Chipotle Mexican Grill (CMG) — Q1 2019 Earnings Call Transcript

Hello, everyone, and welcome to our first quarter of 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. 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, including projections about comparable restaurant sales growth and new store openings. 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 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 statements. 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. Afterwards, we will take your questions. Our entire executive leadership team is available during the Q&A session. With that, I will turn the call over to Brian.

Thanks, Ashish, and good afternoon, everyone. I'm very pleased to report strong Q1 results with 9.9% comparable restaurant sales growth that included 5.8% transaction growth; restaurant-level margins up 21%, 150 basis points higher than last year; earnings per share adjusted for unusual items of $3.40, representing 60% year-over-year growth; and digital sales growing 101% year-over-year to represent 15.7% of sales. The ongoing improvement in each of these key metrics over the past few quarters gives us confidence that our mission to win today and cultivate the future is resonating. In fact, this is the fifth consecutive quarter of accelerating comps, 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 enthusiastically. The first quarter strong results were driven by the same strategic focus areas that we've talked about for several quarters now; being culturally relevant and increasing brand engagement and visibility; digitizing and modernizing the restaurant experience; great hospitality and throughput; and of course, enhancing our powerful economic model, all while building a great culture of accountability and creativity. We were definitely visible this quarter with unique marketing programs that celebrate our real ingredients and classic cooking techniques, as well as several initiatives that caught the attention of our guests. As you know, last fall we launched our four-wheel advertising, which showcase Chipotle's point of difference in real ingredients and real cooking techniques. We followed this up with our behind-the-foil campaign in February to showcase what our kitchen looks like every day; real fresh ingredients; real cooking techniques; and real people. Chipotle has always believed that there's a connection between how food is prepared and how it tastes. And what I love most about these commercials is there was no studio, no script, no props, and no actors. It was just our employees doing what they do best, which is making delicious food. Additionally, Q1 also benefited from several other initiatives that made the Chipotle brand more visible in culturally relevant social and traditional media channels. Our free delivery bowl offering, which ran from December 17 to January 7, helped expand access and was not only a great way to attract new guests or app and delivery capabilities, but also to Chipotle as nearly half of the guests taking part in this offer were new or last users. We are seeing increased new customer retention with higher levels of delivery sales after the promotion. We also launched our first digital-only menu innovation on January 2nd called Lifestyle Bowls. This resonated with consumers in a big way. In fact, during the first few days, it generated over a billion earned media impressions. Later in the quarter, we extended the Lifestyle menu platforms with plant-powered options, highlighting our Sofritas and Vegetarian Bowls. We're currently testing several other menu items through our stage-gate process and we’ll update you on their progress over time. Finally, we continue to drive awareness of our brand through a holistic media plan with national TV advertising on culturally relevant programming like March Madness, and continuously engaging on social media that resonates with our guests. Collectively, these marketing efforts help drive culture, drive the difference, and ultimately drive the Chipotle purchase. This contributed to the lift in Q1 sales as evidenced by digital impressions increasing 300% year-over-year and social impressions increasing 400% year-over-year. We are pleased with the returns on our marketing dollars to-date and expect healthy returns from programs being worked on for the remainder of 2019. We’re also excited about Chipotle Rewards, which launched on March 12th. The stage-gate process allowed us to learn, enhance, and optimize the program to ensure a better guest experience upon launch. We're encouraged and have already enrolled 3 million members. The rewards program allows customers to earn 10 points for every dollar spent and receive a free entrée after accruing 1,250 points with periodic bonus offers, so real food becomes a real treat quickly. In addition to rewarding and thanking our guests, we're beginning to gather data that can be used to more effectively target them to engage and grow their loyalty. The Rewards program gives us a currency that we can use to incentivize behaviors as a key part of our digital system flywheel. Our guests have been asking for a loyalty program for a long time, and now the more you eat at Chipotle, the more you can get free Chipotle. We believe that Chipotle Rewards will be a key element that will provide momentum for the digital system, which was again a key driver of our sales growth. The digital system, which includes order ahead, delivery, catering, digitized