奇波雷墨西哥燒烤 (CMG) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to the Chipotle Second Quarter 2021 Earnings Conference Call.

(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Ashish Kohli, Head of Investor Relations.

Please go ahead.

Hello, everyone, and welcome to our second quarter fiscal 2021 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 statements.

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 statements.

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

Our discussion today will include non-GAAP financial measures.

A reconciliation 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, Chairman and 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.

And with that, I'd like to turn the call over to Brian.

Thanks, Ashish, and good afternoon, everyone.

Chipotle's second quarter results highlight the strength of our brand and our people, as we demonstrated growing momentum in our business.

Over the past 15 months, our teams have done an admirable job navigating and executing against macro complexities while giving us great optimism for where we go from here.

While COVID challenges remain, including uncertainty regarding the impact of the Delta variant, I'm confident that our teams are up to the challenge and we're hopeful that we'll gradually see a more stable environment over time.

Specific to Chipotle, we're pleased that all of our restaurants are now open and most are back to normal operations.

For the quarter, we reported sales of $1.9 billion, representing 38.7% year-over-year growth, which was fueled by 31.2% comparable restaurant sales growth.

Restaurant-level margin of 24.5% was more than double the 12.2% we reported last year.

Earnings per share adjusted for unusual items of $7.46, representing a significant increase over the $0.40 reported last year.

Digital sales growth of 10.5% year-over-year, representing 48.5% of sales.

And we opened 56 new restaurants, including 45 with the Chipotlanes.

And I'm delighted to report that Q3 is also off to a strong start.

While our trailing 12-month AUV is $2.41 million, the underlying run rate during the quarter is now above the historical peak of $2.5 million AUV.

When we started this transformation a little over 3 years ago, I was often asked whether I thought we could get back to our peak $2.5 million volumes.

My answer was yes.

And when we achieve it, we will talk about growth beyond that.

So it's a nice achievement for our organization to have $2.5 million AUVs again.

But more importantly, we have growth strategies that will take us to the next leg of our journey, $3 million AUVs, along with industry-leading returns on invested capital that improve as we continue to add Chipotlanes.

Stronger restaurant-level economics, combined with significant unit growth should allow us to optimize earnings power for many years to come.

In fact, we remain confident in our key growth strategies and believe that over the longer term, they will allow us to have 6,000 restaurants in North America with AUVs pushing well beyond $3 million.

Yes, the opportunity ahead of us remains significant.

So what are the key strategies that are resonating with guests and allowing us to win today while we create the future?

To no one's surprise, they are the same ones we've been talking about for some time, namely: opening and running successful restaurants with a strong culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; leveraging digital capabilities to drive productivity and expand access, convenience and engagement; engaging with customers through our loyalty program to drive transactions and frequency; making the brand visible, relevant and loved; and utilizing a disciplined approach to creativity and innovation.

Let me now provide a brief update on each of these, starting with our outstanding operations.

This is a key focal point as our business is building on our digital gains along with in-restaurant strength due to a more confident and mobile consumer as well as the hard work our team has done to build more love for Chipotle.

We've continued to make operational adjustments to adapt to the constantly changing environment, which has led us to recovering about 70% of in-restaurant sales thus far while retaining about 80% of digital sales.

It's no secret that running great restaurants requires great people with a terrific culture, and we are privileged to have the best of both.

Despite the labor challenges in certain parts of the country, the team has remained focused on safety, reliability, excellent culinary and experiences.

I'm extremely proud of our world-class employee value proposition.

We're providing industry-leading benefits, including a new virtual mental health platform, expanded debt-free degrees, attractive wages that were recently increased to an average of $15 per hour, specialized job training and development and significant career advancement opportunities.

And because more than 90% of our restaurant management roles are internal promotes, employees who join the Chipotle family know they have the opportunity to grow their careers with us.

Through investing in our people, we have been able to maintain the stability of our workforce over the last 2 years.

Knowing that our people are the key to our growth, we have been diligent in our recruiting focus since the start of the year.

In reimagining the applicant experience, we're leveraging partnerships that allow us to engage in authentic conversations with prospective candidates and share all the opportunity Chipotle has to offer.

Our coast-to-coast Career Day event last week resulted in us hiring thousands of additional team members to meet current demand and accommodate future growth.

These efforts have dramatically helped improve our labor position.

And as a result, our restaurants are attracting and retaining excellent employees in a tough labor environment.

After visiting several restaurants this past month, I'm encouraged to see more and more guests enjoying their meals in our dining rooms.

They order Chipotle because they can get the exact customized meal they want, made with real ingredients faster than anywhere else.

As a result, we are committed to teaching, training and validating the 5 pillars of throughput every day, during every shift to ensure we meet our high standards and provide a great guest experience.

Over the past few years, Chipotle has evolved to a point where we now have 2 sizable businesses, in-restaurant as well as our record-breaking digital platform that are helping us become a real food-focused digital lifestyle brand.

During the second quarter, digital sales grew about 11% year-over-year to $916 million and represented nearly 49% of sales.

While COVID has, of course, helped bolster these digital gains, ongoing technology investments and operational excellence have been the critical success factors.

Some examples of the digital innovations we've introduced include the addition of our concierge chatbot, Pepper, to the Chipotle app, which has the ability to answer common questions and resolve issues more efficiently, thus freeing up our customer care team's time to help guests with more complicated situations.

