Chipotle Mexican Grill (CMG) — Q3 2022 Earnings Call Transcript

Hello, everyone, and welcome to our third 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 actual results could differ materially from those 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-Q for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website. We will start today's call with prepared remarks from Brian Niccol, Chairman and Chief Executive Officer; and Jack Hartung, Chief Financial and Administrative 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. Our third-quarter results demonstrated the resiliency of the brand and the strength of our organization in managing through a difficult consumer environment along with the inflationary headwinds we have experienced over the past 18 months. For the quarter, sales grew 14% to reach $2.2 billion, driven by a 7.6% comp. In-store sales grew by 22% over last year. Digital sales represented 37% of sales. Restaurant-level margin was 25.3%, an increase of 180 basis points year-over-year. Adjusted diluted EPS was $9.51, representing 35% growth over last year. And we opened 43 new restaurants, including 30 Chipotlanes. In the third quarter, we continue to see a widening of trends by income level with the lower-income consumer further reducing frequency. Fortunately, for Chipotle, the majority of customers are from higher-income households, which continue to increase purchase frequency. While it is difficult to predict the macro impact on future spending trends, we know our value proposition remains strong, and we experienced minimal resistance to our price increase in the quarter. To put it into perspective, our average chicken burrito or bowl, which makes up about 50% of our orders across the U.S., is below $9 in our restaurants. This is a tremendous value when you consider the quality of our food, including our food with integrity standards, fresh preparation utilizing classic cooking techniques, customization, generous portions, and of course, convenience and speed. Our fresh preparation is particularly unique when comparing Chipotle to other restaurants. There are not many restaurant options that prepare their food fresh daily, and we do it in all 3,000-plus restaurants. Our restaurant teams begin preparation at 7:30 in the morning to be able to serve our delicious food by the time we open. We only use 53 real ingredients, all of which you can pronounce, and our dedicated employees prepare the food in our open kitchens using classic cooking techniques. This includes grilling Fajita Veggies and Adobo Chicken on the Plancha and mashing avocados to make our signature guacamole and making our chips fresh every day. So again, when you combine all these elements, you get an industry-leading brand with a tremendous value offering. And our five key strategies will continue to help us win today while we create the future. Now let me provide an update on each of these strategies. Our first strategy is running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; our second strategy involves amplifying technology and innovation to drive growth and productivity at our restaurants and support centers; our third strategy focuses on making the brand visible, relevant, and loved to improve overall guest engagement; our fourth strategy is expanding access and convenience by accelerating new restaurant openings; and our fifth strategy is sustaining world-class people leadership by developing and retaining diverse talent at every level. First, starting with our restaurants. We remain focused on being brilliant at the basics, including staffing our restaurants with talented team members focused on the foundations of the business. These include having great culinary prepared and ready to serve, open to close in a food-safe environment, improving order accuracy and timing for the digital business, and increasing throughput in hospitality for the in-restaurant business. At the end of the last quarter, we rolled out an updated training program called Project Square One, which includes training around throughput, digital execution, food quality, and hospitality to deliver an exceptional customer experience. We've made some progress during the quarter, but we are not where we need to be. The capabilities of our teams need to and will improve. Chipotle is a restaurant business with high standards, and we need to train and develop our teams so that these standards are met. Additionally, in these uncertain times, it is critical that we treasure the guest, and this will