Chipotle Mexican Grill (CMG) — Q1 2021 Earnings Call Transcript

Hello, everyone, and welcome to our first 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. I'll 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 is off to a promising start in 2021, which gives me optimism for the rest of the year. There's still uncertainty related to COVID, but as more people become vaccinated, including many Chipotle employees, I'm hopeful we're getting closer to brighter days ahead. In fact, all but about 20 of our restaurants are now open, with 92% of them offering in-restaurant dining with capacity limitations. For the quarter, we reported sales of $1.7 billion, representing 23.4% year-over-year growth, which was fueled by 17.2% comparable restaurant sales growth, including about a 1.5% headwind from winter weather in February; restaurant level margins of 22.3%, which is 470 basis points higher than last year; earnings per share adjusted for unusual items of $5.36, representing an increase of 74% year-over-year; digital sales growth of 133.9% year-over-year, representing 50.1% of sales, and we opened 40 new restaurants, including 26 with the Chipotlane. Not surprisingly, comparable restaurant sales were the highest during the month of March as we lacked easier comparisons. And I'm pleased to report that April is off to a good start. These results highlight that our key strategies continue to resonate with guests and position us to win today, while we create the future. Let me now provide a brief update on each of these strategies, which I believe will help fulfill our long-term vision of more than 6,000 restaurants, AUVs above $2.5 million, and restaurant level margins above 25%. These are, one, making the brand visible, relevant, and loved; two, utilizing a disciplined approach to creativity and innovation; three, leveraging digital capabilities to drive productivity and expand access, convenience, and engagement; four, engaging with customers through our loyalty program; and five, running successful restaurants with a strong culture that provides delicious food with integrity while delivering exceptional in-restaurant and digital experiences. Let me start with our marketing efforts, where the team is doing a great job being agile and remaining relevant to a consumer mindset that continues to evolve. Internally, we encourage curiosity and experimentation, which takes advantage of our digital and social capabilities in conjunction with TV advertising to consistently reinforce our messaging. For example, we leveraged the return of sports to showcase our brand and purpose. Our first-ever Super Bowl commercial titled, 'Can a Burrito Change the World', was very successful at highlighting Chipotle's dedication to cultivating a better world through real food, sustainable sourcing, and a commitment to the farming industry. We also connected and engaged with our guest during March Madness with a mouth-watering commercial showcasing real ingredients, real cooking, and real people in order to support the launch of our hand-crafted quesadillas. Not to be outdone, our digital communication strategy involves supercharging the superfans who are true advocates. Content on social platforms is a key way we interact with our guests. The angle for all of our creative initiatives is to drive culture, drive a difference, and ultimately drive a purchase. Helping these marketing efforts were a handful of new menu innovations, which provide wonderful examples of the stage-gate process and our team's ability to execute new food experiences. Cauliflower rice, which we launched in early January and will continue through mid-May, is continuing to bring in new guests. In addition, we launched quesadillas across the U.S. and Canada as a digital exclusive offering on March 11. This is our first new customizable entree in 17 years and was the most requested item by guests not on our existing menu. We made sure we took the proper time to develop an excellent product that consumers love and also works well operationally. The end result is a quesadilla that is perfectly crispy on the outside with delicious melted cheese on the inside. My personal favorite is the barbacoa quesadilla. The benefits of a digital-only offering are that it leverages our digital scale while removing operational friction by utilizing our digital kitchen. Although it's only been out for about a month, we're encouraged by its performance thus far with an incidence mix of approximately 10%, and expected to remain a guest favorite moving forward. Last but certainly not least, we also had Carne Asada for the majority of the quarter, and we're pleased to say that it had an incidence mix similar to what we saw last year. Our talented culinary team has not done innovating. We have several market tests of new items scheduled later this year that have shown promise in early-stage consumer testing. We're gaining valuable feedback, and we'll update you on their progress as they move through our stage-gate process. Also, it's likely that we will put another marketing push behind some 2020 initiatives like tractor beverages later this year to optimize their performance once COVID normalizes. Let me now talk about the next strategic driver, our digital platform. Our investments in new digital features and innovations helped Q1 digital sales grow 134% year-over-year to $870 million, representing 