奇波雷墨西哥燒烤 (CMG) 2018 Q2 法說會逐字稿

Greetings, and welcome to Chipotle Mexican Grill Inc.

Second Quarter 2018 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Chipotle.

Please go ahead.

Hi, everyone, and welcome to our call today.

By now, you should have access to our earnings announcement released this afternoon for the second quarter of 2018.

It may also be found on our Investor Relations website at ir.chipotle.com.

Before we begin our presentation, I will remind everyone that parts of our discussion today will include forward-looking statements as defined in the securities laws.

These forward-looking statements will include statements regarding the expected benefits from our strategic focus areas or specific business initiatives; the potential opportunity for our digital sales; sales trends and forecasts for future comparable sales; expected new restaurant openings; estimates of future food, labor, marketing and maintenance and repair costs; statements about our expected effective tax rate and projections of the amount and timing of unusual cost items and stock repurchases as well as other statements of our expectations and plans.

These statements are based on information available to us today, and we are not assuming any obligation to update them.

Forward-looking statements are subject to the risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements.

We refer you to the risk factors in our annual report on Form 10-K, as updated, and our subsequent Form 10-Qs for a discussion of these risks.

Our discussion today will also include non-GAAP financial measures, reconciliations of which can be found on the Presentation page of the Investor Relations section of our website.

I'd also like to remind everyone that we've adopted a self-imposed quiet period, restricting communications with investors during that period.

The quiet period will begin on the 16th day of the last month of each fiscal quarter and continues until the next earnings conference call.

For the third quarter of 2018, it will begin September 16 and continue through our third quarter earnings release.

We will start today's call with some prepared remarks from Brian Niccol, Chief Executive Officer; and Jack Hartung, Chief Financial Officer.

After which, we will take questions.

In the room and also available during the Q&A period are Scott Boatwright, Chief Restaurant Officer; Curt Garner, Chief Digital and Information Officer; Chris Brandt, Chief Marketing Officer; Laurie Schalow, Chief Communications Officer; and Marissa Andrada, Chief Human Resources Officer.

And now, I will turn the call over to Brian Niccol.

Thanks, Coralie, and good afternoon, everyone.

I'm pleased to report a solid second quarter with sales and restaurant-level margins ahead of our expectations.

Total sales grew 8.3% to $1.27 billion, driven by comparable sales of 3.3% and 34 new restaurants opened in the quarter.

This positive comparable sales trajectory enabled us to expand restaurant-level margins, which were up 90 basis points year-over-year to 19.7%.

Earnings per share adjusted for unusual costs grew nearly 24% to $2.87, and our GAAP earnings were $1.68.

While Jack will go through the financials in more detail shortly, I'd like to put these results into context by discussing how the work our 70,000 employees do every day contributed to these financial outcomes.

Last month, we shared with you that we would execute our strategy to win today and cultivate the future by focusing on these 5 areas: becoming a more culturally relevant and engaging brand that builds love and loyalty; digitizing and modernizing our restaurant experience to create a more convenient and enjoyable guest experience; running great restaurants with great hospitality and throughput; being disciplined and focused to enhance our powerful economic model; and building a great culture that can innovate and execute across digital, access, menu and the restaurant experience.

Today, I'll focus on how innovation in digital and access and how improving our operations contributed to this quarter's results.

Let me begin with operations.

We know that strong sales growth and margins are dependent on great operations, which is the hallmark of any healthy brand.

This brand was founded on outstanding operations and real food.

We are getting back to our roots.

When we have the right people leading the right teams and when those teams are well trained and operating with confidence, they execute great guest experiences.

It takes time to build a culture of accountability, and I'm pleased that we are seeing some encouraging signs of progress in key areas, namely, our restaurant AB scores, a measurement system we implemented 1.5 years ago to drive greater accountability, is trending in the right direction.

We are doing a better job staffing our restaurants to match sales volumes, and we have lower year-over-year hourly turnover, which tells us we are making progress on training and building great teams.

Additionally, we have seen a meaningful decline in guest complaints, and with that, our guest satisfaction scores have improved since we started measuring them last year.

This tells us that we've made progress and that our guests are noticing the difference.

We know that when the food is delicious, the feel of the restaurant is great, and we remove the friction from the flow of the order process, no matter the channel, we delight customers.

While I'm encouraged by our progress, we still have a lot of work to do.

We have an opportunity to improve throughput, consistent execution of great food and consistent delivery of a great atmosphere.

