Chipotle Mexican Grill (CMG) — Q4 2021 Earnings Call Transcript

Hello, everyone, and welcome to our fourth quarter and fiscal year-end 2021 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I'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 risk 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. 2021 was an outstanding year for Chipotle, highlighting the organizational strength and resiliency of our brand. Despite an unprecedented environment, our employees remain passionate about their work, dedicated to delivering excellent guest experiences and aligned with our purpose and values. Our business is as much about people as it is about food, and I strongly believe that we have the best in the industry. I'm very grateful for our team members' monumental efforts. And together, we accomplished many incredible things and accelerated business momentum, all of which was fueled by our multipronged growth strategy. For the fiscal year, this resulted in sales growing 26% to reach $7.5 billion driven by a 19.3% comparable sales increase; digital sales of $3.4 billion, which grew 25% versus the prior year; restaurant-level margin expanding 520 basis points year-over-year to reach 22.6%; adjusted diluted EPS of $25.42, representing 137% growth over last year; and we opened 215 new restaurants. I'm also delighted with our fourth quarter performance even with the surge in Omicron cases that began in December. For the quarter, we reported sales of $2 billion, representing 22% year-over-year growth, which was fueled by a 15.2% increase in comparable restaurant sales, restaurant-level margin of 20.2%, which was 70 basis points higher than the 19.5% we reported last year; earnings per share adjusted for unusual items of $5.58, representing an increase of 60% year-over-year; digital sales growth of nearly 4% year-over-year, representing 42% of sales; and we opened 78 new restaurants, including 67 with the Chipotlane. We're encouraged by the recent performance, but what really excites us is the longer-term opportunity as we believe our powerful economic model will deliver best-in-class returns while achieving average unit volumes well beyond $3 million and significantly expanding the number of Chipotle restaurants in North America, which I'll elaborate on shortly. There's no doubt in my mind that our five key strategies still have a long runway and are positioning us to win today while we create the future. We've revamped them slightly to reflect transitioning from our turnaround phase to a sustainable growth base. These now include, number one, running successful restaurants with a people-focused, accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; number two, sustaining world-class people leadership by developing and retaining diverse talent at every level; number three, making the brand visible, relevant, and loved to improve overall guest engagement; number four, amplifying technology and innovation to drive digital growth and productivity at our restaurants and support centers; and number five, expanding access and convenience by accelerating new restaurant openings. Let me provide a brief update on each of these, starting with restaurant operations. The key to happy customers is a wonderful guest experience that provides consistently great-tasting food prepared and served quickly. This hasn't been easy, especially when the number of COVID cases spiked and impacted our staffing capabilities at times. But we're fortunate to have amazing employees at our restaurants who have stayed focused on safety, reliability, and excellent culinary execution while adapting seamlessly to the dynamic environment. Their execution, whether it be on new menu introductions or managing the balance between digital and in-restaurant orders, has been exemplary. As always, throughput remains a key focal area and something that we're determined to improve, especially as more guests return. The critical success factor is ensuring we have proper staffing, which is currently a challenge for many companies. However, ongoing investments in our people, including competitive starting rates, enhanced benefits, debt-free degrees, development programs, and transparent career development opportunities, are resulting in better employee recruitment and retention as well as allowing us to make progress on labor challenges. But we know there's more work to do, especially to support our future growth. As a result, we are focused on increasing our staffing stability through investing in human capital technology that will enhance our hourly team member experience. Specifically, we are in the process of implementing a new digital scheduling program as well as upgrading our learning management portal. Also, I know we've mentioned this before, but it's worth highlighting again the importance of the GM role. Their leadership is crucial in executing the fundamentals of our business and setting the standard for how we run great restaurants every day. Additionally, our GMs help grow the brand and the careers of countless team members, many of whom end up being top-performing leaders in our organization. In fact, during 2021, 90% of our restaurant management roles were fulfilled by internal promotions. Overall, we've promoted almost 19,000 team members in 2021. Our goal is to develop and retain diverse talent at every level of the organization and be the employer of choice, a message we will emphasize at our all-manager conference in March. After all, our employees need to be ready to support the consistent demand our talented marketing team creates by making Chipotle more visible, more relevant, and more loved. This is done using different advertising channels, including traditional media, to enhance brand awareness and stay relevant. A wonderful example is our short animated film called 'A Future Begins', which is a sequel to our award-winning 2011 film 'Back To The Start', and shines a light on the modern-day challenges the next generation of farmers are facing. While many young farmers value sustainability and ethics in farming like we do, they are struggling with new problems like climate change, technology costs, and access to