still very promising a top priority to figure out how we get this thing into a restaurant sooner rather than later.

Jack Hartung:

Yes. I mean, any increase in our underlying G&A is around some of the things that 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 probiotics and things like that. There's some items in there where our equity, we're expecting our equity based on our projections. 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'd be another slight, 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 stepped up for the growth that we want to support, not just for this year but for the next several years going forward.

Operator:

The next question comes from Jon Tower from Citi. Please go ahead.

Jack Hartung:

Yes, 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 city, 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 in, that are coming to the site. It does involve things like permitting, and then you talk 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. Now, what we're doing, Chris is here and Chris has been sending this message to the team is, we really got to rise to 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 those often. And if they hear us more often, it's likely they're going to move it. So that's the strategy to try to hopefully remove that bottleneck.

Brian Niccol:

Yes, no, it's more to do with getting the trust in the team to have the confidence to stay aces and places. 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 and 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 tasks 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. So 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 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 I'm very optimistic about where Scott and the operators are going to get us to when it comes to throughput.

Brian Niccol:

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 tastes great and it is great. So 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. The challenge for us is I think if you, we wanted to add something permanent, we got to remove something. So, that'd be something that we have to work through to just make sure we understand the trade off.

Brian Niccol:

Yes.

Dennis Geiger:

Great. Thank you. Just wondering if you could provide a breakdown of the, the traffic price and mix for the, for the two queue. I think you gave the, the traffic component, but if you could kind of loosely break out those, those others, that'd be helpful.

Dennis Geiger:

Very helpful Jack. Just one or just, I know mix is probably a tough one group size in particular to, to predict. You give us the, the three queue 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, given group size behaviors? And maybe that's tough to predict. Thank you.

Dennis Geiger:

Thanks, Jack. Appreciate it.

Brian Harbour:

Yes, thank you. Good afternoon. Jack, could you just elaborate on some of the food cost drivers? I mean, you mentioned kind of what's, 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?

Brian Harbour:

Okay. Thanks. Could you also just elaborate on what you said about Europe? And I guess the, the broader question is just how fast might we see that grow as we start to think about the next few years?

Brian Harbour:

Thank you.

Unidentified Analyst:

Okay, good afternoon. This is John Park on 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 in the initial development agreement, anything on the royalty rates, things like that.

Unidentified Analyst:

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?

Unidentified Analyst:

Great, thanks a lot.

Brian Niccol:

All right, thank you. And thanks everybody for all the questions. I'll just wrap up with, again, 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. 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 opening. 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.

Operator:

Hello, and welcome to the Chipotle Mexican Grill First Quarter 2023 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Head of Investor Relations and Strategy, Cindy Olsen. Cindy, please go ahead.

Brian Niccol:

Thanks, Cindy, and good afternoon, everyone. 2023 is off to a great start with first quarter sales and margins ahead of our expectations. For the quarter, sales grew 17% to reach $2.4 billion, driven by a 10.9% comp. In-store sales grew by 23% over last year. Digital sales represented 39% of sales. Restaurant level margin was 25.6%, an increase of 490 basis points year-over-year. Diluted EPS was $10.50, representing 84% growth over last year. And we opened 41 new restaurants, including 34 Chipotlanes. These results demonstrate that our focus on running great restaurants with exceptional food and exceptional people is driving performance. Additionally, we benefited from exciting new menu innovations including Fajita Quesadilla and Chicken al Pastor. Transaction trends were positive throughout the quarter and the strength has continued into April. I would like to note that beginning this quarter, we are returning to our pre-COVID practice of providing annual comp guidance and anticipate comparable sales to be in the mid-to-high single-digit range for the full-year. We will also continue to provide quarterly comp guidance for the remainder of this year and anticipate second quarter comps in the mid-to-high single-digit range. Now, I would like to provide an update on our five key strategies that will position us to win today while we create the future, which include

Operator:

We will now begin the question and answer session. [Operator Instructions] Today's first question comes from Dennis Geiger with UBS. Please go ahead.

Brian Niccol:

Yes. So look, Project Square One has been something we've been working very aggressively for probably, I guess now we're going on almost nine months and our operators have done a terrific job. Scott and the team have really, I think, retrenched on getting back to the basics. And some of things where we make great progress on are just being in-stock with great culinary. We're experiencing too many times where we're out of guac, we were out of chips, we were out of chicken, so we've made tremendous progress on that front. We also have made a lot of progress on keeping both lines open from open to close. And both of those reasons that we've improved dramatically are driven by I think more stability in the restaurant with better training and then holding people accountable to those standards. On the throughput side of things, we've made some progress on the frontline, we've definitely made some progress as it relates to being on time and accurate digitally, but we still believe there's a lot of room for improvement. I think you heard in our prepared remarks, we're still working through I would call it better deployment in managing during peaks. So that we service the DML business effectively without jeopardizing the service of the people that are right in front of us in the restaurant. So we still believe there's a lot of runway in front of us on great throughput. We won't get the great throughput though if we don't have great stability and great culinary having both lines open from open to close, and we've made tremendous progress on those foundational elements. So really proud of where the team has moved the organization, but I'm really optimistic about where they can get to.

Brian Niccol:

Yes, no thanks for the – thanks, I forgot to answer that part of your question. So thanks for the reminder. Look, tremendously excited, that's why we're investing in it, right. These clamshell grills that we're rolling into 10 restaurants now make the job easier, make the culinary better and make the culinary more consistently better. So that's a huge win for our customer and our employees. I think I've talked about this, it makes the cooking time dramatically go down. So chicken goes from 12, 13 minutes to two, three minutes and you get perfect sear, perfect char, just really delicious culinary. So that's a big unlock for us, because the grill position is one of the hardest positions to train. So we can make that job easier and then we also free up more space on the plancha, it just eliminates any potential bottleneck for our future growth. The other thing, it's a huge exciting one for us, it's a little further out, is Hyphen. We talked about this quite a bit, which is automating the digital make line. That will enable us to be even more accurate, I think probably get a little bit faster and I think give people more consistent experiences. So, all these things are driving towards hopefully better guest experiences, but also a better work environment for employees. And then, obviously with that, I think will be more efficient in both cases. So, really excited about both initiatives. Obviously, the clamshell grills are a little bit closer in. Hyphen is a little further out. And then we've got some other exciting initiatives on making our prep easier, right, frying chips or cutting and cleaning avocados. So, we're making a lot of investment and we're going to continue to experiment. Not all of it will work, but I'm confident having innovation in this space is a big unlock for our brand in the long-run.

Operator:

The next question comes from David Tarantino with Baird. Please go ahead.

Jack Hartung:

Yes, David. In the first half, you're thinking about it right. We definitely expect our margins to step-up from here. Q2 from a seasonal sales standpoint is a stronger quarter for us. We typically see higher margins in the second quarter. We also have relatively lower marketing in the second quarter and there is some offsets like, like a little bit of inflation in the labor line, but still you're thinking about it right for the first-half of the year. What's unknown in second-half of the year is inflation. We're still thinking there's going to be continued labor inflation in the mid-single-digit. And even though our commodity has been largely tame, where we've had some pluses and minuses that have largely offset each other. We think in the second-half of the year, there is still the possibility of inflation. For example, we don't necessarily expect, we'd love avocados to remain at this level for the rest of the year, but we're being realistic and thinking that may not happen. And there may still be inflation upbeat, we haven't seen it really yet in what we buy, but there is that possibility as well. So, it's really a wildcard about inflation up. Inflation is tame in the second-half of the year, that will obviously lead to even better margins in the second-half of the year, but I think you're thinking about it right.

