The operator welcomes participants to the Chipotle Mexican Grill Third Quarter 2023 Results Conference Call and reminds them that the call is being recorded. Cindy Olsen, Head of Investor Relations and Strategy, introduces the call and reminds listeners that certain statements may constitute forward-looking statements. The discussion will also include non-GAAP financial measures. Brian Niccol, Chairman and CEO, and Jack Hartung, CFO and CAO, will give prepared remarks and the entire Executive leadership team will be available for questions.

In the second quarter, Chipotle saw strong results with sales increasing by 11% and positive transaction trends. The company opened 62 new restaurants, including 54 with Chipotlanes. Laura Fuentes, a hospitality and people leadership expert, has joined the Board of Directors to help with the company's five key strategies. These strategies include running successful restaurants with a focus on people and food, retaining and developing diverse talent, improving guest engagement, utilizing technology and innovation, and expanding internationally. The company has made progress in getting back to their standard of excellence.

The restaurant chain has successfully returned to pre-pandemic staffing levels and is focused on improving operational execution, particularly in terms of throughput. They have implemented two new initiatives to drive further improvement and have received positive feedback from restaurant teams. Throughput is a key performance factor in the crew member bonus plan, motivating employees to achieve high standards.

Chipotle's bonus measure for general managers, field leaders, team directors, and regional vice presidents includes a focus on increasing throughput, which will lead to better guest experiences. The company's Behind the Foil campaign highlights the hard work of its teams in preparing fresh, high-quality food without the use of freezers. This campaign also showcases the career growth opportunities at Chipotle, with one team director starting as a crew member and now managing a sub region of 49 restaurants. Developing future leaders is a key part of the company's growth goals.

The marketing team has successfully increased the visibility and relevance of the brand through various initiatives, including the reintroduction of the popular Carne Asada as a limited time offer and the launch of a new Carne Asada Quesadilla. They have also partnered with college football players and teams to showcase the benefits of Chipotle's real food for athletes. In addition, the team has leveraged gaming integrations and brought back the popular Chipotle IQ trivia game. The company is also working on innovative technologies, such as an automated digital make line, to improve the overall experience for both restaurant teams and guests.

Chipotle has partnered with Hyphen to test an automated digital make line that fits into their existing footprint and allows for the building of various menu items. They are also testing Autocado, a machine that cuts and scoops avocados, and are receiving feedback from restaurant teams. The company is on track to open a record number of new restaurants this year, with the majority featuring a Chipotlane. They recently opened their first location in Calgary, Canada and saw strong demand on opening day.

The company has had success in Canada and is confident in its long-term growth potential there. In Europe, they plan to improve operations and build brand awareness through local initiatives. They are also collaborating with Alshaya Group in the Middle East for successful restaurant openings next year. The CEO thanks the team for their hard work and is confident in the company's ability to achieve its growth goals and purpose. The CFO will now speak.

In the third quarter, sales increased by 11% and comp sales grew by 5% with a 4% transaction growth. Restaurant level margin also increased by 100 basis points. Adjusted earnings per share were $11.36, a 19% increase from last year. The quarter had $1 million in unusual expenses related to corporate restructuring. For the fourth quarter, the company expects comps in the mid to high single digit range, including a recent price increase of 3%. The full year comps are forecasted to be in the mid to high single digit range. Cost of sales decreased slightly due to menu price increases, but was offset by inflation in food costs. Labor costs also decreased slightly due to sales leverage, but were offset by wage inflation. For the fourth quarter, the company expects similar levels of paid time off and other benefits as last year.

In the fourth quarter, other operating costs decreased by 50 basis points due to sales leverage and are expected to be in the low 15% range. G&A for the quarter was $159 million on a GAAP basis, with underlying G&A expected to be around $125 million in Q4. Preopening expenses are anticipated to be around $15 million and depreciation expenses are expected to increase by $4 million to $5 million due to new restaurant openings.

In the third quarter, the company's asset retirement was $7.2 million and is expected to be around $8 million in the fourth quarter. The effective tax rate for the quarter was 24.2%, benefiting from higher than expected tax credits. The balance sheet remains strong with over $1.9 billion in cash and no debt. The company repurchased $226 million of its stock and plans to open between 255 to 285 new restaurants this year, with at least 80% having a Chipotlane. The timeline for new restaurant openings remains extended, but the company believes it can approach 10% new restaurant openings by 2025. The company thanks its employees for their hard work and dedication to providing exceptional food and service to guests.

The company has a lot of potential for growth, particularly in improving the guest experience and increasing throughput in restaurants. They are confident in reaching their goal of 8-10% unit growth by 2025, even with potential construction and permitting delays. In Europe, they are focused on improving operational efficiency and training to support accelerated growth.

The company has challenged its teams to find ways to reduce delays and shorten timelines for deals. They believe their pipeline can reach 10% growth even if the timelines remain the same. In Europe, they are focused on improving operating efficiencies to translate top line growth to the bottom line. The company's traffic saw a strong acceleration throughout the quarter, unlike the overall consumer spending environment. The increase in transactions was attributed to efforts to improve staffing, training, and deployment.

Chipotle's success can be attributed to their great people, culinary offerings, and operational performance. The recent launch of Carne Asada is expected to outperform their previous Garlic Guajillo Steak. The company's focus on staffing, training, and improving throughput has led to good traffic results and they plan to continue protecting their brand and value proposition. Despite inflation and higher interest rates, Chipotle's value and affordability are still appealing to customers across all income levels.

In the paragraph, CEO Brian Niccol and CFO Jack Hartung discuss the company's strong growth being driven by transactions, which is important for the ongoing health and future growth of the business. They also mention the strength of the company's margins in the third quarter and how they are close to reaching their target of 27%. They attribute this to menu pricing and potential easing of inflation and labor costs in the future. However, they note that the margin is not a strict target and may fluctuate depending on various factors.

