奇波雷墨西哥燒烤 (CMG) 2019 Q2 法說會逐字稿

Ladies and gentlemen, thank you for your patience.

We are ready to begin.

And at this time, I'd like to turn the call over to Mr. Ashish Kohli, Head of Investor Relations.

Hello, everyone, and apologies for the delayed opening.

Welcome to our second quarter 2019 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.

I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statement, including projections about comparable restaurant sales growth, new store openings, our effective tax rate and expected G&A expenses.

These statements are based on management's current business and market expectations and our actual results could differ materially from those projected in the forward-looking statement.

Please see the risk factors contained in our 2018 annual report on Form 10-K and in our subsequent Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statement.

Our discussion today will include non-GAAP financial measures.

A reconciliation of these measures to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

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

After which, we will take your questions.

Our entire executive leadership team is available during the Q&A session.

With that, I'll turn the call over to Brian.

Thanks, Ashish, and good afternoon, everyone.

We're pleased with our second quarter financial performance, which reflects continued progress on the strategic initiatives we discussed at our special investor call just over a year ago.

Since that time, our efforts to highlight that Chipotle sources, cooks and serves real food that has the power to cultivate a better world have led to a meaningful improvement in our business fundamentals.

In fact, this marks the sixth consecutive quarter of accelerating comparable sales, which reinforces our view that when we connect with guests through culturally relevant marketing focused on Chipotle's great taste and real ingredients and provide more convenient access with less friction, they respond.

For the quarter, we reported 10% comparable restaurant sales growth that included: nearly 7% transaction growth; restaurant level margins of 20.9%, which is 120 basis points higher than last year; earnings per share adjusted for unusual items of $3.99, representing 39% year-over-year growth; and digital sales growth of 99% year-over-year representing 18.2% of sales.

These strong results were delivered despite tougher year-over-year comparison and benefited from better execution on 4 key initiatives we mentioned on last year's call.

Specifically, revamping our marketing, creating a stage-gate process for innovations, leveraging our second make line to grow digital sales and expand access, and engaging with our customers by launching a new loyalty program.

All of these efforts are layered on top of our foundational work to run successful restaurants with great hospitality and throughput.

Let me now spend a few minutes updating you on each of these initiatives.

First, starting with our marketing efforts.

We made sure to stay relevant throughout the quarter by celebrating our real ingredients and classic cooking techniques.

Our Behind the Foil campaign resonated with guests by showcasing the connection between how food is raised and prepared to how it tastes by featuring our team members' pride in making delicious food daily.

In addition, Q2 benefited from several strategic promotions that made the Chipotle brand more visible while helping expand access.

An example is a free delivery promotion in conjunction with a prominent influencer to celebrate National Burrito Day on April 4. Leveraging the social and digital experience helped make this the highest sales day in Chipotle's history.

More importantly, it was another opportunity to acquire customers and transactions by introducing them to the convenience of delivery.

And we are seeing increased new customer retention with higher levels of delivery sales after the promotion.

On the menu side, we are elevating our core by developing innovation that leads food culture and meets guest requests.

Our Lifestyle Bowls remain popular with customers and we continue to test new menu items that are in various stages of development.

The furthest along is carne asada, which I am pleased to announce is nearing validation through our stage-gate process, after which we will decide on the timing of a potential national launch.

This item is easy to execute operationally, has a unique flavor profile and is receiving terrific customer feedback in our test markets.

We're also gaining valuable feedback on our quesadilla pilot with the good news being that customers really love it.

The new ovens are helping improve the quality and taste of the quesadillas and could potentially be a platform for other new menu items, including desserts and nachos.

That being said, we still have some work to do in order to streamline our workflow.

As I have stated previously, we are not going to roll out new menu items at the sacrifice of throughput.

We will update you on our progress of all potential new menu items as they move through our stage-gate process.

We are very excited about Chipotle Rewards, which launched on March 12 and has exceeded our expectations with over 5 million enrolled members.

Encouragingly, these sign-ups are across all frequency bands and we're starting to use customer data to more effectively target and engage the incidence of lower frequency and lapsed users.

Early results are showing that members are increasing their frequency after joining the program.

The rewards program gives us a currency that we can use to incent behaviors and is a key enabler of our digital ecosystem moving forward.

Our customers are responding positively to our digital system, which includes order ahead, delivery and catering as it reduces friction and creates a convenient and enjoyable way for our guests to experience Chipotle.

Overall, digital sales grew 99% year-over-year to $262 million during the quarter and represented 18.2% of sales.

To put this in perspective, this was more than we did in digital sales during all of 2016.

Delivery remains a key driver of our digital growth given enhanced capabilities on our app and website as well as our expanded reach.

