Chipotle Mexican Grill (CMG) — Q3 2021 Earnings Call Transcript

Hello, everyone, and welcome to our Third 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 will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These statements are based on management's current business and market expectations. And our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our Annual Report on Form 10-K and in our Form 10-Q for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussions today will include non-GAAP financial measures; reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website. We will start today's call with prepared remarks from Brian Niccol, Chairman and Chief Executive Officer, and Jack Hartung, Chief Financial Officer, after which we will take your questions. Our entire executive leadership team is available during the Q&A session. And with that, I'd like to turn the call over to Brian.

Thanks, Ashish. And good afternoon, everyone. Chipotle’s third quarter results highlight strong momentum in our business fueled by a multi-pronged growth strategy and a passionate team that's delighted to see more guests coming back into our restaurants. We continue to retain about 80% of digital sales, but have now recovered nearly 80% of in-restaurant sales. While COVID impacts will likely persist for a few more quarters, we are hopeful that the worst is behind us, and society can shortly return to a more normal environment. Personally, I'm thrilled to welcome our restaurant support center leaders back to the office beginning in November, which will allow us to optimize creativity, camaraderie, and effectiveness. Key elements that helped make Chipotle a unique and powerful brand. For the quarter, we reported record quarterly sales of $2 billion, representing 21.9% year-over-year growth, which was fueled by a 15.1% increase in comparable restaurant sales. Restaurant level margin of 23.5% was 400 basis points higher than the 19.5% we reported last year. Earnings per share, adjusted for unusual items, were $7.02, representing an increase of 86.7% year-over-year. Digital sales growth of 8.6% year-over-year represented 42.8% of sales. We opened 41 new restaurants, including 36 with a Chipotlane. I'm pleased to report that Q4 is off to a great start. These results highlight that our key strategies continue to resonate with guests and allow us to win today while creating the future. While we regularly get asked what's next, I believe our current growth drivers have plenty of runway and will be critical to us reaching our longer-term goal of 6,000 restaurants in North America with average unit volumes (AUVs) above $3 million and improving returns on invested capital. To remind everyone, we're focusing on five key areas. Number 1, opening and running successful restaurants with a strong culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences. Number 2, utilizing a disciplined approach to creativity and innovation. Number 3, leveraging digital capabilities to drive productivity and expand access, convenience, and engagement. Number 4, engaging with customers through our loyalty program to drive transactions and frequency. And last but certainly not least, number 5, making the brand visible, relevant, and loved. Let me now provide a brief update on each of these, starting with operations. Well-trained and supported employees consistently preparing delicious food and delivering excellent guest experiences are at the heart of our success. We're fortunate to have amazing employees at our restaurants who have stayed focused on safety, reliability, and excellent culinary despite the dynamic and challenging environment. I've said it before, and I'll say it again. Our people are our greatest asset, and I can't thank them enough for all their efforts. We are extremely proud of Chipotle's world-class employee value proposition that includes industry-leading benefits, attractive wages, specialized training and development, access to education, and a transparent pathway to significant career advancement opportunities. We believe these efforts are helping to attract and retain great employees, which is more important than ever given the challenging labor environment we're all experiencing today. Over the past 18 months, we've made operational adjustments to adapt to our constantly changing environment in support of our in-restaurant business, as well as our record-breaking digital business. As a result, we've had to allocate labor as needed among the different roles, including digital make-line and the front line, depending on available staff to accommodate the needs of our customers and our restaurant teams. This flexibility has allowed us to keep our frontline open given our ability to divert orders on the digital lines as needed to overcome periodic staffing challenges. This is part of the normal business balancing that occurs at the discretion of on-site managers and has not had a material impact on our business in the past. This was true pre-pandemic and is more relevant now as dining room volumes recover. The good news is that I believe we're finally getting back to pre-pandemic operations, and I couldn't be more excited. We're fortunate to have a dedicated digital make-line and a dedicated dining room serving line. Our frontline represented nearly 60% of our business or $1.1 billion of sales for the quarter. It is big, and it is growing. We are committed to ensuring guests on the frontline get the customized meal they want, made with real ingredients, excellent culinary, and faster than anywhere else. We still have some work to do, but our goal is to provide exceptional throughput, as speed of service is a foundational element of convenience that our guests truly value. Therefore, we are committed to teaching, training, and validating the five pillars of throughput every day during every shift to ensure we meet our high standards and provide a great guest experience. While taking good care of guests is always a top priority, utilizing our stage-gate process to continue innovating is critical to our growth. The great news is that Chipotle is delicious food that you feel good about eating, which creates an emotional connection with our customers, and they love to see ongoing innovation from us. As a result, we introduced new menu items on a regular cadence, as it helps bring in additional customers, drive frequency with existing users, and gives us an opportunity to create buzz around the brand. Recently, we launched smoked brisket for a limited time across all our U.S. and Canadian restaurants. Our culinary team spent the last two years developing the perfect smoked brisket recipe that is unique to our brand and pairs flawlessly with our fresh, real ingredients. This is our third new menu item this year, following on the success of our cilantro lime cauliflower rice and handcrafted quesadilla. Early customer feedback on this entry, which is expected to last through November, has been very positive, and we're delighted to see an increase in both check size and transactions. Quesadillas, which we launched as a permanent digital exclusive offering in March, continue to perform well and are also helping attract new customers to Chipotle. By the way, if you haven't had a chance to try the brisket quesadilla, you