I'll outline some of the initiatives underway to address those opportunities.

We are halfway through our big fix initiative, which is designed to bring our restaurants back up to standards and make them uniquely Chipotle.

This not only improves the guest experience, as the appearance of our restaurants is clean and well maintained for every guest, but the team member experience improves as well.

We overhauled our training materials several months ago and have retrained 3/4 of our field leaders through Cultivate University.

That's an in-restaurant and in-classroom 1-week training session that we launched in April.

That investment and the ongoing development of our field leadership continue to drive crew member engagement.

We are supplementing that training with a new hospitality training program in the restaurants, and we're in the early innings of refining our training to teach and taste the details, so that we achieve the winning combination of great food, feel and flow with every guest experience.

We are zeroing in on how to get back to great throughput, as speed of service is a foundational element of convenience that our guests truly value.

Late last year, we rolled out what we call the owner's path, a comprehensive review of our restaurant's performance.

Equipping our field leaders with this tool is improving their powers of observation and allowing them to focus on the critical details of delivering an improved guest experience.

In addition, the tool creates teaching moments for their general managers and documents that corrective actions are taken when needed.

We're currently rolling out a digital version for mobile phones and tablets of this previous paper-based tool.

That should result in more consistent operations across our restaurants.

We'll have this in place nationally by October.

We're also in the process of redesigning our forecasting and labor scheduling tool.

This is a significant undertaking but necessary for us to have accurate sales forecasting and deliver the right amount of labor at the right time to meet the needs of our guests.

The new tool will have a best-in-class sales forecasting component that will leverage machine learning to remove the guesswork of determining sales and labor needs for our business.

In addition, our team members will have the ability to see their schedules remotely and swap shifts from mobile phones, taking these tasks out of the hands of the manager.

We believe leveraging technologies such as this makes us a more desirable employer as we work to create a better experience for our crew members.

We will continue to make investments in our restaurants because a better experience for our team members directly translates to a better experience for our guests.

I'd also like to talk to you about the progress we are making around innovation in digital and access, as this was a real bright spot in the quarter.

Today, our annualized digital sales are approximately $0.5 billion, and we are in the early stages of this multibillion-dollar opportunity.

Our digital sales grew 33% in the quarter and now account for 10.3% of sales, an acceleration from 20% growth in the first quarter.

We now have 4 million active monthly users across our app and our website, a 65% increase since the end of last year.

Delivery and group occasions were particularly strong this quarter.

Delivery sales quadrupled in the quarter and we know from our customer research that improving access to Chipotle is an important growth lever, whether it be through adding more restaurants or enabling more convenience like delivery.

Today, delivery is available from 1,700 restaurants and we expect that to reach 2,000 restaurants by year-end.

We're also pleased that delivery is now an option available directly from our app.

Our group ordering business was solid in the seasonally strong quarter for catering orders.

In mid-July, we expanded our build-your-own catering offer nationally, whereby we lowered the minimum size and offered more price tiers for group orders therefore expanding access for more occasions.

We tested this enhancement early in the year and found that group order sales in our test stores outperformed the base by mid to high single digits.

Delivery availability for catering expanded to 2/3 of our restaurants in the quarter.

As I have mentioned, Chipotle's second make-line enables the business to handle the incremental growth without any impact on throughput or the in-restaurant experience.

I'm happy to see progress on digitizing our second make-lines, which are now in roughly 500 restaurants.

We're targeting approximately 1,000 restaurants to be enabled with a digital second make-line by year-end, and we are accelerating our rollout to reach completion by the end of 2019.

These digital second make-lines have a direct positive impact on the team member and guest experience.

Also, the digital pickup-shelf test in several New York City restaurants continues to show great promise.

And based on the results to date, we will be expanding the test to a larger number of restaurants in several markets next month.

We've mentioned before that we are undertaking a wide-ranging consumer research project, with the results available this fall.

I did, however, want to mention a few interesting highlights that we've uncovered so far.

Access is the #1 lever we can pull to drive sales, which supports our new unit growth as well as the innovation focus around the access via our digital channels.

Additionally, we sit at in an interesting intersection between fast food and fast casual, with many attributes such as value and speed that are typically associated with fast food and attributes such as quality and freshness, which are typically associated with fast-casual.

We're particularly strong with millennial and Generation Z customers relative to most brands.

And when these groups try us, our odds of repeat visits are much higher.

These early insights give us confidence that new news and the more engaging marketing that we're beginning to see will allow us to drive transaction growth.