Brian Niccol:

Yes. Hey David, this is Brain. We're staying the course on our approach to pricing, which is, if we see inflation that warrants us needing to take additional pricing, we'll take it. I think we've now demonstrated we do have pricing power. We have a really strong brand and we don't want to be in front of the inflationary environment, but we also don't want to fall behind. So, the good news is, we're in a really strong position that when we're ready and we believe it's necessary to pull that pricing lever, we can and we continue to have a really strong brand to do it with. So, we have not made any definitive plans on pricing for the balance of the year, but we're going to stay the course on the approach we've taken over the last, I'd say 18, 24 months.

Operator:

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

John Hartung:

Yes. Yes, I'll take the labor piece first, Sara. First of all, it was most of the benefit that we saw was sales driven in the quarter. We saw our transaction turn positive. We're still running menu price increase compared to last year and about a 10% range. So when you have that kind of a flow-through where transactions are flowing and menu prices are flowing as well. That was a significant benefit in the quarter. We did have some labor inflation, so that was an offset to it. And then we did see some efficiencies. So we did see, really, for the first time, the labor scheduling tool we put into place last year was really starting to pay off. And then the fourth thing I would just say is normally this time of the year as our sales begin to increase seasonally, that is the time where our labor tends to be more efficient. It tends to happen where the weather starts to get warmer, our sales start to grow and our managers are trying to keep up on the schedules, but they end up basically driving a little bit of efficiency. They always seem to be maybe a step or 2 behind. The good news is, as Brian mentioned, operationally, we feel like the restaurants ran really well, and we drove that additional labor efficiency.

Brian Niccol:

Yes, I can say on the loyalty, your question there, what we've definitely seen is we see people higher enrollments when we make it easier to be engaged in the digital system. So a couple of things happen, right? I mentioned this in my earlier remarks. The team improved your ability to redeem rewards by alerting you, so that you don't forget this can form. We also improved your ability to end up going to the right restaurant for your order, which was a big deal. That's one of the biggest misses we seem to have with customers where they didn't realize they were ordering from different restaurants than where they were intending to go. So those types of things make the engagement easier for people, which then they stay in the program. And now doing things like free Potle, Fajita Quesadilla, digital-only just attracts new people to come into that space. And that is what we want to do. We want to continue to have acquisition and then we want to dial up the personalization and make it super easy to stay active and engaged, because we know the more engaged you are it plays out in more purchase frequency and higher ticket. So we'd love to get $33 million to $40 million. I don't know where the ceiling is on this thing, but we're going to continue to push towards getting as many people involved and then work very hard to turn it into a very personalized program that keeps them engaged.

Operator:

The next question comes from David Palmer with Evercore ISI. Please go ahead.

John Hartung:

Yes. I mean, I'll cover a couple of stats and then Brian, you can add-on as needed. First of all, in terms of the first quarter, we did push past our 15 minute max, compared to last year. So, it was nice to see as our transactions turned positive during the quarter, that we did push past last year. We actually at the end of the quarter and as we moved into April, we actually push past where we were in the second quarter of last year as well. So, we're seeing nice progress, but we're still in that low 20%s range, David. We think we can get into the mid-20%s. Mid-20% is comparable to what we were doing in 2019, before the pandemic, if you adjust for the shift in our digital business. But beyond that, if you go back even a few years before that, we don't think there's any reason why we can't get back into at least the high 20s or maybe even into the low 30s as well. Now that will take a few years, but we think that's one project that Brian mentioned, his idea of experimenting with, how can we make sure that we've got basically the labor deployment and we've got the cadence of orders coming through to the DML, to be set such that our teams can with confidence, they can run both lines without feeling this pressure to pull from one line to the other. And typically what happened is the DML, if the orders are coming through pretty high on the DML, there is a tendency to pull somebody from that frontline and I think we're basically seeing some good early results to tell us that we think there's going to be a way to breakthrough and allow our teams to really execute it out at a really high-level on both lines. So, I think that's potentially and a lot to get to some of these higher number 15 minutes throughput figures.

John Hartung:

It's theoretically possible. I think the one thing, David, that is different now is labor rates are much, much, much higher. And our menu pricing hasn't really stayed caught up all the way with the labor over the last few years. And in fact, the biggest move that we made in the second quarter of 2021, we basically raised wages by 15% and only a raised price by 4%. So we basically offset the dollar value of that. We didn't try to protect the margins and certainly didn't try to protect the labor line at all. So I think there's been a bit of a dislocation there. Having said that, we do have a very efficient labor model. We do have a lot of investment in technology. We do have a lot of things that I could see over time as we grow to $3 million volumes and then $3.5 million volumes. And as we really create solutions so that our teams can be more efficient. I think it's certainly possible. It's not necessarily a goal of ours, but we could land there someday.

Operator:

The next question comes from Lauren Silberman with Credit Suisse. Please go ahead.

Brian Niccol:

Yes. Look, I think the drivers for traffic growth are going to start with Project Square One. We have to have great operational execution. We staff trained, deployed, lines open from open to close and giving people great experiences. So that's initiative number one, to keep the traffic moving in the right direction. Obviously, doing things with our loyalty program, our CRM database. We continue to talk about how we're on that journey of continuing to engage with our customers at another level and we'll continue to invest in there, continue to experiment and continue to execute. And then as I've talked about these in our strategies, having the brand visible for what makes Chipotle truly unique its purpose around food with integrity. That resonates with our customers. It resonates with our team members, because it's -- our employees feel great about the food they're serving and our customers. This is the food they want to be eating. And a great example of that are just some menu innovation things that we've added, right, the Fajita Quesadilla. Right now, we're doing Chicken Al Pastor. We made the Fajita Quesadilla program permanent. And we'll continue to do menu news. I think we've talked about this one or two a year. So it's the combination of all those things. that will continue, I think, drive great traffic. And I don't want to walk past the fact that we continue to have tremendous value scores. When you look at what you get from Chipotle for what you pay relative to your alternatives. We continue to get feedback that we're one of the best. And whether you're comparing to other restaurants in our space or even the grocery store. So we love our value position, and then we love the initiatives that we've got in place.

Brian Niccol:

Yes. I mean, formally, it's broad-based. So we're seeing new customers come in, and we're also seeing existing customers increase their frequency. So the operational focus, combined with kind of the marketing and menu innovation is doing exactly what we would want it to do.

Operator:

The next question comes from Andrew Charles with TD Cowen. Please go ahead.

Brian Niccol:

Look, I hate to just kind of repeat myself, but I'm going to repeat myself here, which is Project Square One and getting the foundational elements of Chipotle's execution back to Chipotle standard of excellence. I can't emphasize enough how important that is to have our digital make line open from open to close to have ingredients on that line from open to close, to being staffed and trained on the front line, so to get people down the line really fast with exactly what they want. I can't emphasize enough how important that is because everything then builds from there, right? Our digital personalization program builds on that. Our menu innovation builds on that, talking about a brand with purpose builds on that. And I just think a myriad of things worked really well. The Fajita Quesadilla program was received really well. The Chicken Al Pastor program was received really well. But I know they wouldn't be as powerful if we didn't have Project Square One driving behind it. So I think we've talked about this a lot, Andrew. One of the things that makes Chipotle really special is its operational ability to achieve tremendous throughput with unbelievable culinary and unbelievable customization. We got to nail that. And we have to nail it both on the front line and in the digital experience.