be a primary focus for everyone in operations and across our company. With so much change over the past couple of years brought on by the pandemic, it has been refreshing to focus on the foundation on which Chipotle was built. We see that our highest volume restaurants are meaningfully outperforming lower-volume restaurants in terms of throughput. These restaurants have in common experienced managers who understand the importance of the foundations. As our newer restaurant employees go through the training and get more real-time reps, we believe we will see consistent improvement over time. As we discussed last quarter, we continue to look for ways to enhance our tools and systems to support in-restaurant execution and improve the overall experience for our employees and guests. I am excited to share a pilot that we recently announced, as well as an update on Chippy. We are piloting advanced location-based technology to enhance our app functionality and provide a seamless, convenient experience for our guests. For guests who opt-in, the program can engage with Chipotle app users upon arrival at our restaurants and utilize real-time data to enhance their experience with our order readiness messaging, wrong pickup location detection, reminders to scan the Chipotle Rewards QR code to checkout, and much more. I’m happy to share that Chippy is now in one of our restaurants, and we are excited to test and learn from the autonomous robot that helps our teams make tortilla chips, speeding up their time to serve and support our guests. Chippy is trained to replicate Chipotle's exact recipe to cook the chips to perfection, finishing with a hint of lime juice and a dusting of salt. Additionally, Chippy can make chips throughout the day, which results in fewer outages and improves freshness. Moving to our branding, our Real Food for Real Athletes platform continues to expand as we rolled it out to football, America's most-watched sport. The campaign focuses on athletes that love to eat at Chipotle as part of their training and lifestyle as it helps them perform their best by providing proper nutrition through real ingredients. At the pearl level, we brought together The 88 Club for the first time in an ad with Dallas football greats who were the #88: CeeDee Lamb, Michael Irvin, Dez Bryant, and Drew Pearson. The 88 Club TV ad premiered during Sunday night football, and all of the athletes' go-to Chipotle orders were featured in our app. Chipotle's 88 Club content achieved great engagement with millions of views across channels. Additionally, at the college level, we took a local approach with the Real Food for Real Athletes campaign in Ohio, which is one of our biggest markets and where we have our largest restaurant support center. We partnered with Ohio State offensive lineman and running back TreVeyon Henderson on an ad narrated by former Buckeye running back great Archie Griffin. Tapping into the passion the fans have for their favorite teams and game day excitement, the ad showcased TreVeyon's journey before he runs onto the field and was amongst our highest engaged videos in social media channels. Shifting to limited-time offers, we remain comfortable with our cadence of one to two LTOs a year as it excites our guests and drives both higher frequency and spend. As you may have seen, we launched Garlic Guajillo Steak in mid-September, which is an entirely new flavor profile featuring tender cuts of freshly grilled steak with the bold flavor of garlic and guajillo peppers finished with fresh lime and cilantro. In maintaining our relevance in the Metaverse, we premiered the Garlic Guajillo Steak to our community on Roblox, where users could grill, season, cut, and virtually taste the steak. The first 100,000 users who successfully completed the Chipotle Grill simulator received a promotional code that can be redeemed in our restaurants. Again, demonstrating our ability to blend the Metaverse with real life. Complementing the Roblox experience, we also provided early access to our 30 million rewards members as we continue to provide rewards members with added value. While still early days, Garlic Guajillo Steak is receiving excellent customer feedback and driving a higher check as a premium protein experience. However, it faces the challenge of rolling over our highly successful Brisket program from last year. As a reminder, Brisket ended in mid-November, and the Garlic Guajillo Steak program will run through the end of the year. Additionally, following the success of Pollo Asado, we