Also, I'm pleased with the speed at which we are getting transaction-driving initiatives across digital, access, loyalty and menu into test markets.

The combination of these test markets and our early insights from our consumer research will inform our plans in 2019 and beyond.

Before I turn it over to Jack, I want to thank all of our team members across the country that are working diligently to serve our guests real food, cooked to perfection and prepared in our restaurants with fresh ingredients, just the way our guests like it.

This hard work is the basis for all of our future success, and we appreciate it tremendously.

Now over to you, Jack.

Thanks, Brian.

I'm really pleased that our team's focus on our 5 strategic priorities has contributed to a high-quality quarter with comp sales of 3.3% and a 19.7% restaurant-level margin.

And underlying earnings were also strong after adjusting for a number of unusual costs during the quarter.

As we discussed on our call last month, we'll continue to see costs over the next few quarters associated with our restructuring, relocation and underperforming store closures.

These charges also have a temporary impact on our tax rates, which I'll talk about in more detail later.

We generated revenue of $1.27 billion during the quarter, an increase of 8.3% from last year on comp sales growth of 3.3%.

That's on top of last year's strong 8.1% Q2 comp sales increase.

Restaurant-level margins of 19.7% expanded 90 basis points from last year, and normalized earnings per share adjusted for the unusual items was $2.87.

The second quarter had unusual expenses mostly related to the transformation, and that negatively impacted EPS by about $1.19, leading to a GAAP earnings per share of $1.68.

In Q2, we expensed about $25 million in expenses related to restaurant asset write-offs, approximately $16.5 million related to office closures and $7 million related to the restructure of our organization and other unusual expenses.

These charges were offset by a nonrecurring benefit of about $6.5 million related to lower stock comp expense as a result of the restructure.

As a result of these transformation expenses, our tax rate increased about 400 basis points, which I'll explain later.

The Q2 comp of 3.3% was primarily driven by higher average checks due to the price increases taken over the last year as well as queso add-ons.

Price increase averaged about 4% in the quarter, and customer resistance to the price increase remains at or below 20%.

The menu price impact was lower than Q1 as we lapped the first increase from April of last year in about 20% of our restaurants.

Sales trends in the first 3 weeks of July continue to mirror what we saw in Q2, with the comp increasing over the last week or so as we've begun to compare against those softer trends from last year.

So overall, comps should improve from the 3.3% in Q2.

However, keep in mind that comparisons will get tougher later in Q3 as we lap the introduction of queso in early September, which initially added about 3.5% to the comp before settling into a sustained benefit to the average check of about 2%.

And in November, we will lap the price increase in about 1,000 restaurants, which added an additional 1.3% prorated impact to the comp.

Based on second quarter results and expected improvement in the Q3 comp, we're increasing our full year comp sales guidance from low single digits to a low to mid-single-digit comp range.

We opened 34 new restaurants in the quarter and expect to be at the lower end of our 130 to 150 new opening guidance for the full year.

While we're still building inventory for next year's openings, we continue to expect 2019 openings will be at or above the 2018 levels.

Our new restaurants this year have opened strong, and we're continuing to emphasize high-quality, high-returning new restaurants as we build out our pipeline.

As mentioned on our last call, we expect to close between 55 and 65 underperforming restaurants.

And today, we're closing 29 Chipotle restaurants.

During the second quarter, we closed 5 Pizzeria Locales in Kansas and Ohio, and we also closed 3 Chipotle restaurants, including one relocation.

So with today's closures about half of the underperforming restaurants have now closed.

Food cost for the quarter were 32.6%, a decrease of 150 basis points from the 34.1% in Q2 of last year.

The decrease from last year was driven by the menu price increase and more favorable avocado prices.

The decreases were slightly offset by elevated prices for our steak and barbacoa.

We expect food cost increase to the low 33% range in Q3 due to the seasonal shift to source higher cost avocados from California and an uptick in paper and packaging costs.

We expect to be closer to the 33% in Q4 as we begin to shift the supply of avocados back to Mexico.

Labor costs for the quarter were 27%, an increase of 80 basis points from the 26.2% in Q2 of last year.

The increase from last year was driven primarily from wage inflation of about 6% and increased restaurant manager bonus costs as we returned to normalized bonus payouts, rewarding our managers for delivering strong results.

These increases were offset by leverage from the menu price increase.

We expect labor costs to increase to the high 27% range in Q3 and to the mid-28% range in Q4, and these increases are driven primarily by seasonally lower sales in Q3 and Q4 and by general wage pressures.