farmland. Launching this film is one of the ways that we are raising awareness of our mission to influence the 2023 farm bill that would facilitate equitable access to up to 1 million acres of land for the next generation of farmers. We also utilized creative social media to drive culture, difference and ultimately purchases. We celebrated the 21-year anniversary of Boorito by providing $5 digital orders and serving up $1 million in free Booritos through a virtual Chipotle restaurant on Roblox. We are the first restaurant brand to create a virtual experience on the interactive Roblox platform, which resulted in Halloween 2021 having the most digital transactions of all time at Chipotle. This is a great illustration of us reaching consumers in a unique way to build sales today and the brand for tomorrow. Enhancing our marketing efforts involves a consistent cadence of 2 to 3 new menu items per year, using a disciplined approach to innovation. Not only do these items help bring new guests into the Chipotle family, but they also drive frequency with existing users and give us another opportunity to highlight the brand. In 2021, we launched cauliflower rice in January, followed it up with quesadillas in March, and finally debuted smoked brisket in September. All of these new items performed very well, driving an increase in both check size and transactions. In 2022, we have already launched plant-based Chorizo for a limited time across our U.S. restaurants. This entrée is made using fresh ingredients growing on a farm rather than in a lab and proves that you don't have to sacrifice flavor to enjoy a vegan or vegetarian protein. It is off to a terrific start and is helping drive cultural buzz for its health and environmental benefits. And there's more on deck. Pollo Asado, the first menu innovation with chicken in our 28-year history, has been successfully validated as part of our stage-gate process, and our culinary team is in the early stages of developing other exciting menu items. So stay tuned. Another important growth driver that accelerated during the pandemic has been our technology transformation, which is helping Chipotle become a real food-focused digital lifestyle brand. During the fourth quarter, digital sales grew 4% year-over-year to $811 million and represent 42% of sales. We're pleased to see our digital sales dollars continue to grow despite tough comparisons, and our overall digital mix remained steady in what seems like a new normal. Incredibly, our full-year digital sales of $3.4 billion is nearly 3.5 times what we did pre-COVID in 2019. Digital has proven to be sticky as it's a frictionless and convenient experience that has been aided by continuous investments, and you will likely see us increasing technology enablement for our restaurants and support centers to amplify innovation, enhance customer experience and optimize efficiencies to improve operational execution. As a result of this pandemic, many new consumers were introduced to Chipotle via our digital channels and are now using us for alternative and, at times, incremental occasions. Having 2 large and growing businesses supported by separate make-lines makes it easy for guests to access Chipotle through different channels and is a key point of differentiation. Currently, about 2/3 of our guests use in-restaurant as their exclusive channel, with the remainder using Chipotle's digital ecosystem to conveniently access our real food. This dynamic gives us several future opportunities, including adding more guests, converting more of our in-restaurant guests into higher frequency digital users, and leveraging our expanding loyalty program. We now have more than 26.5 million members in our rewards program, which is a key enabler of our digital flywheel. We're focusing more on personalization by creating journeys, primarily for new and at-risk customers that can influence guest behaviors and ultimately drive more frequency. As the program grows and we gain more experience, we are constantly learning, evolving and optimizing. For example, we are offering greater customization and flexibility to redeem rewards as well as gamifying the program with personalized challenges and badges to help drive engagement and deepen relationships with our guests. Not only have we seen strong positive responses from our most loyal fans, but even more exciting is that these program enhancements have increased engagement from our medium and low-frequency guests. We are delighted with our progress to date and believe ongoing investments and further leveraging of data-driven insights will make us even better. Our last strategic driver is to expand access and convenience, which today is the top request from consumers. And we're listening. I'm excited to share that over the long term, we now believe we can operate at least 7,000 Chipotle restaurants in North America, up from our prior goal of 6,000 based on the success of small town opportunities that are delivering unit economics at or better than our traditional locations. We're also in the early stages of testing alternative formats, including seam locations, which, if successful, could further expand our addressable market. Additionally, given healthy and improving cash-on-cash returns, we are building a real estate pipeline that will allow us to accelerate new unit growth in the range of 8% to 10% per year, with greater than 80% of new restaurants having a Chipotlane. And, of course, we continue to look for ways to enhance convenience with Chipotlanes, alternative formats, delivery, and catering to provide many ways for our guests to access Chipotle. In closing, I can't thank our employees enough for everything they've done to elevate the brand and cultivate a better world for each other, our guests, and our communities, no matter what external restrictions came our way in 2021. As I've said before, challenges create opportunities, and we are now in a much stronger competitive position than we were 2 years ago. While we're still navigating through what we all hope is the last phase of this pandemic, I look forward to the future with optimism and can't wait to see what 2022 holds for Chipotle.

