Chipotle Mexican Grill (CMG) — Q2 2022 Earnings Call Transcript

Hello, everyone, and welcome to our second quarter fiscal 2022 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These statements are based on management's current business and market expectations, and our outlook projections in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and in our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. On our discussion today, we 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 will turn the call over to Brian.

Thanks, Cindy, and good afternoon, everyone. We are pleased with our second-quarter performance during a period of inflation and consumer uncertainty. For the quarter, sales grew 17% to reach $2.2 billion driven by a 10.1% comparable; in-store sales grew by 36% over last year; digital sales represented 39% of total sales; restaurant-level margin was 25.2%, an increase of 70 basis points year-over-year; adjusted diluted EPS was $9.30, representing 25% growth over last year; and we opened 42 new restaurants, including 32 Chipotlanes. I would like to spend a couple of minutes providing insight into current trends and our outlook. Regarding Q2, through mid-May, comparable sales were on track to reach the top end of our guidance range. Since then, the underlying trend has decelerated and we anticipate mid- to high single-digit comps for Q3 with planned pricing in August. There are a couple of key things we have learned during the quarter. Our pricing power is strong and the brand is resilient, our culinary and food with integrity commitment is a key point of difference, our restaurants are staffed with terrific people despite a difficult hiring and retention environment, and our people are still getting up to speed on running a growing multimillion-dollar digital business as well as a growing multimillion-dollar in-restaurant business. To accelerate this learning curve, we are instituting an ops initiative focused on being brilliant at the basics. We did this in 2019 and saw a positive impact on the business right up to the pandemic in 2020. I will discuss this in more detail later. And finally, we are focused on the right strategies. It is as important as ever that we remain focused on our five strategies that help us to win today while we create the future. Now, let me provide a brief update on each of these strategies, which include number one, running successful restaurants with a people-accountable culture that provides great food with integrity, while delivering exceptional in-restaurant and digital experiences. Number two, amplifying technology and innovation to drive growth and productivity at our restaurants and support centers; number three, sustaining world-class people leadership by developing and retaining diverse talent at every level; number four, expanding access and convenience by accelerating new restaurant openings; and number five, making the brand visible, relevant, and loved to improve overall guest engagement. Let's start with discussing running successful restaurants. I'm happy to say that I've seen lines out the door in mobile pickup shelves full in Boston, Philadelphia, Denver, Austin, Arbor, Dallas, Cincinnati, London, Paris, and Los Angeles. I think everybody gets the point. Fortunately, we were staffed with terrific employees, and they were working hard with smiles on their faces and great attitudes. I'm very proud to say that our restaurant teams have successfully grown average unit volumes to about $2.8 million, with 39% being digital. Our general managers and teams have adapted well to our growing digital and growing in-restaurant business. However, customers were waiting on digital orders and the front line was moving, but it could have been quicker. I know we can be better. This is why we have launched an ops initiative, focused on retraining our crew members on the fundamentals of our business. These fundamentals include having great culinary prepared and ready to serve, open to close in a food-safe environment; ensuring that restaurants are staffed and appropriately deployed across both the digital make-line and front make-line; improving order accuracy and timing for the digital business; and increasing throughput in hospitality for the in-store business. Additionally, we completed the rollout of our new labor management tool that helps put the right people in the right place at the right time. We believe the combination of being brilliant at the basics with the new labor management tool will drive meaningful productivity in our restaurants. Along with our labor management tool, our technology roadmap remains robust. I think it is worth highlighting how we are investing in technology to support strong execution of the basics. We just installed new customer-facing pin pads that offer faster and contact-free payment options. We've deployed a new learning management system that enables immersive ways for our employees to experience training and provides digitally enhanced e-learning courses, videos, and resource materials. We also are in the process of updating our POS hardware across the system, which should be completed by this year, and we have made DML enhancements that aid accuracy and throughput. These recently completed or in-flight programs will all be positive for our restaurant teams and guest experience. Additionally, we will continue to invest in possible technology for the future, like Chippy, the autonomous robot we are testing that integrates culinary traditions with artificial intelligence to help our teams make tortilla chips, bringing up their time to serve and support our guests. And we are exploring an automated real-time kitchen production system that ensures high-quality food is available to meet the needs of our guests. This brings me to our Cultivate Next venture fund, which is off to a great start and is giving us a