really are missing out. And we're far from being done. Plant-based chorizo is currently being tested in a couple of markets, and our talented culinary team is in the early stages of developing other exciting menu items. All that being said, our stage-gate process is not limited to new menu innovations. We use it for many parts of the business, including development. As you know, we validated new restaurant expansion in Canada earlier this year. Impressive unit economics with AUVs and margins equal to or above those in the U.S. led us to accelerate development in this market. We've opened one new restaurant in Canada year to date and have several more planned before year-end, including our first-ever Chipotlane that's scheduled to open next week. Similarly, we are now in the early stages of using this process to learn, iterate, and eventually validate expansion in Western Europe. COVID slowed our ability to execute several critical initiatives. However, with restrictions easing, we're making nice progress and have implemented some of our digital assets as well as begun to test alternative formats and explore new trade areas. The recent openings have exceeded expectations. So while we continue to view international expansion as a medium- to longer-term opportunity, I remain quite optimistic about its future contribution to the Chipotle story. A more near-term pillar of growth has been our ongoing digital transformation, which is helping Chipotle become a real food-focused digital lifestyle brand. During the third quarter, digital sales grew nearly 9% year-over-year to $840 million and represented 43% of sales. We're not surprised to see the mix moderate as the world continues to reopen. However, we're pleased to see our digital sales dollars continue to grow despite lapping tough comparisons. In fact, our year-to-date digital sales of nearly $2.7 billion, are just slightly below the $2.8 billion we achieved during all of last year. Digital is proving to be sticky as it's a frictionless and convenient experience, which has been aided by continuous technology investments to improve operational execution, innovation, and the customer value proposition. As a result of the pandemic, many new consumers were introduced to Chipotle via digital channels and are now using us for alternative occasions. The thing I love about having two separate businesses is that they serve different needs that will likely prove to be incremental and complementary over the long run. This is reinforced by the fact that different guests are accessing Chipotle through different channels. Currently, about 65% of our guests use in-restaurant as their main access point. Nearly 20% use digital as their primary channel, and the remaining 15 to 20% use both channels. We're encouraged by this dynamic as it gives us several future opportunities, including the ability to convert more of our in-restaurant guests into higher-frequency digital users. Not only are we pleased with the level of digital sales and overall mix, but we're also delighted to see that our highest margin transaction, digital pickup orders, is gaining traction. This channel represented slightly more than half of digital sales in Q3. As always, we're not being complacent and continue to look for ways to enhance convenience and access through alternate restaurant formats, digital-only menu offerings, and leveraging our large and growing loyalty program. Speaking of the loyalty program, we're excited to have more than 24.5 million members, many of whom are new to the brand. This gives us a large captive audience to engage with and distribute content that promotes our values and motivates our super fans. We continue to leverage our CRM sophistication by focusing a lot more on personalization and using predictive modeling to trigger journeys primarily for new and lapsed customers. These personalized messages are more brand-related as opposed to offers or discounts, which is allowing us to optimize program foundation and economics. All these efforts, along with the use of enhanced analytics, are allowing us to consistently attract more visits from loyalty members than non-members. No doubt the loyalty program has moved from a crawl to the walk stage and we still have a lot of room to grow. Offering new ways to engage with Chipotle is essential to the ongoing evolution of our digital business. Our first enhancement was rewards exchange, which provides greater customization and flexibility to redeem rewards and allows guests to earn rewards faster. More recently, we announced extras, an exclusive feature that gamifies Chipotle rewards with personalized challenges to earn extra points and/or collect achievement badges in order to drive engagement. As the program grows, so does our ability to provide sophisticated and relevant communications to our guests, which will ultimately deepen the relationship between members and the brand. We are pleased with our progress to date, but believe with ongoing investments in further leveraging data-driven insights, we can get even better. Amplifying all the growth initiatives I've mentioned thus far are the collective efforts of the marketing team, which are designed to make Chipotle more visible, more relevant, and more loved. We believe that real food has the power to change the world and using custom creative across a wide variety of media channels that allow us to drive culture, drive difference, and ultimately drive a purchase. For example, we use numerous campaigns to stay relevant via important sporting events such as the basketball championships, where we had a million dollars’ worth of free burritos and our TV advertising. We also utilize social media, including our website to authentically highlight real food for real athletes during the broadcast from Tokyo. And of course, to celebrate the launch of smoked brisket, we offered an exclusive peek to our loyalty members prior to a full launch, supported by a media plan across online, video, digital, and social media platforms, as well as traditional TV spots. All of these helped attract new guests into the Chipotle family, as well as increase frequency of existing users. We're fortunate to have an innovative marketing team that wants to be a leader, not a follower. And our marketing organization is built on a culture of accountability that encourages new ideas, is committed to experimentation, and is ruthless on measuring returns, and isn't afraid to pivot to different opportunities if they don't perform to our high standards. Every day this team is focused on driving sales today while enhancing our brand for tomorrow. Chipotle is committed to fostering a culture that values and champions our diversity while leveraging the individual talents of all team members to grow our business, elevate our brand, and cultivate a better world. Our team has proven their ability to be resilient and successfully execute against macro complexities. Again, a huge thank you to our nearly 95,000 employees for all their efforts. As a result, I believe we are better positioned to drive sustainable, long-term growth than we were before the pandemic, which makes me even more excited about what we can accomplish in the years ahead. With that, here's Jack to walk you through the financials.