Occupancy costs for the quarter were 6.9%, which is flat with last year.

Other operating costs for the quarter were 13.8%, a decrease of 20 basis points from Q2 of last year.

Our marketing and promo costs were 3.2% in the quarter, a decrease of about 40 basis points compared to Q2 of last year.

We expect marketing and promo costs to be at or slightly above 3% of sales for the full year, with elevated spending continuing in Q3 and Q4.

Other operating costs continue to include about 30 basis points of higher maintenance and repair costs, which we first discussed on our Q4 call, and we expect M&R to continue at this elevated level for the rest of the year.

G&A in the quarter increased by $8 million compared to Q1 of this year.

The increase compared to last quarter was primarily due to the stock comp forfeitures and the timing of the 2018 equity grant that we discussed on the last earnings call.

And as I mentioned earlier, G&A also included $7 million in charges related to the restructuring and additional unusual charges in the quarter, but those were offset by a $6.5 million nonrecurring benefit related to revising our estimates of forfeitures related to stock grants for employees expected to leave the company.

The G&A increase compared to Q2 of last year was primarily in support of our restaurant growth, digitizing our restaurant experience and operational leadership changes in the field.

Depreciation expense for the quarter was 3.9%, an increase of 40 basis points from the 3.5% in Q2 of last year.

This increase is due to the accelerated depreciation for items we're replacing related to the maintenance and repair refresh as well as capital initiatives that we described on our Q4 call.

We expect the increase related to the refresh to fall off in the second half of the year.

However, it will be replaced by accelerated depreciation from the restaurant closures we detailed earlier.

As a result, we expect depreciation to remain at this elevated level for the rest of this year.

Our pretax income was $70 million and our reported effective tax rate was 33.3%.

Our tax rate was higher than the 29% underlying rate we discussed on our last earnings call and is a direct result of the $42 million in unusual expenses this quarter.

Without these charges, our tax rate would have been right around a 28.5% effective rate, and we expect to return to a roughly 29% rate next year when the transformation charges are fully behind us.

This underlying rate of about 29% may be affected in future years by stock comp vesting and exercises when the benefit realized by our employees varies from our accounting treatment, and we'll fully call out these impacts as they occur.

We continue to expect the transformation costs from the restructuring, restaurant closures and other unusual costs will total between $115 million and $135 million, with most of that amount hitting in 2018.

We estimate that about $50 million to $55 million will hit in Q3, with most of the remainder in Q4.

There will likely be some charges related to terminating restaurant and office leases that will spill into 2019.

We'll also write off about $10 million in deferred tax assets beginning in Q4, with most hitting in 2019 as fully vested but underwater options will likely expire as we complete the restructure of the organization.

In Q3, we expect our effective tax rate to be right around 30.3% or about 130 basis points higher than we guided last quarter.

In Q4, we expect our tax rate to be as high as 43% or about 450 basis points higher than we guided last quarter.

Both of these increases are due to a lower pretax income as a result of the transformation expenses.

As mentioned during our Q1 call, our Q4 rate is impacted by performance shares that will likely expire in that period because the performance shares will only vest if the stock price is over $700.

We took deductions on these performance shares over the years but if they prove worthless, we won't get a tax benefit contributing to the estimated 43% tax rate.

We'll continue to provide more specifics on future transformation-related costs when we have more certainty around the timing, and we will continue to break out the unusual costs from normal costs so you can follow the underlying trends.

We're encouraged by our second quarter results and the contributions of our restaurant teams to deliver an excellent guest experience.

We're also encouraged by our guest response to our digital initiative so far, along with a solid sales and restaurant-level margin performance during the quarter.

We're confident that significant changes we're making to our organization will enable us to continue to improve operational excellence in our restaurants, to be more nimble and innovative in digital, access, menu and the restaurant environment, and to execute better to deliver on our commitments to our guests, our employees and our shareholders.

And now, we're happy to take your questions.

(Operator Instructions) Our first question comes from the line of Sara Senatore with Bernstein.

Just on the 2Q, the implication is with 4 points of price, I think that you saw some negative traffic.

And I guess, how do you turn that around?

And in particular, you talked about really a lot of growth in digital usage.

But do you think you're substituting -- just substituting from walk-in orders or can you actually tell that these orders are incremental?

And are you starting to build a database of your customers that might allow for better targeted marketing?

Yes.

Thanks for the question.