50% of sales. Momentum continued to build within the quarter, with March setting a new record for digital transactions supported by our best-ever digital order-ahead month, over 800,000 app downloads, and the most new digital customers since May of 2020. With the overall digital mix remaining relatively stable for the last three quarters, we’re delighted to see that our highest margin transaction, digital pickup orders, were slightly more than half of digital sales during Q1. Within the delivery channel, about 40% were initiated through the Chipotle app or website, while the remainder were through a handful of partners. Our digital sales are a sticky, frictionless, and convenient experience as evidenced by our April digital sales mix holding around 50%. Aided by the quesadilla launch, our digital sales are now slightly above the COVID peak from last year. While we've recovered roughly 60% of in-restaurant sales as dining rooms have reopened. We also continued to see outside digital performance in Chipotlanes, which have revolutionized the drive-thru experience towards order-ahead for pickup transactions, which is our most profitable channel. As our digital ecosystem has evolved from a commerce system to a platform of engagement, we continue to look for ways to enhance convenience and access, including Chipotlanes, alternative store formats, digital-only menu offerings, and Chipotle rewards. We are regularly making enhancements to our app, website, delivering group offerings to support the current and expected future growth within this channel. We'll also continue to make important tech investments to create a path for the future. One such example is our recent investment in Europe, an early-stage leader in autonomous delivery. Nuro uses robotics in their fleet of on-road, occupantless, and autonomous vehicles to deliver everyday consumer goods, and we believe has the potential to take the delivery experience to the next level. Speaking of our loyalty program, we now have more than 21 million passionate members that receive targeted and personalized messages. We are leveraging the CRM platform for purpose-driven messaging, as well as tempting fans with our latest promotions. Communications to our customers are individually tailored, so that specific customer activities prompt targeted responses. Each digital message can vary along the customer buying journey, such as the latest promotional offer and a new menu item or a more targeted offer to entice a customer that has not visited a restaurant for a certain period of time. For example, customers received communication about the quesadilla launch featuring their favorite protein based on their ordering history. Our loyalty program has been very successful in driving additional transactions across our light, medium, and heavy consumer segments. But we continue to increase the level of sophistication and experience in our information and targeting, which should bode well for the future of Chipotle rewards. Let me end by talking about the foundational ingredient of our success. And that's our restaurant operations, where the team has done a great job staying focused on safety, reliability, and excellent culinary. Running great restaurants requires great people, and Chipotle is privileged to have amazing employees. Our continued investment in our team members to ensure they have the resources to develop and thrive in their career, including the recently announced expansion of debt-free degrees in agriculture, culinary, hospitality, and supply chain is paying off. Turnover continues to be relatively stable, and we are seeing great applicants for open positions to staff our expected growth in AUV and new restaurant openings. After visiting a number of our restaurants recently, I'm encouraged to see more guests enjoying their food in our dining rooms. As a result, we've been reiterating the importance of executing great throughput by teaching, training, and validating the five pillars of throughput every day during every shift. After all, guests need to feel safe and deserve a great and fast in-restaurant experience. 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 and cultivate a better world. To show how passionate we are about inspiring real change in people, food, and the environment, we have tied 10% of officers' annual incentive bonus to the company achieving certain ESG goals. Our updated sustainability report, which was published last week, showcases our desire for transparency and being a leader in sustainability. I also want to take this opportunity to welcome our two new independent directors, Matt Carey and Mauricio Gutierrez. Both bring excellent experience to our board and will be valuable assets for Chipotle. Finally, I want to thank our employees for their incredible level of collaboration and tireless dedication, which were critical in helping demonstrate the brand's resiliency. While the past year has been full of ups and downs and the volatility related to COVID may not be fully behind us, I believe Chipotle is stronger today and is well positioned for growth. As a result, I'm excited about our future as we remain a premier fast-casual brand, focusing on all stakeholders, a leader in culinary, a leader in food with integrity, and an innovator providing convenient access inside our restaurants as well as through our expanding digital ecosystem.