front-row view of emerging food technologies. We are interested in our breadth of innovations, including sustainable farming, supply chain advancements, restaurant operating efficiencies, and ways to elevate the employee and guest experience. We've received a lot of interest with over 200 inquiries for investments. And as you may have heard last week, we announced our first investments in Hyphen and Meati. Hyphen is a food service platform that automates the assembly of meals on a make-line and could help fulfill our promise to deliver on time, accurate orders for our digital guests. We look forward to sharing more investments in the future that will help us drive meaningful change at scale. I do want to take a moment to discuss our people. Despite a challenging labor market, I am proud to say our staffing levels remain above 2019 levels. Our purpose of cultivating a better world with Food with Integrity has created a brand that people are proud to represent and be part of. We continue to offer a 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, along with our growth and purpose, are helping to attract and retain great employees. And our people development program is important in order to accelerate our new restaurant openings. The real estate pipeline remains strong and supports our target of 8% to 10% new restaurants per year with more than 80%, including the Chipotlane. We now have 430 Chipotlanes, and results continue to exceed our expectations with Chipotlanes generating higher average unit volumes and higher restaurant level margins. In fact, a recent opening of a Chipotlane in a small town in California had one of the highest opening day sales in the company's history. In addition to the US, we are also excited about our progress in both Canada and Europe. Canada has hit a stride with AUVs and returns that are at the same level as the US, and Canadian comparable sales trends remain strong. We currently have 29 locations in Canada, and longer term; we see room for several hundred, which is included in our target of 7,000 restaurants in North America. And Europe continued to move through the stage-gate process. We have made significant progress in improving the economics in Europe, driven by operational efficiencies, adding our digital systems and opening smaller formats that resemble the US restaurants. We have opened five new restaurants in the UK over the last 18 months, and results have been strong. We are gaining confidence that Europe could be another layer to our growth story in the future. This brings me to making the brand visible, relevant, and loved everywhere we operate. Our Real Food for Real Athletes campaign focuses on helping athletes across all levels perform their best by providing proper nutrition through real food and real ingredients. As an official sponsor of the NHL, we activated this relationship through traditional media and creative promotions to highlight Chipotle, including having our logo in the ICE for every game of the Stanley Cup Playoffs. Additionally, we have partnered with US soccer to create behind-the-scenes content that showcases how Rose Level and Sofia Smith overcame the challenges of competing at the highest level of women's soccer. And later this year, we will file the US Men's National team via our sponsorship and with advertising during the World Cup. We also continue to appear in nontraditional channels to drive difference, culture, and ultimately, a purchase. We recently launched Burrito Builder on Roblox on National Burrito Day. The first 100,000 players to successfully roll a virtual burrito at a virtual Chipotle earned a free entree unwrap. These led to one of our best digital sales days and marks the first time a brand enabled Roblox player to earn and exchange virtual Roblox currency for real-world items. Moving on to the menu, our pipeline remains robust. Building upon the brand's recent success with menu innovations, including smoked brisket and Pollo Asado, we have tested and successfully validated Garlic Guajillo Steak, and this steak is ready for rollout in the future. Shifting to our digital experience, we now have a digital business tracking towards $3.5 billion in sales, and we currently have over 29 million rewards members. We are mining the data every day for insights, while leveraging the information to influence behavior and drive greater frequency. We are also working aggressively on greater personalization across the customer journey and obtaining valuable insights on, which incentives provide the greatest ROI. Additionally, we're excited about the recent launch of the rewards program in Canada, which will provide another way for Canadian guests to engage with the brand and provide Chipotle with the ability to further delight its Canadian Rewards members. Finally, our digital ecosystem is rolling out in the UK, and France will follow shortly thereafter. To conclude, there is much uncertainty we are all dealing with, but what I am certain about is Chipotle and its people will remain committed to leading and growing. I'm certain that over time, we have the ability to grow our average unit volumes and achieve at least 7,000 restaurants across the US and Canada. I'm certain that we will move our purpose of cultivating a better world forward in a meaningful way. I'm certain that Chipotle provides one of the best value propositions in the industry. I'm certain that we have the right teams with the right focus to navigate whatever comes our way and that our culture will continue to offer our crews terrific career opportunities. Finally, I'm certain that we are well positioned for long-term growth. Lastly and very importantly, I want to thank our restaurant teams for their hard work and contributions to making Chipotle one of the best restaurant brands in the world. With that, here's Jack to walk you through the financials.