Brian Niccol:

Yes, sure. Well, I don't want to just walk by Canada. We're getting ready to expand into Alberta. We'll open probably 10-plus restaurants up there, which is like a 50% increase. So not and the team in Canada are doing a fabulous job. We're going to continue to drive that market. Specifically on Europe, Jim and the team have done a great job. Our U.K. business has got great momentum. Not surprising, there's a lot of inflation in the P&L there. and we have not priced for it because we think a lot of it is temporary, and we're still establishing ourselves in those markets. And I'm optimistic because if you can get the top line, usually, the rest worked itself out. And we're putting in place the digital system, the operational excellence, the great culinary. So I'm optimistic we're going to get there where we'll move this thing out of the stage gate process, but we're going to take our time, because we want to get it right. We don't want to just be fast. And that's what the team is after, and they're making great progress.

Operator:

The next question comes from John Ivankoe with JPMorgan. Please go ahead.

Brian Niccol:

Yes. It's actually two things happened for us. One, the higher income consumer continue to come and hardly came at a little bit faster pace from a frequency standpoint. And then we did see some, I would call it, recovery in the lower income consumer, still not all the way back to where it was, call it, a year ago, but an improvement from where it was over the last six months. So we've seen nice improvements across all of our income cohorts, and we continue to see great strength in the higher income.

Brian Niccol:

Yes. Thanks for the question. This, I think, is a big opportunity for us because we're still very much in the early days on this. I think the teams have done a great job of turning the data into action through, call it, like CRM programs. And we're just starting to tip our toe into the personalization opportunity. And I think you're going to see really kind of CRM evolve into personalization at meaningful scale. So I think there's a lot of opportunity to be had in this space. I'm proud of the work that's been done to-date and where we currently are. But I just think there is tremendous opportunity going forward. assuming we can get this personalization program, right?

Operator:

The next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Niccol:

Delivery was still right around 20%, right?

Brian Niccol:

Yes, high teens. And we saw a nice strength in our digital business, a little bit of a rebound in the delivery business, more so probably in the marketplace. But we're feeling really good about how we're positioned in all those access channels. Order ahead, delivery and coming into the restaurant.

Brian Niccol:

Yes. Look, we are really delighted by how well the Fajita Quesadilla performed for the very reason you just mentioned, right? It's all existing ingredients. It required some work on the digital side of things. But for the most part, this was a really easy one for operators to execute. So the team is doing some work to figure out other opportunities like that within our menu and maybe could apply for both the frontline and the digital line. I do believe there's still a lot of hidden gems within the Chipotle menu. And I think we have the opportunity to talk about them in a more visible way. So more to come. I know Chris and the team are working through, can we find something that can perform as well as Fajita Quesadilla following those kind of requirements.

Operator:

The next question comes from Sharon Zackfia with William Blair. Please go ahead.

John Hartung:

Well, I'll do the first one -- or the second one first. And I'm surprised it didn't get asked before. So no, we provide it.

John Hartung:

We're almost not in Sharon. So yes, listen, transactions were in kind of that 4%-ish kind of mid, low-single-digit. It's a nice turnaround from what we saw in the fourth quarter that we saw a check the net check was 7%, so that gets you to that kind of 10.9%. And of the check, it was about 10% pricing and then a 3% mix. And just as a further clarification, the 10% pricing is about 8.5% is in our in-store and our order ahead business. And then on top of that, there's a 1.5% for delivery. And then on Chipotlane, Sharon, largely the same. I mean, Chipotlane still perform higher from a sales standpoint, higher from a margin standpoint and then higher from a return standpoint. I think we have mentioned in the past, it's -- the comparisons aren't as great anymore. So in other words, a few years ago, we would open up restaurants that could have a Chipotlane, but didn't as we were kind of executing the strategy. And today, when we have 80%, 85% of our restaurants have a Chipotlane, the 15% or 20% that don't can't have one, meaning it's an urban location, it's an in-line location. So it's really different trade areas. So we're starting to see that some of the sales comparisons are getting a little bit not necessarily relevant. We're still seeing the Chipotlanes perform at a higher level, but it's a little bit like comparing an apple to an orange, but still margin return and from a sales standpoint, they're still great. It still does generate higher digital mix by several hundred basis points, and there still is a shift where delivery takes a step down from something in the high teens into the mid or low teens, and order head steps up quite a bit from something in the call it the low 20% up to the high 20s or even the 30%. So all the same kind of directional thing that we've seen, all the benefits that we've seen with Chipotlane are continuing to show up.

Operator:

The next question comes from Jon Tower with Citigroup. Please go ahead.

Brian Niccol:

I mean, look, obviously, as we get closer to that 7,000 number. We'll have a much better idea of whether or not we can grow beyond the 7,000. The good news is we've not seen any slowdown in our performance. So all the restaurants we're opening. They're opening with strength. And obviously, we look at this every year as we kind of take another look at our market planning. And the good news is we're opening restaurants in -- for Chipotle, I would say, somewhat penetrated markets, and they continue to perform really well. And that gives us confidence because then we can kind of start thinking through like, well, you start extrapolating that across the country, you could see how you could get beyond 7,000. But not ready to take the number up just yet. I love seeing great performance. It's great to see the small towns do really well. And it's great to see, frankly, the restaurants do really well in urban and are more penetrated markets. So lots of opportunity in front of us on new restaurant opening frontier.

Brian Niccol:

We always think through kind of something in the front half and something in the back half. We haven't definitively made a decision on what we're going to do in the back half yet. The good news is our pipeline is really strong, and we've got some flexibility. But we want to see where the consumer is, the strength of Project Square One and that will inform what we choose to do in the back half of the year.

Operator:

The next question comes from Peter Saleh with BTIG. Please go ahead.

Brian Niccol:

Yes. No, one of the things that's great about this is it would fit in our existing locations. It's almost pull off the current line, put in the new line kind of idea, which is really exciting. Probably the first place you'd see us do it. It will be with new units just because it's easier to implement. But the good news is Kurt and the team are designing this so that it will work with our existing restaurants.

Brian Niccol:

Yes. Well, the good news is Chicken Al Pastore has been broadly appealing. So both to new users and existing customers. The decision to make it permanent would be something we would do after we finish this LTO 1. So we haven't come to the conclusion that we would make this permanent, but your statement is correct, it's definitely performing really well. And crew member feedback is this is an easy one for them to make, and customer feedback has been really positive as well. So we did decide to make the Fajita Quesadilla permanent in our digital platform, but that's a little different than making Chicken Al Pastore permanent. So for this one, it's definitely planned to be an LTO, we'll execute it as an LTO, and then we can always revisit whether we make a permanent menu item down the road.

Operator:

The next question comes from Jeffrey Bernstein with Barclays. Please go ahead.