second make lines, mobile order pickup shelves, and now, Chipotle rewards, is creating a more convenient and enjoyable guest experience, making it easier to order food from Chipotle, however and wherever you'd like. To that end, I am pleased to share that we recently completed the addition of mobile order pickup shelves in all relevant restaurants. These self-service shelves are key components in digitizing and modernizing our restaurant experience. As they increase access, speed of service, and convenience for our guests, while building more love for Chipotle and driving digital sales. Additionally, this is a key component to improve delivery times. The delivery driver no longer waits for orders when they enter our restaurant. They simply go straight to the shelf, select the appropriate order, and head off to the delivery destination. We feel this is a competitive advantage and allows us to have industry-leading delivery times. I want to thank our teams for their great execution on this initiative. Regarding our digital make lines, they're currently in approximately 1,300 restaurants and we expect to have them in all applicable restaurants by the end of 2019. Early results are showing that restaurants with mobile order pickup shelves and digital make lines generate digital sales above our national average. Through a combination of delivery, order ahead, and catering, our digital sales accelerated from Q4 and grew 101% year-over-year in quarter one. Digital sales totaled $206 million during the quarter and represented 15.7% of sales. We also relaunched a new chipotle.com website in February that is helping increase customer conversion. We are pleased to average more than 1 million digital transactions per week. Delivery remains a key driver of our digital growth given enhanced capabilities on our app and website, as well as our expanded reach. As I mentioned earlier, we are seeing some residual lift in delivery sales that lasts beyond any promotion. There has been very little guest overlap between our in-app delivery and our third-party delivery partner apps. As part of our goal to increase access, we continue to open Chipotlanes, and this test will ramp up later in 2019. These restaurants are a great extension of our digital system as they help increase convenience and access to Chipotle for customers looking to pick up digital orders without getting out of their cars. On marketing and digital, we're helping to bring guests into our restaurants, the operations team is determined to deliver a great experience that will keep them coming back. Specifically, we are focused on team stability and development, creating and supporting an inclusive engaged culture, exceptional throughput, and consistently delivering great tasting food and food safety. Our field leadership conference last month allowed us to reiterate these messages, while highlighting the theme that Chipotle is a people-driven, world-class organization. A key part of this is to continue supporting and celebrating our general managers through better leadership training, providing a clear direction on career progression to ensure long-term success and great benefits as illustrated by our enhanced tuition assistance program. While early, these efforts are beginning to make a difference. We experienced a solid reduction in overall turnover measures in Q1, which tells us we're on the right path with our people-focused initiatives. We are now consistently executing line testing and leveraging chef food and cooking demonstrations to improve the quality of our food. These efforts are being noticed by guests as measured by our guest experience survey. In addition to these outcomes, we are seeing a modest improvement in throughput, aided by training, focus, and providing our teams with an easy-to-use dashboard that provides greater visibility on performance. We still have more work to do, but I am encouraged by the progress thus far. We are aligned in our approach and believe that great execution will enable Chipotle to capitalize on future growth opportunities. As we continue to evolve our brand and grow the business, it is an honor to welcome Patricia Fili-Krushel and Scott Boatwright to our board of directors. Pat is currently the CEO of the Center for Talent Innovation and has previously held numerous leadership roles in Comcast, Time Warner, and WebMD. Scott recently retired as CFO of Starbucks after a long and successful career. From contributions in global business strategy and talent management to finance and risk management, I'm confident both Pat's and Scott's perspectives and valuable insights will help us accelerate our goals. With that, let me conclude by thanking all our team members for their belief in Chipotle. Their dedication and passion to provide our guests with a great experience, serving real food cooked to perfection and prepared in our restaurants with fresh ingredients. Whether I'm in our restaurants or in our support centers, I feel the energy and see the right actions being taken day in, day out. This focus and strong execution have brought us to where we are today. The care, hard work, and dedication of our teams on the line, in the kitchen, and in our support centers, are the reasons we are winning in the marketplace. We're off to a great start in 2019, and with our sustained efforts, I believe Chipotle can cultivate a better world. With that, here's Jack to walk you through the financials.