began testing Chicken Al Pastor in Denver and Indianapolis. Chicken Al Pastor adds an exciting level of spice to guests' go-to orders. If successful in the stage-gate process, it could be available for rollout in 2023. Our next strategic pillar is expanding access, which is still a top request from consumers. We remain on track to open 235 to 250 new restaurants in 2022 and anticipate opening between 255 to 285 restaurants in 2023 barring any further delays in construction or equipment availability. Our pipeline remains strong, and as these challenges ease, we are confident that we can achieve the top end of our targeted 8% to 10% range. In addition to expanding in our core markets, we remain excited about new opportunities, including Alberta, Canada and small towns in the U.S. We plan to enter Alberta, Canada in 2023 with our first location in Calgary. Alberta makes the most sense as our next market to open in Canada as it has two of the main cities, Edmonton and Calgary, each with relatively large populations. Additionally, there is brand recognition as people from Alberta have visited Chipotle restaurants in British Columbia and Ontario. In the U.S., our small town strategy is also performing very well. Overall, small town restaurants have comparable margins and returns to the company average, and we're excited about the growth opportunity, which is included in our 7,000 long-term restaurant target. I'm also proud to share that opening day sales for a restaurant in a small town in Texas set a new company record. I would like to express my congratulations and gratitude to the restaurant and development teams for making that happen. Speaking of teams, our purpose of cultivating a better world starts with our people. The importance of developing our people is paramount to running great restaurants as well as developing future talent to grow. I'm delighted that over 90% of our promotions are internal, and I believe we will continue to see that percentage increase. There are many examples of senior leadership roles that started out as crew members. In fact, one story that particularly moved me was about our team in the Mid-Atlantic region, where our Regional Vice President, Team Director, and Field Leader were all promoted from within the organization in March. Our RVP immigrated to the U.S. from Egypt, and his first job was as a crew member in 2009. He is another person that has worked his way up from a crew member to Regional Vice President overseeing $1 billion in sales. For perspective, that would be the fourth largest company in Egypt. His successor as Team Director immigrated to the U.S. from Palestine in 2017 with his first job as a crew member and now oversees a $200 million business. And finally, his successor is a field leader who is a woman, who immigrated to the U.S. from Ethiopia in 2015, who also started as a crew member and now oversees 7 locations totaling $20 million in sales. Their perseverance is inspiring to many and a great example of how our growth and brand changes lives and communities for the better. Each of these individuals is also developing terrific talent that has the ability to become future leaders. For perspective, each year just in the United States and Canada, we have the opportunity to promote more than 1,500 managers to open our new restaurants. In addition to career opportunities in industry-leading benefits, we also believe that communication between leadership and our restaurant teams is critical. We do this through several ways, including chitchats, where members of our executive leadership team meet with our restaurant teams to listen to their feedback. Through this feedback loop, we were able to identify that our teams wanted more educational benefits, which is why we implemented debt-free degrees and career certificates. Team members who have participated in our educational programs are 2x more likely to be retained and 6x more likely to be promoted. Supporting, developing, and growing our people will remain a core focus for Chipotle and is key to growing to 7,000 restaurants. In closing, I want to thank our employees for another great quarter. We remain committed to getting back to the basics and running great restaurants. I believe these actions will position us for strong performance in any environment and more importantly, is key to delivering an excellent customer and employee experience. I'm excited to see everyone back in our restaurants next week for our 22nd year at Boorito. And with that, I'll turn it over to Jack.