Thanks, Brian, and good afternoon, everyone. We're proud of our performance during the first quarter with sales growing 23.4% year-over-year to $1.7 billion as comp sales grew 17.2%; restaurant level margin of 22.3% was 470 basis points higher than last year, and earnings per share adjusted for unusual items was $5.36, representing a 74% year-over-year increase. This included a benefit from lower taxes related to option exercises and share vesting, which is more than offset by higher G&A related to performance-based catch-up adjustment and taxes on equity exercising investments. I'll discuss these factors in greater detail shortly. The first quarter had unusual expenses related to our 2018 performance year modification to account for the unplanned effects of COVID, restaurant asset impairments and closure costs, as well as transformation costs, which negatively impacted earnings per share by $0.91, leading to a GAAP earnings per share of $4.45. While the impact from COVID appears to be lessening, we're not quite out of the woods yet, as seen by the recent spikes in a few regions as well as a pause in administering certain vaccines, and therefore it's still difficult to provide comp guidance for full year 2021. We are encouraged by the strong start and we're optimistic about our full year performance in 2021. The geometric two-year stack for Q1 comp is about 21% due to dining rooms reopening, our cauliflower rice launch, effective marketing, continued digital performance, and the introduction of quesadilla, which all helped drive a strong finish to the quarter. For Q2, we expect our comp to be in the range of the high 20% to 30%, with quesadilla incidents normalizing and a lower marketing investment. Food costs are 30% in Q1, a decrease of 280 basis points from last year that's due to primarily to menu price increases, a mix shift toward higher margin protein, and lower waste, which were partially offset by costs associated with cauliflower rice and fewer sales of high margin beverages. In Q2, expect food costs to be in the mid to high 30% range, but the benefit from our delivery menu price increase will be more than offset by seasonally higher avocado prices. Labor costs for the quarter were 24.9%, a decrease of 300 basis points from last year; this decrease was driven primarily by sales leverage and efficiencies related to digital orders, partially offset by labor inflation. We expect labor costs to be in the low 24% range during Q2 through the benefit of delivery menu price increase, as well as seasonally higher sales. Other operating costs for the quarter were 16.9%, an increase of 200 basis points from last year due to higher delivery fees, which were partially offset by sales leverage and a one-time insurance credit. Delivery expenses remained elevated year-over-year given the significant growth in delivery, and as you may have seen, we increased our delivery menu prices by 4% earlier this month to help cover the higher cost of this premium access point. We will continue to evaluate and fine-tune our delivery strategy in this dynamic market. Marketing promo cost for the quarter were 3.5%, a decrease of 20 basis points from last year given a significantly lower level of delivery promotion this year. While we invested more marketing dollars in order to score in quesadilla and cauliflower rice, as well as the first-ever Super Bowl ad. Our marketing expenses are expected to be in the mid 2% range in Q2, the time period tends to be less responsive from those advertising channels. Similar to past few years, full year 2021 marketing expense is expected to be around 3% of sales. Lower marketing spend in Q2, other operating costs are expected to be around 16% for the quarter. In Q1, restaurant level margin was 22.3%, while our trailing 12-month average unit volumes excluding the delivery menu price increase were roughly $2.27 million. Normalizing for the higher marketing spend, our underlying restaurant level margin was essentially in line with the theoretical margin of 22.7% expected at the sales volume. We're pleased with this progress and we remain confident that we have taken and will continue to take the necessary actions to ensure the margin stays on the algorithm as our AUVs rise throughout the year. In fact, we expect our trailing 12-month average unit volumes to pass $2.4 million in Q2, we expect our margin algorithm to keep pace. G&A for the quarter was $155 million on a GAAP basis or $129 million on a non-GAAP basis, excluding $24.4 million for the previously mentioned modification to our 2018 performance shares and about $1.6 million related to transformation expenses. G&A also includes $89 million in underlying G&A, $30 million related to non-cash stock compensation, which includes the $7.7 million increase related to our strong performance in Q1 and $10 billion related to higher bonus accrual and payroll taxes and equity vesting and stock option exercises. Looking to Q2, we expect our underlying G&A to be around $94 million as we continue to make investments including in technology to support our future growth. We anticipate stock comp will likely be around $25 million in each of the remaining quarters in 2021 to reflect the new round rate, although this amount could move up or down based on our actual performance. We also expect to recognize around $5 million in each quarter related to performance-based bonus expenses and employer taxes during each quarter, as well as $1 million related to our upcoming Virtual Field Leadership Conference in Q2. Our effective tax rate for Q1 was 20.2% on a GAAP basis and 18.5% on a non-GAAP basis. Our effective tax rate benefited from option exercise and share vesting had elevated stock prices. As I'm sure you know, we received a tax deduction for the value our employees received upon option exercise or share vesting, when the net value exceeds the accounting charge of those shares, we benefit from a higher tax deduction. For fiscal 2021, we continue to estimate our underlying effective tax rate will be in a 25% to 27% range though it may vary based on discrete items such as the equity-related impact I just mentioned. Turning now to the balance sheet, we ended Q1 with $1.2 billion in cash, restricted cash, and investments with no debt along with a recently refinanced $500 million untapped revolver with a five-year term and more favorable terms than our previous facility. We also restarted our buyback program in late February when our stock price was low, and we repurchased $61 million of our stock at an average price of $1,425 during the quarter. We had nearly $154 million remaining on our share authorization as of March 31. We expect to continue to opportunistically use excess free cash flow to repurchase our stock. That being said, the best use of our cash remains investing in more Chipotle, which continues to deliver outstanding returns. We opened 40 new restaurants in the first quarter, more than doubled the number opened in Q1 last year, with 26 of these including Chipotlanes. While only 65% of the new units had Chipotlanes in Q1, for the full year, we still anticipate opening around 200 new restaurants with more than 70% including Chipotle lane. As of March 31, we had a total of Chipotlanes including five conversions. Customers love the Chipotle lane experience, as it is the access channel that excels at providing convenience and speed and great value all at the same time. Performance continues to be stellar. In the trailing 12 months, Chipotle lane restaurants continue to drive 17% higher overall digital sales compared to non-Chipotle lane. In order ahead, our highest margin transaction, is nearly 80% higher than non-Chipotle lane, while delivery, our lowest margin transaction, is about 30% lower than our non-Chipotle lane restaurants. New Chipotlanes are opening with about 15% higher sales, and the comp at the 69 Chipotle lane restaurants that have been opened for more than a year continues to outperform the non-Chipotle lane restaurants from the same open period. Beyond the significant growth opportunity in the U.S., we're excited to accelerate new restaurant openings in Canada, which was recently validated by our stage-gate process. We're building a healthy new restaurant pipeline and expect to open a handful of restaurants over the next 12 months, including our first Chipotle lane in late summer. We'll continue to experiment with different location formats and restaurant designs throughout the country to gauge consumer preferences. Ultimately, we believe we can open at least a few hundred restaurants in Canada, especially with their unit economics now approaching those of the U.S. The recent Surrey British Columbia opening, which is our first new Canadian location for years, opened very strong and gives us even greater confidence about our growth strategy. We close by thanking all of our team members who've proven their agility to operate through uncertainty while also staying focused on our long-term purpose; their commitment to constant improvement of the customer dining experience, while strengthening our branded business is what helps drive our strategic growth initiatives. The combination of investing in our people, delivering the relevant and compelling marketing, leveraging our digital systems to enhance convenient access, and great execution of the restaurants is leading to a better guest experience which ultimately allows us to further strengthen our powerful economic model.