Thanks, Brian, and good afternoon, everyone. I'm very pleased to report another strong quarter as both comps and margins accelerated from our last report. The biggest lever to strengthening our economic model has always been comp sales and transaction growth. The Q1 results illustrate that point as we achieved our highest restaurant-level margin in nearly four years. Customer engagement and visits are increasing as a result of a compelling marketing message, more convenient access, including delivery, and strong operations. Sales were $1.3 billion in the quarter, an increase of 13.9% from last year and comp sales growth of 9.9%. This 9.9% comp includes a reduction of 30 basis points as a result of deferred revenue from our loyalty program. Restaurant-level margins of 21% extended by 150 basis points over last year, and earnings per share, adjusted for unusual items, was $3.40, representing 60% year-over-year growth. The first quarter had unusual expenses related to the transformation, and these negatively impacted our earnings per share by about $0.27, leading to GAAP earnings per share of $3.13. In Q1, we recognized $7.5 million in non-recurring expenses, primarily related to the organizational restructuring. Transformation costs which started last year now total about $98 million, and we continue to expect these charges to total between $100 million and $120 million. The EPS of $3.40 includes $7.3 million or $5.5 million on a tax-effective basis. G&A related to higher bonuses, higher non-cash performance-based stock compensation adjustments, and higher employer payroll taxes, all related to our strong performance and the strong performance of our stock. The higher stock price also contributed to a tax benefit of 480 basis points in the quarter. The stock option exercises and RSU vestings at the higher stock price drove excess income tax deductions. This tax benefit offset the higher performance-based costs included in G&A, resulting in no net impact to EPS. I'll talk in more detail about these impacts later. Our Q1 comp of 9.9% was driven by a healthy acceleration in transactions as 5.8% of the comp came from greater guest visits. The higher average ticket includes a price impact of roughly 2.5% and a mix contribution of 2%, driven by growth in digital orders, which have a higher average check. With the launch of our Chipotle rewards loyalty program, accounting rules require us to deduct or defer revenue for anticipated reward redemptions in our current comp sales. This negatively impacted our Q1 comps by about 30 basis points. We're pleased that our customers have responded enthusiastically to our digital strategies and our culturally relevant marketing, which drove increased guest visits this quarter. Our restaurant teams welcomed our customers by providing a great guest experience. With these strong Q1 sales results, we're increasing our full-year comp guidance from mid-single-digit to mid-to-high single-digit range with price contributing about 2%. Our comparisons get more difficult as the year goes on. For Q2 specifically, recall that last year's second quarter benefited by about 100 to 200 basis points from the beginning of our partnership with DoorDash in May and from the start of our spring marketing campaign. Lastly, the revenue deferral of 30 basis points in the quarter related to loyalty is expected to increase each quarter as we acquire more customers, and it's likely to hit 100 basis points or more before redemptions cause the deferrals to level off. We opened 50 new restaurants in the quarter, and returns for new restaurants continue to be strong with projected year-two cash-on-cash returns in the low 40% range. Our development teams continue to emphasize high-quality and high-returning sites. For 2019, we continue to expect to open between 140 to 155 new restaurants with a weighting towards the second half of the year. We anticipate Q2 openings to be slightly higher than what we saw in Q1. Food costs for the quarter was 32.2%, a decrease of 20 basis points from last year as leverage from the December price increase was partially offset by higher protein prices. Our supply chain team drove approximately $2 million in cost savings through more efficient sourcing this quarter. While we expect to find additional efficiencies, it's too early to quantify the impact, which we expect to materialize later this year or early next. Of course, our number one 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. While avocado prices were stable throughout most of the quarter, in late March they began to spike based on higher demand from retailers who have been aggressively advertising the fruit, combined with lower expected supply in the short term due to reduced harvesting for the Easter holiday, along with a lighter California crop this summer. We expect Q2 food costs to increase around 100 basis points from Q1. For the full year, we continue to believe food costs will be right around 33%. Labor costs for the quarter were 26.7%, a decrease of 110 basis points from last year. This decrease was driven primarily by sales leverage and the menu price increase. We also decreased our workers' compensation liability due to better management of claims activity and we experienced lower