In fact, delivery is now available for more than 95% of our restaurants and remains highly incremental.

We continue to see residual lift in delivery sales that last beyond any promotion and have seen very little guest overlap between our own in-app delivery and our third-party delivery partner apps.

Additionally, with mobile order pickup shelves available in all relevant restaurants and digital make lines in nearly 2,000 restaurants, we are modernizing and making the customer and team member experience more efficient while building more love for Chipotle.

With more customers coming to Chipotle restaurants, many of whom are new, it is imperative we provide a great guest experience.

The operations team has made progress against this goal partly as a result of our focus to make 2019 the year of the general manager.

Specifically, we have a great company with a meaningful purpose that people want to be a part of.

We have a culture of food safety.

We are dedicated to training and developing talent, and we are enhancing our industry-leading employee benefits.

In addition to our newly expanded tuition assistance program, you may have seen our recent announcement of a new crew bonus program.

This gives hourly employees the opportunity to earn up to an extra month's pay each year based on the restaurant achieving certain performance and food safety goals.

This is another example of investing in our most valuable asset, our people.

As a result of these efforts, we believe our employee value proposition is resonating.

Manager and crew turnover have come down nicely over the past year.

Our food is being prepared more consistently through line tastings and the result is being executed better.

And we are seeing steady improvement in throughput aided by training, focus and providing our teams with an easy-to-use dashboard that provides greater visibility on performance.

While I am encouraged by the progress thus far, I believe we still have a significant opportunity for further throughput gains.

When done well, throughput isn't simply about moving people through the restaurant as quickly as possible.

Instead, it's about outstanding customer service with clear, authentic communication as customers efficiently move down our serving line.

I believe better execution on our 5 key pillars, which have historically been proven throughput drivers, will drive sales and transactions.

Everyone at Chipotle believes real food can change the world, so we strive every day to do the right thing for our employees, for our customers and for the environment.

I would like to personally thank each of our team members for their tireless dedication and passion to make Chipotle a success.

In closing, what really excites me is that I believe we are still in the early, early stages on many of our key initiatives.

And by continuing to execute and get better, which we are committed to doing, Chipotle is well positioned for future growth.

With that, here's Jack to walk you through the financials.

Thanks, Brian, and good afternoon, everyone.

We're proud of our performance though the first half of 2019 as we continue to see comps and margins expand.

The combination of investing in our people, delivering relevant and compelling marketing, an enhanced digital system and great execution in our restaurants is all leading to a better guest dining experience which ultimately allows us to further strengthen our economic model.

Sales were $1.4 billion in the second quarter, an increase of 13.2% from last year.

The comp was 10% in the quarter, which includes a 40 basis point reduction as a result of deferred revenue from our rewards program.

Restaurant level margins of 20.9% expanded 120 basis points over last year and earnings per share adjusted for unusual items was $3.99, representing 39% year-over-year growth.

The second quarter had unusual expenses related to our transformation as well as legal reserves, which I'll talk about in more detail later, and these negatively impacted our earnings per share by about $0.77, leading to GAAP earnings per share of $3.22.

Our Q2 comp of 10% was driven by a healthy acceleration of transactions as nearly 7% of the comp came from greater guest visit.

The higher average check includes a price impact of about 2% and a mix contribution of roughly 1.5% driven by growth in digital orders which have a higher average check.

We're delighted by the customer response to the convenience offered by our digital strategy as well as the culturally relevant marketing, which once again drove increased guest visits into our restaurant.

Given the strong Q2 and first half 2019 results, we're increasing our full year comp guidance from mid to high single digits to the high single digits with price continuing to contribute about 2%.

And as you think about the cadence for the remaining 2 quarters, remember that our comparisons get more difficult as the year unfolds.

We opened 20 new restaurants in the quarter with continued strong economics.

For 2019, we expect to open between 140 and 155 new restaurants with a weighting that's heavily skewed towards the fourth quarter.

We anticipate Q3 openings to be slightly higher than what we saw in Q2 with Q4 openings increasing significantly.

Based on the site pipeline we're building so far this year, we expect the 2020 new restaurant openings to be more equally weighted by quarter.

Food cost for the quarter were 33.7%, an increase of 110 basis points from last year due primarily to higher avocado prices, partially offset by menu price increase.

While we anticipated some of the avocado price increase due to a spike in late March based on higher demand from retailers, prices spiked again in June due to further reduced supply coming from Mexico.

This resulted in a roughly 50 basis point greater headwind from avocados during the quarter than we expected.

Avocado prices are likely to remain elevated in July, but should start to moderate as we move through the quarter as our sourcing shifts to other market.