Thanks, Brian. Sales in the second quarter grew 17% year-over-year to reach $2.2 billion as comp sales grew 10.1%. Restaurant-level margin of 25.2% increased about 70 basis points compared to last year. And earnings per share adjusted for unusual items was $9.30, representing nearly 25% year-over-year growth. The second quarter had unusual expenses related to certain legal proceedings, our previously disclosed 2018 performance share modification, transformation costs as well as the restaurant asset impairment and closure costs, mostly offset by an unrealized gain on investments, which negatively impacted our earnings per share by $0.05, leading to GAAP earnings per share of $9.25. Regarding our sales trends. As Brian mentioned, we were on track for comparable sales to reach the upper end of our guidance range for the first half of the quarter. Since then, we've experienced a step down due to a combination of macro pressures, our ability to handle the growth with a relatively new workforce, and a return to normal summer seasonality for college-based restaurants. For perspective, about 15% of our restaurants are in college towns, and we've not seen normal seasonality in 3 years. Looking ahead to Q3. With pricing from last year rolling off, our current trends in July are running in the mid-single-digit range. Assuming current sales trends continue, we expect our comp to be in the mid- to high single-digit range, which includes our planned August pricing increase of about 4% to help offset incremental inflation pressures, especially in dairy, tortillas, and packaging as well as pockets of wage pressure throughout the country. I'll now go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter were 30.4%, about flat to last year. The benefit of menu price increases offset elevated costs across the board, most notably in avocado, packaging, dairy, beef, and chicken. In Q3, we expect our cost of sales to be about 30% of sales, as the benefit from the menu price increase will be partially offset by the higher cost of dairy, tortillas, and packaging. Labor costs for the quarter were 24.8%, an increase of about 30 basis points from last year. This increase was driven by our decision to take a meaningful step up in wages last May, which is partially offset by menu price increases. In Q3, we expect our labor costs to be about 25% due to leverage from our menu price increases offsetting pockets of wage pressures across the country. As Brian also mentioned, we have now completed the rollout of our labor management tool. While our teams are still learning how to use the tool, we believe it has the potential to lead to better deployment to both make lines during peaks, which we think will eventually lead to better throughput on our front serve line and better on-time results for the P&L. Other operating costs for the quarter were 14.3%, a decrease of about 90 basis points from last year. This decrease was driven by menu price increases, as well as a decline in delivery expenses, partially offset by higher costs across several expenses, most notably utilities, including natural gas. Marketing and promo costs for the quarter were 2.5%, 10 basis points above last year. In Q3, we expect marketing costs to remain in the mid-2% range with the full year to average right around 3%. In Q3, other operating costs are expected to be in the mid-14% range. G&A for the quarter was $141 million on a GAAP basis or $130 million on a non-GAAP basis, excluding $7 million due to the settlement of certain legal matters, $3 million related to the previously disclosed modification to our 2018 performance shares, and $1 million related to transformation expenses. G&A also includes $106 million in underlying G&A, $25 million related to non-cash stock comp and a $1 million benefit related to lower performance-based bonus accruals, partially offset by payroll taxes and equity vesting and exercises. We expect our underlying G&A to be around $111 million in Q3 and continue to grow slightly thereafter as we make investments in technology and people to support ongoing growth. We anticipate stock comp will be around $25 million in Q3, although this amount could move up or down based on our performance, bringing our anticipated total G&A in Q3 to around $136 million. Depreciation was $70 million, and we expect it to remain at this level for the rest of the year. Our effective tax rate for Q2 was 25.3% for GAAP and 25.1% for non-GAAP. For fiscal 2022, we 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 the quarter with $1.2 billion in cash, restricted cash, and investments with no debt along with a $500 million untapped revolver. During the second quarter, we repurchased $261 million of our stock at an average price of $1,350. We increased our level of stock repurchases during the quarter when our share price fell with the market overall, and we'll continue to opportunistically repurchase our stock. During the quarter, the Board authorized an additional $300 million to our share authorization program. And at the end of the quarter, we had $320 million remaining. We opened 42 new restaurants in the quarter, of which 32 had a Chipotlane. The performance of our Chipotlanes continues to be strong, maintaining record-high new store productivity. In terms of development, we continue to navigate various challenges, including construction and permitting delays and material shortages. However, our team has done an outstanding job of anticipating these challenges and mitigating delays where possible. And we still anticipate opening between 235 and 250 new restaurants in 2022 with at least 80% including a Chipotlane. As I mentioned last quarter, once we move beyond these development challenges, we expect to be able to accelerate openings and get closer to the high end of the 8% to 10% opening range. In closing, I've experienced Chipotle's resiliency over the past 20 years through both great times and challenging times, and I share Brian's confidence in our ability to navigate the current environment. Looking forward, I'm excited about the growth opportunity ahead of us with a runway to more than double our restaurant base and grow AUVs beyond $3 million with a 40% flow-through. I want to thank our 100,000 employees in our restaurants and in support roles for their continued effort and commitment to Chipotle. With that, we're happy to take your questions.