Thanks, Brian. And good afternoon, everyone. We're pleased to report solid third quarter results with sales growing 21.9% year-over-year to $2 billion as comp sales grew 15.1%. Restaurant level margin of 23.5% expanded 400 basis points over last year. And earnings per share adjusted for unusual items were $7.02, representing 86.7% year-over-year growth. The third quarter had a GAAP tax benefit that I will discuss shortly, which is partially offset by expenses related to a previously disclosed modification to our 2018 performance shares and transformation expenses, which netted to positively impact our earnings per share by $0.16, leaving the GAAP EPS at $7.18. As we look ahead to Q4, there remains uncertainty on several fronts, including COVID-related impacts as well as inflationary and staffing pressures. But given our strong underlying business momentum, we expect our comp to be in the low to mid double-digits, which is encouraging considering there will be about 200 basis points less in pricing contribution during Q4 versus Q3 as we class some of our delivery menu price increases. And our brisket limited-time offer will be for a partial quarter, as compared to the full quarter of carnitas out of last year. Let me now go through the P&L line items, beginning with cost of sales. Our supply chain team has done an outstanding job navigating the numerous industry-wide disruptions, which led to food cost being 30.3% in Q3, a decrease of 200 basis points from last year. This was due primarily to leverage from menu price increases, which were partially offset by higher costs associated with beef and freight that, unfortunately, are continuing to worsen. It is hard to predict how much of these headwinds will ultimately be temporary versus permanent, but they're likely to persist for the foreseeable future. In addition, Q4 will also include the higher-cost brisket LTO, which collectively will result in our food cost being in the low 31% range for the quarter. Labor costs for the third quarter were 25.8%, an increase of about 40 basis points from last year. This increase was driven by our strategy to increase average nationwide wages to $15 per hour, which is partially offset by menu price increases, sales leverage, and a one-time employee retention credit. Given ongoing elevated wage inflation and greater new unit openings, we expect labor costs to be in the mid 26% range in Q4. Other operating costs for the quarter were 15.1%, a decrease of 170 basis points from last year due primarily to price and sales leverage. Marketing promo costs for the quarter were 2.4%, about 20 basis points lower than we spent last year. While Q3 tends to be a seasonally lower advertising quarter, the timing of some initiatives also shifted into Q4 this year. As a result, we anticipate marketing expense to be around 4% in Q4 to support smoked brisket and for the latest brand messaging under our Behind the Foil campaign. For the full year 2021, marketing spend is expected to remain right about 3% of sales. Overall, other operating costs are expected to be in the mid-60% range for the fourth quarter. Looking at overall restaurant margins, we expect Q4 to be in the 20% to 21% range. Our Q4 underlying margin would be around 22% when you normalize marketing spend and remove the temporary headwind from the brisket LTO. The remaining cost pressure will continue to evaluate and take appropriate actions on menu prices to offset any lasting impacts. Our value proposition remains strong, which we believe gives us a lot of pricing power. Despite these challenges, we remain confident in our ability to drive restaurant level margins higher as our average unit volumes increase. For the quarter, our GAAP earnings were $146 million; on a GAAP basis, it was $137 million on a non-GAAP basis, including $7.6 million for the previously mentioned modification for 2018 performance shares and $1.6 million related to transformation and other expenses. G&A also includes about $100 million in underlying G&A, about $28 million related to non-cash stock compensation, about $8.5 million related to higher performance-based bonus accruals and payroll taxes, equity vesting and stock option exercises, and roughly $600,000 related to our upcoming All Manager Conference. Looking to Q4, we expect our underlying G&A to be right around $101 million as we continue to make investments primarily in tech to support ongoing growth. We anticipate stock compensation will likely be around $27 million in Q4, although this amount could move up or down based on our actual performance. We expect to recognize around $5.5 million related to performance-based bonus expense and employer taxes associated with shares vested during the quarter, as well as about $1.5 million related to our All Manager Conference. Our effective tax rate for Q3 was 14.7% on a GAAP basis and 19.7% on a non-GAAP basis. Both rates benefited from our option exercises and share vesting at elevated stock prices. In addition, our GAAP tax rate included a return-to-provision benefit for additional net operating loss generated on our 2020 federal income tax return, and carry back to prior years. For Q4, we continue to estimate our underlying effective tax rate to be in the 25% to 27% range, though it may vary based on discrete items. Our balance sheet remains healthy as we ended Q3 with $1.2 billion in cash, restricted cash, and investments, with no debt along with a $500 million untapped revolver. During the quarter, we repurchased $99 million of our stock at an average price of $1,813, and we expect to continue using excess free cash flow to opportunistically repurchase our stock. However, opening more Chipotles continues to be the best return we can generate. During Q3, despite a few delays in the opening timeline, we opened 41 new restaurants, with 36 of these including a Chipotlane. While we're experiencing construction inflationary pressures, subcontractor labor shortages, critical equipment shortages, and landlord delivery delays, our development team is doing an excellent job opening these new restaurants. In fact, we currently have more than 110 restaurants under construction. And while timing is somewhat unpredictable, this gives us confidence in ending the year at or slightly above 200 new restaurants, with more than 75% including the Chipotlane versus our prior expectation of 70%. Also, the team has done a nice job building a robust new unit pipeline, which we believe will allow us to accelerate openings in 2022. Because of the challenges I just mentioned and how they could impact the timeline, we'll provide 2022 opening guidance during our Q4 call. As of September 30th, we had a total of 284 Chipotlanes, including 12 conversions and 8 relocations. They continue to enhance access and convenience for our guests while demonstrating stellar performance. While it's early days, Chipotlane conversions and relocations are yielding encouraging results. We'll leverage our stage-gate process to learn and refine our strategic approach to accelerating our Chipotlane portfolio. I'd like to close today by thanking all of our Chipotle team members for the exceptional results we're reporting today, as well as their hard work and dedication in helping to sustain our long-term powerful economic model. Maintaining a 40% pass-through on incremental sales as we expand AUVs will lead to higher margin and improving cash-on-cash restaurant returns. You can see why we remain optimistic about our future. With that, we're happy to take your questions.