Thanks, Brian, and good afternoon, everyone. We ended the year on a positive note, with sales in the fourth quarter growing 22% year-over-year to reach $2 billion as comparable sales grew 15.2%. Restaurant-level margin of 20.2% expanded 70 basis points over last year. And earnings per share adjusted for unusual items was $5.58, representing 60.3% year-over-year growth. The fourth quarter had unusual expenses related to legal expenses, our previously disclosed 2018 performance share modification, transformation costs, as well as restaurant asset impairment and closure costs, which negatively impacted our earnings per share by $0.89, leading to GAAP earnings per share of $4.69. As we look ahead to 2022, there remains uncertainty on several fronts, including COVID impacts as well as staffing and inflationary pressures that limit our visibility and therefore make it difficult to provide full-year comparable sales guidance. These headwinds were significant in January, which also included some challenging weather, leading to a January comparable sales growth of around 5%. We remain optimistic that as these challenges ease, our comparable sales will accelerate from the January level. While it's difficult to predict the comparable sales for Q1 with precision, we expect it to land somewhere in the mid to high single-digit range, assuming the effects of COVID continue to subside. There's no doubt our restaurant-level margin is messy in the near term. So let me provide some perspective on Q4 and what we expect moving forward. Besides ongoing labor pressures, our Q4 margin was impacted by a higher level of commodity inflation than we originally expected, primarily due to elevated beef and freight costs. As a result, we took a 4% menu price increase in the middle of December to help offset these headwinds. Given the timing of this pricing action, it had little impact in the quarter, resulting in our Q4 margin being at the lower end of our 20% to 21% guidance range. However, looking ahead to Q1, where we will see the pricing benefit for the full quarter, our restaurant-level margin is expected to be nearly 22% and normalizing for the elevated marketing spend expected this quarter as well as transitory COVID-related cost pressures, the underlying Q1 margin would be in the low to mid-23% range. The bottom line is that our underlying margin remains healthy, and we believe we still have pricing power to use as needed if inflation continues to rise going forward. Of course, we'll be thoughtful and patient as we consider these actions to make sure we continue to deliver an excellent value and dining experience to our guests. Now let me go through the key P&L line items, beginning with the cost of sales. While our supply chain team continues to do an admirable job keeping our restaurants stocked with key ingredients and managing the cost of doing so, external challenges were quite extreme in Q4, which led to the food cost being 31.6%, an increase of 60 basis points from last year. As I just mentioned, inflation on beef and freight and, to a lesser extent, avocado costs more than offset the leverage from our menu price increases. Regarding Q1, the successful premium brisket limited-time offer has ended, and we will benefit from our December pricing. These tailwinds will be partially offset by a full quarter of elevated beef prices, as well as seasonally higher avocado pricing. Consequently, we expect our Q1 food cost to be in the 30% to 30.5% range. Labor costs for the fourth quarter were 26.4%, representing an increase of about 100 basis points from last year. This increase was driven by our strategic decision to raise average nationwide wages to $15 per hour in May of last year, which was partially offset by menu price increases and sales leverage. While we are expecting elevated wage inflation to continue, especially given higher exclusion and overtime pay due to the Omicron variant, our December menu price increase should provide some offset, resulting in labor costs being in the low 26% range for Q1. Other operating costs for the quarter were 16.3%, a decrease of about 160 basis points from last year, primarily due to price and sales leverage. Marketing and promotional costs for the quarter were 3.6%, about 30 basis points lower than we spent last year, but as expected, there was a 