Offsetting some of the avocado pressure in Q2 was approximately $2 million in cost savings through more efficient sourcing.

While our supply chain team will continue to search for efficiencies, our top priority is to continue to pursue high quality, sustainably raised ingredients and our pursuit of efficiencies will never be at the expense of food quality or food safety.

Of note, protein pricing was in line with our expectations during the quarter and we've not seen any impact from market forces thus far.

Since we purchase higher quality, more expensive pork as opposed to commodity pork and we have pricing agreements in place covering the near term, we don't expect a significant impact on our cost for the rest of this year.

Factoring in the above items, we expect Q3 cost of sales to be slightly lower than Q2 while Q4 should be at or slightly below 33% of sales.

Labor cost for the quarter were 25.7%, a decrease of 130 basis points from last year.

This decrease was driven primarily by sales leverage partially offset by labor inflation, which continues to be in the 4% to 5% range.

We expect Q3 labor cost in the mid-26% range as we expect similar labor inflation against lower sales seasonality.

Other operating cost for the quarter were 13.5%, a decrease of 30 basis points from Q2 last year, as sales leverage more than offset higher marketing and promo costs.

Marketing and promo costs were 3.3% in the quarter, an increase of about 10 basis points compared to Q2 of last year to fund our Behind the Foil campaign and various delivery promotion.

We expect our marketing investment to be spent more evenly over the second half of the year with marketing and promo budget for the full year remaining around 3% of sales.

Other operating costs continue to include delivery fees and deliveries is a way for us to increase convenience, drive awareness and ultimately acquire new customers.

It remains the fastest-growing part of our business with a relatively small portion being associated with free delivery promotion.

Given the high incrementality we're currently seeing, delivery continues to be accretive to our restaurant level margin.

G&A for the quarter was $121 million on a GAAP basis or $97 million on a non-GAAP basis, which excludes $4 million related to transformation expenses and $20 million for legal reserves.

G&A also includes $20 million related to noncash stock compensation and $4 million related to higher bonus accrual from our strong performance and payroll taxes on stock option exercises.

Similar to last quarter without these items, our underlying G&A to support our restaurants totaled right around $72 million, which is in line with our expectations.

Moving forward, we expect our underlying G&A support to increase by about $2 million to $3 million in Q3 as we round out our organizational structure.

Assuming our current financial trends continue, I would expect stock compensation, including performance adjustments and the higher bonus expenses to remain right around this $25 million for both Q3 and Q4.

As it relates to legal reserves, we recorded $20 million in the quarter for estimated loss contingencies related to legal proceedings, much of which relates to older cases and includes the previously disclosed government investigation that's been going on for about 4 years now, nearly 4 years.

We have a new general counsel and legal team who are taking a determined approach to resolving certain outstanding matters with the objective of putting these specific issues behind us wherever appropriate.

While we still have work to do to bring final resolution to these matters, we believe this reserve is a reasonable estimate based on where we are today, and we'll update you as we have more information.

Continuing down the income statement.

Our effective tax rate was 26.6% on a GAAP basis and 23.9% on a non-GAAP basis.

Included in both our GAAP and non-GAAP tax rate is a recognition of excess tax benefits from stock-based compensation.

The GAAP tax rate is higher because of the possible nondeductibility of some of the legal reserves.

For the remainder of 2019, we expect our underlying effective tax rate to be in the 26% to 29% range, though it may vary quarter-to-quarter based on discrete items.

Our balance sheet remains strong with cash and investments totaling about $746 million as of June 30.

We've repurchased $58 million of our stock at an average price of $703 per share during the quarter.

Similar to last quarter, even though there are fewer shares outstanding and trading as a result of these purchases, our diluted weighted average shares actually increased by 182,000 shares from Q1 as a result of more options being in the money given the higher share price.

In closing, we're encouraged by our Q2 results and the progress we're making against our strategic growth initiatives that were laid out about a year ago.

Sustaining our sales momentum is the most important lever to our powerful economic model and that requires great execution and delivering an excellent guest experience.

We're grateful to all of our team members for their hard work and their commitment in contributing to our vision of cultivating a better world.

And now we're happy to take your questions.

(Operator Instructions) Our first question today comes from David Tarantino from Baird.

Congratulations on a strong first half of the year.

Brian, you mentioned being in the early stages of a lot of the initiatives.

And I guess the context of my question is related to the momentum you've seen in the first half of the year.

And I guess it won't be long before investors start worrying about your ability to cycle such big numbers as you move into next year and even the following year.

So I guess can you talk about how you think about the business recovering over the next year or 2 as you cycle these big numbers and how, as you layer in what you have in the initiative pipeline, your degree of confidence in sustaining such positive comp momentum?