Thank you. Good afternoon. Hoping you could talk a little bit more about labor in terms of staffing. In the context of AUVs being up versus 2019, well more than 20%, just because you had mentioned that in regards to staffing levels in regards to 2019 today, are you suggesting that it needs to be more efficient in terms of labor or that you need more bodies in terms of staffing? Like, how does it compare to the context of the AUV increase, if that's applicable?

Yes. Hi, Nicole. The way to think about it is, obviously, our labor model reflects our increase in transactions and sales. So we look at it as, is the restaurant staffed at model given the volume and transactions that the restaurant has. And what we're referring to is, the percentage of restaurants that are staffed correctly is better than where we were in 2019. So that's what we're referring to. And then what we're talking about is, obviously, a lot of the people that have joined our company over the last two years really haven't experienced the front line and what it means to grow that in-restaurant business while also growing the digital business. And that's why Scott and the operators are focused on ensuring that everybody is brilliant at the basics to execute our growing two lines of business.

Okay. And then, just can you briefly discuss in terms of last year's 15% comp, how things tracked in July, August, and September? So we can understand a little bit about what to think about compares from the prior year period.

Yes. Nicole, this is Jack. You'll remember that in the second quarter of last year, we did have a staffing challenge, and that's when we took the significant increase. So we did compare during part of the quarter to a little bit of a softer comparison. But since we announced in May, I think it was like around mid-May that we were increasing wages, and right at that moment, we started paying the higher rates as new people are coming in. And the announcement that we made at that time was also a signal to our existing teams that you're going to get a raise in early June. So we saw staffing stabilize, and then we saw our sales recover. So we did have a several week period during the quarter where we did have a little bit softer comparison.

Okay. How did July, August, and September of last year perform? The comparison was 15% last year in the third quarter, right? How does that look?

Those were normal comparisons. By then, our staffing has stabilized. As a result, those are tougher comparisons.

Okay. So each month was kind of 15%? There was no notable difference between the months?

Yes. Listen, they vary month-to-month, but there was nothing during the quarter that I would tell you makes that comparison. I would say, if anything, Nicole, just compared to Q2, it's just a little tougher of a comparison overall.

But each month was fairly...

They didn’t bounce all over the place.

Okay. Thank you.

Hi. Good afternoon. I wanted to ask you a couple of questions about the comp trend. I guess, I first wanted to understand how you're thinking about the slowdown you saw towards the end of the quarter. And I know you rolled over some pricing, so maybe had some less pricing contribution. But you seem to be also pointing out some operational challenges that may have caused that. And I guess, how do you determine whether it's that versus maybe just a general slowdown in consumer spending, if you will?

Yes. It's difficult to differentiate between macro pressures and the feedback we're receiving about order times. From my visits to restaurants and discussions with our field leaders, it's clear that we have many new employees who are still learning the fundamentals of efficient service. This situation feels repetitive, but it's crucial for our operations to have the right people in key roles. The expeditor and linebacker positions are essential, and new employees often don't realize their significance, including many general managers who have been recently promoted. We believe there's potential for improvement through our new labor tools, correctly deploying our staff, and ensuring that they receive the necessary training to understand what excellent throughput looks like. Many of the new hires have not experienced the pace at which we can operate, leading them to underestimate our speed.

Got it. And Jack, could you help us understand what your transaction levels or growth was in the second quarter and what your third-quarter guidance implies on that metric?