120 basis point sequential increase from Q3 to support smoked brisket and the latest brand messaging under our Behind The Foil campaign. As with Q4, Q1 tends to be a higher marketing quarter to support new menu items like plant-based chorizo. Therefore, we expect marketing to be in the high 3% range in Q1, but to remain around 3% for the full year. Overall, other operating costs are expected to be in the mid-16% range for the first quarter. General and administrative expenses for the quarter were $116 million on a GAAP basis or $133 million on a non-GAAP basis, excluding $18 million related to the proposed settlement of legal matters, $7.6 million for the previously disclosed modification to our 2018 performance shares, and $1.3 million related to transformation expenses. General and administrative expenses also include about $100 million in underlying G&A, $30 million related to non-cash stock compensation, $1.8 million related to higher performance-based bonus accruals, payroll taxes, and equity vesting and stock option exercises, and roughly $1.4 million related to our upcoming all-manager conference. We expect our underlying G&A to be around $101 million in Q1 and grow slightly every quarter thereafter as we continue to make investments, primarily in technology and people to support ongoing growth. Despite the elevated spend, our goal remains to achieve leverage on this line item relative to our sales growth, just like we did in 2021. We anticipate stock compensation will be likely around $30 million in Q1, although this amount could vary depending on our performance and subject to the 2022 grants, which are issued in Q1. We also expect to recognize around $4 million related to employer taxes associated with shares that vested during the quarter, as well as about $17 million related to our all-manager conference. Our effective tax rate for Q4 was 20.3% on a GAAP basis and 18.7% on a non-GAAP basis. Both rates benefited from option exercises and share vesting at elevated stock prices. Additionally, our GAAP tax rate included a benefit for the write-off of uncertain tax position reserves in the fourth quarter of 2021. For fiscal 2022, we estimate our underlying effective tax rate will be in the 25% to 27% range, though it may vary based on discrete items. Our balance sheet remains healthy as we ended the year with $1.4 billion in cash, restricted cash, and investments, with no debt, along with a $500 million untapped revolver. During the fourth quarter, we repurchased $169 million of our stock at an average price of $1,750. We expect to continue using excess free cash flow to opportunistically repurchase our stock. We're privileged to have the financial strength to make ongoing strategic investments, including restaurant design and real estate development growth. I’m really impressed by the hard work of our development and operations team as they opened 78 new restaurants in the fourth quarter, with 67 including a Chipotlane. This is despite all the construction inflationary pressures, subcontractor labor issues, critical equipment shortages, and landlord delivery delays. For the full year, we exceeded our guidance and opened 250 new restaurants, with 81% or 174 including a Chipotlane. We ended 2021 with 355 Chipotlanes, including 16 conversions and 11 relocations. Overall, these formats continue to demonstrate stellar performance. Furthermore, we're gaining more confidence in our conversion and relocation strategy, which will allow us to enhance the Chipotlane opportunity and provide more access and convenience for our guests. As a result, we expect to open between 235 and 250 restaurants in 2022 with more than 80%, including a Chipotlane. This guidance includes 5 to 10 relocations to add a Chipotlane. Looking past the pandemic, we expect to be able to accelerate openings in 2023 and beyond and move towards the high end of the 8% to 10% openings range that Brian mentioned. Let me end by expressing my gratitude to our nearly 100,000 team members in restaurants and support centers for overcoming countless issues in the past year to safely serve and delight our guests. Their focus and strong execution have brought us to where we are today, and I believe will be critical to sustaining our industry leadership in the future. With that, we're happy to take your questions.