We also gave guests the ability to easily rate their order right in the app and online at chipotle.com, providing our restaurant operations teams with actionable insights on how to maintain and improve the digital guest experience.

Additionally, we have opened a digital-only kitchen, continued expanding our digital drive-throughs with Chipotlanes being the majority of our new restaurant openings, refreshed group ordering and invested in digital internationally by launching the Chipotle app in Canada and implementing our digital assets in Europe.

While the results and positive feedback on these innovations show us we're on the right track, we know there's still more to do to enhance the customer experience by expanding access and minimizing friction.

Not only are we pleased with the level of digital sales and overall mix, we're also delighted to see that our highest margin transaction, digital pickup orders, is gaining traction, and we expect this to continue as we add more Chipotlanes and customers experience the value of this occasion.

As I mentioned earlier, we held on to about 80% of our digital gains exiting Q2.

This highlights our digital experience as sticky because it is everything customers love about Chipotle with added convenience.

And due to the pandemic, many new consumers were introduced to Chipotle via our digital channels and are now using us for alternative and often incremental occasions.

Naturally, we believe our digital sales mix will moderate as capacity restrictions ease and guests feel more comfortable physically ordering and dining in our restaurants.

However, we expect absolute digital sales dollars to find a new equilibrium in 2021 and grow from there.

We're encouraged to see that so far in July, we continue to hold on to these digital gains even as in-store recovery has strengthened.

Moving next to the loyalty program, which is a key enabler of our digital ecosystem and an expanding network that now has more than 23 million members.

With this large base of consumers, Chipotle can distribute its own content more and more effectively and drive deeper levels of engagement within this community than ever before.

We are leveraging our CRM platform to drive brand engagement and send personalized messages to help supercharge our super fans.

We have proven that we can influence decisions along a guest buying journey when we offer them the right individually tailored offers at the right time.

We're continuously improving our analytics and are consistently able to generate more transactions from light, medium and high-frequency users.

With the recent announcement of Rewards exchange, we're optimistic we can continue to build upon our success.

The updated functionality provides greater customization and flexibility to redeem rewards and allows guests to earn rewards faster, all of which is expected to improve engagement and drive additional frequency.

While we are off to a terrific start, we will continue to invest in the program to take it to the next level and have other enhancements to the program that are expected to be rolled out by year-end.

While the loyalty program is used to help drive frequency, our marketing efforts are primarily designed to bring more people to the brand.

The combination of reach-based media and a successful frequency-driven loyalty program make a great 1-2 punch that both brings in new users and increases transactions with our existing customers.

The marketing team continues to ensure that relevant creative across a wide variety of media channels enables the brand to remain visible and live at the intersection of Chipotlane culture.

Their agile approach, innovative mindset and relentless commitment to measurement have led to ongoing success.

For example, our campaign to support the quesadilla launch was omnichannel with relevant creative across online video, digital and social media platforms as well as via traditional TV spots.

We also celebrated team Chipotle, a group of American athletes who loved the brand long before they became famous.

Their personalized unwrapped videos provide an inside look at Chipotle's athlete, super fans and what it takes to compete at the highest level.

It also highlights that training hard and eating real food with real ingredients go hand in hand.

Furthermore, our Burritos and Bitcoin campaign around National Burrito Day was one of our most successful social initiatives to date, with billions of impressions for this culturally relevant promotion.

These are just a few examples of the brand's work to drive culture, drive difference and ultimately, drive a purchase.

Another important pillar of our marketing efforts is a steady stream of new menu innovation, with a cadence of on average about 2 to 3 per year.

Cauliflower Rice was a seasonal item that enhanced our lifestyle bowls and was successful bringing in new guests.

We launched quesadillas as a permanent digital exclusive offering in March, and this menu item continues to perform well as it appears in about 10% of our transactions and is also helping attract new customers to Chipotle.

Our talented culinary team is far from finished and our pipeline is filled with promise.

I'm pleased to report that smoked brisket has been validated by our stage-gate process.

In addition, we are also in the early stages of developing other exciting menu items that we will validate using our stage-gate that will bring news and new customers to the brand.

To conclude, Chipotle is a unique brand committed to fostering a culture that values and champions our diversity while leveraging the individual talents of all team members to grow our business, elevate our brand and cultivate a better world.

Well-trained and supportive people preparing safe, delicious food and delivering excellent guest experiences are at the heart of our success.

A big thank you to all our hard-working employees for making this possible.

As a result, I'm convinced more than ever that we have the right team, the right culture and the right strategies to allow Chipotle to be a premier growth company for many years to come.

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

Thanks, Brian, and good afternoon, everyone.

We're pleased to report solid second quarter results with sales growing 38.7% year-over-year to $1.9 billion as comp sales grew 31.2%.

Restaurant-level margin of 24.5% was more than double the 12.2% margin from last year and represents the highest margin since 2015.

And earnings per share adjusted for unusual items was $7.46, a significant improvement over last year's adjusted EPS of $0.40.

Just like last quarter, the second quarter had unusual expenses related to our 2018 performance share modification related to COVID, restaurant asset impairments and closure costs, legal expenses as well as transformation costs, which negatively impacted our earnings per share by $0.86, leading to GAAP earnings per share of $6.60.

Looking ahead to Q3, while uncertainty still exists with the potential impact of the Delta variant as well as the pace of the economic recovery, if current sales trends continue, we expect our comps to be in the low to mid-double-digit range, which implies a nice sequential acceleration in our geometric 2-year stack.