Thanks, Brian. Good afternoon, everyone. I want to start by reiterating Brian's commentary about treasuring our guests and earning every single transaction. During past periods of economic challenges, focusing on our guests, getting the details in the restaurants right, and providing a great dining experience has served us well. As Brian mentioned, this will be the primary focus of our organization and what we believe will lead to building an even stronger brand for the future. Now moving to our third quarter results. Sales in the third quarter grew 14% year-over-year to reach $2.2 billion as comp sales grew 7.6%. Restaurant-level margin of 25.3% increased about 180 basis points compared to last year, and earnings per share adjusted for unusual items was $9.51, representing over 35% year-over-year growth. The third quarter had unusual expenses related to one-time employee separation expenses, corporate and restaurant asset impairments, corporate restructuring and our previously disclosed 2018 performance share modification. Looking ahead to Q4, our current comparable sales trends are choppy as we lap our Brisket LTO from last year, and we expect our October comps will likely end in the mid-single-digit range. Assuming current sales trends continue, we expect our comps to be in the mid- to high single-digit range for the full fourth quarter, as Garlic Guajillo Steak will be in restaurants through the end of the quarter compared to Brisket, which ended in mid-November of last year. Earlier this month, we took a price increase in around 700 restaurants to address pockets of outsized wage inflation. Menu prices in each restaurant increased between 2% and 3%, which had a company-wide impact of about 0.5% overall. I'll go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter were 29.8%, a decrease of about 50 basis points from last year. The benefit of menu price increases offset elevated costs across the board, most notably in dairy, packaging, and tortillas. In Q4, we expect our cost of sales to remain at about the same level as the benefit from the menu price increases will be offset by higher beef, chicken, dairy, and tortillas. Labor costs for the quarter were 25.1%, a decrease of about 70 basis points from last year. This decrease was driven by sales leverage and somewhat offset by wage inflation as well as lapping the employee retention credit that we received in Q3 of last year. In Q4, we expect our labor cost to be in the mid-24% range due to leverage from our menu price increases as well as our premium price Garlic Guajillo Steak. Other operating costs for the quarter were 14.5%, a decrease of about 60 basis points from last year. This decrease was driven by sales leverage as well as a decline in delivery expenses due to lower delivery sales, partially offset by higher costs across several expense categories, most notably utilities, including natural gas. Marketing promo costs for the quarter were 2.2% or 20 basis points below last year. In Q4, we expect marketing costs will be in the mid-3% range with the full year to come in right around 3%. In Q4, other operating costs are expected to be around 15%. G&A for the quarter was $141 million on a GAAP basis or $136 million on a non-GAAP basis excluding about $4 million in employee separation and corporate restructuring costs and $1 million related to the previously disclosed modification to our 2018 performance shares. G&A also includes $115 million in underlying G&A, $21 million related to noncash stock compensation, a $1 million benefit related to the reversal in lower performance-based bonus accruals, mostly offset by payroll taxes on equity vesting and exercises. We expect our underlying G&A to be around $120 million in Q4 and continue to grow slightly thereafter as we make investments in technology and people to support our ongoing growth. We anticipate stock comp will be around $25 million in Q4, although this amount could move up or down based on our performance, and $1 million for costs associated with our field leader conference in early 2023, bringing our anticipated total G&A in Q4 to around $146 million. Depreciation was $71 million, and in Q4, we expect it to increase slightly to $73 million. Our effective tax rate for Q3 was 24.4% for GAAP and 23.4% for non-GAAP, and both rates benefited from option exercises and share vesting at elevated stock prices. For Q4, we continue to 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 strong as we ended the quarter with over $1.2 billion in cash, restricted cash, and investments with no debt, along with a $500 million untapped revolver. During the quarter, we repurchased $107 million of our stock at an average price of $1,438, and we've repurchased a total of $628 million year-to-date. We increased our level of stock repurchases during the quarter when our share price fell with the market overall, and we will continue to opportunistically repurchase our stock. During the quarter, the Board authorized an additional $200 million to our share authorization program, and at the end of the quarter, we had $413 million remaining. We opened 43 new restaurants in the third quarter, of which 38 had a Chipotlane, and we remain on track to open between 235 and 250 new restaurants in 2022 with at least 80% including a Chipotlane. As Brian mentioned, we anticipate opening between 255 and 285 restaurants in 2023 with at least 80% including a Chipotlane. Development delays remain a headwind, including equipment and construction material shortages, construction labor challenges as well as permitting, utilities, and inspection delays. While we expect these challenges to persist into 2023, our pipeline remains strong, and we expect to move towards the high end of our targeted 8% to 10% openings range once these headwinds subside. To conclude, we believe we have a tremendous growth opportunity ahead of us, with room to more than double our current presence in the U.S. and Canada over the long term. We will remain focused on what makes our brands special, and that is our purpose of cultivating a better world, our food integrity standards, a strong unit economic model, and of course, our talented and dedicated teams. With that, we're happy to take your questions.