Obviously, I think I may have mentioned in my early remarks, a lot of our new transaction-driving initiatives are getting ready to head to pilot, and we also are working on some new marketing communication as well.

So I think as those things start to enter markets and then we gain learnings on how to improve those programs and then plan for national execution, the goal is to use the staged-gate process then to inform what our sales and transaction performance can be going forward.

The good news is our price increase that we passed through has passed through nicely.

We're not seeing customer counts retreat versus anything we've seen historically when we take pricing.

I mean, regarding your question on digital sales, obviously, there's multiple elements to that, right?

There's the delivery aspect, there's our catering, and then there's also the app or website orders.

And we see varying degrees of incrementality across each of those spaces.

The thing that we do know, though, is when we get a digital order through that second make-line, the economics of that order are very attractive, and then our customer satisfaction scores also are very attractive.

So we've continued to see improvements on accuracy and speed at which we're getting people the food they want, when they want, where they want it.

So still a lot to learn.

And actually, when we get the pilot going on our loyalty program, I think that's going to give us another level of insight and understanding on exactly how all these transactions are interacting with each other.

And that's a new skill we're going to be building for the organization going forward.

Our next question comes from the line of David Tarantino.

Just maybe a clarification question on the comps for the quarter.

Could you maybe explain how the trend transpired as the quarter progressed?

It sounded as if, on the last call, you might have started a little slow and then maybe picked up later in the quarter.

But is that accurate?

Or how should we think about that?

Yes, David.

I think that is accurate.

We talked on the last call that in April, because of weather and the seasonal shift of Easter, that we got off to a slow start.

May was a great month for us, that's when we had the DoorDash promotion, so May looked great.

And then June settled in right at about the overall average for the month.

So I would say, the overall comp of 3.3% is a good kind of gauge for what the underlying trend was.

A little less in April, more in May but then we settled out right in the middle in June.

And so, we feel good about the way that we ended the quarter and how we're entering the third quarter now.

Great.

That's helpful.

And then, I guess, Jack or Brian, that does suggest a little bit of underlying improvement in at least the way we look at the business on a sequential basis on traffic.

So could you maybe talk about what you think drove that improvement, whether it was the operations improvements you talked about?

And then on the operations improvements in particular, is there any sort of deeper look at that data that would suggest that's moving the needle as you kind of split the restaurants that are doing the best from the worst apart from one another?

Yes.

Look, I don't think it was just one thing.

The good news is though, as I've mentioned earlier, we've seen improvement in our operations on all the key metrics.

And we continue to hear more and more positive customer feedback on their experiences and fewer -- or a reduction in customer complaints.

And we believe there's even more opportunity for us to get even better on throughput going forward.

So we're pleased with the progress we're making on ops.

We also saw in the quarter, people really responded positively to the advertising that we put out there.

And then obviously, we've seen very positive responses to varying elements of our digital program.

So I think it was a combination of multiple things, not one thing that drove it.

And that's what has us excited about how we're moving forward with all the pilots across the business.

We're making progress, I think, on ops, we're making progress on digital, and we're making progress on really understanding our customer base better.

So that, you know what, we get the brands the right message, then with the right food at the right place with the right value, I think we'll continue to see improvement in our performance.

Our next question comes from the line of Nicole Miller with Piper Jaffray.

Culture of accountability.

Could you talk a little bit more about maybe how it's changed to work in the store day-to-day?

And how are you aligning that with incentives to have the employees make these changes?

Nicole, I think we missed the first part of your question.

Could you just start from the beginning?

Absolutely.

So asking about the culture of accountability, and I thought it was helpful how you talked about how that translated to the customer engagement or improved guest satisfaction.

So what I'm wondering is from the employee perspective, in that store, how is it different to work there today than before?

And what are the incentives that you have put in place to keep them aligned with your culture of accountability?

Yes.

Thanks for the question.

Obviously, one of the things that I think Scott's done a nice job in the field is the accountability is both on developing a great team as well as being accountable to providing a great experience for the customer.

So I think we're starting to see our teams being more staffed correctly, engaged at another level than where they had been over the last couple years, and everybody has clarity on what their role is on the team.

And I think we've talked about this in the past, but we've given everybody their kind of top 5 responsibilities, which then gives the team the ability to trust that each other is going to be doing what they need to do for them to be successful.

And then to your question on incentives, yes, we've moved to some quarterly bonus programs and we've seen that actually have a material impact on our employee satisfaction with -- when they make great progress then they get rewarded much closer to when they have that success.