John Hartung:

Yes. On the guidance, it assumes we don't take any additional pricing similar to the comment that Brian made before. Right now, we're staying the course. So what it assumes is we continue the same transaction trends that we've seen in the first quarter continue into second quarter. It recognizes that we took some menu price action last year, and those will roll off. And so that's, in essence, what we put together for the full-year guidance. And the idea here, Jeff, is that we don't know if we're going to continue like beyond the next few quarters and give quarterly guidance all the time. You might remember a few years ago, we used to give just the annual and then not talked about what the quarterly guidance is. And so what we're doing right now is we're kind of doing both for a while, and then we'll see how the trends unfold. We'll see what happens to the macro. And we'll make a decision in terms of what our guidance is going to be. But we actually think about our business in terms of a longer-term approach than quarter-to-quarter. And so we think the guidance ought to match that as well. So that's the reason for the change.

Brian Niccol:

Well, we've been really happy with how the brand has shown up and the initiatives that we've rolled out on the percentages, I think that has more to do with timing than anything else.

Brian Niccol:

Well, I think Chris here, you'd also say too, like the summer months aren't the best time for broad-based media, right? So I think that's part of the timing.

Operator:

Today's last question comes from Jake Bartlett with Truist Securities. Please go ahead.

John Hartung:

Yes. It's not our -- it's a good question. It's not our base case. Our base case is to see modest inflation in the back half of the year. We're predicting somewhere in the low to mid-single-digits. We've been really pleasantly surprised by what's happened so far. We have had a number of miscellaneous items where we've seen inflation like some of our oils tortilla, some of our sauces and things like that, but even offset by lower-than-expected avocado cost. So that's why our food cost has been steady for two quarters in a row. And it's been a number of quarters that that's happened where we haven't seen any net inflation. So I do think it's a possibility. It depends on what the Fed does. It depends on what happens to inflation broadly. The wildcard there is if inflation disappears, you have to also then wonder, okay, what's happened with the macro economy, what's happening with unemployment and consumer demand as well. So right now, we kind of like the environment we're in right now, where consumers have jobs. They have money. They're visiting restaurants, and the inflation that we're seeing is pretty modest. So that base case that we put together and how we plan the rest of the year feels pretty good to us. We wouldn't mind inflation going down, but we'd love it if it didn't. Also be accompanied with a softness in demand.

John Hartung:

So first of all, in our prepared comments, we did say our guidance assumes that there's not a meaningful change in the macro environment, okay? Because obviously, all bets are off that happens. But in terms of our outlook, our outlook does not -- our base case does not include a recession or certainly not a meaningful recession. Again, it looks like unemployment is holding up really well. It looks like consumer spending is strong right now. I mean, Brian mentioned our -- we saw softness in the second-half of last year, especially the fourth quarter in lower income consumer. We saw those consumers come back almost at the same rate as our higher income consumers. And so we see that as a positive in a positive macro sign. So we're cautiously optimistic about what's going to happen in the second half of the year. Now if there is a recession, we feel like we're really well prepared. We have -- we own all of our restaurants. We don't have any debt. So we don't have the possibility of franchisees under pressure if they have debt payments and that there is a softening of demand. And we don't feel like we have to run the business based on a quarter-by-quarter and tally. So if we need to write a couple of tough quarters here or there, we certainly think we have the financial wherewithal and we have the long-term view to do that. But again, we're cost optimistic that the economy will hold up.

John Hartung:

Thank you.

Brian Niccol:

Okay. Thanks. And thanks, everybody, for joining the call and all the questions. Obviously, we're very proud of the work that has gone into achieving these results. I think I mentioned this before, Chipotle has got one of those special brands strengths when you look out there. There aren't many companies, I think, that are growing top line, expanding margins and building new units to the tune of 8% to 10%. And then when you combine that with the strength of the balance sheet, the strength of our economics, we're very confident in the strategies that we're continuing to execute we are not slowing down, though on Project Square One, and we're not slowing down on providing digital access, and we're not going to slow down on making the brand visible and loved. And at the foundation of all this when we have great people, with great culinary, we usually end up with great experiences for our guests. So we're staying the course, and we believe the strategies and these focus areas are going to deliver results for the long-term. And we're optimistic about our long-term future of getting to those 7,000 restaurants and AUVs well beyond 3 million. So thanks again for taking the time, and we'll talk to you in a couple of months, if not sooner. Thanks. Bye.

Operator:

Good day and welcome to the Chipotle Mexican Grill Fourth Quarter 2022 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead.

Brian Niccol:

Thanks, Cindy, and good afternoon, everyone. We delivered another year of strong results in 2022, expanding AUVs and restaurant-level margin despite facing one of the highest inflationary periods on record and an uncertain macro environment. These results demonstrate Chipotle's resiliency driven by our talented teams, delicious food made fresh daily, convenience, customization, and of course, our tremendous value. For the year, sales grew 14% to reach $8.6 billion driven by an 8% comp. Digital sales represented 39% of sales. Restaurant-level margin was 23.9%, an increase of 130 basis points year-over-year. Adjusted diluted EPS was $32.78, representing 29% growth over last year, and we opened 236 new restaurants, including 202 Chipotlanes. Turning to the fourth quarter. While we are pleased with our overall growth, our results were impacted by a few factors that were unique to the quarter, including a lower-than-expected benefit from garlic guajillo steak and a headwind from loyalty accounting. For the quarter, sales grew 11% to $2.2 billion driven by a 5.6% comp. In-store sales grew by 18% over last year. Digital sales continue to represent 37% of sales. Restaurant-level margin was 24%, an increase of 380 basis points year-over-year. Adjusted diluted EPS was $8.29, representing 49% growth over last year, and we opened 100 new restaurants, including 90 Chipotlanes. Our transaction trends improved throughout the quarter as we lapped brisket, and I'm pleased to report that our underlying trends have further improved entering 2023, with transaction trends turning positive. For the first quarter, we anticipate comps in the high single-digit range. Our focus on getting back to the basics and running great restaurants is beginning to pay off, and we plan to further emphasize this in 2023. Additionally, we will continue to build upon our five key strategies that will help us to win today while we create the future. Now let me provide an update on each of these strategies, which include

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will be from David Tarantino from Baird. Please go ahead.

Brian Niccol:

Yes. So, first of all, underlying just means transactions. There wasn't anything there. So, thanks for asking for the clarity. And basically, what we saw is as we exited the quarter, our transactions turned positive, and then we saw that continue to build in January. You are right, there was some Omicron and then there were some good weather. But what we've also seen is our staffing is at the best it's been. Our turnover is at the best it's been in two years. And I think the combination of focusing on the basics, meaning no menu deactivations, keeping the lines open, both our frontline and digital make-line from open to close, teams deployed correctly, is also a key driver in why we're seeing the traffic progress in January throughout that whole month. So we're feeling good about where we are operationally. We believe we can still get even better as we get closer and closer to our infamous burrito season. But it's a great position of strength that we're walking forward from. And we like how we exited December and we like how January shaped up.

Brian Niccol:

Yes. Sure. So I'd like to put a little color on this, menu deactivations in our digital business. Obviously, during the course of the last couple of years, we've had a lot of supply chain challenges, and one of the workarounds we created was allowing teams to deactivate certain items, right, so whether it's clock or chips or anything on those lines. And we've kind of just reestablished with both our suppliers, our distribution partners and our teams that that's not a fallback position anymore. The expectation is – I don't know. Can you hear me, David?