unemployment expenses. These benefits were partially offset by labor inflation, which continues to be in the 4% to 5% range. We expect Q2 labor costs to be in the low 26% range as leverage from sales growth and the menu price increase is expected to offset ongoing wage inflation. Other operating costs for the quarter were 13.4%, an increase of 50 basis points from Q1 of last year, and higher marketing and promotional costs more than offset sales leverage. Marketing and promotional costs were 2.5% in the quarter, an increase of about 70 basis points compared to Q1 of last year to fund our behind-the-foil campaign in February and free delivery bowl campaign in early January. We expect to increase our marketing investment to around 3.5% in Q2, but still expect overall marketing and promotional budget for the full year to be around 3% of sales. Other operating costs were also higher due to the inclusion of delivery fees. Delivery continues to be the fastest-growing part of our business with high incrementality. From a margin standpoint, because of the efficiency of our dedicated second make line, along with the high leverage our economic model generates on incremental sales, delivery continues to be accretive for our margins. G&A for the fourth quarter was 7.8% of sales or $103 million, which included nearly $5 million related to transformation expenses, nearly $25 million related to non-cash stock compensation, higher bonus accruals related to our strong performance and payroll taxes and stock option exercises, along with $1.5 million in expenses related to our biannual field leadership conference. Without these items, our underlying G&A support totaled about $72 million, right around what we expected. We expect our underlying G&A support to remain around this level for the rest of the year. While total G&A each quarter should be lower than the $103 million in Q1, as we complete the transformation of our company and those related costs fall out, the total G&A each quarter will vary as a result of these performance-based charges and the level of option exercises. As an example, stock compensation in the quarter includes an upward revision of $1.9 million in our non-cash stock compensation related to performance shares. Unlike stock options and restricted stock grant, the accounting expense associated with performance shares will adjust up or down each quarter over the vesting term based on actual performance. Our annual grants have evolved over the past two years to become more heavily weighted towards these performance shares, with the percentage of overall equity grants growing from less than 10% in 2017 to about one-third in 2019. While these performance shares, which are tied to improving margins and comps, are effective in aligning company performance with incentive pay for the creation of shareholder value, the variable accounting treatment can cause volatility in our recorded quarterly G&A cost. Another component of G&A that's difficult to project and will fluctuate quarter-to-quarter is the employer payroll taxes and stock option exercises. These costs will vary depending on the stock performance and the timing of when our employees choose to exercise. Depreciation expense for the quarter was $53.8 million, which included $1.8 million of accelerated depreciation related to our digital make line project progressing more quickly than initially anticipated. For the full year, we expect depreciation to be about 4% of sales. Asset retirements were higher this quarter as re-retired assets were identified last year as we completed the big pay. Our effective tax rate was 22% on a GAAP basis and 21% on a non-GAAP basis, both lower than our communicated range of 27% to 30%. Our effective tax rate benefited from option exercises and restricted share vesting and elevated stock prices. In essence, we receive a tax deduction for the value our employees receive upon option exercise or share vesting. When that value exceeds the fixed accounting charge for those shares, we benefit from a higher tax deduction. For the remainder of 2019, we expect our underlying tax rate to be at the low end of our previously disclosed 27% to 30% range. Though it may vary quarter-to-quarter based on the factors I just mentioned. Our balance sheet remains strong with cash and investments totaling $735 million as of March 31. We repurchased $52.4 million of our stock at an average price of $567 per share during the first quarter. Even though there are fewer shares outstanding and trading as a result of these purchases, our diluted weighted average number of shares increased by 422,000 shares as a result of more options being in the money given the higher share price. This negatively impacted EPS by $0.05 in the quarter. In closing, we're encouraged by our Q1 results and the progress we're making against our strategic growth plan. We know that many initiatives, many of which are in the early stages, will help drive sustainable, long-term growth for Chipotle. This will benefit our guests, our employees, and our shareholders, and it will allow us to have a positive impact on how real food is sourced and made accessible, contributing to our vision of cultivating a better world. And now, we're happy to take your questions.