Great. Thanks, and Brian, just to vouch, that brisket quesadilla sure is killer. Jack, you noted the Q4 food and labor challenges. If we think ahead, I think the more important question is that, what is the business capable of achieving at $3 million sales volumes in terms of restaurant margins? Is 27%, 28%? Is that still the right level, or do you think the industry may force pressures into some degree the freight challenge that you mentioned? Does that make that margin level more aspirational? Thanks.

Hey, Andrew. Listen, thanks for the question. No, we still believe that margin range at $3 million is still very much in play. Listen, it's very much of a labor challenge right now. There's food inflation as we talked about. We don't know how much of this is temporary or transitional versus permanent, but what we do know is we've got what we believe is great value. Our customers continue to appreciate Chipotle. They love the convenience. They love the value. So we believe we've got pricing power really better than almost anybody, if not everybody, in the industry. So we'll be very patient. We're not going to cover inflation that hits in one quarter or another immediately, but we will carefully consider the fourth quarter, what action we will take. You know that it is about this time of year that we do consider what pricing we will take. But we'll be patient and watch and see what happens with inflation and how much stays permanent. But we've got pricing power to ensure those margins are in exactly the range you just talked about, Andrew.

Got it. And just my other question still on brisket, is the issue of the fact that it's ending a little bit earlier in November versus what you saw on the menu side of last year? Is that just due to supply that just ran out, or was that the case all along that November is probably targeted end date?

We're probably a little bit shorter than we originally planned, but that's just a direct result of the great response from the consumer and the great execution of our operators. We got a great product, people have loved it, and it's driven both incremental transactions and checks for us, so we're really happy with it. I'm guessing we'll probably do brisket again at some point in the future.

We're looking forward to that. Thanks, Brian.

Good afternoon. I guess my question, kind of building on brisket; I know you had indicated, Jack, that the cost could be up some sequentially. Can you kind of break that out into brisket versus just underlying inflation? And then I'm curious with brisket. I think it's the highest priced protein you've ever had. I mean, what does that taught you about where you can go on the menu?

Yeah, Sharon, brisket, it's about a 50 basis point impact. Inflation is probably another about a 100 basis point impact, and you've got pushes and pulls beyond that, so.

Just to your question about the pricing; it just demonstrates the value proposition and the pricing power that we have in our business that I think Jack alluded to earlier. So we're really happy with the value proposition and the strength of our business. In the event we feel like we need to pull that pricing lever, we have the ability to do it.

Hi. Good afternoon. A couple of questions. One, I wanted to clarify your fourth-quarter comps guidance. So I guess if I look at the two-year comps performance you delivered in the third quarter and what you're projecting to in the fourth quarter, it does imply a fairly meaningful step-down in that metric. And, Jack, I was just wondering if that's the right way to measure the business or I guess, I know there's differences in comparisons if you look further back, but I guess how are you viewing the two-year comp metric as a guidepost for your business?

Yeah, David, I think you have to go back further because if you think about it, it was back two years ago, so it'd be if you look at a three-year look now. When we first launched carne asada that was a huge hit. And then we relaunched carne asada and it jumped over the original carne asada result. And now we have brisket that's kind of one on top of both of those years. And so I think a two-year doesn't take into account the strength and the strong comp we had in the fourth quarter back in 2019. To go back to 2019, the fourth-quarter comp was by far our highest comps. So I think the two-year doesn't quite look at the whole package. When we look at the underlying trends, with the exception, David, of the pricing that rolls off at about 200 basis points related to delivery that we took last year, we think the trends are holding up nicely.

Great. Thank you for that. And then, Brian, I wanted to ask about Europe. Your commentary there sounded fairly optimistic. So you mentioned that you're seeing better-than-expected performance from some of the recent openings, and I'm just wondering if you could elaborate on what changed for the recent openings and what exactly are you testing in the stage gate process. And how long will it be before you make a judgment on whether you have the model right for accelerated expansion?