This is due to the menu price increase we took in early June, which is holding strong so far, as well as in-restaurant sales continuing to recover.

Of course, we'll closely monitor developments regarding the Delta variant and follow all local protocols to ensure the safety of our restaurant teams and our customers.

As Brian mentioned, in June, we increased our average hourly rate to $15 and subsequently took a 3.5% to 4% menu price increase to cover the cost in dollar terms.

While average restaurant cash flow remains the same, this lowers margin by about 80 basis points and it increases sales by about $100,000 on an annual basis.

So the historic margin algorithm we have discussed is not as relevant going forward.

However, we maintain our goal of being able to pass through approximately 40% of incremental sales to restaurant cash flow, which is an important piece of our earnings growth potential.

This is critical as we march towards AUVs of $3 million as higher sales will lead to higher margins and cash on cash return -- restaurant returns should increase well above the low to mid-60% range we're seeing today.

Let me now go through the key P&L line items.

Food costs were 30.4% in Q2, a decrease of nearly 300 basis points from last year.

This was due primarily to leverage from menu price increases as well as lower beef prices, which were partially offset by higher costs associated with new menu items and avocados.

Given the current environment, it shouldn't be a surprise to anyone that Q3 is going to be challenged by several industry-wide issues, most notably beef and freight costs as well as staffing shortages at our suppliers.

We anticipate these commodity headwinds will negatively impact the quarter by an additional 60 to 80 basis points, essentially offsetting the benefit of menu price increases.

This will result in food cost for Q3 being at or slightly above the percentage we saw in Q2.

Over the next few quarters, we'll have greater visibility on how much of this inflation is permanent versus transitory, and we can take the appropriate actions as needed to help offset any lasting impacts.

Labor costs for the quarter were 24.5%, a decrease of 370 basis points from last year.

This decrease was driven primarily by sales leverage and to a lesser extent, efficiencies related to digital orders, which were partially offset by higher wages that we saw for just 1 month during the quarter.

We expect labor cost to be in the low 26% range during Q3 to reflect a full quarter of our wage increase.

Other operating costs for the quarter were 15.2%, a decrease of 400 basis points from last year due primarily to sales leverage and lower promotional expenses.

Marketing promo costs for the quarter were 2.4%, a decrease of 260 basis points versus the prior year due to a significant level of free delivery promotions last year.

We anticipate marketing expense to be in the mid-2% range in Q3, while the full year 2021 marketing spend is expected to remain about 3% of sales.

Overall, other operating costs are expected to be in the mid-15% range for the quarter.

G&A for the quarter was $146 million on a GAAP basis or $119 million on a non-GAAP basis, excluding $23.5 million for the previously mentioned modification to our 2018 performance shares, $2.1 million for legal expenses and $1.2 million related to transformation expenses.

G&A also includes $92 million in underlying G&A, about $22.5 million related to noncash stock comp and nearly $4.5 million related to higher bonus accruals and payroll taxes on equity vesting and stock option exercises.

Looking to Q3, we expect our underlying G&A to be around $96 million as we continue to make investments primarily in technology to support ongoing growth.

We anticipate stock comp will likely be around $25 million in Q3, although this amount could move up or down based on our actual performance.

We also expect to recognize around $4 million related to performance-based bonus expenses and employer taxes associated with shares that vest during the quarter as well as about $1 million related to our All Manager Conference scheduled for Q1 of next year.

Our effective tax rate for Q2 was 23.7% on a GAAP basis and 22.4% on a non-GAAP basis.

And similar to last quarter, our effective tax rate benefited from option exercise and share vesting at elevated stock prices.

For fiscal 2021, we continue to estimate our underlying effective tax rate will be in the 25% to 27% range, though it may vary based on discrete items.

Turning now to the balance sheet.

We ended Q2 with nearly $1.2 billion in cash, restricted cash and investments with no debt, along with a $500 million untapped revolver.

During the quarter, we opportunistically repurchased $145 million of our stock at an average price of $1,408.

We had about $208 million remaining on our share authorization as of June 30, and expect to continue to prioritize using excess free cash flow to repurchase stock.

But as I've said before, the best returns we can generate are by investing in more Chipotlanes.

And during Q2, we opened 56 new restaurants with 45 of these including a Chipotlane.

And despite some external challenges, the development team continues to do an excellent job building new restaurants as well as developing a robust new unit development pipeline.

For the full year, we now expect to be at or slightly above our prior 2021 guidance of 200 new restaurants with more than 70%, including a Chipotlane.

As of June 30, we had a total of 240 Chipotlanes, including 8 conversions and 6 relocations, and they continue to enhance access and convenience for our guests while demonstrating superior performance.

New Chipotlanes are opening with about 20% higher sales compared to the non-Chipotlanes opened during the same time period.

Over the trailing 12 months, Chipotlane restaurants continue to drive about a 15% higher overall digital sales mix compared to non-Chipotlanes and is skewed heavily towards order ahead, our highest margin transaction.

And a 2-year geometric comp at the 88 Chipotlane restaurants that have been open more than a year continues to outperform the non-Chipotlane restaurants from the same period.

Along its early days, Chipotlane conversions and relocations, which are both going through the stage-gate process, are yielding encouraging results.

We'll continue to learn and refine our approach to judiciously accelerate our Chipotlane portfolio, whether it be in older existing restaurants, strategic relocations of existing restaurants or through new restaurant additions.