So I think it's the combination really of making sure that we're holding ourselves accountable to a great experience but also holding ourselves accountable to develop a great team and then obviously rewarding them when they have successes.

And then just a final question.

When you think about the structural framework previously of a $2 million AUV translating loosely to a 20% store-level margin, you're doing that yet you have over 3 percentage points of marketing that is at least twice as much as what it had been historically.

So it seems that there might be more leverage in the model.

Is there any kind of framework you could give or update for us to think about as we model going forward?

Nicole, we've also got M&R just a little high as well.

So I mean, the results we're seeing in the last couple of quarters give us even more confidence that the model, at $2 million, gets you right about in that high teens to 20% margin.

And as we grow the volume from there, we think we can move back up into the 20-plus percent margin.

So the things that we thought the model can do, I think we're starting to see that they're coming to [life].

Our next question comes from the line of David Palmer with RBC Capital Markets.

Brian, you mentioned some statistics earlier about how the fast-casual occasion, perhaps, overlaps with that of fast food in some ways with younger generations and that trial seems to be important with these consumers.

I'm trying to understand what you're seeing and saying about the opportunity there.

In the past, I think Chipotle tried to get trial going, coupons and the like, with this understanding that if you get trial, they'll come back.

But how are you thinking about marketing perhaps different than that and using the data you're seeing?

Sure, yes.

So I think I mentioned this in our call a couple weeks ago.

We've got a big foundational consumer study out, and we're starting to get some top lines in.

And what we have definitely seen is when people try the brand and have a positive experience with it, their intent to stay with the brand is much higher than a lot of our competitors in both fast-casual as well as fast food.

And it's very exciting because when we look at younger people, we get an even more positive response to intent and then intent to stay with us.

So that's what I was referencing.

And then the brand, obviously, I think we all instinctually see this as very much a purpose-driven brand that syncs up nicely with Gen Z and millennials, and we're seeing that play out in our research as well.

So we're going to want to continue to build on that strength as we move forward.

And Jack, you mentioned the restructuring expense that you expect.

I know it's not typical, necessarily, in the sector, but could you talk about the dollar savings you anticipate or maybe the return on investment from these store closures and restructuring expenses and the timing of that?

Any color would be helpful.

Yes, David.

On the restaurants we're closing, these are all cash flow-losing restaurants.

We've got about half of them closed right now.

So it's going to take -- before we can see the full effect, we're going to have to have them all closed.

But we should pick up somewhere in the 20, 30 basis points of margin once they're all closed.

So there's a definite improvement in our margin returns from that standpoint.

Most of the other costs, that's more with restructuring the organization.

There's going to be return on that.

It's not going to be as black and white or linear.

The return is going to be on having a culture that's more innovative, a culture that's more results-oriented.

And we think there's going to be lots and lots of benefits there, but it's going to be less of a cause and effect where we can tell you what the actual return is.

Our next question comes from the line of Karen Holthouse with Goldman Sachs.

This is actually Jared on for Karen.

Can you guys give us a sense of maybe delivery as a percent of your total sales at this point, and maybe just some context about how delivery is contributing to a stronger comp in 2Q versus 3Q?

Yes, delivery is a piece of that 10% number that I mentioned earlier on our digital sales.

And what we're seeing is, today, we're in 1,700 restaurants, we'll be expanding to closer to 2,000 here shortly.

Really, the delivery performance, not surprising, right now, what we're seeing is it really is impacted by how we promote it, because we're in the early days of getting people to even understand that it's available.

I think, the last number I saw, we still have over 50% of customers not realizing Chipotle is available for delivery.

So we're seeing some variability in the delivery performance based on how we promote with these partners.

The thing that is exciting though is we are seeing, when we get that bump, we don't fall below where we were.

So we're continuing to see progress.

And I think, over time, as we build awareness, build a habit, I think we'll see this play a bigger and bigger role in getting us into an off-premise occasion.

And if I could just follow up with one more.

Have you guys seen any learnings early on the new menu test items that you have in tests right now?

Sure.

I think I mentioned this earlier.

We're actually -- you've seen the products in our NEXT Kitchen where that's really just for us to look at operational execution.

And we're just getting ready to use our staged-gate process to move a handful of initiatives into an actual test market, where we'll be at scale, where we'll start to really have true learnings of customer experience, team member experience and then how that plays out on total Chipotle performance.

So too early to comment on any of those items right now.

Our next question comes from the line of Andy Barish with Jefferies.