Yes. So I would say that the biggest difference is the first time we opened our restaurants with our digital mainlines as part of the opening and also having the access point of delivery as well. And then we experimented with how big really the seats are. So all the restaurants have a nice dining room, but some of the dining rooms are more like the size of our restaurants in New York City versus the size of the dining room you might find in a traditional suburban outlet. The good news is we're seeing great results in both executions. It's great to see the power of our digital business with the great customized in-restaurant experience that you get. I would tell you that's been the biggest shift. And then, we've also gone back and put into digital assets in all our existing restaurants. We're starting to see that take hold as well. So it's very early. A lot of these restaurants just opened in the last month or weeks, and we're really happy with the way that it started. Hopefully, we can continue to get earnings in an environment over the UK, and then, ultimately, France, where COVID is not putting restrictions on the business. I think you're right in interpreting we're really excited about the results we've seen, but it's early days, and we want to make sure it performs ongoing, not just at the opening.

Great. Thank you very much.

Thank you very much. I have two questions. The first concerns the cost outlook, particularly regarding commodities and labor. Jack, could you share the inflation details from the third quarter? More importantly, as we look toward the fourth quarter, what are your directional thoughts? I understand you've mentioned what's transitory and what's permanent, but I'd like to hear your insights about what we might expect as we move into 2022. Additionally, I have a follow-up question.

We're facing the same inflationary challenges as all businesses, including restaurants. Some of these challenges come from supplier labor, not just our own labor costs. Everyone is experiencing similar issues, including shortages of raw materials, which makes it hard to predict future costs. In this quarter, inflation was moderate, in the mid-single digits, although there are forecasts for some materials that could see significant increases. We're not currently experiencing those drastic hikes, just some isolated spikes, while most of our ingredients remain stable, albeit under upward pressure. We need to be patient and observe how factors like shipping and international supply normalize. There are material shortages affecting not just our food and paper, but also our ability to open new locations, and some of that will also stabilize over time. We believe we can manage any inflationary effects on our margins; it's about waiting to see which issues are temporary and which are not before making decisions.

Understood. And then the follow-up was right on that topic. In terms of menu pricing and the thought process in determining the right level, just wondering whether your goal would be to fully protect the margin, obviously removing the transitory. But if you felt like they were more permanent pressures, is the goal to fully protect the margin or do you think about more of the long-term traffic trends and maybe don't necessarily take the full pricing that you could otherwise potentially do? I'm just wondering, what's that thought process like? Maybe you've learned something with delivery; I know you took a very large increase there, wondering whether you're seeing the desired results of consumers shifting to more of the Chipotle site or any learnings from that that you could apply to broader pricing decisions? Thanks.

Yeah, Jeff, it's a great question. I would say that our ultimate goal, so this would be over the long term, maybe the medium term is to fully protect our margins. We have great value. When you look at our pricing versus other restaurant companies for the quality of the food, the quantity of the food, and the quality and convenience of the experience, we offer great value. We believe we have room to fully protect the margin, but we're not going to do it quarter by quarter. So we're not going to worry about pressure out a particular quarter on the margins. We're going to watch it for a few quarters and see what happens. But ultimately, our expectation, I think it gets back to the first question about when we get to $3 million volumes, do we expect the margin to be that same kind of 27%, 28%? We absolutely do.

The only thing I would add to that is along those lines, the good news for us is we still have tremendous growth. We still have a lot of work that I think can always be ongoing to drive more efficiency and cost out of the business. And then on top of that, we've got this great value proposition that allows us to take advantage of pricing once we understand the combination of growth, cost efficiencies, and then our value proposition. That's why you're hearing Jack say he's very confident in our ability to, at the end of the day, capture the full margin and earnings possibility out of our business as we grow beyond $3 million averaging of volumes.

But that 17% increase it took on delivery that you mentioned last quarter. I mean, I'm assuming something of that magnitude is having an impact in terms of shifting consumer preference or not necessarily?

Well, first of all, I would just clarify. We didn't take it all at one time. We took about 7% last August. We moved that up to 13% in the fourth quarter, and then we moved it up to 17%. So it was done in stages, Jeff, so we could see what the consumer response was. We just didn't see that much movement. You see a little bit of movement. We did see order had moved up a little bit, but we were pleased with the way that our consumers responded. We felt strongly all along that that channel, it's a high convenience channel with a high cost; that channel really to bear those costs, and we're really happy with the way it ended up.

Thanks. Just a quick follow-up on the price elasticity on delivery particularly. What do you think that was? What do you think the volume trade-off was?

I don't know that there was one that I can measure that accurately, David, because we did see delivery ease, but we also saw dining rooms open up as well during those periods. We didn't see much of any resistance back in the third quarter of last year when we took the 7%, when we took out 13%; COVID was starting to worsen as we moved into the holidays. So there's so much noise going on. It's hard to say we lost a specific amount of sales in delivery. We saw some softness there, but there were other things going on too. Our latest price action was happening when the economy and restaurants were opening up again. But when we look at the net-net at the whole picture of what our overall sales were and then between channels, we're really pleased with the overall sales trends and we're happy with the way the channels have shifted to the point where that shifting is moving back into our highest margin order ahead and our second highest margin come into the restaurant and order. So the way we've ended up throughout the whole last year as we took these actions, we think we ended up in a really good spot.