In closing, I want to reiterate how proud and thankful I am to all Chipotle team members for their tireless efforts.

They're helping create value every day for our business, our communities, our shareholders, and each other, which is taking our amazing brand to new heights.

As one strong team unified by our purpose and values, we remain committed to driving our powerful and durable economic model.

Needless to say, my optimism for Chipotle's long-term potential has never been higher.

With that, we're happy to take your questions.

(Operator Instructions) And our first question will come from Nicole Miller of Piper Sandler.

Great quarter.

Just wanted to ask one question around development with just 2 parts, please.

The first is, how are you getting to at least or maybe above 200 units?

When you started the year, that seems like it could be a really, more of a target.

So I'm just wondering like what has changed in the marketplace that's allowing you to get there now?

And maybe that's a function of also growing the pipeline for next year, if there's anything you can say even qualitatively on that?

And then just the second part is around best practices.

Like how are things going outside of the U.S.?

How is Canada?

I think maybe the first Chipotlane opened.

How is Western Europe?

I think you're going to suburbs and testing technology.

What are some shared best practices?

Yes, sure.

Thanks, Nicole.

And we, obviously, were very delighted with our quarter results.

To get to your specific question about new unit openings -- obviously, we're halfway through the year.

So that gives us more confidence in where we're going to end the year.

And I think we talked about coming into the year, how we had a really strong pipeline of units that were planned to be open.

The team has done a phenomenal job in securing the people capability to be ready to open the restaurants.

They've done a phenomenal job on the supply chain to ensure that we have everything we need to open restaurants, and we've continued to have really great openings.

So the combination of sites lined up, supply chain in place, people capability ready to go, gives us just that much more confidence on how we'll finish out the year to reinforce our guidance around 200-plus new openings.

And we continue to build a really robust pipeline going forward that's primarily driven by Chipotlanes, which is also a huge enabler for the business going forward.

Your second question about what are we seeing in Canada and Europe.

Canada continues to perform, and we're really excited about the opportunity of opening more restaurants up there.

Obviously, Canada has been a little bit slower on the reopening process.

But even despite that, they continue to deliver great economics and frankly, are performing in line with the U.S., and we're very optimistic about how we can continue to open and grow in Canada.

In Europe, I think I mentioned this in some of our recent investor meetings.

We just opened 2 new restaurants outside of London, and both of those are off to really good starts.

We're just a couple of weeks in but we love the diversity of assets that we're opening.

We love the fact that we have our digital assets all in place.

And I'm optimistic about what we're going to learn, so that we can really give clarity on the opportunity in Europe down the road.

But that's still in the early stages of our stage-gate process.

And I think I've mentioned this in the past, probably COVID has slowed us down in our learning there than anywhere else.

But love what we're seeing in the U.S. on new units, and it's exciting to the economics we're getting out of Canada.

The next question comes from Dennis Geiger of UBS.

Brian, just wondering if you could talk a bit more about the digital and the dining businesses.

I guess specifically, the customer overlap there, where you think that overlap is now?

I believe historically, it's been sort of in the 10% to 15% range.

And just kind of curious if you have any decent sense on where that might be going, going forward as dine-in traffic goes from 70% to 100% and depending on where digital shakes out.

Just curious how you think about that dynamic going forward?

Yes, sure.

So I think we mentioned this in our comments earlier, but we've hung on to about 80% of our digital sales, and we're seeing about 70% of our dining room sales recaptured of where we were pre-COVID.

And what we're seeing is the overlap is still in that 15-plus percent range of people doing both channels.

which leaves the door open for a lot of incremental occasions or different occasions.

The one thing that is driving some of the bounce back in our dining room business is we are seeing more business at lunch.

And we're also seeing that lunch business occur Monday through Friday.

And then when you look at kind of like suburban versus urban, that's another place where you're starting to see clearly people return to work or return to normal, I would say, behaviors throughout their day.

So the lunch occasion is definitely coming back while we're hanging on to all these new occasions around dinner and a lot of these off-premise occasions we've been talking about over time.

I'm guessing we'll continue to see the overlap slowly go up from here, because as more people return to the dining room, I'm hoping they've had really positive experiences digitally that will suggest, hey, I want to give Chipotle a try in the dining room and vice versa.

Hopefully, people that are dining room-only people have heard great things about our rewards program, our digital system and they'll start giving that a try.

But the thing I love about the 2 businesses, they serve different occasions, different needs.

And I think that proves, over the long run, these things are incremental or complementary.

That's very helpful.

If I could slip just one more in.

Just curious on the pricing increase.

Brian, if you could just comment at all on the customer resistance that you saw there, maybe how that stacked up relative to expectations and what that might mean as you think about the next increase.

Yes, sure.

So obviously, I think we've talked about this before, Chipotle has a tremendous value proposition.

We always have known we have some pricing power.

It's something we really would prefer to be the last thing we have to use.

It made sense for us to take some action specifically in the delivery channel and then most recently across our menu.

Consistent with the past, we saw very little resistance to price increase in any of these channels.

So I would say, it went as expected, and we'll continue to keep an eye on our value proposition going forward.

And I would tell you, the good news is, I think our value proposition remains very strong, so that if we're faced with any headwinds that warrants the need for pricing, I think we can do it with confidence knowing that the brand is really strong and our value proposition is really strong.

The next question comes from Andrew Charles of Cowen.

This is actually Brian Vieten on for Andrew.

So just think about long-term margins here.