Yes, sure.

Thanks, David.

So yes, my point on why we're in the early stages of all these initiatives is very simple.

We just launched our rewards program in March.

We've got 5 million members in there.

This is a place that we're going to grow from.

We're not done adding members to the rewards program.

As you think about the digital ecosystem, we first started with installing digital make lines and we layered in the digital pickup shelves so that it will be even easier for the customer, and then we layered in the rewards program.

And if you think about the awareness of this total system for our customers, we're still in the early days of those levels of our awareness and utilization.

So I think there's opportunities to grow from where we are today on that front.

And then as you think about really kind of revamping our marketing communication and allocating those marketing dollars, you're really just now starting to see the marketing team utilize new communication vehicles and continue to fine-tune the communication as it relates to Chipotle's real ingredients, real cooking, which results in, we think, really the best food out there.

And then the last piece is some of the innovation that we've been working on in our stage-gate process.

All those things are still in its early days and in most cases, the only thing we've brought out really is the Lifestyle Bowls to date.

And then I'd be remiss not to talk about all the great progress we're making in operations.

If you think about where we were 6 months ago, a year ago or even 2 years ago, we are far better than we were.

And I'm confident that team is focused on the right things to be better 6 months from now, 12 months from now, 2 years from now.

So still very much early days.

We're delighted to see the response that we're getting to the digital system, the response that we're getting to, I would say, better operations with more consistent, better tasting food that now is getting to be a bit faster.

And then we're very optimistic about how we can grow from here with this reward system and also the future as it relates to innovations, as it relates to the menu and/or [global] market.

So delighted to see the response to date, but this is just the beginning is how I would categorize it.

Sounds good.

And on the rewards program, can you elaborate on what you learned to date in terms of your ability to change behavior with that program or incent behavior with that program?

I think I'm a member of the program and I don't even recall seeing any incentive throughout the quarter.

So just wondering how you're using that and what you're learning so far.

Well, we have you blocked, David.

No, I'm just kidding, totally kidding.

Yes.

So look, we are early days in this.

And we obviously are breaking this up into various cohorts and we're trying to experiment which each of those cohorts to understand if you incentivize them with points on certain days of the week or certain add-ons, what type of behavioral changes do we see?

And the good news is we've done a couple.

We've not done a whole lot.

And the thing to keep in mind is, last quarter, where were we?

I think 2 million, 3 million people.

This quarter now, we're closing in on 5 million.

So we're still refining the cohorts and then we're also experimenting with each of these cohorts to understand how that impacts their behavior.

With that all said, the few programs that we've run, we've been really pleased with our ability to influence behavior going forward.

So as the population gets bigger in the rewards program and we get more fine-tuned on our cohorts, our goal is to then further drive behaviors that make sense for the customer and then also make sense for the Chipotle proposition.

So early days, but we're very pleased with where we are right now.

Our next question comes from David Palmer from Evercore ISI.

Just a couple of quick questions on digital.

Looks like your mix was up 8 points from the prior year.

How much do you think this mix increase is driving comp?

How incremental do you think it is?

And over the next year, how do you think specifically, I guess it's related to Tarantino's question, but how much do you think this digital lift can continue?

And just thinking about this, the digital mix was up 2.5 points from the previous quarter.

So it looks like that digital lift is increasing or accelerating.

But of course, we have more difficult comparisons as you think about things like loyalty coming up.

So any thoughts on that?

Yes.

Sure.

So look, we continue to understand all the facets of how this digital business is coming to life, right, as it relates to order ahead, delivery and rewards.

And then we also have about 16 restaurants now with Chipotlane, where we've added another access point for people that order ahead.

And what I'm delighted about is we see places where you're seeing the digital business achieve 30% and north of 30%, and it is driven by just giving people more access, building more awareness and giving them great experiences.

So we definitely are not, we think, at the top of where this is.

We think there's still lots of room for growth in all aspects of the digital business.

Our catering business continues to still be a relatively small piece of the order ahead business and we think there's tremendous opportunity on that front as well.

So as we continue to build awareness, give people more access and get them to understand the occasions that they can use this access for, we've been pleased to see where this business can get to, and we've got some evidence of getting north of 30%.

And do you think that, are you thinking about how much of that 8-point mix is really adding to the comps you're seeing lately?

You mean the 18%?

Well, the 8-point increase or it's 18% this quarter.

But a year ago...

Oh, versus a year ago, versus the 10% you're talking about?

Yes.

Is that how you think about it?

Yes.

So the good news is, as we've talked about it, a component of this is delivery, which is highly incremental.