I wanted to inquire about mobile ordering and pickup, which seems to have very high incremental margins. I would expect that the advantage from labor efficiency is significant and increasing due to labor costs. It appears that the mix for mobile orders and pickups may have slowed down somewhat. Can you discuss that mix and if you have any strategies with your database to encourage this behavior and potentially improve your margins? Thank you.

Yeah, luckily, the order-ahead business continues to make nice progress. As we open more and more Chipotlanes, we see that business get even bigger. And you're right, David, the efficiency of that order or that transaction is the best margin transaction in our business. We love opening more Chipotlanes. Our marketing team, our digital team, they continue to drive customers to that access point because it's highly convenient. I think I just saw some numbers on this where the time from your order to actually your food being ready is now less than 10 minutes in our business. So we've gotten even faster at this space to make it even more convenient. Just to give you perspective, a couple of quarters ago, that was in the 12-minute range. We're getting better, and as we continue to provide more convenience and speed, and get more Chipotlanes, you're going to continue to see that occasion continue to grow, and I think it's great for the business and it's great for our customers.

Thank you.

Thank you. Good afternoon. I want to ask a little bit about labor and how you're getting informed there. You're obviously ahead of the curve on benefits. But just thinking about some of the decisions you have to make. Let's say, is it digital make line or digital closes? What are you learning about the labor pool? When will you decide if some of those pressures are transitory or not? If they're not, what would you do? Do wages go up? Do you have to overstaff to account for not enough bodies? Or is it just simply so much demand?

We are taking a team-by-team approach and focusing on each restaurant individually. We are fortunate to have strong leadership throughout our organization. When we encounter a restaurant that is having staffing issues, we analyze the situation to determine whether we have the right leader and culture in place. Once we understand those factors, we ensure that we offer competitive wages and benefits, and communicate the genuine career growth opportunities at Chipotle. We have found that with the right leadership and a strong culture, we excel at attracting talent. In each market, we must keep our wages competitive. Chipotle has the flexibility to adjust our strategy on a restaurant-by-restaurant basis to maintain a strong position. Our goal is to avoid falling behind and to lead in attracting and retaining top talent. Our approach is straightforward: we seek the best people, reward them appropriately, and support their development so that they can grow with us.

Thank you for that. And then I think I actually lost track of price. I think it was 10% in the quarter, but if it's going to be like 200 basis points lower, I either had too much rolling off or maybe some more came on. So could you talk about price? Maybe a little bit of color by month in Q3 and in Q4? Thanks.

Yeah. I mean, I'll do it by quarter, Nicole, but it didn't change that much by month either. There's roughly about 10% in Q3, that's going to drop to about 7.5% or so in Q4. Just to remind you guys of the component, 10 sounds like a lot. It's the 4% that we took in June to support the higher wages. It's roughly 2.5% related to delivery, that's way to base on our delivery business. There is our national pricing that we took last year that's about 2 or a little bit more than 2. There's a final piece in this line, which we took some beef back from last year or early this year when beef prices started to spike. Now beef spiked again so we're behind on that as well. I only break it out that way because all the action we've taken has been much targeted, very specific, and very purposeful. We will move down to that 7.5 in the fourth quarter; a good part of the delivery pricing that we took in the third and fourth quarter of 2020 completely rolls off into the end of the fourth quarter.

Thank you for that. Appreciate it.

Thanks for the question. On loyalty, can you share any metrics on how customers spend, or frequency changes once customers joined the rewards program? And then I know early, but anything you can share on what you're seeing with Chipotle exchange and extras, and which cohorts you're seeing the greatest responses from?

Yes, sure. What we have demonstrated over time is that people that are in our rewards program or our loyalty program, they come more often and they spend more. We've definitely seen the rewards program has also created another level of engagement where those that before weren't participating are now being influenced with the opportunity of these different incentives, right? I don't know if you are enrolled in our program, but you'll see something like a streak, where you come X number of times, you get a bonus points. The attractive thing about that is not everybody wants to wait to redeem for a full-size entrée. This opens the door for them to redeem faster and be rewarded for taking action. We see people continue to engage in the rewards program. It continues to work really well to take advantage of new users, medium users, or heavy users that want to engage with the brand. We are able to influence their behaviors resulting in more frequency and higher tickets.

Thanks. I'm definitely enrolled in the program. One of the best. On staffing, where are you seeing the greatest challenges? Do you see it more in recruiting new staff or retention and any differences that you can call out in the labor environment across markets?

Yeah. So I would say it kind of ebbs and flows. Unfortunately, this is the cycle when the restaurant gets understaffed, and it becomes a much harder job for the individuals that are working there. So we work aggressively to go recruit train so that we do retain those that are with us. I would say the greatest challenge has been when the dining rooms reopened, we needed to staff up quickly to catch up with the demand, and that was harder than we had hoped. Luckily, I think we took a lot of right actions where we've got a lot of our restaurants now in good footing. Now we have these scenarios where things pop up and you have to deal with it accordingly, whether it's exclusions as it relates to COVID or kids going back to school. You're in kind of the normal course of having to make sure you're always recruiting. And then we've got to make sure we're getting people trained up, they're being successful in their job, and then they stay with us. Ultimately, they're able to hopefully get a general manager job and progress into our organization to above-store leadership as well. Our focus has been on making sure that we're getting these restaurants staffed and trained correctly because that's the best remedy for retention.