I have a question about delivery, if I may. And the first part is, you've seen an inflection point, which I don't think we've observed in any other limited service in terms of launching delivery and really seeing a change in comp. So I was wondering if you could maybe talk about what you think might be distinct about your context for what you're doing, where you could see that level of incrementality that we're not really seeing perhaps elsewhere. And then just on the margin side, you said it is accretive to margins but also called that was a cost headwind. Could you talk a little bit about that? And if there's any opportunity to perhaps lower the cost of delivery, whether it’s the take rates that aggregators have or something else? Thanks.

We’ll answer both of those questions. So your first question, why do we believe Chipotle is a great solution with respect to delivery? I think it's as simple as our food really travels well in the channel. When you think about the time and the ease of access to actually get your order in and then the amount of time that it takes for your food to be delivered is among the best in that space. We're basically removing a lot of obstacles for people because the app experience or the web experience, I think is one of the best out there. It's very easy for people to place orders. When you look at the wait times of people getting their food from orders at home, again, it's one of the best alternatives out there for that space. Time and time again, delivery drivers love delivering Chipotle food because of our smart pickup times. They know the food will be ready when they walk into the restaurants, they grab it off those pickup shelves, and they go. There’s literally no wasted time in the process, and that’s where we’re going to continue to work towards is removing all of the friction so that these deliveries become as efficient as possible. In regard to your question on the margins and incrementality, we continue to see that as we give people more access, we get more incremental business. Delivery is one of those occasions proving to be highly incremental for the Chipotle business. On the margin side of things, we are continuing to see with that high level of incrementality it results in a margin-accretive proposition. Jack, I don't know if you want to add anything.

The only thing, Sarah, when we look at delivery, we take the sales. Some of it is a trade-off that we think is coming from in-store to delivery. Most of it, we think at least two-thirds is incremental. But we take our costs associated with that business, so we separate it as a separate business, and we've got our food costs, our labor costs, and you factor in the delivery costs as well. Our second make line is very, very efficient, and our incrementality drives a high margin incrementality. The margin that we get on the delivery business is higher than the 21%. So if we didn't have delivery, we would not have delivered the 21% margin. Now, I called that out in other that we do have delivery fees in there, so you're going to see that line item is going to be higher. When you take the whole P&L of delivery together, we're generating net incremental margins higher than 21%.

Thank you. Good afternoon and congratulations. If you could think about same store sales performance and rank the drivers, it does sound like delivery is number one. But I'm just wondering what your TV marketing in the past would suggest there was on comp. In terms of delivery, when you think about the 15% or so of sales in delivery, how much is going to your app? And how much is going through other third-party marketplace sites? Besides having the ability to keep your data when it comes to your app, what are some of the other economic differences?

The first piece, I just want to clarify the 15.7%. That is digital; that's percent of sales in digital. Within that 15.7%, delivery makes up a certain percentage of that. I just want to make sure you understand the 15.7% is not a delivery percent of sales; that's our total digital percent of sales. To go to your first question though, the breakdown between the various levers that drove comp, I really think we just had a lot of things working in unison building nicely on top of each other. You have the marketing, which I think was very visible with some smart menu innovation around these ideas of lifestyle bowls. We have had very positive response to advertising that I think reinforces why Chipotle is a different restaurant company. There are real ingredients and real cooking techniques that bring food fresh and quickly. I think that is coming through loud and clear. We know that this is compelling for people excited about being part of the Chipotle business. The other piece is obviously our digital business. As we continue to make access easier, we have mobile pickup shelves giving more restaurants access digitally. We execute that much better than we did the prior week. Consumers love the app experience. They love the new website experience. That's resulting in more commitment to this easier access approach through the digital channel and they are loving the idea of delivery, where our delivery times are usually below 30 minutes. We're one of the only companies out there that has delivery both in our app and is using third-party partners. There is no overlap between the two access points, so they're proving to be two different occasions, which is terrific news. We have built strong relationships with our partners and are able to use data smartly to inform what we do next. The other thing is the rewards program got started, and one of the things terrific about the rewards program is more engagement. You see commitment to this digital ordering and all these additional access points. Lastly, our operations are improved. If you had a chance to be in Chipotle lately, I think they look great versus a few months ago. Our crews are staffed, they know how to make great food, they are doing line testings, and our throughput is improving. So when you think about all the initiatives that are going on, our operations are at a higher level than they have been in the past.

Just a couple of questions on the sales trends. Jack, first, can you maybe talk about how the comps trended through the quarter? Was it a gradual build or any color you could add there would be helpful?