Yes, David, transactions increased by between 3.5% and 4% during the quarter. We also experienced a mix shift that we haven't discussed in some time, as our business has increasingly shifted towards in-restaurant models. The mix shift was approximately a negative 6%, and the average group size decreased by about 4.5%. This decrease is largely due to the transition from digital to in-restaurant services. Looking ahead to Q3, we anticipate that transaction comparisons may soften somewhat because of the macro challenges we observed in the second quarter. However, we also expect the negative mix shift to improve slightly.

And Jack, one clarification. When you say ease, do you think it will stay positive, I guess? Was this your guidance to assume it's positive, or are you thinking…

David, it's going to be right around slightly positive or right around flattish, right around in that range.

Okay. Thank you very much.

Thanks, David.

Thanks very much. My first question is just maybe clarify a little bit more why seek more pricing now. It seems like your margins are where you thought they should be you're sort of balancing the inflationary impact versus pricing. And you're also now confronting a weaker consumer. So, why now versus maybe letting some pricing lapse and maybe waiting longer and just out of the abundance of caution? Maybe your thoughts on that, please.

Yes, what we've observed is that, unfortunately, many inflationary pressures have persisted rather than receded. There are specific items that have remained driving factors of inflation, including avocados, dairy, tortillas, and certain types of packaging. We had hoped to see some of these costs decrease, but that hasn't happened. However, there are other areas of our business that have stabilized, which gives us some hope that we might not need to keep raising prices. We make it a point to carefully assess when a cost becomes a permanent issue that we must address with pricing versus when we can afford to wait and see if it decreases. We thought it was important to share our current perspective on this matter.

I appreciate that. Regarding the softness you experienced after May, was there a specific area of the business where this was first noticeable? Did you see any weakness in the delivery channel, for example? Which part of the business slowed down more than others? And were there any indications of consumer behavioral changes related to this?

Yeah. I think what we saw was probably not all that different from what people have been saying. The low-income consumer definitely has pulled back their purchase frequency. Fortunately, for Chipotle, that is not the majority of our customers. The majority of our customers are a higher household income consumer. And we've actually seen their frequency increase and potentially not experience, I'm guessing, some trade-down from other areas where they were choosing to get their leading occasion. So probably the first indicator was in our, I'll call it, our rewards data, where we saw some of these low-income consumers starting to slow down on purchase frequency.

And not necessarily impacting the delivery channel specifically, which one might think of as being an expensive channel?

No. No. Actually, that's been pretty stable throughout.

Okay. Thank you.

Thanks for the question. I have a follow-up regarding the mix and how the number of people per order is affecting things. One casual dining company mentioned that families appear to be returning to their pre-COVID summer habits. It seems like the family orders we saw last summer are decreasing as families engage in other activities. Do you think it’s possible to observe this trend in the numbers or any insights data that suggest there might be a challenging seasonal headwind this summer, influenced by more than just economic factors?

David, we noticed that while the group size in restaurants did decline slightly, it wasn't as significant. The overall decrease was around 4.5%, largely due to a shift from digital to in-restaurant dining. Nevertheless, the group size among in-restaurant customers decreased a bit. I can't definitively connect those trends, but if you're observing families returning to their pre-COVID dining habits, that might be a factor. Additionally, for the first time in three years, we experienced typical college seasonality, with college restaurants performing well during the school year due to in-person attendance. However, we also saw the seasonal pattern we hadn't noted in three years, where college students return home and tend to eat out less. It's possible that they prefer home-cooked meals. Our data shows that returning students visit Chipotle less often compared to when they're at college. So, we are indeed seeing some normalization in the overall trends.

And in the past, you've talked about an incremental margin framework. Maybe something like 35% to 40% would be normal. Obviously, the first half has been below that, particularly in the first quarter, maybe catching up to a bit here in the second quarter. With the four points of price that you're talking about, do you feel like you're going to be getting back to that incremental margin from here on out?

That's right, David. In fact, that's exactly why we did what we did. We still have some additional going to see carry into Q3 for tortillas, dairy, packaging, and some known increases related to beef that we've known for a while all those roll into Q3. And really, what this allows us to do is, when we get up to this, we've talked about a $3 million average volume, and then our margin should be somewhere in the 27% range that gets us back to that kind of a situation. And the pass-through for every incremental sales dollar we get in should be right back to that 40%-ish flow-through that we've talked about in the past.

Thank you.