Thank you, guys.

Thanks. Good afternoon, guys. My question relates to Chipotlane. I was hoping you could provide some color on the average volumes, margin, and investment in that format versus the traditional format. My second question is that given the Chipotlane format really unlocks the use of different real estate sites, how much does the format increase the domestic unit potential of the brand?

Yeah. Listen, I'll start with the performance. The Chipotlanes typically open up somewhere in that 10% to 15% range higher on sales. Their margin, obviously, it's higher for two reasons. One, because the sales are higher, and we know that our higher volume restaurants flow through a higher margin. There's also the efficiency that we talked about where much more of the digital business. First of all, the digital business is usually 10% to 15% higher. If we're doing 45%, so say in a non-Chipotlane, we'd be doing 55% or higher in a Chipotlane. It skews towards order-ahead, our highest margin transaction, so the return is much, much better. The incremental investment costs generally is going to be about $75,000 to $85,000, something like that. With those kinds of sales and those kinds of higher margins, it's by far a superior return. In terms of Chipotlane, the Chipotlane in the typical restaurant that you'll see open up, it's not any smaller than a typical restaurant, so it doesn't take a different footprint. What we are experimenting with though is a smaller footprint with the Chipotlane, where we might be able to go into the same location. The same location would be where you've got two restaurants already, they could be very, very high volume restaurants, and there just isn’t really enough room to economically put a third restaurant in between those two. If you can reduce the footprint, it reduces the rent, it reduces the investment costs. Because we have higher margins with Chipotlane and customers, more than 50% of them want to go through the Chipotlane order head they picked up. It's mostly digital and almost half of that is order ahead. We do have an opportunity economically to drop in a restaurant in between those two high-volume restaurants. We're in the early days of that. We're just experimenting with that, but we think that that's got some legs going forward, and that, Chris, would be incremental. Those will be deals that we wouldn't have done without the Chipotlane format.

Just as one follow-up, I know digital-only Chipotlanes are still in the testing phase, but does that format potentially allow you to have a much broader menu with items that are maybe more difficult to execute than you could in a traditional format?

I mean, it definitely allows for some additional innovation on the menu as evidenced by our quesadilla. That’s something that I think our culinary team and our marketing team continue to take a look at. Regardless though, one of the things that's great about Chipotle is people can get the customization that they want and also that we can provide it at a really exciting speed. We have to be careful that we don't create complexity that slows us down even in the digital channel. The digital channel gives us some additional flexibility. I love the fact that we're now closing in on people being able to order off-premise, and have their food ready to be there in less than 10 minutes. That's really exciting for us. We're going to keep an eye on the throughput for digital, just like we keep an eye on the throughput on our frontline. So it definitely opens the door for some things. I just want to make sure you understand at the end of the day, we still want to have great speed even in our digital business.

Understood. Thank you.

Thanks and appreciate all the commentary on top-line growth and margins specifically. I wanted to switch topics a little bit and think about unit growth here. It seems like the unit growth number in the quarter came in a bit lighter than some of the expectations, but you maintained that full-year guide. Just wondering if you could comment on the construction in the permitting environment and what you're seeing from that perspective and if there is any risk that some of these new units need to get pushed out into next year.

Yeah, Jared. I made a few comments in the prepared comments as well, but it's a challenge. It's a challenge in all the areas you just mentioned. It's a labor challenge for our contractors and it's a material challenge, and it's also a permitting challenge. It's one reason why we mentioned that even though we opened 137 restaurants so far, we've got about 110 or over 100 restaurants under construction. There's not a risk that we won't get to 200 openings; I don't think there is a risk that we won't get to or beyond 200. More than a previous year, more than a typical year, there's timing risk in that. I think we'll get to that 200-plus. It gives you an idea of how robust our pipeline was. Without these timing risks, we would have been well beyond the 200. For next year, I also mentioned that we've got a very robust pipeline. The good news here is our pipeline is really, really strong. We're doing everything we can to work through the timing issues like we're pre-ordering supplies, for example, so that we're not going to run out because we're pre-ordering things. We're doing everything we can to work with our contractors. But if they have short labor or if they have exclusions because people are exposed to COVID, the construction site is going to shut down. Those are things that are just unavoidable. We're navigating as best we can through that. Most important is the pipeline is really, really strong. The quality when we open up these restaurants is really, really good. So it gives us great optimism, and the timing issues, we're just going to navigate the best we can.

Thanks. I really appreciate the color there. And then just one more sort of on that. I know you're kind of holding off on giving '22 guidance in terms of unit growth, which you typically do in the third quarter, but fully understand the volatile environment there. If you were to think about sort of a normalized environment without some of these timing issues, and especially as it relates to the very healthy cash balance you have, is there any reason that outside of, again, COVID-specific or supply chain impacts, we shouldn't be starting to think about accelerating levels of unit growth in '22 and maybe even '23 and beyond?

Yeah, listen; our pipeline will support that acceleration. It really does come down to timing. It's not just about capital. I mean, just because we have the capital doesn't mean we'll accelerate pace. It's a combination of good sites being available, the openings being strong. We're getting now up to 75% of our new openings are Chipotlane, which you heard us talk about the performance there, so there's every reason to continue to invest in the success. So you will definitely see some acceleration.