That's in the 70% range, I think is what we've shared and what we continue to see and appears to be pretty consistent what other people see.

Our order ahead business, not as incremental as our delivery business, but we're still continuing to see it be a very incremental piece on the business as well.

So we're not breaking out exactly the contribution relative to the comp.

But what I can tell you is, it continues to be an incremental piece of the business and it comes with a nice flow-through as well.

So we love incrementally profitable transactions, and that's what this digital business brings to the Chipotle business.

Our next question comes from Nicole Miller from Piper Jaffray.

Two quick questions.

The first is on marketing.

So the 3% spend is relatively static year-over-year, but dollars are up.

So I imagine impression [weeks], et cetera, the dollar spend is up.

The question is fairly simple in that the dollars are up and comps are up.

So what's the thought process behind increasing marketing spend above 3% and depending on how you define your peer group, that could be another 100 basis points to fall in line with your peer group.

Sure.

So I think, obviously, this quarter, the spend was up, part -- a big reason for that is Chris and his team I think are smart about allocating our marketing dollars to communication vehicles that are going to be highly effective.

And there was more options available in this quarter for us to get the Chipotle message in front of our customers at the right time.

And fortunately, we had the right communication there.

The thing I'll tell you is, we are always evaluating whether or not we have the right spend.

And what we see today is we feel really good about the absolute dollars that we're spending.

And I think really what you're seeing more than anything else is the allocation of those dollars resulting in the brand being more visible with the right communication at the right time, which then is driving ultimately a purchase at Chipotle.

So no plans in the near term to go beyond that 3%.

The other thing to keep in mind too Nicole is, as this business grows, the marketing budget grows with it because it's 3% of now a much bigger business than it was 6 months, a year ago.

And the marketing team is going to be really smart about how they allocate those additional dollars going forward so that the brand continues to even be more visible and even more effective in its communication.

So really proud of the work that, that team has done.

But I think we're still getting started on this one as well and there's a lot of creative things to come with the dollars that have been allocated to marketing to date.

That's very helpful.

I think what gets lost in the shuffle of can you comp the comp is, there's really just not much in a 3% spend and that would be one way if you ever wanted to look way, way out in the future to do it.

So that's very helpful.

The second question is around your comment on digital and some stores seeing 30% mix.

It'd be pretty fascinating to understand anything you could share.

This might not be the right metric, but the first one that comes to mind is the AUV range.

So I'm trying to understand clearly with the comp being what it is and the flow-through, I don't think there's any question that it's incremental.

So would you characterize the AUV of those digital, high use digital stores as the system average?

Maybe they're higher at above the system or maybe they're even at like what a prior peak used to be for the system.

What does that look like?

Yes.

What I can definitely share with you is they are above our average for sure.

And I don't think we want to get into specifically talking about what the AUVs are because some of that relates to the site-specific.

But what I can definitely share with you is, where the digital system is totally in place, meaning, even adding a Chipotlane, it's beyond the average unit volumes.

And then even in the places without Chipotlanes, it's above and beyond our average unit volumes where you see this digital business play such a big percentage of the business.

So we feel great about continuing to drive that digital business to a higher percent because it is incremental, which then results in these higher average unit volumes that we're seeing across our system.

And our next question comes from Sharon Zackfia from William Blair.

I just have to say, I did get an incentive through rewards so I'm pleased to be in a different cohort than David.

So...

You know what, that means though you're a light user.

Coralie is going to block me as we're talking.

So on the delivery side of the equation, I guess just given the success you've had with DoorDash and it sounds like very little overlap between what DoorDash is doing and what you're getting through your own app.

I mean how do you think about opening that aperture to other third-party delivery providers?

Is that something you're exploring?

And then it seems as if the digital cadence didn't slow at all after you lapped the DoorDash agreement in May.

And if you could just talk about if that was, in fact, the case that maintained its momentum.

Yes.

So to answer your first question, we've got a great relationship with DoorDash.

We do to date also provide delivery with Postmates and Tapingo.

So it's not exclusive.

However, DoorDash and Chipotle, I think have done a nice job of marketing the delivery channel.

And we've got a great relationship in place with that team.

And as you mentioned, we lapped our DoorDash partnership pretty successfully.

And one of the things that I'm really excited about seeing is, it does continue to show up in the data that those that use our in-app delivery experience are not the same people that are using a third-party app experience.

The other thing that I'm also really excited about is, there are a lot of people on these third-party platforms that still have not gotten to try Chipotle delivery.

Even though Chipotle is one of their top delivery partners, there is lots of runway with people that are using these aggregator sites to still have an opportunity to experience the Chipotle delivery experience.