Now that we're kind of essentially back to peak AUVs, as we look ahead, kind of $3 million AUVs and beyond.

Just I guess, just philosophically, what's the right way to think about the restaurant margins you can produce at that level, just given the efforts you guys have done to close the margin gap for delivery sales?

Well, I'll start and then Jack, feel free to chime in.

I think what you're hearing from us is we believe we've got a lot of growth still in front of us from a top line standpoint, and the model of how we flow these incremental dollars is very much strong and in place to continue to be a leader in the industry on this front.

And as I mentioned, we also have pricing power.

So you kind of pair those things up, you realize, look, we're going to do all the right things we can on a supply chain front, being as efficient as possible, investing in the things that matter to our customers and our employees.

And then obviously, I think we'll be rewarded with top line and then accordingly, we'll figure out how best to flow that to the bottom line.

But we love the situation we're in.

We believe we're going to continue to drive growth from here, and we're very optimistic about our future.

But Jack, I don't know if you want to comment on anything else as it relates to this question.

Yes.

Listen, the data point that we shared today about when we grow our sales, we expect about 40% to flow through to the margin, suggests there's still a lot of leverage as we grow our volumes from $2.5 million up to the $3 million, that our margin is going up.

And I would just, in rough terms, I would say, from where we are today in the 24%, 25% range, we can add hundreds of basis points of margin as we move up from $2.5 million up to $3 million.

And importantly, when we get into that range, we're going to have cash on cash returns on our restaurants, which today are very attractive at 60%, 65%.

They're going to be in the 80%, 90%, even approaching 100% returns.

And that's -- frankly, internally, that's something we've always looked at.

We know that if we generate super year returns on all of our invested capital that we can add lots of shareholder value, and we expect that to only get better over time.

The next question comes from John Glass of Morgan Stanley.

First, just going back to pricing, just to level set, where will the effective pricing be in the third quarter, just given the price increase you took in the delivery.

I just want to make sure I understand that in the context of your comp guidance.

And related to that, Jack, I understand the mechanics of lowering restaurant margin with the increase in the labor.

You made it sound like that's just going to be the way it is.

But I think previously, you sort of talked about, well, we'll look at pricing over time so that we can kind of get back to that one-to-one relationship with AUVs and margins.

Is that still the goal?

Or do you just think it should be lower because you don't want to get too aggressive on pricing in the near term?

Yes, John.

I mean, listen, there's still that possibility that we could take additional pricing action to fully close the gap.

I just think there's so much going on right now with inflation and the question about whether inflation is transitory or permanent.

We've got labor inflation.

We took a big move there.

We'll see how that shakes out.

And now we've got the Delta variant as well.

There's just a lot of unknowns.

And so what we don't want to do is sit here and declare that we're going to do something with certainty between now and the end of the year.

I think what we want to do is, let's see how the menu price continues to be accepted by customers.

So far, really, really good, really seeing no resistance whatsoever.

Let's see what happens to inflation and let's see what happens to the economy over the next several months, and we'll make the appropriate decisions at the appropriate time.

But I think the important thing, John, is that we've got a lot of upward mobility on our margins.

We have pricing power.

Now it's just a matter of how and when we decide to use that pricing power to either protect margins or to invest in our people like we just did with the wages, but nothing's been locked and loaded in terms of what we will do between now and the end of the year.

And the effect of pricing for the third quarter?

Yes, John, it's -- the Q2 was about 9-ish percent call it.

Q3 will be slightly higher.

What happens is, you're going to get the full quarter for the wage menu price increase we just took.

We got about a month worth of it in Q2.

We'll get a full 3 months in the third quarter.

But then we're also starting to lap the delivery increase that we started taking in the third quarter of last year.

So it will move from about, call it, a 9%-ish increase or the low 9s to about 10% in Q3.

And Brian, just one more.

Did the increase in wages solve largely the labor issue?

Are you fully staffed in restaurants?

Are you still needing to employ people even with those higher wages?

And can you just talk about maybe the tenure of your employees now?

I think in the past, you had tenured employees, you had great throughput, maybe there's been more turnover just during COVID.

Are you seeing the same kind of performance out of restaurants and throughput that you would hope for, given this comp level?

Yes.

So to answer your first question, the employee value proposition that we're bringing forward with the higher wages, the ability to grow into $100,000 opportunity in very short order has worked very well.

And I give a lot of credit to our guys in the field with being out there, recruiting and retaining our talent.

And we're in a really good labor spot relative to, as you look at our historical performances, we're back to where we were in 2019 and frankly, a little bit better, which is great to see.

And also, the growth in our company is really resonating with our employees.

Our general managers know that they have the ability to become field leaders, and our field leaders know they have the ability to become team directors.

And folks that are shift managers and kitchen managers know there's going to be lots of general manager jobs available.

So that's why I'd say the whole employee value proposition, I think, is really resonating.

And combine that with the company's purpose, and we've made tremendous progress on what was really a difficult situation that popped up in, call it, February and March with the business just frankly coming back faster than we were able to hire.

But now our hiring has caught up.

To answer your other part of the question, we still have work to do to get our great throughput model back in place.

It's been, geez, well over a year since folks saw lines.

And for some of our employees, it's the first time they're seeing lines.

And for customers, too.

Part of the process of getting people to move down the line quickly is, they need to know how to order, what they want to order and getting back to individual meals, as well as our team members being quick to move them down the line, but doing it in an accurate way.

