The Chipotle Mexican Grill Second Quarter 2023 Results Call welcomed participants who were in listen-only mode. Cindy Olsen, Head of Investor Relations and Strategy, began the call by reminding participants of the risk factors associated with forward-looking statements. Brian Niccol, Chairman and Chief Executive Officer, and Jack Hartung, Chief Financial and Administrative Officer, then gave prepared remarks. The strength of the business in the second quarter was attributed to the focus on exceptional food and exceptional people, as well as the success of Chicken al Pastor.

Chipotle reported a 14% growth in sales for the quarter, driven by a 7.4% comp. Restaurant level margin was 27.5%, an increase of 230 basis points year-over-year, and adjusted diluted EPS was $12.65, representing 36% growth over last year. For the third quarter, comps are anticipated to be in the low to mid-single-digit range, and for the full year, mid to high-single-digit comps are expected. The company has restructured its organizational structure to better optimize its processes and focus on five key strategies, such as running successful restaurants with a people-accountable culture, developing and retaining diverse talent, and improving overall guest engagement.

Project Square One is now permanently embedded in the company's training DNA, and they will focus on retraining crew members on key components each quarter. They will emphasize throughput and proper deployment during peak periods, and are testing changes to the cadence of orders on the digital make line to improve throughput and on-time orders. If successful, these changes will be rolled out to other restaurants.

Chipotle has seen an improvement in throughput in certain restaurants due to the balanced deployment between the front make line and the digital make line, as well as the consistent feedback from the field leader and the expo in position during peak periods. The restaurants are outperforming the region and the company average, and Cultivate University has been relaunched as a three-day training program for newly promoted field leaders on skills such as developing future leaders, the foundations of exceptional throughput and culinary, and a culture of accountability.

Chipotle is offering Cultivate University to support new field leaders in their transition to managing a $20 million business. They are also launching a behind-the-foil ad campaign, introducing new menu items such as Chicken al Pastor, and launching a rewards program to drive frequency with existing customers.

Freepotle has been successful in driving enrollments in the first half of the year, and Chipotle has leveraged the basketball playoffs and NHL partnership to remain top of mind. Additionally, the return of the popular Chipotle Hockey Jersey Bogo Day had the highest participation in the history of the program. Chipotle is also partnering with athletes and teams around big sporting events, and has implemented a dual-sided grill in their restaurants which can cook chicken in under four minutes and steak in under one minute.

The dual-sided grill and third pan rice cookers have been rolled out in 10 high volume locations and 200 existing restaurants respectively, with plans to add more of the latter this year. Additionally, the restaurant is investing in Veedu to explore collaborative robotics, such as the autocado, which cuts, cores, and peels avocados and saves time while still allowing teams to hand mash their signature guac. These initiatives result in more consistent execution with better moisture, faster recovery times, and less waste, making the complex culinary role more desirable.

Chipotle has been recognized as one of Time magazine's most innovative companies and has added Stephen Piacentini as their new Chief Development Officer. This year, they are targeting 255 to 285 new restaurants with over 80% including a Chipotle, and they have opened their 600th Chipotle in Canada. They are also targeting 7,000 restaurants in North America and have added resources to their European operations. They have also announced their first ever development agreement with the Alshaya Group to open restaurants in the Middle East.

The Alshaya Group is planning to open Chipotle restaurants in Kuwait and United Arab Emirates in 2024. Chipotle celebrated its 30th anniversary earlier this month and has been successful due to its people, purpose of cultivating a better world, and focus on delivering exceptional food. In the second quarter, sales grew 14% year-over-year and comp sales grew 7.4% with over 4% transaction growth. For the third quarter, comps are expected to be in a low to mid-single-digit range, and full-year comps are forecasted to be in the mid to high single-digit range. Restaurant level margin increased about 230 basis points compared to last year and earnings per share adjusted for unusual items was $12.65, representing 36% year-over-year growth.

In the second quarter, cost of sales decreased by 100 basis points, labor costs decreased by 50 basis points, other operating costs decreased by 40 basis points, and marketing and promo costs were 2.4%. For Q3, cost of sales are expected to be around 30%, labor costs to be around 25%, marketing costs to be in the low 2% range, other operating costs to be in the mid 14% range, and G&A to be $153 million on a non-gap basis. Corporate restructuring expenses were $3.5 million.

In Q3, G&A is expected to total around $160 million, with $125 million of that being underlying G&A. This includes $29 million related to non-cash stock compensation, and $5 million related to bonus accruals and payroll taxes. Appreciation for the quarter was $79 million at 3.1% of sales, and depreciation is expected to increase slightly each quarter. Asset retirement was $16.2 million, including $8.5 million related to corporate and restaurant asset impairments. The effective tax rate for Q2 was 23.8% due to an increase in tax benefits, and the balance sheet remains strong with over $1.8 billion in cash, restricted cash, and investments with no debt. The company repurchased $88 million of their stock at an average price of $1,937 and have $295 million remaining under their share authorization program.

Chipotle opened 47 new restaurants in the second quarter, 40 of which had a Chipotle, and they are on track to open between 255 and 285 new restaurants this year with 80% including Chipotle. They are still investing in food with integrity, expanding access, and innovating within their restaurants. They are looking at pricing plans for the second half of the year due to inflation of the beef and avocado categories, and they are considering a price increase in December when they historically took price in 2018 through 2021. Additionally, the resumption of student payments in September could affect restaurant industry spending.

Brian Niccol and Jack Hartung discussed their approach to pricing and how they are seeing some inflationary pressure on labor and food costs, specifically avocados. They have seen some benefits from lower cost avocados and the shift from beef to chicken, which has been a benefit as well. They will look at customer demand and transaction patterns before making any decisions on pricing. Andrew Charles asked about the 3Q guidance and the lower income consumer, to which Brian Niccol responded that the consumer is showing resilience.