So lots of runway even in the partnership that we have in place.

And then as I think about our digital business as it grows and we generate more awareness about the occasion, I'm very optimistic about how we grow from here going forward.

Our next question comes from Sara Senatore from Bernstein.

I had a question about the product launches and then a follow-up on the digital mix.

Just on the, you talked about carne asada being well received and looking to quesadillas and getting the ops right there.

I mean I think my question has to do with, is the goal to sort of prevent menu fatigue?

Is it to bring in new customers?

Is it to drive incrementality in a given quarter that you launch it?

Is there anything you can tell us about to the extent that you're seeing successful tests, how that's translating into new or incremental traffic?

And how to think about that in the context of I think people in general are creatures of habit and a lot of people probably order the same things over and over again anyway?

So any color on that.

And then like I said, I have a follow-up on the digital mix.

Sure.

So to answer your question on the menu innovation, we view it as it should be able to drive incremental sales transactions.

The reason why is because it does give people an experience that they don't get out of their everyday experience.

So it gives them a reason to either come more often or maybe come and try us for the first time.

And as we do these tests, that's what we're really trying to understand.

How much of this is, hey, this is just among our existing user that's coming more often because we've now added another occasion for them or you know what, we've now piqued somebody's interest that's never had the opportunity to try Chipotle in the past.

And carne asada is a great example where we've actually gotten the request of both nonusers of Chipotle and users of Chipotle to say, how come you guys never do carne asada?

Now whether or not it stays on the menu permanently, there's a lot of things that go into that decision.

And that's why we keep these things into our test long enough so that we can understand how does it behave both new with marketing and then just on a sustained basis as part of the menu.

And then things like the quesadilla, it adds another level of validation because it cannot have a negative impact on our throughput.

But things like quesadillas and nachos, those are clearly things that both, again, users and nonusers of Chipotle have said, "Wow, that would really make the brand, the restaurant experience even more attractive so that I could come more often." So that's why we're experimenting with these things.

And that's why we use the stage-gate process so we can understand that balancing act between incrementality among existing users as well as bringing in new users.

Great.

And then just on the -- I know you said you're not breaking out the contribution to comp from the different types of digital ordering.

But is it fair to assume that at least some of the growth came from mobile order and pay?

The reason I ask is because of one, the extent to which when you see people actually coming into the store, maybe that's an opportunity to engage with them versus delivery.

And then, two, of course, I think they have very different margin profiles in so far as mobile order and pay, I think, is probably the highest margin and delivery is lower.

So if you could just maybe talk about that either even qualitatively, the mobile order and pay versus the delivery.

Yes.

Sure.

So yes, obviously, it contributed to our comp growth, right?

I mean the thing that's wonderful about this digital business is, it's incremental transactions with higher ticket.

So we're picking up more ticket, and that is true both in the order ahead business as well as the delivery business.

Now obviously, order ahead business has even better economics because we don't have to deal with the aspect of the delivery cost.

But both are proving to be incremental, both are contributing to the comp, and we're very bullish on how we can drive this going forward.

And our next question comes from John Glass from Morgan Stanley.

Brian, as you look at your digital mix across your fleet of stores, is it a normal distribution?

Is it more skewed as you might think to more urban markets, more affluent markets or is it really across the breadth of your stores?

And I guess the comment is on digital, but also on delivery specifically, how evenly distributed or not is that business for you?

Yes.

You know what, it's actually fairly evenly distributed.

You don't have certain spikes in some of those areas that you mentioned.

It's fairly evenly distributed, John.

That's helpful.

Can you talk about also throughput, maybe update us on the metrics you're looking at for throughput.

You said it's improving, but there's still opportunity.

And in particular, the digital make line is accounting for, I'm rounding up, nearly 20% of your sales.

Is that executing as you would expect or do you need to tweak that as the volumes are growing faster there that maybe you may one-time expect and you need more capacity there or is it still underutilized and there's headroom?

Yes.

So first, I'll answer the question just in general on throughput.

The teams have made really great progress on throughput.

We are halfway through the year.

I think we mentioned in our prior call that we have -- the teams are incentivized in their bonus based on throughput targets.

And then even to the point now where we will provide a crew bonus, assuming they're able to hit their -- both throughput targets, food safety targets and the other key operating metrics that we ask the team to hit.

But I think the thing that's really been powerful is Scott has got the operation organization just focused on a critical few items.

It's be staffed, have a great team, have a great leader, which results in great culture.

And that's number one he's got them focused on.

Number two, great food, taste the food, know how to make the food and do it right every single time.

Throughput, we now have the dashboard in place.