Hi, good afternoon, everyone. My question is really about the reopening of the dining rooms to a more full extent and the resumption of consumer activity we're starting to see as the vaccines roll out. And I guess, Brian or Jack, can you elaborate on what you're seeing as that activity returns in terms of sales and mix? And then, secondly, based on what you're seeing as the dining room traffic might be coming back, how are you thinking about the overall unit volume opportunity in the U.S., assuming that some of these digital transactions might stick?

Yes. Hey, thanks, David. Look, what we're definitely seeing is people want to be back in our dining rooms. I've had the luxury of traveling recently, and Scott and I've been to numerous restaurants, and it's great to see the lines again in our dining rooms. We're seeing a nice rebound, obviously, in those dining room sales because there weren't any a year ago. And at the same time, what we're seeing is our digital business is really continuing to thrive. In the quarter, I don't know if you guys picked up on this, but we had record sales for our digital business, despite the fact that our dining rooms are opening. So I think it just demonstrates the power of both access modes, meaning the in-restaurant dining access mode and the digital access mode. And then, not surprising, you're seeing the occasions come back based on whether you're coming into the dining room or whether you're ordering off-premise. And that's more tied to how open the region is, is how I would kind of describe it. So we're feeling great about where we are. Consumer sentiment is definitely one where they want to get back out to socialize and get back into the dining rooms and have that in-dining experience. And then, at the same token for those occasions that they've built, the behaviors around digitally, those are remaining in the business, and I think that's why you're seeing our results in Q1. And frankly, why I'm really proud of our team is that we're managing these two businesses out of one kitchen with really added excellence.

Great. And then, my other question is on the quesadilla. And I guess, from a consumer behavior uptake, it sounds like you're getting a high incidence for that product. Do you have information that would tell you whether that's kind of new customers or incremental customers or existing customers trying the product? I guess, what do you think the incrementality of that might look like?

Yes. So you're exactly right, David, the incidence is high. We're in that 10% range, I think is what we discovered. And the thing is really exciting is, it's comprised of a lot of new users. So we're seeing two things happen. A lot of new users come into the business through the quesadilla proposition, and then our existing customers, we're also seeing them utilize that quesadilla platform as part of a new eating occasion. So, it was actually our highest penetration of new customers in the month of March, which I think is just a testament to, one, people coming back to the dining rooms; and two, I think, a really meaningful innovation around quesadilla.

Great. Thanks. Hopefully, you can hear me okay? Just curious on the delivery side of the equation. It sounds like Jack, you'd mentioned the company has taken another 4% pricing in the delivery channel during the quarter. Where does that set the delivery occasion now relative to an in-store transaction? And do you feel like there's even more potential to take pricing in that channel if necessary down the line? And when I ask the percentage piece on a margin basis to gross as well?

Jon, you cut out at the very end.

Okay. I was just asking gross profit dollar versus the margin percentage when it comes to the delivery transaction? How those have changed with the incremental pricing versus the restaurant transaction?

Yes. Jack, you want me to take that, or you want me to start or…

Yes. I'll go ahead and start, Brian. Listen, the last price increase that we took, it doesn't get us all the way to where a delivery transaction delivers the same margin as an in-store transaction. And certainly not as much as our highest transaction, the order ahead. The gross dollars are pretty close. But as you know, when you are charging higher prices, you're grossing up the sales. And so it makes it a little harder to fully capture that margin. But I would say, we're within striking distance where, maybe a few percentage points away if we wanted to completely equalize the margin on an in-store transaction for a delivery. So we've made a lot of progress over the last year. And when we've taken these increases along the way, we've seen either acceptable resistance. And we've also seen what looks like people are shifting channels, because it does look like our order ahead moves up when we do see customers maybe resist the higher pricing and delivery channels a bit.

Great. And if I may, on the loyalty side of the equation, I believe, Brian, you'd mentioned earlier, there is some efforts internally to improve engagement per customer feedback that you've received. So what have you heard from customers in the loyalty program that has been done today?