I have a two-part question related to your pricing and traffic trends. So first, I was wondering if you could share what your transaction trends were in the third quarter and what the guidance implies for the fourth quarter? And then I have a follow-up related to that.

Yes, sure. So in the third quarter, I think transactions were down roughly 1%. A lot of the additional headwinds we've had with kind of the mix shifting as people return to their normal course of behavior has resulted in smaller group sizes. So that's kind of consistent with what we've seen. In the current quarter, obviously, we've got Garlic Guajillo Steak launching right now going over top of the Brisket. I think as we mentioned, we continue to see some pressure on the low-income consumer. So we're still seeing transactions pushed into that negative range. And obviously, we'll continue to keep an eye on it as we go forward. Jack, I don't know if you want to add anything to that.

Yes, just pricing during the quarter, David, we're running right around 13%, and that will move up a bit in the fourth quarter. So that's part of our guidance as well. I think the big thing in the fourth quarter to note is just Brisket was very successful last year, and we ran out of inventory in the middle of November. The comparison actually gets easier in the second half of the quarter.

Great. That's helpful. And then my follow-up, Brian, is I think you're aware there's been a lot of concern about the pricing strategy hurting the traffic. And I think you mentioned in your prepared remarks that you're not seeing resistance to the price increases yet. So I just wondered if you could comment on your price position now and how you think about the traffic trends you're seeing and whether or not you think that you've seen any resistance.

Yes, the price point in our business remains very competitive and attractive compared to regional players. When looking at fast-casual competitors, our prices are generally 10% to 30% lower than theirs. Despite the inflationary environment leading to increased costs of over 20% in the past two years, we have maintained our pricing strategy. Our position relative to our competitors remains strong, and our value proposition continues to attract customers. We have not observed changes in customer behavior regarding menu choices, and people are still ordering what they normally would. Additionally, grocery store prices are on the rise, making our offerings an even more appealing cost option for consumers. For instance, getting a chicken burrito tailored to your preferences for around $9 or less is a significant value.

On that point of price, components of mix, and traffic. Can you just talk about the price piece? So what is the art and science that you blend for the here and now? And how do you think about using that tool to protect margin? But then also long term, how do you exercise that pricing power or not against the long term unit opportunity, which I imagine requires affordability, right, appealing to the masses? So if you could talk about that a little bit, that would be great.

Yes, sure. I mean, that's exactly right, Nicole. The way we're trying to balance this is really only use price as the last lever to pull. And I think that's what we've done throughout the course of the last, call it, two years because we like having the strong value proposition, frankly. I like being in the position where we have the best culinary with the best ingredients and arguably the best price. It's a position of strength we want to retain moving forward. The reality in an inflationary environment is you're going to have to pull that lever. It's important to look at how your pricing stacks up relative to people's alternatives. Those alternatives are either grocery stores or other restaurants. Our value proposition remains strong. We're delighted to continue to see new units opening at a terrific opening rate. They're still achieving 80% to 85% of what our typical restaurants do. Our Chipotlanes continue to outperform, and frankly, even in our small towns, we're continuing to see tremendous openings. I think that tells me we're getting signals in all different fronts that our value proposition remains really strong.

And as that applies to the fourth-quarter commentary, then, is that just price that's flowing from August into 4Q? Or could you speak to incremental price in the fourth quarter to get above that 13%? Is that essentially being used to protect margin, even though you’re really hitting that 25% profile or algorithm margin you'd be looking for?

Yes, Nicole, there are actually three things going on when you move from the third quarter to the fourth quarter. First, we took our last price increase around August 1, so that hit part of the third quarter. The rest of it, the fourth quarter will get a full hit. We also, on a very targeted basis, identified pockets throughout the country, and there were 700 restaurants that had accelerating wage pressures. What we did was up the menu prices to cover some of that, not to get our margin back, but just to try to cover some of that, which ended up being about 2% and 3% in those 700 restaurants, translating to about 50 basis points overall for the company. The third piece is we took our price increase in the fourth quarter of last year around that December 7 or 8, and that rolls off. So those pieces will see pricing bounce a little before it drops back down in the first quarter.

Two questions. The first one is a question on food costs that are down under 30%. I'm wondering if that's just all pricing net of commodity inflation? Or is there something else going on in there? For example, the fact that more is being made off the digital make line that's helping your portion sizes, your portion control, or the rebound in beverages or something like that.

Yes, there are really two main points. First, we have higher menu prices for our delivery business, which represents about 17% to 18% of our total operations, and we charge virtually no fee—just a $1 fee plus a small commission. This means our menu prices are significantly higher in this segment, resulting in what seems to be a much lower food cost. Second, regarding inflation over the past two years, food inflation has been around 20%, while labor inflation is closer to 24%. Consequently, when we raise prices to address the higher labor costs, we benefit in terms of food cost, which is why it's below 30%. Historically, we've not seen our food cost drop below 30%.

And just a follow-up, whether the weakness in the low end pertains to your pricing or if certain customers are being priced out. What actions do you think you have in your arsenal to correct that?

Yes. One of the things we're definitely evaluating is how do we separate these groups into understanding their current situation. What do we need to do to ensure that they can still access the Chipotle experience? The team is hard at work figuring out how best to use our CRM/rewards program to be very targeted with these different cohorts we have. Some of it is obviously the low-income consumer. Some of it is also what they're interested in.