We're showing the teams what is the difference between having the 5 pillars in place versus not having the 5 pillars in place.

And we're seeing nice results on that front.

And then obviously, a culture of food safety has to be evident in everything that we do since we're handling real ingredients with real cooking techniques every single day.

So all of it is working together.

And I give Scott and a lot of our [ATDs] a lot of credit because they are really getting after one best way of execution and then holding themselves accountable against that execution.

So I think we're going to continue to see better progress on operations going forward.

And we look at this every day.

And you know this, the restaurant business, the retail business is an everyday business.

And that's the type of focus that we have.

Every day, we want to be better than we were the day before.

And that's what we're getting after on the throughput, team stability, great food and then, obviously, all in a food safe environment.

So on your question regarding the digital make line, the good news is we have plenty of capacity.

Capacity is not our issue.

If anything, we just have to learn how to execute better on that second make line.

Some new metrics are important for us, right?

On the front line, we've never had to worry about accuracy because the reality is, I'm interacting with you and you get exactly what you want as you move down the line.

Now we've moved to a place where you order, you pick it up and go and then you open it up and that's the moment of truth of whether or not it's accurate, everything is there and is it hot.

And the good news is, the food is hot because we make it really quick, the deliveries are really fast and we're learning our way to become even more accurate.

So some things that we're learning so that we can be better with that off-premise experience.

But all in all, plenty of capacity.

Customers really love having the additional access, both on-premise and off-premise.

And then as I mentioned, I think the in-store operation is just really continuing to improve and much better than we were 6 months ago or even a year ago.

And our next question comes from Andy Barish from Jefferies.

One quick sales question and then an expense question.

Any commentary you're willing to share just on sort of cadence given you were lapping -- during the 2Q given you were lapping the DoorDash launch and the launch of For Real advertising and then the start of the 3Q here?

Yes.

Andy, from a dollar standpoint, our sales were even throughout the quarter and then they continued through -- the trends continued through July.

You did see a difference in the comp percentage as we moved from April to May and June because we are comparing against the things that you mentioned.

But from a dollar standpoint, we still see nice underlying strength and that continued into July as well.

Okay.

And then can you give us a quick update.

Jack, I think you mentioned the $2 million of food cost saves, was that just the continuation of what you saw in the first quarter?

Is that $2 million incremental?

And then just more broadly from an organizational perspective, obviously, given the numbers you're putting up right now, cost saves, efficiencies are kind of happening on their own.

But are there some efforts that may bear some fruit as we look out to 2020 more on the pure cost save side of things?

Yes.

Andy, the $2 million is incremental.

So that's on top of the run rate that we reported in the first quarter.

And the team does continue to look at opportunities.

And there are a number of opportunities, Andy.

So I fully expect that we'll be talking about greater savings, especially as we move to the end of this year and into 2020.

Our next question comes from John Ivankoe from JPMorgan.

In the past, we've talked about the ability to take price to the extent that there was any cost pressure, whether from commodities or labor or anything else.

Is 2% pricing the right thing for this brand, especially looking at some of the absolute pricing of Chipotle versus some peers which have obviously gotten higher.

How much pricing do you think you have at this point that you could take to the extent that you needed to that wouldn't influence your current rate of customer traffic?

Yes.

So we've taken the approach on pricing that we don't want to be overly aggressive with it.

I love the value proposition that we present today because as you mentioned, a lot of other people that are doing real ingredients, real cooking, their prices are significantly higher than Chipotle.

And it just puts us in a very nice position where if we need to take pricing, we have the pricing power to do it, but we want to be very judicious in when we choose to do it.

And the good news for us is, we see no reason to go beyond the 2% right now.

But we've also learned that we definitely have room to price beyond 2%, if necessary.

And if the environment mandates that, then we will do it accordingly.

Okay.

And next just a quick modeling question.

Your D&A in the second quarter looks to have taken a step-down.

Is that the new run rate in D&A per operating week, however you want to look at it, or was there anything unusual in the second quarter regarding D&A expense?

Yes.

That's close to a normal run rate.

But keep in mind, we've had a lot of things happening the last year in terms of closing restaurants, which means you accelerate depreciation for a while, same with the offices.

So I think we're to more of a normal depreciation.

But keep in mind, as we open up new restaurants, especially because we talked about opening up a heavy load in the fourth quarter, you'll see that in the fourth quarter, as those stores open, you'll see some incremental additions to depreciation and amortization at that time.

Our next question comes from Jeffrey Bernstein from Barclays.

Two questions.

Just one specifically on the commodity front.

I'm wondering whether you can offer any color in terms of what basket inflation you're seeing today.

It sounds like you're saying pork is not an issue in the coming quarters.