I would like to discuss the margins a bit more, particularly in relation to the first quarter. Jack and Brian mentioned a low to mid-23 range as an underlying figure. Could you elaborate on what factors contribute to that? Additionally, as we move through the year, could you provide insight into the expected margin trajectory and whether there are any changes to the long-term algorithm you previously shared, or if it remains consistent with your earlier messages?

Yes. So I'll start, Jack. To answer your question, the long-term algorithm, we still believe we will achieve it. It's a combination of the sales growth and, obviously, pricing where we need to, when we need to. And then we've got a lot of initiatives going on to ensure that we're as efficient as possible. So long term, we've got 100% confidence in what we can achieve. For your specific question about some of the short-term challenges, I'll turn that over to Jack.

Yes. The key things that are happening as you move from Q4 to Q1 include this: the menu price increase we took in December had less than a 100 basis points impact in the fourth quarter. We will get the full benefit of that in Q1. This will be offset somewhat by the fact that beef inflation has continued. We thought beef would level off and subsequently decrease, but that hasn't happened yet. Thus, while we experienced a partial quarter of beef inflation during Q4, we will absorb a full quarter of inflation during Q1. These two items, and then the fact that brisket, while a premium-priced item, is also a premium-cost item, will put pressure on the margin as well. The brisket LTO ended during Q4. So, looking at what our margin is expected to be in Q1 without considering timing adjustments is in the high 22% range. However, we will spend more than average on marketing to support our new menu items and new campaigns. Adjusting for the timing of that and some other timing differences, that's where our normalized underlying margin should land in the 23% range. Another thing to add is that typically, our winter months are not our high-margin months. It ultimately depends on inflation throughout the year, but if inflation doesn’t worsen, we hope to see margins at or above that 23% level going forward.

I wanted to ask about menu innovation. 2021 was a year in which you had several really successful innovations come through the menu. I would like to understand your thoughts on this as we approach 2022 and how you plan to build on what you've already introduced and what your focus will be for the menu.

Yes. Sure. Yes. Well, you touched on the first part. We're really happy with how all of our initiatives performed. I think it's a testament to our discipline around ensuring what we launch has a high probability of success and that we're able to execute, supply it, and then deliver a great experience. So really delighted with what we accomplished in '21. As I mentioned in my earlier remarks, the plant-based chorizo is off to a great start. If you haven't had a chance to try it, I highly recommend it. It's really terrific. As we think about future menu innovations, we want to listen to what our customers say they would like to see. That's why we've implemented new items like quesadillas and improved the queso. We aim to stay attuned to consumer habits and trends, which is why you see us focusing on items like cauliflower rice and plant-based chorizo. We're excited about this Pollo Asado program that we just tested. Obviously, Carne Asada is also something we're very enthusiastic about. And hopefully, you had a chance to experience the brisket, which I thought was outstanding. Going forward, we will continue to launch 2 to 3 innovations a year and follow a disciplined approach so that we have a solid understanding of potential performance prior to rolling it out nationally.

Question on pricing. Is the current year-over-year run rate around 12% after that latest increment? What will dictate your pricing strategy through the year? And in particular, how do you view your pricing power? What informs your view about Chipotle's pricing power, and how does that relate to your pricing strategy?