Yes. So you kind of cut out near the end, but I think I got the gist of the question, which is, how are we seeing more customers become more engaged within our rewards program? And the simple answer on that is, I think we've gotten a lot smarter with the analytics. So that, I mentioned this in my prepared remarks, we're really trying to figure out how we move just from a commerce experience to an engagement experience. And so what you're seeing is, the power of that playing out by people shopping more often with Chipotle, experimenting with other things on the menu. And obviously, there's going to be further enhancements to our rewards program going forward because we want to respond to our customers to keep them engaged in this rewards program.

Oh, thank you. I wanted to ask a little bit about the loyalty members and also your comment about the 40% I think you set up delivery orders coming through proprietary apps. So first, just the loyalty members, I guess, do you have a sense of what percentage of your total customers that might represent if you have a certain 80 million, 100 million unique customers, something like that? I guess I'm trying to sort of reconcile the loyalty membership with the delivery orders or the digital orders that are coming through your native apps, because it seems like the share of orders that are coming through your own ordering platform has gone up. And I'm trying to figure out, are you shifting people away from a third party by virtue of incentivizing them through loyalty or that kind of thing? Or is it just that the people who are ordering directly are very high spending customers and they're the sort of minority that will ultimately download your apps versus preferring the convenience of an aggregate platform? I know, there's a lot in there, but I'm trying to understand sort of the power of the Chipotle brand versus like, kind of like, call it, the convenience of the aggregators and who owns the customer there?

Yes. Look, I think where you just ended your question is the answer, which is, we have a very powerful brand. And as a result, when people join our rewards program, download the app, and start ordering through our app, they realize that they have the access of order-ahead and pickup whether it's at a Chipotle lane, order-ahead and pickup meaning, I can grab it off the shelf and go, or I can get delivery through our app. In all those occasions, you are able to accrue points and get recognized for being an engaged customer. And we're providing lots of access, lots of convenience, with a very powerful brand position behind it. And that's why I think you're seeing our order-ahead business continue to grow, our white-label or delivery business in our app continuing to grow as a percentage of the delivery occasion. And I think it's just a function of the brand continues to resonate, our first strategy is all about building the brand, trust, and love. And I think while we do that and provide a great experience, both digitally and for whatever occasion you want associated with that digital experience and then you give them rewards, it's a really powerful system that keeps people engaged.

Great. That makes a lot of sense. And then, just do you have any sense of like, kind of what share of Chipotle customers are on your loyalty program versus ultimately what you might get to?

Well, look, we've got 21 million customers in the rewards program, 60% of those are active, ongoing. And then, we've got programs with those that we see lapsing. But we don't see a whole lot of crossover still between the dining room experience and the digital experience; there's only 10%, 15% that are doing both occasions. So there is still a lot of upside in getting our dining rooms reopened for that customer experience, customer occasion. And that's why I think the earlier question I got, I'm so optimistic about our dining rooms reopening because it's not cannibalizing from our digital business. These are really two distinct occasions that people want to have access to great food with integrity. So there's 100 million Chipotle customers coming through these doors. And the good news is, we know when we get that dining room open, there's a lot of people that are going to come back that we haven't seen in a while.

So on quesadilla, as you move through the Stage Gate process, you talked a lot about your focus on operations, the quesadilla is now available across the system. Are you seeing any impact on throughput or operations relative to what you expected?

Yes. Look, I'm really happy to say the Stage Gate process worked. Because two things. One, we've got the right kitchen equipment to create a great product at great speed. And then two, we got the right operational process in place. So, if in the event somebody does order still on the frontline, obviously our guys will figure out how to accommodate it, but it is a much faster experience with a much better product. So we've improved our employees' experience when that happens. And then, for our customers, they're learning the quesadilla made to be an off-premise solution with Chipotle's food. And I think it's a testament to our teams, our operators that validated it, our marketers that have explained to customers how to use it, and then, the marriage of our technology to actually get the transaction in place. So it's a great example of using the Stage Gate process in the most effective way possible.

And I think you thought you had the expectations for quesadilla incidents to normalize in Q2. So just to clarify, do you expect the mix to settle below the 10%? And then, how does the attachment rate to the quesadilla compare to what you see with burritos and bowls?

Yes. So look, we're just saying we're only what a couple weeks into this. And the good news is, we haven't seen go backwards yet. So, and the feedback from our customers are they loving it. The attachment rate looks really good. It's frankly, a little bit better than our burritos and bowls. So I think that's the power of showing our food going really well with quesadillas. And again, it's Chipotle's food is really good and guess what, it's really good when it's in a quesadilla.

I want to revisit the topic of delivery menu price increases. You mentioned a recent 4% increase, but the test you conducted had a significantly higher delivery price increase. Can you discuss whether you experienced any pushback during the test? Additionally, what led you to choose a 4% increase? Why did you believe that was the appropriate amount?

Yes. So just to clarify or go ahead, Jack?