Two things just on -- can you help us understand as you start to lap, I think you mentioned, Jack, the July issues last year in Virginia, just how we should think about that maybe 500 or 600 basis points decline in traffic kind of coming back?

Yes, Andy.

There's a couple things going on right now.

We're also comparing against, right now, SAVOR.

WAVS.

So we did see a nice uptick in a comp in the last week or so as we compare it to the soft sales from last year.

But SAVOR.

WAVS happened as well, which there was a big BOGO, a lot of buy one, get one.

And so, that's creating a little bit of noise, but we do expect to see much more attractive traffic and much more attractive sales comps over the next several weeks.

And that'll only be slowed a bit as we compare to the launch of queso last year, which I talked about in my prepared comments.

So yes, we're already seeing the positive effect from the comparisons to last year -- to the softness from last year.

Got you.

And then anything on sort of pricing as you do the research on the brand, the ability to be a more regular menu price increase taker instead of every several years as has been the case in the past?

Yes.

So one of the things we're definitely looking to understand is exactly the health over value equation.

The good news is, our value continues to be very strong.

And what we're assessing right now is what is the right approach to sequencing pricing over time, making sure we don't ever get ahead of a great value equation?

So that's part of the consumer research, frankly, that we've got going on right now.

As we get those learnings back, it we will inform how we approach pricing going forward.

Our next question comes from the line of Jeffrey Bernstein with Barclays.

This is actually Jeff Priester on for Jeff Bernstein.

Operationally, given all these initiatives, including your potential new items coming from the NEXT Kitchen, and I know, in New York, some of the pickup shelves around the end of your actual make-line, is there going to be an issue down the line where implementing some of these initiatives where you need to expand the line or reorganize it to get some of these things out there?

And then I have one follow-up.

Yes, sure.

So I think I've mentioned this before.

Obviously, everything we're looking at has to be thoughtfully executed so that the throughput engine of Chipotle is not jeopardized.

And I think I mentioned this earlier, there's some projects that frankly, just are a bolt-on.

So like a digital-shelf pickup, that actually improves the customer experience and the team member experience because it illuminates that confusion for where the mobile order person is supposed to go, that awkward moment at the cashier, it eliminates a lot of that.

So that, in our opinion, is a throughput enabler because 2 things happen.

One, it merchandises the fact that you can do this mobile ordering and not have to go through the line.

And then the second piece is it really takes advantage of our second make-line, which is, I think, a huge advantage to open up an off-premise business.

But look, the varying initiatives, if it comes with needs for new equipment, we'll test out the new equipment and make sure that it works and plays nicely with the throughput engine that we have.

If it doesn't, then that's why we use the staged-gate process to learn and figure out how we try again.

And it's going to be an [intricate] process with us, so I'm very excited that we're going to start the process of seeing some of these pilots get into market, so that we protect the integrity of what's made Chipotle great, while we figure out how we enhance relevance and dial up engagement.

Great.

And then on delivery, can you give us a sense of the average check you're seeing relative to your dining customer and then, as well as the number of customers per order, the number of entrées per order, however you want to approach it?

Yes, I mean, we see obviously, a nice increase in our digital orders.

So the mobile and delivery orders are in that $16 to $17 range versus our traditional check is in the $12 range.

And we're still learning, frankly, what is the order size that comes with it versus additional attachments like chips and guac and queso and so on and so forth.

But we're really seeing a blend, right now, of both there are times we see more add-ons and then there are times where clearly it's a larger group occasion that's off-premise that's ordering through the app or through the delivery third party.

Our next question comes from the line of John Ivankoe with JPMorgan.

This Brandon on for John.

I believe on the first quarter call, you mentioned that you expected marketing and promo to be elevated throughout the remainder of the year.

Do you still expect that to play out throughout the back half of '18 here?

Yes, we were -- it will be a little elevated.

We were light in the first quarter, we were at 3.2% this past quarter, and we'll be right at about that same 3.2%.

So overall for the year, we'll average right at about 3% for the overall year.

Got it, okay.

And then I just had a follow up.

You mentioned in your prepared remarks, the restaurant AB and guest sat scores are beginning to trend in the right direction.

Could you elaborate on that comment and maybe quantify some of those improvements?

Yes.

So the restaurant AB is the measurement tool that we use that's a couple of metrics that are very important to us that cover financials, people, guest experience and the team, okay?

And what we're happy to see is we're seeing a nice move from Bs to As, and that's a good sign.