Yes. So David, I think we're more in the 10% range right now as you look at Q1. If we were to take any more pricing for the balance of the year, that would end up being a bit over 6% for the year. To answer your question on when and why we would take pricing, Jack can touch on this. We continue to see pressure on wages, and we want to ensure that we remain competitive on that front. We feel like we're in a really good position right now. As a result, our restaurants are staffed better than they were pre-COVID and, frankly, better than they have been for the last 2 years through this entire COVID period. Therefore, we do not want to fall behind on wages, and we will keep a close eye on that. Additionally, we will look for any inefficiencies to help mitigate that, but we do have the pricing lever. Regarding Jack, we mentioned beef and freight pressures that continue to remain elevated—we don’t see them ease—so we will have to consider some additional pricing. While we want to avoid taking additional price hikes, we're fortunate to possess this capability, and to date, we see no resistance at the current price levels. I've mentioned this in my earlier remarks or possibly in an earlier interview: When discussing these pricing percentages, it's beneficial to focus on absolute dollar amounts. For most regions, the chicken Boorito still costs less than $8, and the chicken bowl is also under $8, which offers fantastic value, particularly when comparing it to competitors whose product quality and level of customization don't compare to ours.

Brian, I think you just touched on this a bit, but I hope you can elaborate further. You guys just took another price increase, and with around 10% now, I'm curious about the value proposition. How do you ensure that you don't outprice some of your consumers? Is there a benchmark you look at to price against? Or is there something else we can consider to gauge how much inflation you're willing to take on?

Yes. We use a combination of methods. First, we continually evaluate the value strength of our brand through traditional market research and analytics post-price changes to assess transaction responses. Fortunately, we now have substantial data due to our loyalty database that informs us about behavioral impacts based on our pricing strategies. Thus far, we have encountered minimal resistance in this area. Furthermore, we also analyze external market conditions. For example, while evaluating prices, it’s clear that the pricing is often dictated by competitive options available. Many customers feel that our value proposition provides excellent food quality and a greater variety of customizations, all offered at competitive prices. We find ourselves in a favorable market position, and while we prefer not to utilize all our pricing power, we will be judicious if we must.

My question is regarding the unit growth outlook accelerating. My initial question is about your confidence level in ramping up to those numbers in the current labor market, given its tightness. Are there specific initiatives on the staffing side ahead of that acceleration worth discussing?

Yes. We feel very confident about the performance of our restaurant openings. We opened 215 restaurants, and the performance was excellent. This reflects the hard work of our real estate development team and our operators in ensuring that those restaurants were staffed appropriately upon opening. I previously mentioned that we promoted approximately 19,000 individuals to managerial positions, showcasing our commitment to developing talent. The beauty of our company is that as we approach 3,000 to 4,000 restaurants, we can cultivate our future leaders from within. This strategy enables us to prepare better for the steady flow of new openings as our base expands, resulting in stronger growth. The recent 215 restaurant openings amid COVID challenges are a testament to our team's capability, and I’m optimistic about our robust pipeline and the strong demand for Chipotle.

Yes. David, Chipotlanes continue to outperform our non-Chipotlane restaurants. This is why you've seen us pursuing a strategy where now 80% of our new openings include a Chipotlane. Chipotlanes generate higher volume and skew more heavily toward digital, which is a higher-margin transaction. The investment is only modestly higher, around the $75,000 range. For non-Chipotlane openings, if we calculate a cash-on-cash return taking two to three years to generate around 55% to 60% return versus Chipotlanes that yield returns in the 65% to 70% range. These are exceptional returns. Additionally, Chipotlanes enable us to enter small towns and locations that provide further streams of revenue and convenience from a financial and operational standpoint. Consequently, Chipotlanes continue their strong performance.

Can you just update us again on the pace of the loyalty membership trajectory as we enter 2022? Is it showing a healthy pace of growth? And with this now a very large base of members in this immense digital ecosystem, Brian, what's the biggest strategic or operational unlock that lies ahead related to loyalty that you see as incremental to the business going forward?