It hasn't changed per se. Our desire to have more Chipotlanes and to push the percentage of new restaurants that open with each Chipotle lane. We want to continue to push the envelope there. And then with conversions, we want to opportunistically look at relocations and rebuilds that remodels where we can add a Chipotle lane. We still think that we can have hundreds of conversions. It's hard to pin that down though, because, in essence, what you do is we have to as we approach the end of a lease term. Like let's say you've got a 10-year primary term with options, when you get to year seven or eight that's the time you have the conversation with landlords. If you've tried to have the conversation with landlords to try to get permission to modify the space in year two or three, when you've got seven years left, landlord doesn't really want to have that conversation. So we have those conversations and we have many of them throughout the year. If you look back to 10 years ago, we will have 100 or more, maybe in the 100 to 150 range, where we're having conversations with landlords. Those conversations are going well. But it's too early to tell exactly how many hundreds of these conversions we can get, we're definitely pushing the envelope.

I would like to understand how sales trends might develop after the full reopening, once vaccinations are completed and things start to operate at a reasonable level. I anticipate that certain areas, particularly work commute locations, may lag behind. What insights do you have from your early markets that have reopened regarding the on-premise business sales trends? Currently, it seems that on-premise sales are at about 70% of pre-COVID levels across the board. How are your most reopened markets performing in that regard? When sales reach that level, how is your off-premise business, especially the digital segment, sustaining itself? I have a quick follow-up as well.

Yes. So David, the way to think about it is, like in our regions that are the most open, obviously, you're not that far off on your average of the return in our dining business, the places where we're more open, we're above the average. And the thing that I love to see is, regardless, our digital business is maintaining that 80% to 85% run rate. The thing that's also exciting, though, is, as I mentioned, in the quarter, we still had record levels of digital business. And that's because we're going to continue to use our system called rewards, quesadillas to drive people further and further commitment on our digital platform for those occasions where it makes sense. So, in the places where we're more open, we got more of our dining room business back, and our digital business is hanging in there. I'd say it's actually our digital business is operating from a position of strength. And then, the places where it's slower, the dining room has come back, thank heavens, we've got such a strong digital business.

And I guess this might be one for Jack, in terms of how you think about sales and margins over time, in the past, you've had a rule of thumb of your AUVs tracking with margins, the way the world is working feels like sales will be higher on average for the average company out there. But margins may be more challenged for the average company out there. You might have some better defense mechanisms than others in terms your digital business and whatnot. But how are you thinking about that relationship? Is that changing, even as you see some of the recent measures you've been taking? And I'll pass it on.

Yes, David, we remain very confident that our margin algorithm is functioning well. Over the past few months, we have made significant progress and are close to achieving that algorithm. As our volumes increase, we reported an average unit volume of $2.17 million, and as we aim for $2.4 million and $2.5 million, we believe our margin will reach 24% and 25%. However, this won't happen every quarter and won't be perfect. We anticipate our margins will improve with our volumes. There may be a slight decrease as we move from $2.5 million to $3 million, which might prevent reaching a 30% margin for a $3 million restaurant, but we expect to achieve a range of 28% to 29%. Therefore, we fully expect to expand our margins. A key factor enabling this is the significant growth in our delivery business, which still represents our lowest margin transaction. However, we have significantly narrowed the gaps, and our customers continue to choose this channel or others. Providing customers with choices and allowing them to pay for the added convenience of delivery appears to be an effective strategy for us.

Brian, based on the experience with quesadilla, how open-minded are you around future digital-only menu innovation that can't be done on the front make line, such as the potential for nachos and enchiladas? And perhaps from an ops perspective, are you confined to only one to two possible digital innovations in the new ovens? Or could there be several more items launched before you become capacity constrained on this digital make lines?

Yes. Look, the good news is, we're far from capacity constraints on those digital make lines and we're continuing to make enhancements to our digital make line, so that our employees become even more accurate and efficient. The equipment that we've chosen gives us a lot of flexibility, whether it's additional entrées or desserts or whatever it may be. The good news is we got a lot of great ideas in our culinary team, and obviously, we'll vet them through the Stage Gate process. But, look, the goal is to be balanced. At the end of the day, we want to have a great experience in the restaurant and a great experience, if you choose to go digital. And I don't think you're going to see us ever get out of equilibrium, where we're providing a great experience for whatever channel it could be. I don't want to come across this DML all of a sudden, you're doing something every month. That's not who we are. Who we are, are great ingredients done in very simple ways, so that you can customize. And the good news is we've got lots of capacity on that line. And now we've got more flexibility because of the additional equipment that we have. So not surprising, I think there's a lot of growth still to be had on their digital business. And there's still tremendous growth to be had in our dining business.

That's helpful. Then Jack, I have a follow-up question on development. This might be a little technical, but looking at the proxy, it looks like there were 324 site assessment requests over the next 12 to 18 months. That's about 50% higher versus the 227 that was in the proxy from a year ago. And so, when I look at the guidance for 200 store openings this year, it's not quite 50% above the 161 you did last year. So, in terms of the guidance for 200 openings, besides conservatism just on the availability of construction crews, is there anything else in there that might be presenting pressure on 2021 development?