Awesome. Thanks for taking the questions. I've got a few. So just a clarification first on the fourth quarter same-store sales guidance. Right now, are you guys trending towards the higher end of that range, given you're expecting some mix shift lower as well as some pricing rolling off?

Yeah. October results are good so far. So we didn't see a fall-off at all in October. But in terms of the range, there's a lot of uncertainty going on. We still have 2.5 months ago, so I'd hate to want to be more specific at this point.

Got it. And then just go into the, I think question earlier or some of the labor challenges you alluded to in the press release and on the call, did that impact same-store sales, specifically throughput at all during the quarter?

I mean, look, obviously a fully staffed restaurant outperforms an understaffed restaurant. One of the things that's terrific for our business, though, is the fact that we have most of the digital mainline in the front line; we're able to flex that digital mainline so that we can keep the integrity of our front-line experience. We never have to close our restaurants. What we're able to do is then allocate accordingly. The other thing we've learned that's another benefit of this digital business is that we have restaurants within a couple of miles of each other, and delivery doesn't get impacted if you ship from one restaurant to another. We have to throttle back our digital business in one restaurant because we're a little light on staffing so that we can keep the frontline running smoothly. The good news is we got another restaurant right around the corner that is able to fulfill that digital order. So we didn't see a lot of drop-off in the business that way. At the end of the day, I wish all our restaurants were fully staffed, and I know we're missing sales because not all of them will be staffed. There is still upside in getting our staffing solved in every single restaurant. The good news is we're in really good shape for the majority of our restaurants. Our teams have done a phenomenal job, and it’s going to be something that we’re going to continue to work hard on. It's not going to get any easier. We have to continue getting better at recruiting, training, and keeping these restaurants staffed. We’re fortunate that we've got these two businesses and got the flexibility, but I wish every restaurant was staffed. It'd be a better job for everybody. It'd be a better experience for every customer.

Thank you. I have one more question about the pricing decision. Can you explain your thoughts regarding the fourth quarter? Are you considering taking additional price increases now due to the anticipated protein inflation extending into '22? Can you clarify your reasoning for deciding whether to implement any further price changes sooner rather than later?

I think Jack mentioned that we typically evaluate our pricing strategy for the coming year during the fourth quarter. One key factor we're assessing is where labor costs will settle, not just in our restaurants but also with many of our suppliers. We believe that wage increases are not temporary and are likely to persist. Other costs, such as freight, might be more temporary. We want to gain a clear understanding of these factors. The positive aspect is that we have a strong value proposition, allowing us to adjust our pricing as needed, whether that means increasing it or holding back. Considering our business's growth, we want to avoid premature pricing changes unless necessary. We're confident in our ability to adjust pricing when needed, but we prefer to do this based on permanent changes rather than temporary fluctuations. We also need to consider how this pricing strategy aligns with our growth and other cost-saving initiatives underway.

Got it. Thank you.

Great. Thank you. Brian, just wanted to ask a little bit more on some of the key incremental drivers of sales growth over maybe the coming months and quarters. Just curious based on what you've said, if it's fair to think about incremental benefits from a few, I guess, including that dining room of traffic goes from 80% to 100 at some point. Digital sales remain incremental in that scenario, obviously, the additional pricing that you just spoke to, I guess stepping up and maybe the efficiency from the crew just getting better as dining room traffic comes back. Curious if it's fair to think about all of those as incremental from here and then if there's any others that you would call out above and beyond everything that's been working and supporting momentum to date? Thank you.

I believe you've highlighted many key points. We still have room for improvement in productivity with our frontline staff. As we become fully staffed with trained and capable team members focused on the three key areas of throughput, there is significant potential for growth in our business. Additionally, we will capitalize on our expanding rewards program, which is approaching 25 million members, representing a 40% increase from a year ago. Although we may not see such rapid growth in the future, we are enhancing our ability to utilize this database to influence customer behavior and engagement. We will also continue to implement menu and culinary innovations. Our value proposition will stand out as we enhance access for our customers. Specifically, our chicken burritos are competitively positioned within the current market, especially with changing pricing trends across various menus. While I'm not certain of the exact value this brings, I feel confident about our strong value proposition as we navigate the future market conditions.

Great. Thank you.

Thank you. And thanks everybody for joining the call and thank you for all the questions. Obviously, very proud of our results for the third quarter, and I think it speaks volumes to our strategy, our culture, and our ability to commit ourselves to great execution in a constantly evolving environment. I continue to be very optimistic about our ability to get to $3 million plus AUVs with, really, I think, impressive earnings growth behind that. I'm very confident that we're focused on the right strategies. There's a lot of growth in those strategies, and I love what our innovation pipeline is looking like, whether it's experimentation in new assets, cost opportunities, and international. There's just a lot of growth in our business both in the U.S., from a new unit standpoint as well as average unit volumes. As you think about the model that we take outside the U.S. So very proud of the team. A huge thank you to them again. It's been a challenging environment, but I think we're demonstrating the strength of the Chipotle culture, the Chipotle purpose. If you don't have those things, I don't think you get the results that our company has achieved in the most recent quarter. Thank you again for taking the time, and we'll talk to you next quarter. Take care.