Yes. We are fortunate to see meaningful growth in our loyalty population. Although the growth rate isn't as rapid as it was a year or two ago, it remains strong. Interestingly, as we add more restaurants and expand access, our loyalty/rewards program becomes even more appealing, which keeps driving new members. A significant unlocked opportunity is still the untapped potential of dining room customers and data surrounding them. Many exclusive dining room customers are well acquainted with Chipotle's offerings but may need to consider digital options. If we engage them positively with the rewards program, there will be tremendous opportunities for growth.

Brian, you were proactive getting the average wage to $15 an hour back in May of last year, but I was curious about your multi-year view for where wages could go as more national retailers enact formalized programs to get to $17 an hour as you strive to keep Chipotle as an employer of choice.

Yes. I think wages will continue to rise as companies like ours remain competitive. The combination of competitive wages and growth opportunities is essential to attracting the right talent. It’s crucial to communicate that even in challenging times, we promoted 19,000 people last year; this shows that our employees grow with us and are eager to stay. I believe there is real value in being a leader in this space, as our workplace environment is truly special. We are fortunate enough to provide opportunities for employees to change their lives and those of their families.

I wanted to circle back on the small town opportunity. How many of these opportunities exist today? What evidence do you have for this incremental potential? Years ago, there was something called an 'A model', which boasted lower CapEx but decent returns and lower volume units. Are these lower volume but better returns because they are lower CapEx? How should we think about both the returns and volume calculus as we consider the small market opportunity? How many are there currently?

The nice thing about these smaller locations is that they have a somewhat higher margin due to lower lease costs, and what we're witnessing is no trade-offs in terms of volume; in fact, we're seeing substantial revenue growth. This provides a great proposition: lower fixed costs, yet consumers view us favorably, leading to robust opening sales and sales retention. We’re excited about the potential in these locations, and there is a significant number that we aim to find and build. To clarify, when we speak about 'small towns,' we are often talking about towns with populations over 40,000, which may be considered small by Chipotle's standards—still reasonably sized.

There are some that will be smaller than that, but they won't be vastly smaller. The key point is that these are restaurants not located in metropolitan areas, so they rarely face competitive issues with larger Chipotle or Chipotlane locations. They tend to show higher margins and similar volumes, which elevate returns. Construction costs could be modestly higher, but the significant challenge is maintaining a strategic approach to manage these locations effectively, ensuring reasonable travel distances for field leaders to supervise them efficiently. This way, with a combination of strategic planning and optimal proximity, our field leaders can manage multiple restaurants effectively.

Wanted to see if we could circle back into loyalty and the growing digital base of users that you have. I'm curious as to how that has been informing your lifetime value considerations for customers. I believe that ties back into the journeys we discussed. But I'm interested if you're currently acting on this or how you envision it integrating into your pipeline moving forward.

Yes, it’s a top priority. We're thrilled about the density of our database, and we've gained immense insights over the past couple of years that allow us to do what you stated. We recognize that once consumers join the rewards system, their average ticket size and frequency of visits to Chipotle increase. This enables us to increase our share of occasions, which is ultimately our target. Our strategy involves enhancing access and raising awareness through engaging communications while personalizing experiences to encourage greater frequency. This increases opportunities for engagement and retention, ultimately leading to higher performance. We can also identify instances where we need to improve execution, providing us opportunities to turn around less-than-ideal experiences and foster a loyal consumer base.

I wanted to circle back on labor, if I could. With 7 to 8 months since you increased wages and made other labor investments, how effective have these changes been? Understanding that Omicron posed some challenges, what kind of improvements have you seen in retention or application flow, or the percentage of stores that are significantly understaffed? If further actions are still necessary, what might those take: additional wage increases or something other than money for stores that remain understaffed?