No, I would say it's more of a timeline challenge. We've seen that the timeline has elongated over the last year or two or so. And so, this year, for example, we target 200, first quarter was exactly on pace to do 200. I think you can expect us to see similar numbers in Q2 and Q3. Now, what might happen, Andrew, we might overperform a bit in the fourth quarter. It's too early to say that right now; we certainly have a very healthy pipeline. That pipeline is chock-full of a bolt line. So, we think the numbers go up from here, not down. But right now, the responsible number of 200, I think still applies. But let's see how things shape up in quarter two and three, and what the fourth quarter looks like.

Just one question for me. I'm curious about, traditionally thinking about restaurants and unit-level economics. And what I'm wondering is, with your 21 million loyalty relationships in the CRM platform you're talking about, can you talk now about customer lifetime value? Like, what's the economics of a customer? Now that you found some of them outside of the four walls of the store?

Yes, it's a great question, Nicole. One of the reasons why we're so optimistic about our rewards program is, these reward members versus non-reward members, they're coming more often and they're also spending more. So that's obviously a great outcome of putting somebody into a rewards program. And then, I think the team has really become so much more sophisticated in our ability to understand what they want from Chipotle. And as a result, you're going to see us making some further enhancements to the rewards program and the experiences that people can have. So they will be even further engaged. And the whole reason why we're doing that is because we think we can get even more frequency out of people and potentially continue to influence that check further. So it's a very valuable asset, and I think it's going to continue to become more valuable.

I wanted to touch base on the labor environment and what you guys are seeing from that respect, obviously, we've heard a lot in the news lately about the availability of labor and the challenges of staffing up. So I wonder if you could talk there a little bit about what you're seeing and if you're seeing those similar challenges play out. And then, as it relates to that, how you guys think about potential pricing power and/or pricing in different markets? Thanks.

Sure. It's encouraging to see the economy rebound significantly, with customers returning to normalcy. As we experience this growth, we are eager to enhance our restaurants to match the business demand. The positive aspect is that this rebound happened quickly in March. The downside is that we need to catch up on staffing. However, our employee value proposition is exceptional, and as people become aware of these opportunities, we typically see a strong flow of applicants. Our focus then shifts to training and developing these individuals, as we provide not only immediate jobs but also opportunities for future careers. It's exciting to see our business thriving and the need for additional staff, as this growth translates to more jobs and greater upward mobility. Recently, we had over 13,000 promotions, which highlights our growth and the strength of our offer to those who stay committed to development and training. As our business continues to expand, we will staff accordingly. I'm very optimistic about attracting the right talent, fostering a positive culture, and providing valuable opportunities. Now, what was the second part of your question?

Just as it relates to kind of increasing wage pressures across the industry, how you guys think about mitigating that through price increases? Obviously, you've taken on delivery, but more broadly across even like the dine-in side of the business and how you think about that geographically as well?

Yes. I think we've talked about this in the past; the good news is our value proposition is, I would say top-tier. And so that gives us a lot of flexibility on how we price and when we price. We've taken a very conservative approach to it. We've been more in that 1% to 2% range on an annual basis. I mean Jack has talked about is that usually offsets any labor inflation that we deal with. So, I think we're in a really strong situation, both from a brand value proposition and then the ability to attract and retain people with our employee value proposition.

Just taking that a little bit further. I know, some of the traditional metrics have kind of gotten a little bit skewed by everything going on right now. But can you quantify sort of what type of wage inflation you're seeing? And then, also on the commodity front? Certainly, the commodity proteins have been significantly higher, just wondering if you're starting to see that in the non-commodity markets that you're buying from?

Yes. I'll take this. First of all, Andy, in the last year, what we've seen with labor inflation, it's more modest than it had been in the last five years. And last five years, we've seen inflation in kind of the mid-single digit range; and with some of the dislocation going on with COVID. Actually, the labor inflation dropped to the low single digits. But we expect, I think most people expect that's going to tick back up. And let me just give you an example because the other thing that you might be thinking about is, what if we have a national minimum wage, that's that over time approaches $15. Now, the way to think about this is our minimum wage, or our average wage right now, is $12 for our crew, it's $13 for all of our hourly employees. We're not that far off of like, for example, a $15 number. But let's say for example that there's going to be an across-the-board, 10% increase in our wages; that would have an impact on our margins, I will call it 150 to 200 basis points. And that would offset that with menu pricing that will take a 2% to 3% price increase. So all of that is very, very manageable. And we feel like if there is going to be significant increased inflation there because of market-driven or because of federal minimum wage. We think everybody in the restaurant industry is going to have to pass those costs along to the customer. And we think we're in a much, much better position to do that than other companies out there. In terms of commodities, the one that we're seeing for sure and this is more of a seasonal shift that we see pretty much every year is avocados. We are going to see an increase in avocado prices as we shift into the next season. We don't see anything else moving up dramatically right now, Andy. I mean, I think everyone's kind of waiting to see what happens in terms of demand and if there are any disruptions with supply chain; we're not seeing any that we're worried about right now. But with everyone talking about with the stimulus and the reopening and the vaccine, there is going to be a surge in demand. We think we're well prepared from a supply chain standpoint. But that's the only kind of wild card as the year unfolds is. Will there be maybe a cyclical or interim dislocation where maybe there is some commodity inflation, but nothing that we're seeing right now.