Brian Niccol:

Okay. The expectation is you should be in stock, and then you should be prepared from open to close with those items. So there were points and times during that quarter where we had hundreds of menu deactivations, and now we're back into the single digits on how that's going. So that's a key metric. Another key metric would be our digital on-time percentage. That's improved by nearly ten points. And so I think that's a function again of being deployed correctly, staffed correctly and then obviously, having the ingredients you need in order to build the order correctly. And then we've seen some progress on throughput as well on the frontline. And I anticipate really where we'll see big movement on throughput is more towards the second quarter, when we get into kind of more of our peak performance, and that's why you saw us focus on hiring so many additional people. So there is a lot of good indicators beyond just the traffic trends that we've seen. I always like to start with, hey, if you got more stability, your teams are deployed correctly, they are trained correctly, and then we keep it very focused on the basics of running the restaurant, we know we get good outcomes.

Operator:

And the next question is from Sara Senatore from Bank of America. Please go ahead.

Brian Niccol:

Yes. Well, I think what we’ve been referring to more often than not is just the absolute wage that we’re paying and then what that inflation subsequent with that has been. The stores, fortunately, are – we keep track of an at-model metric. And that’s what we’re referring to, where we’re closing on 90% of our restaurants being at-model. In regard to the shoulder-to-shoulder training, that’s just part of our process. And I think there was an element at some point where we’re maybe getting too reliant on virtual training versus the shoulder-to-shoulder training, meaning our field leaders, our team directors also need to be in the restaurants doing shoulder-to-shoulder training with our general managers and our new crews. So that should not result in any additional labor cost with having more shoulder-to-shoulder training. But Jack, I don’t know if there’s anything you want to add to that.

Sara Senatore:

Okay. So, just as we’re thinking about kind of the labor, there’s still room, I think, what you’re saying for improvement on just the restaurant-level margin line is the new comp?

Sara Senatore:

Okay. And then just quickly on the new store productivity. Could you clarify that sort of there, it’s 1,000 basis points better? Is that because the Chipotlanes open at higher volumes than non-Chipotlanes, and so it’s just sort of comparing the different models? Or is there something else going on where across the board, new store productivity is better? Thank you.

Sara Senatore:

Thank you so much.

David Palmer:

Thanks. I wanted to ask a question about digital orders. I’ve been somewhat surprised by the level of decline there. I think back in the third quarter, we estimated that digital traffic per store decline in the mid-teens. That’s including both delivery and pickup. Maybe you can comment on where you think that was correct, but also how much you think digital traffic per store declined in the fourth quarter. And just relatedly, what are your thoughts about that channel? I know it’s important to you. What’s your outlook for it? And are there things you can do to stabilize that line? Thanks.

Jack Hartung:

Yes. I’ll get started, David. Listen, there’s a couple of things that are driving it. One is, we’re having a surge in return to in-restaurant. And so that part of our business is growing very, very healthily throughout the last year and a half or two years since we’ve been moving away from the pandemic. But secondly, delivery has been declining as well. Delivery transactions in the fourth quarter declined 15%, and that’s I think just again a normal kind of move away from people getting out and about. And I think there’s probably some people who are deciding that while that channel adds a lot of convenience, there is a higher price that comes with that. So those are the two main drivers. And we figured that digital would kind of settle in this high 30% range. And so we’re at 37% range now. So it’s within the range that we thought we would be in. And early on in the pandemic, we saw our two markets that were the least affected, that’d be the Southeast and the Southwest. When they were starting to normalize, they were normalizing towards that high 30% range. So it feels like about the right range for us.

Brian Niccol:

Yes. That’s right, David. I mean the way we think about it is, we feel like we’ve reset the delivery business to be now where it makes sense economically. And as such, our order-ahead business, I think, has started to show the right trajectory. And then obviously, our in-store business has shown tremendous acceleration. So, I think you said it well.

Operator:

The next question is from Andrew Charles from Cowen. Please go ahead.

Jack Hartung:

Yes. So let me start with the fourth quarter. Our expectations were that our margin would be more in the 25% range rather than the 24% range. And when you look at the pieces of how we got down to 24%, part of it was the loyalty breakage. Frankly, there was an 80 basis point change year-over-year in the comp related to just that journal entry that we had to book for the breakage. If you look at just the – there was 30 basis points of additional or reduced breakage that we had to reflect this year, that cost us 20 basis points on the margin. It was 60 basis points on – we saw higher-than-expected medical claims and sick pay during the quarter as well. We typically do see those things pick up a little bit in the fourth quarter and especially in December. But it – the surge was more than we expected. That’s not something that we would expect to recur. And then sales softened during December as well. I think that went hand-in-hand with softer retail sales. We know there was some weather and a seasonal shift in the holidays and things like that. And that was 20 basis points, 30 basis points or so. So, we look at that margin in the fourth quarter. And we think if those things normalize, there is as much as 100 basis points or so that we can get back. We don’t get it back all at one time, but we definitely think we have the potential to do that. So with that in mind, if you’re looking at more of that high 24% and that 25% range on a normalized basis, then we are confident that as we move from the current volumes on a menu price-adjusted basis just over 20 – $2.7 [ph] million up towards that $3 million, the flow-through that we know our model provides will still get us to that 27%.

Jack Hartung:

Yes. I mean, listen, the way I would describe the quarter, we started out soft and we talked about that in October that we were doing a mid-single-digit comp, that GGS, while there was an attachment rate that was as expected, it wasn’t driving transactions. So, we started out soft in the quarter. We picked up as we stopped comparing against brisket. That was in the middle of November. So we had, call it, high single-digit comps for a while. And then we lapped the menu pricing increase from December of 2021. And then just as we got around the holiday, we just didn’t see that pop, that momentum that we normally see in – so December. So the way I would describe it is, frankly, we started the quarter soft and we ended the quarter soft. Now what we’re happy about is, as the holidays – we got through the holidays and we got into January, that’s where our transaction, not just from a comparison standpoint but just on a trend month-over-month, really did improve. And so we feel good about where we go from here. But yes, listen, the fourth quarter was a tough quarter for us.

Operator:

Next question will be from Brian Bittner from Oppenheimer & Co. Please go ahead.

Jack Hartung:

Yes. So, I mean I’ll start with that and then we can talk about expectations. We’re running right now in that kind of 9% to 10% range. And as I mentioned, it rolls off early in Q3. And then in – I’m sorry, early in Q2 and mid-Q3. And then there were a couple of delivery adjustments, target adjustments in there as well. We’ll end up being somewhere in that kind of mid-single-digit because by the time you get to the end of the year, we’re running basically zero pricing. So overall for the year, it will be somewhere in that kind of mid-single-digit. In terms of pricing action, we're not going to take a price increase just to cover a lap over last year. The main thing we're going to do is we're going to want inflation, and we're going to hope that inflation is tame. Right now, we know that there is some pressure on a few of our ingredients. Beef is the one that we keep hearing about. We haven't seen it yet, but everyone is predicting that there's going to be greater supply versus demand. But we'll watch that carefully and see what inflation does. But it's going to be more about inflation and wages, inflation and ingredients and do we need to take pricing action to cover some of that, but I – we wouldn't take a price increase just to cover a comp lap.

Jack Hartung:

Yes. I mean, right now, we're running, call it mid-single-digit positive traffic. We expect for the quarter, that guidance range assumes that we're also going to be positive transactions more in the low-single-digit as we move away from Omicron. Pricing will be that 9% to 10% range that I mentioned. And then there's going to be a mix component. We think it's kind of probably be in that low maybe 2-ish, 3-ish percent something like that. Mix is a little harder to predict, but those are the main components.