We started the quarter very strong. We had the free delivery bowls that continued into January. Then we had Lifestyle Bowls as well. There was a lot of talk about the Lifestyle Bowls. The quarter started very strong and things rebounded near the end of the quarter. Overall, it was fairly steady if you factor out some of the weather. But we did start out -- like I said, we started out very strong and then settled into nice gains for the quarter with the exception of the weather during the middle of the quarter.

And then, Brian, you mentioned that the guest experience surveys you run have responded well to the operational improvements you mentioned. I was wondering if you could elaborate on where you are now on whatever metric you're measuring versus where you were three or six months ago. How much do you think that might be influencing the trends you're seeing relative to some of the more tangible drivers you talked about?

One of the biggest changes we’ve seen is feedback on the food testings. It's a direct result of our teams focused on creating great food. The customer satisfaction surveys are showing high marks on food and experience compared to where we were in the past. This feedback helps build the idea that this food is terrific.

Just a quick follow up. Brian, I know you shared some throughput metrics in the past related to your peak 15 minute intervals. The last update you gave us was 25 transactions in the peak on average for the change, and it used to be 35 before all the issues. Can you maybe give us an update on where you are heading into the peak season here on that metric?

I think I made a comment in my early remarks. We're seeing some improvement from that mid-25, that mid-20s number. We're excited about the improvements we've seen. We're not close to that mid-30 number you referenced, but we're definitely making progress from the mid-20 range. I think this is going to be one of those things that we continue to get better at over time.

Can you comment a little more about the loyalty program? How does this fit in as you think about comp drivers? You talked last quarter about a material step up in trend when you activated digital. Did it result or is it taking longer to engage consumers since it takes some time to clear the points?

It's going to take a little longer for us to see the direct impact, though we are excited about our rewards program. We have rolled it out and already have 3 million enrolled. We are just getting started using that information to market to those individuals. There are a few things happening over the next year that will be impactful as we build that enrollment.

If I could, just one follow up on labor, Jack. Are labor dollars per store running a bit higher than your indicated wage inflation about 6% versus wage inflation of 4% to 5%?

Our labor was really outstanding during the quarter. Our teams had about the right level. They were a little more efficient than we would normally shoot for but we had a burst in volume. When you have that 9.9% and consider the impact of deferred revenue, it's a jump up in comp. I would think about it as we leveraged labor by over 100 basis points, while managing wage inflations.

I just wanted to follow-up on the Chipotle Rewards Loyalty program. It seems like 3 million members is pleasing relative to perhaps your internal expectations. I assume you therefore have customer information now in these 3 million. Can you go into more detail on how you'd measure ultimate success, how that membership compares to your total unique users? How should we think about using the data to market effectively to those loyal users?

One of the most valuable pieces of the rewards program is it creates a different type of engagement. In our test markets, we see that using the data smartly can incentivize behaviors leading to positive outcomes for our sales.

You mentioned the digital sales being, I think you said just shy of 16%. I know some stores are doing a whole lot better. Can you give some perspective in terms of the range across the country for the greatest success and how you'd measure incrementality of those sales relative to more traditional sales?

We’ve seen where we've got the full digital system in place, definitely higher percent of sales going through the digital channels. We've even seen this with Chipotlanes, where we have added another access level. There is still a lot of growth to be had and much of it is incremental to business.

I was hoping to understand the experience of stores that have had the pickup shelves and the digitally enhanced second make line. Has there been a significant labor opportunity on a given number of transactions that can be realized in those stores versus other stores that have newly implemented those projects, or stores that don't yet have those projects?

What is definitely true is the most valuable transaction is an order ahead, with pickup from the shelf, obviously leveraging the digital make line requires less labor to run. That is the most valuable transaction for us to grow. The Chipotlane test is crucial as it gives us more access to that highly valuable transaction.

And then secondly, could we have an update on some timing and potential benefit of some of the broader supply chain work that you've been working on, especially looking towards '20?

It's too early for broader benefits from the supply chain optimization initiatives. We’ve started to see some benefits in the quarter, but we’re keeping busy with growing volume while we look into finding efficiencies without compromising food quality.