Thank you. I wanted to ask about throughput and I know a lot has changed as we think about transaction baskets. But historically, you've given some estimates about peak-hour throughput. And I just wanted to see if you could give some context around where you are now, especially now that you have a second make-line, whereas previous peak would have been mostly the front make-line. And is there a way to kind of quantify what improving throughput could do for transactions to your point about not losing people off the end of the line? Is there sort of a framework we can think about that says, one transaction per hour is equal to a point of comp or something like that? I'm just trying to understand as we think going forward, the guidance for transaction contemplates any improvement in throughput?

Yes. We've made some changes because we now have a multibillion-dollar digital business and a separate multibillion-dollar in-restaurant business. We have distinct metrics for the frontline and the digital make-line. For the digital make-line, we focus on timeliness and accuracy, while for the frontline, we emphasize throughput. We believe we can return to our previous levels from around 2013 and 2014, where our throughput was in the high 20s to low 30s.

On a 15-minute basis.

On a 15-minute basis, that's what we're going back after. And that's why it's so important. We really kind of did this exercise back in 2019 and we're starting to see it pay dividends in early 2020. And then, unfortunately, COVID hit. And so, we're confident that if we can get our team members to understand what it means to be, call it, rush-ready in their places and ready to go, there's no reason why we can't get back to those high 20s, low 30s on a per 15-minute basis. I don't know if we've talked about exactly how the transactions translate into sales…

I’m not sure how far you want to go with that. Here’s my take, Sara. It can be challenging to determine when to increase. For example, moving from 22 to 27 is a 5-transaction increase. Each time you add more transactions, it contributes to the daily comparable sales. We measure over the fastest 15-minute period. We believe that if you can perform better in one 15-minute period, you’ll likely perform better in others as well. There is a significant opportunity to improve comparable sales. However, as Brian mentioned, we need to gain more experience. Many team members haven't been on the frontline and haven't even managed a restaurant since our in-store business began to recover. Still, we see a clear opportunity to achieve meaningful growth in comparable sales.

That's super helpful. Thank you. Sorry, just one follow-up on mix. Was there any sort of lower attachment or anything like that, or it's strictly the sort of lapping the order aggregation?

I want to clarify that there is a higher attachment rate to digital orders. When customers move from digital to dining in the restaurant, we see a decrease in the attachment rate. Additionally, we are noticing an increase in drink sales as more people come into the restaurant. To put this into perspective, around 40% of our restaurant transactions included a drink, compared to only about 20% or slightly less for digital transactions. While we've observed this positive shift, it hasn't been enough to counterbalance the decline in group size.

Thanks for – thanks for the question. I wanted to just ask about menu innovation. Brian, I know you mentioned that the Guajillo Steak is sort of past its stage-gate process and ready for launch, whenever that may be. But wanted to also get a sense if you could update us on the other item that's in test, which is the Mexican cauliflower rice and how you think about maybe more permanent menu item as a plant-based base for consumers over time.

Yes. Obviously, we're very interested in that new way of eating. And I think we mentioned this in our earlier comments. We've invested in a plant-based company called Meati. And the idea is how can we continue to find plant-based items that are consistent with our food ethos, that also are delicious from a culinary standpoint. So we've obviously done the cauliflower rices. We have the sofritas that's on our menu all the time. I'm optimistic that hopefully, we can find another center of the plate or call it center of bowl solution that's plant-based, which we haven't done to date, right? It's really been a plant-based read. So the qualifier of these things has been more perceived as, I would say, a piece of your bowl versus the centerpiece of your bowl. And so that's what we're working towards. And I'm excited to see what we learn as we partner up with Meati. And obviously, our culinary team continues to work aggressively in this space.

Thanks. That's helpful. And then just one follow-up on the throughput, which seems to be a little bit of the topic of the day. Is there anything similar across maybe either geographies or store bases that you're seeing throughput as more of a challenge? Maybe that's an urban thing or a suburban thing. Just curious what you guys are seeing in terms of any read across or tie-ins across the geography. Thanks.

Yes, you're not really observing that. I would say the experience is where we see the most significant difference. We have restaurants generating $6 million to $7 million in revenue. That team has been together for years, and once all the COVID restrictions were lifted, they quickly returned to running Chipotles very successfully. This is why we are so confident about the opportunities available, particularly in training new employees on the fundamentals, which allows them to experience the success that comes from following these basics. Ultimately, we believe that improved throughput leads to a better employee experience as well. We should probably discuss this more because our successful employees provide an excellent experience for our guests. Overall, the main point is that we have experienced managers nationwide, so we don't see much variation based on region or whether it’s suburban or urban—it’s primarily about getting more people trained effectively.