I was hoping to better understand the sales cadence that you saw through the first quarter; perhaps you could comment on the two-year stack by month and where that stood quarter-to-date in April. And then, I know you mentioned more normal quesadilla incidents. But could you walk us through kind of the other puts and takes that you considered as you set the second quarter sales guidance?

Yes, sure. So, obviously, the first quarter, I think Jack covered it in his remarks; the geometric average was in the 20%, 21% range. I would obviously tell you, January was a really good start, February, kind of flattish, and March was really strong. Obviously, you got a much easier rollover. And then, we talked about all the things we did around launching quesadilla and dining room, start to reopen, so on and so forth. As you move into April, if you think about this two-year, I think that's probably the best way to think about our business right now, because of what you're seeing in kind of the year-ago performance on Easter, and so on and so forth. The good news is, we've seen days and weeks where you're in the 20s, and we've seen days in weeks where you're in the high teens, so it's bouncing around a little bit. And I think a lot of things are driving that, right, you're still seeing things flash around COVID in different parts of the country. Unfortunately, we had the pause in the vaccines. So you've got some consumer sentiment, I think, bouncing around, which obviously plays a role. And then, obviously, we're going to be more in the leverage phase of our quesadilla launch versus our launch phase, which is what we're taking into account as we think it'll normalize as you go down into the rest of the quarter. So, those are some of the puts in calls; we're in a couple weeks into the second quarter. We love where we are and we'll see how the rest of the quarter unfolds, because I think we've got the right strategies. So, we're going to stay focused on what we know has been working for us.

And could you also comment on California, specifically, obviously, a big important market for you? Could you just ballpark where volumes there are versus the rest of the country? And have you seen an acceleration more recently as COVID restrictions are lifted?

Yes. Look, I mean, this is not just a California phenomenon. This is a phenomenon that's happening across the country, which is, as I think places see a reduction in COVID cases and an increase in vaccines and people get back to maybe their old habits, as well as some of the habits they've created in this new environment. You see the business respond accordingly. So more people being out and about results in really good things for a restaurant concept like us because they only around about Chipotle is a great option. Obviously, we've demonstrated we're a great option when you need that off-premise occasion as well. So the dining rooms become more open, people are more confident to be out and about that bodes well for us in every state. So it's not just the California phenomenon; that's an American phenomenon.

Brian, I was curious what you believe the risk may be to sales growth from pulling the cauliflower rice, I think you said in mid-May?

Look, I think this is a great initiative that we did. I've mentioned in the past, our goal is to keep people engaged with our menu. We'll have some things on for a time period and then take them off and bring them back. What we've seen, where we've tested this in the past is, it's not anything that results in us taking pause and moving forward with our strategy of taking it out in May. So, the good news is, we've got a lot of strength in the business. I'm sure it'll be something we'll bring back down the road. But we feel really good about our strategy of having some items that come off the menu and other items like the quesadilla that will be permanently on the menu.

And then, I was curious if you're seeing a similar level of beverage attachment rate with dine-in usage today that you saw pre-pandemic?

Well, look, I think Jack's talked about this, that's one of the things that's been a little bit of a drag is, as people stop coming into dining rooms, our beverage incidents went down. We fully anticipate as the dining rooms come back, we'll recapture that beverage incidents and things really start to normalize. I think we've got another shot at making people aware of the new tractor beverage offering, which the reason why we initially did that is we were hoping to drive more beverage incidents. So that's our plan. As the dining rooms come back, our plan is to figure out how we can drive more beverage incidents accordingly.

Okay. Well, thank you, everybody, and thanks for all the questions. I just want to start off with first saying how immensely proud I am of all of the Chipotle employees. I think what we've seen in the last quarter, and frankly, the last year is the power of great people, great culture, being focused on the things that needed to be handled right now. And it's pretty powerful to see an organization of 100,000 people come together and do the right thing for each other and their community. So very proud of this organization, very proud of our employees. And look, I think we're off to a great start in '21 because our employees have demonstrated the resiliency of our business. I'm confident that we will continue to do the right things, so that as the dining rooms reopen, we will give people great experiences. We'll continue to invest in our digital business that's not done growing, as evidenced by what we shared here. And then, obviously, we talked about this too, we're very committed to seeing the AUV margin algorithm come to life. And that's really exciting to see that starting to emerge in a meaningful way. And then, lastly, it's really exciting to be building 40 plus restaurants in a quarter; we're going to build from here. And I think we're well on our way to getting back to the business of Chipotle growing in a meaningful way, both top-line, bottom-line, and new units. And then, that results in great opportunities for all our people that have just demonstrated the power of the Chipotle culture and the Chipotle purpose. So thank you for joining. Thank you for listening, and I look forward to touching base in a quarter. Take care.