Operator:

Thank you. And the next question will be from Jon Tower from Citigroup. Please go ahead.

Brian Niccol:

I'll let Jack answer the first one on the store productivity, and then I can chime in on the...

Jon Tower:

Thank you.

Operator:

Thank you. And our next question will be from Sharon Zackfia from William Blair. Please go ahead.

Brian Niccol:

Yes. Look, thanks for the question on this because I think this is an important one, which is what we know is when we have our teams at model and deployed correctly with leadership present for shoulder-to-shoulder training, our restaurants perform and that's what we saw in 2019, and that's what we anticipate occurring going forward. So we know there's upside in how much throughput is our teams are capable of doing. And obviously, we're targeting to get those throughput numbers back to where they were in, call it, the 2019-time-period. The one thing that's nice is our turnover levels have dropped. So we're getting more stability in the teams, which means they're getting more reps. So that as we walk into these higher-level or higher-volume months, they've got more reps and being deployed correctly, working together correctly to ensure that we get more throughput. And that's what we're focused on is the people that we have today, how do we get them trained, how do we get them deployed and then how do we make sure those teams stay together.

Operator:

Thank you. And the next question will be from John Ivankoe with JP Morgan. Please go ahead.

Brian Niccol:

Yes. Sure. So probably the one that's closest in is the new grill work that we've got going on, which I mentioned in my earlier remarks. It just gives our teams a tool that allows them to cook the chicken, frankly just perfect every time and a lot faster, significantly faster. And the same thing goes for steak. And we're actually moving that from a one-store test now to a multi-store test as we speak. So we're excited about that one. Obviously, we're working on an automated digital make-line, which is in partnership with Hyphen. And we'll get the first one of those into a real live prototype in our Cultivate center probably end of this quarter, early in the next quarter. So that one's a little bit further out. And then we just got rolling with a live pilot on the, what we call Chippy, which is our automated arm or robotic arm to fry chips. And – so I have much more information on that as that goes live in the one restaurant. So I'd say the one that's probably close in is the grill, and the ones probably furthest out probably is our digital make-line – automated digital make-line. But all these are really promising because when you can significantly reduce cook times and then make the practice of grilling chicken and steak easier, good things happen with our culinary, and that's what we've seen in the one restaurant. People are giving us feedback that the steak and chicken taste great. Our team members are giving us feedback that they love using the new grills, and so we're more consistent with great culinary, everybody wins.

Operator:

The next question will be from Dennis Geiger from UBS. Please go ahead.

Brian Niccol:

Yes. Sure. So look, we really have not seen any meaningful resistance to our pricing, especially as it relates to our in-store experience. Obviously, the delivery channel was down, but I think that's a function of a couple of things. One, you do have to pay a premium for that occasion, combined with that the in-store experience is back and people are back out and about. So potentially, they see the convenience, the customization of coming in the restaurant and getting it on kind of their control terms. We continue to see the higher-income consumer, the individual that earns over $100,000, coming more often. And frankly, I think the same thing would have happened with the low-income consumer regardless of what the pricing was that we acted on. And we made the decision not to go chasing people with discounts. That's not what our brand is, and that's not what we're going to do. We're better off winning the value gain through great culinary, great speed/convenience, terrific customization, and we know that continues to resonate. Our value scores continue to be really strong. If you look at people that I would say are comparable that are in the fast-casual category, we're still at 10% to 30% discount. So look, I think we've made a lot of really good moves to kind of move with the challenges that we've had to deal with. And as a result, I think we're seeing stronger operations, stronger teams. And we're seeing, I think that work come out to bear in January and where we are here in February. So Jack, I don't know if there's anything to add to that.

Dennis Geiger:

Great. Thank you guys.

Jeffrey Bernstein:

Great, thank you very much. First question is just on the restaurant margin. I know for full year 2022, you ended in that 24% range, though you talked about maybe some headwinds in the fourth quarter that brought that in below expectation. Just wondering, if you can give any specific thoughts as you look to full year 2023. I know you gave some color specific to the first quarter, but as you think about the environment going forward, your pricing perhaps rolling off by the end of the year and what you know today based on kind of the key cost pressures. And just wondering your thoughts on the full year 2023, whether it’s reasonable to assume or return to 25% plus in 2023 or beyond. I know you mentioned getting to more like 27% when you hit the $3 million, but just wondering kind of on the interim what you’re thinking specifically of the 2023.

Jeffrey Bernstein:

Understood. And I’m just following up on a couple of bigger picture topics. I think, Brian, you mentioned that international growth’s going to be at, I think you said a measured pace. I’m wondering if the headwinds, to your point about the economy in Western Europe perhaps, is the primary reason why it’s measured or maybe there are other causes for concern. Anything around that international acceleration and when the timing of that might be would be great. Thank you.

Operator:

Thank you. And the next question is from Danilo Gargiulo with Bernstein. Please go ahead.

Brian Niccol:

No, look, the consumer demand, especially if we use kind of our in-store experience right now looks to be there. Especially as you look at the higher income consumer, their purchase frequency has actually gone up. So, we fundamentally believe that better we operate, the better our performance will be. And that’s why we’ve got, Scott and the team have a full court press, frankly on, great people, great culinary. If we do those two things against our operating standards, we believe we’ll continue to make progress on throughput and we’ll continue to see the gains that hopefully, we’ve experienced in the first part of this quarter.

Brian Niccol:

Yes, look I mentioned this earlier obviously one of the things that we’ve seen is a lot less incidents of many deactivations. So when you go to order online, all the products are available chips, guac, chicken, steak. That is dramatically decreased. And we know that’s a big deal because when you order online, if you don’t have what you want available your conversion rate goes down. And so we’ve seen when we have the products in stock, our conversion rate gets back to where it should be. We’ve also seen a huge step up in our on-time percentage, on-time in a meaningful way. And then we’ve also already seen some progress on throughput, albeit small movement, but I think that has more to do with the time of year than a testament to the impact of Project Square one. What I also think is also really great news is we have more stability in our teams than we’ve had in over two years, and we’ve got more teams at model with less turnover, and I think Scott’s got these teams focused on deploying correctly and getting trained shoulder-to-shoulder, so that they’re ready to go when the rush shows up.

Brian Harbour:

Yes, thank you. Maybe first just a question on delivery, are you able to see in your data that those customers have shifted to coming into the stores or mobile order-ahead, or do you think those customers have basically fallen off as you’ve seen that business decline a little bit?

Brian Harbour:

Okay. And maybe just a related question on kind of some of the new perks that you rolled out, the Freepotle that you launched in January. I mean, is it your view that, that drives kind of a step up in frequency or how else do you think it’ll affect customer behavior? Is there any margin impact of that? And then I guess, also you, it sounds like you’ve seen kind of mobile ordering stabilize, but do you want that to grow as you go into the next couple of years and do you think this can kind of be a catalyst for that?

Brian Harbour:

Just if you think that, that’s kind of the, the next catalyst for driving greater, more order penetration.

Brian Harbour:

Thank you.