Great. Thanks. Brian, can you talk a little bit more about how Chipotle plans to flex value in the menu in the current consumer backdrop as you run double-digit pricing while lapping what looks like about 10% price in the back half of 2021? I know earlier in your career, snacking and looking at the shoulder period between 2 and 5 PM was an opportunity. Is that something that you think applies to Chipotle just given the background for lower-income consumers?

I truly believe that the value we offer with our current products is our strongest selling point. We have examined this closely. When you compare a chicken burrito or steak burrito to other options, the value is evident. If we can execute with accuracy and punctuality, along with efficient throughput, that combination will lead to our success. This is the value proposition that prevails, which is why we are committed to getting the basics right. Focusing on the fundamentals enhances our value. Therefore, having excellent culinary offerings, customization, and adhering to our Food with Integrity principles creates a compelling value proposition for consumers across all income levels.

And my follow-up question is just on another one on culinary. Just talking a little bit more just around Pollo Asado and the ability to keep that on the menu. I know it's a higher margin, obviously, tested very well and it's done very well for you guys. Is the plan to keep that permanently? It's gone a little bit longer than a typical limited-time offer would run?

No. The plan is not to keep it permanently. I think we've talked about this. Ideally, we like having menus two to three times a year. And if we get some that can carry longer, we stay with them longer. But that will eventually be coming out here in the next couple of months. And hopefully, we'll have some other menu news that gets people equally as excited.

Thank you for the question. On unit growth, so on track to accelerate unit growth to 8% to 10%. Can you talk about what you expect with respect to cannibalization and just the trade-off between unit growth and comp?

We measure the impact and have never observed it exceeding a 1% comp impact. The highest we've seen is around 0.7% to 0.8%, which remains very manageable. Each time we enter into a deal, we follow a process where we utilize an algorithm to estimate the expected impact. Our team excels at making these measurements. Although it remains a blend of art and science, we aim for deals that will provide a superior return after impact. We're not trying to place restaurants too closely together to prevent excessive impact, and there's still plenty of opportunity available. As we aim to grow from 3,000 to 7,000 restaurants, we base our projections on our top three, four, or five end markets that already reflect the density corresponding to what we would achieve nationally at 7,000 locations. These restaurants typically have high volume and high returns.

Great. Thank you for that. And then just on potential AUVs, the AUVs are now running at 2.8 million, high end of restaurant peers. You've talked about the opportunity for increased throughput. 40% of sales going through the secondary digital make-line. How are you thinking about peak AUV levels and where that can go? Is there a level where it makes more sense to open another restaurant?

Yes. Look, I think one of the things that truly special about Chipotle is we are not capacity-constrained with our front line or our digital make-line. So I mentioned, right, there's restaurants doing $5 million, $6 million, $7 million. And obviously, it presents an opportunity for us to build a lot more restaurants without having really any meaningful impact. But I think it also just demonstrates the four walls that we're already running Chipotle has tremendous upside as well. So I'm feeling really confident we're going to get past $3 million, and I'm sure we'll probably be talking about how we get to $4 million at some point. But I first like to get past the milestone of $3 million. We can celebrate that milestone. And the good news is I don't see any capacity constraints that would prevent us from saying $4 million is next up.

All right. Thank you. And thanks, everybody, for joining and all the questions. Obviously, we're very proud of our results. I think it speaks again to the resiliency of both the Chipotle brand, all of our employees out in every restaurant, their ability to execute great culinary, great throughput. And I also think it speaks to the strength of our value proposition. So I know there's a lot of uncertainty out there. I said this in my earlier remarks. The thing we spend our time on are the things that we can control, the things that we're certain about. And what I am certain about is Chipotle has got great people running restaurants that do food in a different way. And we continue to give people great access through digital and great throughput on the front line with good hospitality. I think we'll continue to be rewarded with more business. And we're proud of where we are, and we're really excited about where we're going. So, obviously, we'll see what comes next, but I think we're ready. And we'll continue to do what we know how to do best, which is make great burritos, great bowls. And hopefully, we continue to delight our customers so that they come back over and over again. So thank you for taking the time, and we'll talk to you all in three months.