So it's a very important metric, it's one that Scott keeps a laser eye on, and it's a good way for us to understand how we're performing in our restaurants and how we're actually making progress.

Our final question comes from the line of Jake Bartlett with SunTrust.

Great.

First, I just wanted to get a sense for how much of the initiatives are driving or how much the improved outlook in the back is driven by the initiatives or driven by the easy to compares?

And I know in terms of the initiatives, there's a lot of unknown timing.

But maybe you can talk about what you do know.

For instance, I believe when you get your study back on the consumer, that's going to be the source of a new advertising campaign, maybe some impact of the change in the new catering menu.

I'm thinking about the shelf rollout.

You just mentioned how kind of a no-brainer it is.

I mean, is that really a test that's going on or is that just kind of a -- I mean, should we expect that to be rolled out here in the back half?

You know what, I didn't hear the last part of your question, but let me answer the first part, which is, as we've talked about our guidance, it's got very -- it's got nearly 0 on the initiatives that we've been talking about that we are putting into pilot and that we're going to start expanding over the course of the year.

So what we're seeing right now, I think is what I mentioned earlier, which is I think we're seeing a nice improvement in our operational performance.

I think we've got more visible, more effective, more relevant marketing out there, and I think we've done a nice job of expanding access through our digital efforts.

I think it's going to continue to be the combination of all those things plus, as we get some learning on loyalty and potentially some new menus items down the road, that we'll see initiatives play then, hopefully, a bigger role going forward.

But as of right now, there's -- I think it's very minimal.

And what was the second part of your question?

The second part was just your initiatives like the digital -- like, the shelves, the pickup shelves.

You mentioned a kind of it's a no-brainer operationally.

I mean, what is the [optional] to just kind of rolling that out and not considering it a test but kind of just seeing a roll out.

What is there to test with that?

Yes.

So look, I think, as an organization, we're going to be a test-and-learn organization before we go launch.

And even though going into, where we've put it in these 5 stores, our early indications were it's a no-brainer.

The good news is in the first 5 stores, it went as we had hoped.

And as a result, we're expanding now to 4 or 5 markets in very short order.

And then the goal is, assuming we continue to see the positive performance, we'll get it across the system in very short order thereafter.

Great.

And Jack, a clarification on the tax guidance.

I'm just looking, if I think about adjusted earnings comparable to the $2.87 that you mentioned today, I look at the adjusted tax rate there, and it's 28.5% is my estimate.

So when you think about the third quarter effective tax rate that you've mentioned in the fourth quarter, is that more relevant to GAAP earnings?

Or is that relevant to the adjusted earnings we might be focused on?

Those rates are more GAAP earnings.

The underlying rates are going to be more similar to what we talked about on our last call.

So the higher tax rates that you're seeing this time compared to what we talked about on our first quarter call are directly attributable to the fact that we've got all these charges.

It's just pushing our income down, and so it ends up pushing our rates up.

When we normalize our earnings, like for example in this quarter, our normal tax rate would be in that 28.5% range.

Got it.

And then last question, just because I think there is some confusion around depreciation as I look at different estimates, a fairly wide range.

Could you help us understand what is accelerated depreciation in 2018 and will not kind of recur in '19?

And maybe whether you think that depreciation as a whole would be potentially less in '19 than the '18 overall.

Yes, '19 will definitely be less.

We're at a higher level this year, call it 30 basis points or so.

That's due to 2 things.

One is due to retiring assets as a result of our refresh.

We're investing in operating our restaurants, so that requires accelerated depreciation on the items that are going to be taken out of the restaurant.

And then secondly, part of the restaurants that haven't closed yet, we leave a little bit on the books.

GAAP requires that you leave a little bit of the asset on the books and then you write that off over the remaining time that you expect that restaurant to be open.

And so as the M&R that we're doing, the refresh that we're doing, as that depreciation levels off, that'll be replaced by this higher depreciation from the stores that we're going to close, but that should fall off.

Most of it should fall off this year, maybe into early next year, and then our depreciation should go to more the normal historical rates.

Ladies and gentlemen, we have reached the end of our question-and-answer session, and I would like to turn the call back over to Chipotle CEO, Brian Niccol, for closing remarks.

Okay.

Well, thank you, everybody.

I know this is a busy earnings time, so I appreciate everybody taking the time to listen to our results and have a discussion of the business.

And thanks again, and I'm sure we'll be in touch.

Take care.

This concludes today's teleconference.

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