So we still have opportunity on the throughput front, but I think that's just a matter of retraining, building that muscle on our throughput pillars, and I'm confident we're going to capture that opportunity.

Our operators are focused on it.

The next question comes from David Tarantino of Baird.

Brian, I'm curious to know how you're thinking about the appropriate growth rate for the business going forward.

If you think longer term, you have great returns on capital in the units, you have plenty of capital to put to work.

So just wondering how you're thinking about unit development in particular and whether you can accelerate over the next few years.

And maybe secondarily, whether Chipotle can return to being a 10% type unit growth story at some point in our future.

Yes.

Look, I think here's the good news, David.

I think every year since I've been here, we've been able to accelerate new units.

And the good news is, our operations are stronger, our people capability, I think, is stronger.

The P&L now is stronger.

And I think you're seeing our ability to open more units get demonstrated, even in a difficult environment, right?

We talked about how we plan on opening over 200 units this year.

So I think there's going to be an opportunity for us to continue to accelerate.

The pace at which we do that, we're going to be probably more on the conservative side than putting the pedal to the metal on that one, because I just want to make sure we continue to open with excellence.

And I know there's demand, I know the economics are excellent and I know we have the people capability.

I just want to keep doing it in a way where we're able to build upon our success and we have tons of runway in this space.

So optimistic about our ability to accelerate from here.

What that ultimately looks like, as we get closer to each year, we'll probably have a better idea of what we can build on.

The next question comes from David Palmer of Evercore ISI.

Just a quick follow-up first on the pricing that you did on the delivery side.

Did you see a shift to mobile order and pick up?

And do you think that's related?

And if you did, was it related to the pricing at all?

We saw a little bit of a move into our order ahead business, but it coincided, David, with also kind of everything reopening a lot more.

So I don't know how much of that was driven by the pricing versus the fact that the customer was now more mobile.

And they clearly saw the trade-off in paying for the convenience of delivery versus ordering ahead and picking up.

But we saw very little resistance in our delivery business.

So I think it's more to do with people wanting different occasions and then what they want to pay for those occasions and the fact that they're more mobile than, frankly, the pricing driving those behaviors.

But Jack, I don't know if you want to add anything to that?

No, Brian.

I would say the same thing.

We're really pleased with the trends.

We didn't see anything that was a sudden resistance to the delivery menu price.

But because it coincided with people becoming out and about a little bit more, we did see a little shift in that business.

So it's hard to sort through and figure out how much is due to pricing, how much it was due to just people looking for the in-store ordering process.

But the bottom line is, our business moved up.

Okay, it did move backwards, it definitely moved up when you combine all the channels.

Yes.

And actually, I think -- the only thing I'd add to that, David is, one thing we continue to learn is these occasions are unique.

If you want a delivery occasion, you usually don't trade it off with an order-ahead occasion.

But the ability to have access to both is really powerful.

So that's what I think Jack's point is like, at the end of the day, we saw -- we didn't see a step back in our business.

We continue to see steps forward.

And I think it was more driven by the fact that people were more mobile and then they realize these additional access points.

And just a related question about where this on-premise ordering will end up.

At the end of the day, the consumer's been trained to do digital ordering for you.

If you -- the on-premise ordering, it feels like it's something like $0.5 million per store lower than it was pre-COVID.

But in some ways, you're not missing it because you have high-margin digital orders.

But some of this is probably going to come back because people are still a little COVID cautious, you have worker shortages, work from home and some of those things will burn off.

So how do you think about the melt up in that on-premise order business?

And how much of it maybe is semi-permanently shifted to digital ordering?

Yes.

Look, I think -- I mean and this is us just reading our consumer data.

And granted, we're only a couple of weeks really in, where things have really been open and all our restaurants have been open.

But what's definitely clear is that on-premise occasion is a different occasion.

And I think I mentioned this earlier, we only have about 15%, 17% of people overlapping between the occasions.

And when you talk to folks, that in-dining room experience, as much as we've replicated the in-line experience online, it's -- there's still something to be said to walking down the line, seeing the food, getting the sites, the sounds, the smells and getting probably another level of customization that I think is very engaging to customers and they want to have that experience.

So I think our dining rooms are going to keep coming back.

And I also think it's human nature.

You want to eat out, like you like a change of scenery.

People like to share a meal -- and I've probably been one of the few that keep saying dining rooms will come back.

And I think if we give a great experience, they'll come back disproportionately to Chipotle.

The next question comes from Chris Carle of RBC Capital Markets.

Thanks for the question.

So how does the continued recovery of the dining room business factor into how you're thinking about the opportunities across different restaurant types or models with respect to your long-term development plans?

And maybe related to that, could you also share any learnings so far from the digital-only restaurant you opened last year?

Yes, sure.

Look, that's why the focus for us is to build Chipotlanes.

It gives you all the access points, right?

You can order ahead, pick it up in your car, you can order ahead, come in, grab and go, you can come through the line.

And we're going to be focused on building as many Chipotlanes as possible.

As we think about the digital-onlys or Chipotlane-onlys or these alternative formats, they really are -- I think about them as like seeing restaurants are opportunistic to the trade area to maximize Chipotle sales coming out of the trade area.

But the focus area for us is Chipotle.

We want all the access modes for our customers.

Because at the end of the day, I could keep talking about these as different occasions, arguably, you're almost a different consumer when you decide you want to do digital versus being a dine-in customer.

So that's what we're after.

I think it's what our customers want, and I think it's what maximizes returns for us.