Jack, I have a question about G&A. You gave us the underlying $72 million run rate continuing. I'm trying to understand the stock-based comp. You mentioned $25 million, but it also included bonus accruals. If your current guidance is hit, should that $25 million pertain for the rest of the year? Additionally, there was a big impact on the tax rate with the $25 million. Would the tax rate go down as well to offset some of it? What’s your outlook for G&A for '19?

The $25 million relates to stock compensation, of which about $19 million is stock comp. Of this, about $2 million is an adjustment for better performance. The underlying G&A support should remain around $72 million, encompassing headcount to support our business. However, we'll also have performance-based variables throughout the year, including higher bonus accruals and tax implications related to stock exercises.

Secondly, you mentioned a framework around AUVs and restaurant level margins. Is that still applicable with inflation going forward?

The way to look at it, if we're currently running at AUVs of $2.05 million with a margin around 21%, we’re currently right on the money. If we increase sales by $100,000, our margins would be around 22% with this higher sales level. Our model allows us to expand margins as we grow sales, especially with our delivery business, which is performing strongly.

Jack, you mentioned projected year-two cash-on-cash returns in the low 40% range. Will there be a delta between the 2018 and 2019 cohorts? Is the low 40% returns strong enough to justify accelerating development back to the 250 openings per year?

I don’t see any reason why the 2019 performance wouldn't be similar to 2018, with volumes, margins, and returns. It suggests opportunities for more restaurant openings, but we'll continue to move thoughtfully. Our guidance this year remains at 140 to 155 openings; we won't be rushing into 250 openings prematurely.

Can you help frame how you expect G&A to grow versus revenue in the long-term? Are you still assuming Q2 will be around 25% of openings for the year?

Underlying G&A will grow at a lesser rate than sales growth. The plan is for G&A support to remain around the $72 million level, increasing reminisce to our core operations. Expect Q2 to have more openings relative to the same proportion as we’ve seen in previous quarters.

I had a question on menu innovation. Historically, it generally uses existing ingredients. Should we expect future menu innovations to follow that form, or is there room to broaden SKUs in the restaurant?

Yes, you’ll see us doing both. What we did in the first quarter leveraged existing ingredients. However, we are using our stage-gate process to evaluate new ingredients or new forms to introduce into the restaurant that don't impact throughput.

My question is on delivery. Is Georgia's funding part of the delivery or are you funding all of the delivery costs? Given the benefits from delivery across the margin perspective, why wouldn't you offer delivery free all the time?

Delivery is a mode that consumers want to experience. Our focus is on building a long-term economic model where consumers get great value intentionally. We're setting up that model with our key partners, whether through our app or others.

Jack, you said labor costs in Q2 should be in the low 26% range. Would you assume a similar sales trend in Q2 as in 1Q when you give that labor guidance? And what’s your outlook for full-year labor costs given previous guidance was low 27%?

When I think about Q2, I would not expect the same comp. Q1’s comp is 9.9% and will naturally be lower in Q2. However, throughout the year, we expect labor costs to fall between the low 26% to 26.7% range, in line with recent strong comp performance.

Just two quick ones on delivery. Would you be willing to ballpark what percent of digital sales is coming from delivery? Additionally, how much of the orders are through the company app versus third-party platforms? Did that change since the launch of the loyalty program?

We're not going to break out the composition of our digital sales, but we’re up 100% year-over-year. We're seeing great progress in all aspects of our digital system. The rewards program serves as engagement, increasing our digital engagements as well.

On the commodity outlook, Jack, you mentioned the 33% for the year. What's the underlying inflation in that forecast? Assuming avocados stay where they are, what other core proteins and categories should we be mindful of?

We’re observing low single-digit inflation in most commodities. The only significant call-out is with avocados; we expect Q2 food costs to increase by around 100 basis points. Besides avocados, other items appear stable, so we can maintain the 33% for the year.

Thank you for taking the time and your questions. The strategies outlined over a year ago are starting to show impacts through our execution, whether it’s through brand visibility with culturally relevant marketing and menu innovations or improving the restaurant experience digitally. Thank you for your time, and we look forward to continuing down this strategic path. Take care.