Brian Niccol:

Okay, thanks. And thanks everybody for all the questions and being a part of the call. Obviously, 2022 was another one of these years where a lot of unexpected things occurred. But I do think once again, we’ve demonstrated the resiliency of Chipotle and the power of our food with Integrity purpose combined with the culinary and convenience that we provide. Again, we were able to expand our AUVs our margins. We had a record number of store openings in the fourth quarter. And, we’re optimistic about where the business is today because of the focus on great operational execution, combined with great culinary and great people. And you’re going to continue to see us stay focused on executing those basics while we continue to execute against the other strategies to make the brand more visible, loved and hopefully engaged with. So off to a good start in 2023 and we’re optimistic about our growth runway going forward. So thanks everybody for being a part of the call and we’ll talk to you soon, I’m sure. Take care. Bye.

Operator:

Good afternoon, and welcome to the Chipotle Mexican Grill Third Quarter 2022 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead.

Brian Niccol :

Thanks, Cindy, and good afternoon, everyone. Our third quarter results demonstrated the resiliency of the brand and strength of our organization in managing through a difficult consumer environment along with the inflationary headwinds we have experienced over the past 18 months. For the quarter, sales grew 14% to reach $2.2 billion, driven by a 7.6% comp. In-store sales grew by 22% over last year. Digital sales represented 37% of sales. Restaurant-level margin was 25.3%, an increase of 180 basis points year-over-year. Adjusted diluted EPS was $9.51, representing 35% growth over last year. And we opened 43 new restaurants, including 30 Chipotlanes. In the third quarter, we continue to see a widening of trends by income level with the lower income consumer further reducing frequency. Fortunately, for Chipotle, the majority of customers are from higher-income households, which continue to increase purchase frequency. While it is difficult to predict the macro impact on future spending trends, we know our value proposition remains strong and we experienced minimal resistance to our price increase in the quarter. To put it into perspective, our average chicken burrito or bowl, which makes up about 50% of our orders across the U.S., is below $9 in our restaurants. This is a tremendous value when you consider the quality of our food, including our food with integrity standards, the fresh preparation utilizing classic cooking techniques, the customization, generous portions and of course, the convenience and speed. Our fresh preparation is particularly unique when comparing Chipotle to other restaurants. There are not many restaurant options that prepare their food fresh daily, and we do it in all 3,000-plus restaurants. Our restaurant teams begin preparation at 7:30 in the morning to be able to serve our delicious food by the time we open. We only use 53 real ingredients, all of which you can pronounce and our dedicated employees prepare the food in our open kitchens using classic cooking techniques. This includes grilling Fajita Veggies and Adobo Chicken on the Plancha and mashing avocados to make our signature guacamole and making our chips fresh every day. So again, when you combine all these elements, you get an industry-leading brand with a tremendous value offering. And our five key strategies will continue to help us win today while we create the future. Now let me provide an update on each of these strategies, which include

Operator:

[Operator Instructions] And our first question will come from David Tarantino of Baird.

Brian Niccol:

Yes, sure. So in the third quarter, I think of transactions were down roughly 1%. A lot of the additional headwinds we've had with kind of the mix shifting as people return to their kind of normal course behavior has resulted in smaller group sizes. So that's kind of consistent with what we've seen. And then in the current quarter, obviously, we've got Garlic Guajillo Steak, launching right now going over top of the Brisket. And then I think as we mentioned, we're continuing to see some pressure on the low-income consumer. So we're still seeing transactions be pushed in that negative range. And obviously, we'll continue to keep an eye on it as we go forward. Jack, I don't know if you want to add anything to that.

David Tarantino:

Great. That's helpful. And then my follow-up, Brian, is I think you're aware there's been a lot of concern about the pricing strategy hurting the traffic. And I think you mentioned in your prepared remarks that you're not seeing resistance to the price increases yet. So I just wondered if you could comment on, I guess, how you're thinking about your price position now and how you think about the traffic trends you're seeing and whether or not you think that you've seen any resistance. It doesn't sound like you think you are, but I guess the traffic being slightly negative, just wanting you to have a chance to address that.

Operator:

The next question comes from Nicole Miller of Piper Sandler.

Brian Niccol:

Yes, sure. So I mean, that's exactly right, Nicole. The way we're trying to balance this is really only use price as the last lever to pull. And I think that's what we've done throughout the course of the last, call it, two years because we like having the strong value proposition, frankly. I like being in the position where we have the best culinary with the best ingredients and arguably the best price. And so it's a position of strength and it's a position we want to hang on to as we go forward. The reality is in an inflationary environment, you're going to have to pull that lever. And that's why I think it's really important to look at how your pricing stacks up relative to people's alternatives. Those alternatives are either the grocery store or other restaurants. And when you look at those, our value proposition remains in a really strong place. So we're delighted to continue to see new units opening at a terrific opening rate. They're still achieving 80%, 85% of what our typical restaurants do. Our Chipotlanes continue to outperform. And then frankly, even in our small towns, we're continuing to see just tremendous opening. So I think that tells me we're getting signals in all different fronts that our value proposition remains really strong whether it's a new restaurant coming to an area or an existing restaurant competing in an area that we've been competing in for a while. So that's the needle we're trying to thread.

Jack Hartung:

Yes, Nicole, there's actually three things that are going on when you move from the third quarter to the fourth quarter. First, we took our last price increase around August 1. So that hit part of the third quarter. So the rest of it, the fourth quarter is going to get a full hit. We also, on a very targeted basis, we identified pockets throughout the country, and there were 700 restaurants that had accelerating wage pressures. So if you look at what our typical wages are across the country and we took that very large 15% increase, we got everybody up to $15 or more in the second quarter of 2021, we have individual pockets in these restaurants that we identified that were going $1, $2 and $3 above what the rest of the country was doing. And that's just because the labor market was so tight there. So what we did, we just tried to up the menu prices just to cover some of that, not to get our margin back. But just to try to cover some of that, then ended up being somewhere between 2% and 3% in those 700 restaurants. That's about 50 basis points or so overall to the company. And the third piece, Nicole, is we took our price increase in the fourth quarter of last year around that December 7, December 8, something like that, and that rolls off. So those are the pieces. So you'll actually see for the quarter, the pricing will bounce up a little bit before it drops back down in the first quarter. So it will move from 13% up closer to call it 14.5% or approaching 15% before it drops down to 11% in the first quarter of next year.

David Palmer:

Two questions. The first one is a question on food costs that those costs are down under 30%. And obviously, that's well off where they used to be. I'm wondering if that's just all pricing net of commodity inflation? Or is there something else going on in there? For example, the fact that more is being made off the digital make line that's helping your portion sizes, your portion control or the rebound in beverages or something like that. I'm wondering if there's more than just price net of commodities and I have a quick follow-up.

David Palmer:

And just a follow-up, whether the weakness in the low end is -- pertains to your pricing or the fact that certain customers are getting priced out or not. I'm wondering what actions you think you have in your stable of potential tactics that you can deploy to correct that? Are there -- is this something where you really dial up the CRM and start doing tax to keep people sort of in the tent and keep their -- get people back in the flow again? How do you think you'll address that weakness, if at all?

Operator:

The next question comes from John Ivankoe of JPMorgan.