Jack Hartung, CFO of Chipotle, discusses the company's strong economic model and plans to reach a 27% growth next year. He also mentions the price and mix breakdown in the third quarter, with a 2.8% price increase and a 2% mix component. Looking ahead to the fourth quarter, they recently took a 3% price increase and expect the mix component to be less of a drag. A question is asked about a potential California-targeted price increase to mitigate the impact of higher wages, to which Jack responds affirmatively.

The company is anticipating a significant increase in labor costs in California next year, which will likely result in a mid to high single digit price increase. They have not yet decided on the exact pricing strategy, but they are committed to passing on the cost to consumers. The company is currently prioritizing operations and projects, but they are still working on menu innovation, with a focus on promoting their existing menu items and potentially bringing back past menu innovations.

The speaker is confident in the menu and future plans for the next 18-24 months. The next question is about labor productivity and getting back to the 23% labor margin in the past. The speaker acknowledges the challenge of labor inflation and mentions the California Act adding to it. The key to efficiency is deploying labor properly and having the right people on the frontline to improve throughput.

The company is focused on improving throughput and leveraging labor to decrease labor costs. They believe that investments in technology like Autocado and Hyphen can help offset labor inflation, but it may be difficult to achieve a 23% labor cost. Improving throughput can lead to additional transactions and comps, but the impact on labor leverage is not significant.

The speaker discusses the importance of increasing transactions to grow margins and mentions a specific initiative to improve digital order accuracy and on-time performance. They state that this initiative is currently rolled out in about half of their restaurants and has resulted in improved throughput, but there is still room for improvement. They also mention that there is no constraint on reaching peak throughput levels and there is potential to exceed previous levels.

The speaker discusses the company's recent growth and potential for future growth. They mention that there is currently no bottleneck in the business and that there is room for expansion. The company's main focus is on improving throughput and they are confident that this will lead to continued growth. They also mention that they are looking into ways to measure unmet demand and the potential for growth in areas where there is high foot traffic.

The company is developing tools to capture data on customer wait times and frontline performance. Historically, faster throughput has resulted in more transactions, as people tend to walk away from long lines. This is seen both in physical restaurants and on the digital side. The company is able to flex capacity in restaurants by adding staff, and very few restaurants are at max capacity for digital orders. The faster the company is, the more customers it is able to serve, as seen in recent results.

The team at the company is focused on personalizing the user experience by using analytics and insights to make suggestions based on the customer's past purchases. They are currently working on implementing this throughout the ordering process. The team has also been testing dual sided grills in 10 restaurants, but have encountered some challenges with the energy needed to run them.

The speaker discusses the cost and installation of equipment for a new feature in their business, and mentions that they are still working on making the economics of it work. They then answer a question about the impact of delivery and mobile ordering on their business, stating that they are focusing on being on-time and accurate with orders, and are seeing progress in both areas. They also mention that the volume of their new feature, Chipotlanes, is getting closer to the volume of their regular business.

The speaker discusses the impact of the pandemic on the Chipotlane, a preferred access channel during that time. They mention that they are comparing apples and oranges when comparing current performance to pre-pandemic performance due to the implementation of Chipotlanes in most restaurants. They also mention that margins are better due to increased digital sales, and customers are choosing the more efficient and value-driven convenience channel over delivery. The next question asks for an update on throughput compared to 2019 and whether 2019 is still the right benchmark, given the significant shift in the business.

The company has adjusted their 2019 benchmark to account for the decrease in volume going through the frontline. They have set a target for their teams to achieve a certain number of transactions per 15 minutes, and they have seen progress in this area with the implementation of core four and other techniques. They are confident that they are on the right track to reach their target.

The company is basing its current guidance for comps on current trends rather than taking into account any weather-related impact from the previous year. They are also seeing improved margins and increased flow through in stores with Chipotlanes. The industry may see an increase in promotional intensity from larger competitors in order to attract and retain traffic.

Brian Niccol, CEO of Chipotle, discusses the company's focus on providing a great customer experience rather than relying on price promotions. He believes that their high-quality ingredients and customizable menu offer strong value for customers, and that their prices are 15-30% lower than competitors. The company has also found that they are a strong value proposition for various consumer segments, including those with student debt. In response to a question about the potential impact of anti-obesity drugs, Niccol states that they have not seen any negative effects so far, but acknowledges that their slightly higher income demographic may make them more vulnerable.

In this paragraph, the speaker asks about the potential impact of a new drug on the company's sales and how they plan to respond. The CEO reassures that they have not seen any significant impact and their food options are suitable for various diets. The speaker also asks about the company's forecast for commodity and labor inflation, to which the CFO responds that they are predicting a 3%-4% increase.

The company is happy with its current operating environment and believes it can operate effectively with a 3-4% price increase. However, if the increase continues at a higher level, it may be more challenging. The company is confident that people will continue to dine at Chipotle, based on recent trends. The CEO also discussed the progress of the Hyphen make line, which has shown potential for increasing capacity, accuracy, and speed, but still has some challenges to overcome before moving to the next stage of development. The team is using a stage gate process to learn, iterate, and improve the prototype.

The speaker discusses the promising signs for the accuracy, speed, and cleanliness of a new prototype being developed. They commend the team's efforts and passion to improve the prototype for a second generation. They also mention that urban stores are performing slightly better than suburban stores, but central business districts are still behind in terms of sales. The speaker concludes by thanking everyone for their questions and expressing pride in the team's results and focus on throughput and culinary excellence.

The company is committed to having well-trained employees and is pleased with their current results. They are optimistic about their future and plan to build new units and increase profits. The speaker thanks the audience for their time and ends the conference call.

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