Jack Hartung explains that the components of their guidance for the third quarter imply a menu price increase of 2.5-2.6%, positive transactions of 3-3.5%, and a negative mix of 2% due to a lower group size.

Jack Hartung explains that there is a subtle seasonality shift, with restaurants in touristy areas doing better and those in non-touristy areas being softer. Recently there has been a normalization, though there may not be a full bounce back in the fourth quarter. Sara Senatore then asks about throughput, and how the new equipment is impacting cooktimes.

Brian Niccol explains that Chipotle has made progress on throughput, but they are still not where they want to be. They need four people on the front line to reach their goals. In places where great throughput execution is achieved, they are seeing two to five transactions in their best 15 minutes. To become more efficient and faster, they have implemented double-sided grills in 10 restaurants which have decreased cooking times from 12 minutes to 3-4 minutes. They are also in the pilot phase of testing avocado and raisin, but they are not in any restaurants yet with either item.

Brian Niccol is confident that the company will be able to meet their full-year guidance for low-to-mid single-digit comp sales growth despite the challenges associated with 110,000 employees learning the throughput system. He believes that through continued focus and great progress, they will be able to build a culture of throughput that will lead to increases in both traffic and total comp. He is considering various actions to sustain the momentum in the fourth quarter.

Chipotle is looking to enhance its operational performance and introduce a new menu item in the fourth quarter. They are expanding internationally, with a focus on Western Europe, Canada, and the Middle East. They are opting for a mix of company ownership and partnerships in the Middle East with Alshaya, as they believe the concept will resonate well.

Brian Niccol is excited about the double sided growth that will be enabled by new cooking equipment. The new equipment will allow for faster, more consistent execution of orders and will help reduce the difficulty of training. The manufacturers have the capability to scale to what is needed once the green light is given, and the project is expected to take around a year.

Brian Niccol discussed the personalized marketing efforts that Chipotle has been implementing, such as suggestive sales and customized recommendations. These efforts have been seen in the app and web, and have resulted in increased loyalty and sales. The next step is to roll out the personalized marketing to cover more people on a larger scale.

Brian Niccol discusses the benefits of the double-sided grill, such as freeing up capacity, allowing for faster cooking and recovery times, and creating simplicity for team members. He also alludes to an upward bias to the 7000 North American store target and that Chipotle could potentially become a $10 billion brand.

Brian Niccol believes that Chipotle has a lot of potential for growth, even without having to be aggressive. He believes that the economics of each new restaurant that is opened is very good, and if the AUVs and store count continue to grow, the brand could reach $20-30 billion. Jack Hartung mentioned that when the company first went public, the goal was to have 3000 restaurants, and now they have achieved that.

Brian Niccol is discussing the progress of the hyphen make line and its testing phase. He notes that the team has done a great job in taking it from a concept to a prototype and then to a working prototype. He also states that they are currently learning a lot and preparing to figure out the next generation version. He mentions that they are monitoring certain KPIs to determine the success of the make line.

Jack Hartung explains that the increase in underlying G&A is due to investments in resources for Europe, innovation such as probiotics, and equity-based calculations. He also anticipates a slight increase in G&A from Q3 to Q4.

Jack Hartung explains that the delays in the market are not due to equipment issues, but rather due to city-controlled issues such as getting utilities to the site, permitting, and inspections. Chris is sending the message to the team to make sure they are calling and pushing the cities to get the work done, whether they are working at home or in the office.

Brian Niccol explains that the key to improving throughput initiatives is for the team to have the confidence to stay in their assigned roles and positions. He believes that with experience and trust, the team will be able to power through the line and take care of tasks accordingly. Scott and the team are focusing on getting the pillars of great throughput back into the culture and general manager turnover is now in the low 20s.

Jack Hartung discussed the breakdown of traffic, menu price, and mix for the two-queue. He mentioned that traffic was better than 4% on the positive side, menu price increased by mid five, and a mix item reduced the comp by about 2.5%. Brian Niccol added that if they wanted to add a permanent item, they would have to remove something.

Jack Hartung explains that group sizes have been normalizing since the pandemic began, but are still higher than 2019 levels. He predicts that the gap should narrow each quarter, but will not be totally flat by the end of the year. He then elaborates on the food cost drivers, mentioning that avocados are part of it, and that the new item will affect food costs going forward.

The team is focusing on building the brand in Europe and ensuring performance is consistent, similar to what was done in Canada. Once performance is consistent, they will build more aggressively. The team has a plan and the team members have visited Europe. In the previous quarter, there was low grade inflation in food costs, which was offset by favorable avocados and chicken al Pastor. For the third quarter, food costs are expected to increase as avocado prices normalize and there is no offset.

Chipotle has seen success in building their brand in the United States, Canada, and soon Europe. They have put a leader in place in Canada and have seen great success. They have sent one of their top operators to London to help build the brand. They are in no rush to build restaurants without having people ready to go, good economics, and a great brand to execute against. They have recently signed a new agreement with Alshaya to help with franchising.

Brian Niccol discussed Chipotle's successful quarter and the strength of their business. He mentioned that wage inflation for new hires is in the 3-4% range, which is normal, and the restaurants are doing a great job of staffing and meeting their model. He concluded the conference by expressing pride in what the team has accomplished.

The speaker is confident in the team's ability to increase throughput and drive the business forward through traffic growth with great culinary, people, and restaurant openings. He is proud of the results and optimistic for the future, and looks forward to sharing the results with the audience next quarter.

This summary was generated with AI and may contain some inaccuracies.