We've seen tremendous progress even during the Omicron surge. The experiences of the past 2 years have helped us tremendously—we’ve developed focused efforts to prevent problems in markets where staffing is challenged. Team members who were temporarily excluded are returning, and we maintain robust recruitment practices to ensure we have sufficient staffing. Collectively, our improved staffing capabilities have contributed to industry-leading retention rates across the enterprise; our rates are currently hovering around 2% among our system. As we move into a season with increased demand, we maintain efforts to ensure that we are adequately staffed. We acknowledge that we have significantly improved staffing efforts across the board.

On the food cost side, as I mentioned, we observed inflation in the beef and freight categories, as well as some pressure from avocados. But if you specifically ask about chicken, which is our largest protein, we have not experienced significant issues there recently, although there have been near misses. Our supply chain team has performed exceptionally in managing supplier relationships and capacity adjustments as necessary. Moving forward, beef will probably continue to experience more pressure, while avocado prices seem seasonal. There could be more volatility with other ingredients down the road; in general, however, we’ve prepared well and believe we’ve taken the necessary pricing actions based on what we know thus far.

I wanted to refer back to general manager turnover rates throughout 2021. Are you noticing any fluctuations in quit rates? As you think about a growing business, will any aspects of training, compensation, or the profile of individuals you're looking to promote shift as Chipotle scales in this next era?

We're quite fortunate with our general managers, who have shown incredible commitment. They’ve consistently led their teams through challenges, showing adaptability during times of staffing shortages. We emphasize the need for a strong GM role as these individuals set the tone for effective day-to-day operations. Our goal remains to follow through with our learning and training systems, which will further improve our operational capabilities. We will also implement upgraded labor scheduling tools, aiming to make the job more manageable for the staff involved. The positive news is we have not experienced the high resignation rate reported by many; in fact, our management ranks remain strong.

I would like to add to the conversation about international development outside North America. We're currently focused on existing markets such as France and the U.K., and while progress in Germany has been slower than expected, we’ve seen encouraging openings in France and the U.K. These markets reflect consumer preferences for our clean food offerings and high levels of customization. At this time, we are concentrating on solidifying our success in these countries before expanding further into other Western European or international markets.

Could you elaborate on the delivery mix today and how the margins for those orders compare to other channels with the incremental delivery menu pricing over the past year? How are you thinking about delivery mix and its impact on margins as we move further into 2022?

Certainly! We currently operate two business models for delivery: our in-app white-label delivery and partner services through third-party companies like Uber Eats and DoorDash. As we've increased menu pricing, the margin impact has lessened. While this channel does typically come with additional costs, consumers continue to demonstrate their willingness to pay for convenience. Our digital business makes up roughly 42% of our total business, with delivery accounting for around 20%. Most encouragingly, our order-ahead model continues to grow, particularly with the introduction of Chipotlanes. Therefore, we didn't experience nearly the same margin dilution previously seen in the delivery space, and the digital order-ahead model remains our strongest transaction in terms of margins.

I wanted to revisit the operational efficiencies you mentioned earlier, specifically around improving the jobs of team members via technology. Can you provide specific examples of what initiatives you’re focusing on? Additionally, what aspects would be non-starters for you concerning Chipotle's core values?

Absolutely. We're striving to equip team members with better technology, particularly for labor scheduling. We’re implementing artificial intelligence tools that consider more than just historical data; it leverages real-time analytics for operations, which will significantly reduce instances of running out of ingredients and enhance overall productivity. Beyond this, we’re exploring robotics and automation to alleviate less desirable tasks such as dish-cleaning. The intention is not to compromise our culinary standards; we’ll continue making fresh guacamole and season our chicken in-house—but finding ways to remove less desirable repetitive tasks could vastly improve daily operations. Thank you, everyone, for your questions and for joining us today. I want to reiterate how proud I am of our team as we navigated a challenging 2021. We achieved many milestones, from robust comparable sales growth to substantial digital expansion. We opened over 200 new restaurants, setting new records for us. Despite inflation and staffing challenges, I’m optimistic about our future in 2022, buoyed by our remarkable team. Thank you for your ongoing support.