Just wondering if there's any directional trends you could offer, whether you think there's some upward pressure expected as we look to 2020.

It seems like that's what the industry is talking about.

But I get the impression you perhaps don't see it the same way.

And then I had one follow-up.

Yes, Jeff.

Avocados is the inflation story that we're seeing.

And it's not really sustained inflation.

It's more of a cyclical thing.

It's a supply and demand out of balance right now.

We expect that to become more normal.

I don't think we'll necessarily get back to the prices that we paid in the first quarter this year, but it should drop from what we saw in Q2.

We're seeing a little bit in dairy.

We saw, but this is unique to us, a little bit in cilantro.

But these are very, very minor and manageable items.

We don't see or we're not anticipating anything significant with any of our proteins.

That can change between now and the end of the year.

But right now, it looks like other than avocados, the commodities are behaving.

Got it.

And then as you talk about kind of the outlook from an earnings perspective, I mean I understand the comp visibility you have based on the guidance you provided.

But obviously, the earnings flow-through is critical.

As you look to the back half of the year, any other changes you would expect?

I mean just not sure if you think the comps are never going to ease a little bit as you suggest on the tough compares.

Would you expect restaurant margin expansion to moderate like how you're thinking about the puts and takes in the back half of the year with what seems like some very strong comp momentum and how that might flow through to earnings?

Yes.

On a year-over-year basis, if you're talking about a high single digit comp versus a 10% comp, yes, you're going to see a different margin leverage than that.

Jeff, you can walk through the modeling to see what that would look like.

But remember, we had pretty strong margin at the end of last year.

I would say the biggest wildcard in terms of our margin potential is avocados.

If avocados normalize, avocado has increased by about 150 basis points just from Q1 to Q2.

So imagine if that comes back to us or if half of that comes back to us.

Our margin potential gets much greater as avocados normalize.

We have a shot that next year avocados could be more plentiful.

Remember, avocados kind of go in this every other year.

Next year should be a more plentiful year.

Now we'll see if it actually materializes.

But I would say that's the biggest wildcard.

In terms of our flow-through, we're really happy with the flow-through that we've seen with the comp that we've gotten.

If you do see a or as you do see a lower comp, the flow-through year-over-year is going to be somewhat less, but we think we'll still see some nice flow-through based on the contribution margin that we earn.

Nice to hear avocado is the bigger issue than labor.

That's a positive sign looking at 2020.

Our next question comes from Will Slabaugh from Stephens Inc.

Just had a follow-up on the throughput comment that, Brian, you made earlier in your prepared remarks.

Can you put any context around that in terms of where you are today versus where you were previously, I guess [your thoughts] as well.

And then what you see is that opportunity going forward?

I couldn't hear the first part of your question.

I'm sorry.

Yes.

Sure.

Just a comment on throughput.

And you mentioned that in your prepared remarks that throughput was improving.

So wondering if you could put some context around that in terms of where you are and what the opportunity is going forward.

Oh, sure.

So I think we talked about this in the past where today, we're kind of in the mid-20s.

And our peak throughput performance we're kind of in the mid to low 30s.

And I think the thing that I'm excited about is, the team is really focused on getting ourselves from that mid-20s to high 20s.

And then you know how this works, once we get to high 20s, we'll be looking at low 30s.

So that's what I mean by we've got terrific focus and we're seeing progress.

And then you have these moments where people achieve something and then we're able to share that with everybody else in the organization so that the throughput machine really starts to get going and people realize what's possible.

So that's where we are today.

We're definitely making progress on that mid-20 number.

And then once we move beyond kind of the mid-20s, high 20s, we'll be zeroing in on the low 30s.

And ladies and gentlemen, with that, we will conclude today's question-and-answer session.

At this time, I'd like to turn the conference call back over to Brian Niccol for any closing remarks.

Okay.

Thanks, everybody, and apologies for the technical difficulties that got us rolling, but we got it all sorted out.

And really appreciate you all taking the time to listen and ask questions.

Obviously, very proud of our results, very proud of the team and very proud of what's happening in our restaurants.

As I mentioned in our call, we've got some very specific strategies that we're focused on around marketing, digital, operations and really using the stage-gate process on innovation.

We're in the early days on a lot of these initiatives.

We're delighted by the customer response we've seen to date, and we're delighted by the performance we're seeing in our restaurants to date.

And I look forward to sharing where we are next quarter with you all on this journey for Chipotle to really cultivate a better world.

So thank you, everybody, and I'm sure we'll be in touch.

Ladies and gentlemen, the conference has now concluded.

We do thank you for attending today's presentation.

You may now disconnect your line.