Specifically, our digital-only restaurant in the trade area where it made sense to do it, it's doing really well.

But you know what, if the trade area is supported putting in a Chipotlane, I'll put a Chipotlane in there.

The next question comes from Jared Garber of Goldman Sachs.

Somewhat of a follow-up to the last question and your commentary, Brian.

I'm just curious how you guys are thinking about sort of the Chipotlane opportunity over the longer term.

Obviously, about 80% of the new units this quarter had a Chipotlane versus, I think, like sort of the traditional guidance of about 70%.

If we think about that opportunity over the next several years, are there day parts?

Are there menu innovation items beyond sort of the quesadilla that you're thinking about that can really only be served with Chipotlanes that sort of some sort of critical mass that we should be thinking about over the longer term?

Yes.

Look, I definitely think as you get more penetration of the Chipotlane asset, it gives us another opportunity for our operating platform.

And the thing I love is, we've got a multibillion-dollar digital business that over time is going to have more access, right?

So of course, we're going to figure out how to maximize that, whether that's day parts, whether that's menu.

So as we get more penetration on these access points for our digital business that give customers less friction and more convenience, we'll figure out how our operators can best serve it.

But the thing I love is, the quesadilla has demonstrated we can run innovation off of our digital business without impacting our dining room business.

And I think we're also going to be able to run innovation on our dining room business without impacting our digital business.

And our operators have done a great job of using great culinary, it's a single kitchen back there, to then serve as two businesses, whether it's our digital make line business or our frontline business.

So that's how I would think about it.

And then are there any operational changes you're thinking about as you fully recapture?

I know you're at -- it's about 70% of in-restaurant dining today, obviously, that continues to increase.

If we were to assume that your digital business remains really robust and that's additive business when things sort of fully normalize, you talked about some tech investments that you're making.

Are there sort of remodel thoughts about what a sort of a Chipotle of the future might look like as you balance out maybe a very robust in-restaurant experience with the digital side as well?

Yes.

Look, the way I would describe it is, we're going to be investing in ways to get better throughput executed in both the digital make line and our front line.

And we're looking at investments on helping our teams with smarter prep, having the right food available at the right time, better forecasting, better staffing.

These are all things that will just allow us, frankly, to provide more burritos and bowls digitally, as well as more burritos and bowls on the front line.

So we're really focused on the fact that we've got a lot of capacity in these restaurants.

So whatever we can do to invest in our people or operation to enable them to provide more burritos and bowls per minute is a huge leverage point for us.

So that's like, at the highest level, that's how I think about it.

I mean, there's various things in simple projects that provide certain benefits, but the higher order thing we're after is, how do we ultimately end up with just enhanced throughput, both for the digital business and the frontline business and in such a way where we still get no compromise on customization, quality of food and now with our digital business accuracy.

The next question comes from John Ivankoe of JPMorgan.

I guess, at this point in the call, I was curious if we could have some color about dine-in and I guess, the relationship between dine-in and all-premise broadly in the markets that have been opened the longest like the Southeastern Texas versus, I guess, the Northeast and West Coast.

How much of a difference in kind of customer flow are you seeing kind of '21 versus '19?

And are there some perhaps leading indicators that we can talk about as all markets, I guess, fully normalize and become the same in 2022?

Yes.

Look, I would tell you that I think the most important leading indicator for us is we're starting to see our lunch business come back.

And what's great about that lunch business is, it's usually an individual that, frankly, we hadn't seen in a while.

And while that's occurring, we still have these, what I would call, the group occasions, that back in 2019, Chipotle didn't participate in to the level that we're participating in.

We have started our journey of getting into these group occasions and these off-premise occasions, but COVID really accelerated that.

So what I would tell you is, probably the best piece of news that I've seen in our data is to see that our lunch business is coming back, because as soon as people are given the opportunity to go back to their behaviors of going to their office, dropping their kids off at school, activities, whatever it may be, they're back to wanting to eat out lunch, and that's an on-premise occasion that we have seen a nice uptick, I believe.

The next question comes from Nick Setyan of Wedbush Securities.

I wanted to go back to the longer-term commentary on margins again.

I think you said 40% flow through.

If I take every $100,000 from $2.5 million, I think that implies about 50 bps of margin uptick per $100,000 or so.

I guess, is that separate from any future price increases?

And also, how are you thinking about sort of labor inflation and overall inflation in general, and as we kind of progress from this $2.5 million AUV to $3 million over the next few years?

Yes, Nick.

Listen, that 40% flow-through is something that will happen if we don't have anything out of the ordinary happening with inflation, meaning if inflation just settles into a normal cadence, and we use some of our pricing power to offset that, we'll have the ability to flow that 40% through.

If you have a dislocation for some period of time, that 40% is going to vary.

But we know, as I mentioned a few minutes ago, we know we have pricing power.

We're in a position, because we're all company-owned, that we take a long-term view.

We can watch how the inflation unfolds over the next few months, the next few quarters.

We can see how much is transitory, how much is going to be permanent.

And we could take the right pricing action at the right time.

So we don't have to be in a hurry to do it like some franchise organizations might be, feel a little bit more pressure to do that.

But the 40% flow-through, that assumes just kind of over a longer period of time, as you're moving from this $2.5 million volume up to $3 million, that as long as over that period of time, maybe not every quarter, maybe not every year, but over that period of time, we're able to offset inflation with some modest pricing increases, we can have that 40% flow through.