Brian Niccol:

Yes. Thanks for the question. Obviously, one of the things that has been, I guess, a breath of fresh air is we've now had the ability to get back to focusing on the basics of Chipotle. And obviously, it starts with great culinary and then it starts with great teams being trained and developing each other. And look, I think the other thing that we're now surrounding these teams with is technology to have more real-time information on the performance of the restaurant so that our field leader, our General Manager and our team knows either where there's an opportunity to be better or where there is success, let's put more energy to where that success is. The fact remains, since January, we've got roughly 50% of our field leaders are new to the company. And -- I'm sorry, not new to the company -- new enroll, right? So 90% have been promoted internally. But we've got a lot of new people in the Chipotle business at new levels of responsibility. And so that's what Project Square One's all about is making sure if you're a newly promoted field leader, you know how to do the job. You're newly promoted General Manager, you know how to do the job. Maybe you're new to our company all together at the crew level, you know how to do the job. And over the last two or three years, we've had to flex based on different regulations coming at us for how we wanted to run the restaurants. Now we're getting back to what we believe is the right way to run a Chipotle in an environment that allows us to execute our standards, our processes and our culinary. And so there's still opportunity for us to get better at it because the teams need more reps. But I think we're also surrounding them now with, I think, clarity on what the standards are as well as tools to give them clarity on how they're performing real time.

Brian Niccol:

Yes. No. I mean we've seen improvements definitely in our in-store experiences. And I think that's a testament to folks getting back to the business of running the front line. We still have opportunities to get better on that digital business when it comes to accuracy, specifically. And it really that accuracy shows itself more in a delivery occasion but we're seeing evidence where we're continuing to make great progress. I think I mentioned this earlier, in our higher-volume restaurants where you have more tenured field leader, more tenured general manager, more tenured crew, they're really outperforming on all these metrics and their satisfaction scores are higher. Their volumes are higher, the turnover is lower. So we know when we get teams to stabilize have high levels of capability, we get great results. And that's what Project Square One is all about. It's just reestablishing those processes, those standards and then ensuring that people have the capability to deliver on those processes and standards.

John Glass :

Brian, can you talk about the efficacy of the LTOs you're running today versus a year or two or three ago? Is this driving incremental traffic? Or is this just like a check benefit, right, as people sort of purchase these new, but you're not really driving as much in terms of new customers. I guess where I'm going with this is you're on kind of a treadmill now of sorts, right, where you have to continue to innovate to make sure that you're covering last year's promo. Is there an off-ramp to that? Do you think about ways to broaden or differentiate promotions beyond just protein differentiation into other things that might help you as you start to -- eventually, you're going to have a protein that doesn't do as well as the year ago then what?

John Glass:

Can I just clarify when you made the comment about traffic and the dynamic between mix and more people are coming back to the restaurants? Shouldn't that benefit traffic and maybe to the detrimented mix? I think you made the comment that, that was impacting traffic. But I would have thought that would have been a positive to order accounts even if it was hurting mix. Do you see it that way? Or do I have that wrong?

Jack Hartung:

Yes. The main mix we're seeing, John, is group size. So as we're seeing customers kind of return to more normal habits, so it's less digital more in-restaurant. And even in the in-restaurant channel, there's a slight decline in the group size. So what's happening, what seems to be happening is people rather than working from home and going with like family, for example, we're bringing dinner home for their family. They're kind of back to eating more on their own as an individual that they might be out with a group of 4 people, but they're all paying for their own lunch. So the group size across all the channels and then because there's still a shift moving from digital to in-store. The group size is the biggest mix thing that we're seeing. And that ends up meaning we're selling less burritos per transaction. So it's got a negative mix impact.

Jack Hartung:

It does have a positive traffic impact. That's right.

Danilo Gargiulo:

So I would like to understand a bit more whether the demand and the comp is coming from mostly new customer acquisition versus essentially like improving on the throughput in your high-volume stores.

Danilo Gargiulo:

Got it. And then one more question. I know you mentioned there is a comparable level of margin between the kind of small town store versus the kind of the urban store. I wonder if you can also like compose for us kind of the high-level economics. And if we were to talk about pricing versus traffic, are you seeing any major differences between the urban stores versus the small town stores?

Operator:

The next question comes from Dennis Geiger of UBS.

Brian Niccol:

Sure. I mean, look, obviously, one of the biggest opportunities for us is to make sure our restaurants are staffed and trained. And I think Jack mentioned this, we still have pockets of areas or we're still battling that very challenge. And I think as long as we have the ability to attract people and use obviously all of our benefits and purpose of the brand. But at the end of the day, you have to make sure the wage is attractive and retain people. So the ability to keep these restaurants staffed, have the teams fully trained and then executing against our standards, I think there is a lot of transaction opportunity in that, both on the frontline as well as in the digital business. And doing both of those things really well. I know there is upside in the business going forward. I think we've made tremendous progress coming out of kind of the COVID challenges and then coupled with the labor challenges and the inflationary environment. So we're in a position of strength, but I think we can be a lot stronger and better going forward and that will manifest itself, I think, in some additional transactions in a tough environment. That's why you hear us talking about, hey, look, we've got to treasure every guest because we got to get it right, because it's going to be a tougher environment for the consumer going forward. So that's a big opportunity without a doubt. And then obviously, we'll continue to take advantage of our CRM tools, our marketing capabilities to continue to keep people engaged and hopefully loving the brand so that they want to come as well. The other thing I should mention, too, is we're going to open a lot of restaurants in the fourth quarter. just the fact that we're going to be opening more restaurants gets us more new users and gets people to have more experiences with Chipotle, which continues to build on itself a positive kind of vibe for a growing vibrant brand. And people like to work there, people like to eat there. So we're going to keep pushing that path forward too.

Sara Senatore:

I wanted to just ask a little bit about your customer base. It's kind of a two-part question. The first is that among -- in smaller towns, you're talking about kind of lower volumes. Typically, I think of those as a slightly lower income cohort, but we spent a lot of time talking about low-income consumers. So I just wanted to see if you could kind of reconcile those and whether this means something different about your value proposition in small towns. And then the other piece is just thinking about your marketing campaigns and emphasizing athletes and gaming. Could you talk a little bit about who your customer is? It seems like it's mostly targeting younger men, although I'm either young nor a man, so I can't speak to that from personal experience, but maybe just talk about those two components.

Operator:

The next question comes from Andrew Charles of Cowen.

Brian Niccol :

Yes. Look, I mean what we've really spent a bunch of time on is looking at what happened in the last kind of recession or slowdowns. And the good news for us is, yes, you had some low-income consumers step away, but we also had higher income consumers trade into our business. And then as economics improved, all cohorts came back to the business in a big way. So we didn't lose those that came in and we regained those that unfortunately got hit by some tough economic headwinds. So we're not going to be chasing with discounting in the traditional sense. We are going to use targeted CRM initiatives that we know get a great return and also play a meaningful role in the consumer that receives that message. So we've seen it work in the past. We believe it will work going forward. And I think, the key thing for us to do through this whole period is execute our basics really well. That's our strongest point of differentiation. Our strongest point of differentiation without a doubt is our culinary, our ingredients, our customization and our speed. We do those things really well, we'll be rewarded with people's business.

Jack Hartung:

No. Andrew, when we provided that guidance, we did the -- basically, the analysis and the forecast, it's really all about Brisket. The idea here is that we've got Garlic Guajillo Steak through the entire quarter. And Brisket was very, very successful. But then we ran out. We ran out in mid-November. So when we look at what's going to happen in the second half of November and then as we move into December, those comparisons alone getting easier, give us the confidence that we can get to -- we think we'll move up. That's why we kind of range-bounded the guidance from the current trend we're running today, which is mid-single digits, up to high single digits because we do think that easing of comparison is going to lift our comp. But we don't have any incremental pricing into that guidance.