And then just on the smoked brisket near term, is the timing on that Q4 or Q3?

We haven't sort of nailed down -- yes go ahead, Jack.

Yes, that was timing on a menu price increase, yes, we haven't made a decision on...

No, no.

Jack, he was asking about brisket.

Okay.

Go ahead, Brian.

That's yours.

Well, I do love the brisket.

Thank you, Jack.

The answer is, it's been validated in our stage-gate process.

We've not nailed down exactly when we'll do it.

but it's always nice to have it ready to go.

And we'll look at the marketplace, and we'll figure out the best time to do it.

The next question comes from Peter Saleh of BTIG.

Great.

Brian, I just wanted to come back to that conversation on the brisket for a second.

I know you're not disclosing an exact time of launch.

But can you talk maybe a little bit about how you're positioning it in the menu?

Is something else coming off to make room for the brisket?

Or is this going to be purely incremental on the menu?

Yes.

So right now, our plan is, it will be a seasonal item.

And that's the way we tested it and validated it.

So it's a nice incremental occasion, is what we've seen.

And I look forward to everybody getting the opportunity to try it, because it's also delicious.

Great.

And just on the cash balance, I know you guys had indicated about $1.2 billion of cash investments.

But I think, Brian, you also indicated you'll be a little bit more prudent maybe in development going forward, making sure that you're building the right units.

So what's the right amount of cash to hold here?

I know you guys announced a little bit more on share repo, but any thoughts around maybe returning more of that capital to shareholders through a special dividend or an ongoing dividend, anything of that sort?

Yes.

Well, first of all, I don't want you to misconstrue my comments on new units.

Our plan is to continue to demonstrate that we have the ability to add more units.

We've done it every year.

Every year, we've accelerated.

And I think we're going to still be able to do that, so.

And the good news is, we have the cash to do it.

And we also know there's no better investment with our cash than the build more Chipotles.

So that's always going to be the first priority.

And then obviously, I think Jack talked about in his remarks earlier, our share buyback program, that's going to continue to be a part of the puzzle.

But there's no plans for a dividend.

Jack, I don't know if you wanted to add anything?

No, listen, I would agree with that.

The only thing I would add is that we're -- we've taken, during COVID and as we now look at the Delta variant and there's some uncertainty with that, we've been even more conservative than normal with our balance sheet.

But what I think you can expect to see is, as things stabilize, as they become more predictable, we'll be able to return even more value to shareholders through buybacks.

But we also have the revolver as well, which gives us a little bit of breathing room.

But last year, when the pandemic started, it became pretty clear that these were very different times, and we needed to make sure that we had enough assets or enough cash in the balance sheet so we can invest in our people, invest in technology, continue to open up our restaurant and not give up on any of our long-term strategies.

And so we're still retaining a bit of a conservatism with managing our balance sheet.

But again, as things become more certain, you can expect to see more buybacks in the future.

And again, it will be opportunistic.

We'll take advantage when the price moves down, just like we did during this quarter.

Our next question comes from Jon Tower of Wells Fargo.

A lot of them have been answered already.

But I guess I'll circle back on the loyalty platform.

The 23 million members that you have today, can you talk about maybe how much that represents of the total customer base today?

And then can you quantify how the rewards member uses the brand versus a nonrewards member, with respect to frequency, the spend, the mobile ordering platform versus perhaps just picking up at the store or using delivery?

And can you maybe even tell us how much that percentage -- how much a loyalty membership represents as a percentage of total sales?

So let me -- a few different questions there.

First of all, the rewards program probably represents about 25% of our customers, roughly, is the way to think about it.

And the thing that's great about our rewards customers are, they have a higher ticket, they have higher frequency, because usually they're more skewed towards digital, which is consistent with what we see in our digital business.

And I do believe as we continue to enhance things like our rewards program, where now you know you can redeem your points for lower denominations and get like chips and guac or a T-shirt or whatever.

That's just going to dial up engagement for people.

We didn't change the reward necessary to achieve a burrito, but we did enhance opportunities to engage with the brand at different levels.

So I think that's going to be enticing for more people to join the rewards program.

And those that are in, they'll continue, I think, to incentivize their behavior accordingly.

So did I -- I think I covered all of them.

Was that all your questions?

Yes, I think you nailed it, so.

This concludes our question-and-answer session.

I would like to turn the conference back over to Brian Niccol, Chairman and CEO, for any closing remarks.

Okay.

Yes, thank you.

And thanks, everybody, for joining us.

Obviously, I'd be remiss if I didn't repeat what I said earlier, which is a huge thank you to everybody in our organization, all of our operational leaders and folks in our restaurants.

I think they have really demonstrated the power of great people, great leaders, great culture drives great results.

And this quarter is truly a reflection of that, without a doubt.

The other thing I want to touch on is, obviously, we're very optimistic about Chipotle's long-term growth plans.

I think we have the ability to grow units, grow average unit volumes, grow margins, frankly, grow everything you want to grow and then at the same time, grow our organization.

So people have the opportunity to grow with this company and participate in all this wonderful growth.

And that's really what, I think, is driving the strong employee value proposition that's resulting in us being able to staff our restaurants at an effective rate right now.

So very proud of this organization, very proud of our results and also very optimistic about the future.

So thank you for joining us, and we're going to get back to cultivating a better world.

All right, thanks, everybody.

The conference has now concluded.

Thank you for attending today's presentation, and you may now disconnect.