The question was on Project Square, and Brian, you specifically mentioned in your prepared remarks that there is still more to do there. I wanted to get a sense of improvements that you could still make relative to how you're currently executing. I wanted to get a sense of how much of that is just giving the employees and managers more time, or are there changes that consider increasing staffing levels, pay, or technology that could improve some of the customer metrics you're striving to achieve?

Yes. Thanks for the question. One of the things that has been a breath of fresh air is we've now had the ability to focus on the basics of Chipotle. Obviously, it starts with great culinary and then starts with great teams being trained and developing each other. The other thing we've surrounded these teams with is technology to give more real-time information on the performance of the restaurant so that our field leaders, general managers, and teams know where there's an opportunity to be better or where success exists. Since January, about 50% of our field leaders are new to the company. It's critical for us to ensure that newly promoted field leaders and general managers know how to do their jobs. We've gone through a lot of change due to the pandemic, and now we’re getting back to what we believe is the right way to run a Chipotle.

And have you noticed any changes in your guest satisfaction scores, or is that something you're just trying to achieve internally?

Yes. We've seen improvements in our in-store experiences. I think that's a testament to folks getting back to the business of running the front line. We still have opportunities to improve our digital business when it comes to accuracy, especially in delivery occasions. We see evidence where we're continuing to make great progress. In higher-volume restaurants, where you have more tenured field leaders, general managers, and crew, they're outperforming on these metrics, and their satisfaction scores are higher, volumes are higher, and turnover is lower.

Brian, can you talk about the efficacy of the limited-time offers you're running today versus a year or two or three ago? Is this driving incremental traffic, or is it just a check benefit? I guess, is this offsetting the need to innovate to cover last year's promo, and is there an off-ramp to that?

Yes, this is something we evaluate. I don't think of our business relying on one thing. Right now, we're doing Garlic Guajillo Steak. I think there is incremental business to be had because of better throughput, better execution, and there's business to be had because we give people some menu variety. Unfortunately, in this environment, there are macro headwinds on the lower-income consumer.

I appreciate that perspective. Can I clarify when you made the comment about traffic and the dynamic between mix and more people coming back to the restaurants? Shouldn't that benefit traffic and maybe detract from mix? You mentioned that was impacting traffic, but I would have thought that would positively impact orders even if it was hurting mix. Do you see it that way, or do I have that wrong?

Yes, the main mix we're seeing is group size. As customers return to more normal habits, we're seeing less digital and more in-restaurant, and there's a decline in group size. So what's happening is customers are eating more individually rather than working from home and bringing dinner home for their family. Overall, while we've seen a positive traffic impact, the group size has a negative mix impact.

I'd like to understand whether demand and comp is coming from mostly new customer acquisition versus improving throughput in your high-volume stores.

We have an understanding of new customers in the digital space. We see that group being highly represented. Where we see gains in frequency is from our more heavy users. Our digital business grew significantly during COVID, attracting many new users.

I have another question. Can you compose for us the high-level economics? Pricing versus traffic. Are you seeing major differences between urban stores and small-town stores?

At a high level, small-town restaurants are performing well with comparable margins and returns to the company average. Although they have lower volumes, costs are more favorable, leading to higher margins. Urban restaurants are outpacing non-urban, but they still have not kept pace compared to 2019 due to higher costs of doing business, including rent and labor.

Brian, could you highlight the biggest opportunities from a transaction perspective? You mentioned that transactions are slightly negative in the quarter. What are some of the bigger levers that support transaction growth for the rest of the year and into '23?

One of the biggest opportunities for us is to ensure our restaurants are staffed and trained. We have pockets where we're still battling challenges. Keeping these restaurants staffed, having capable teams that execute high standards has a lot of transaction opportunity, both in-store and digitally. We also plan to open many restaurants in the fourth quarter, attracting new users and providing more experiences with Chipotle.

Could you talk about your customer base? In smaller towns, are they typically a slightly lower-income cohort? Do you see this affecting your value proposition? Additionally, could you discuss your marketing campaigns and the demographics you’re targeting?

We continue to over-index with young people, with a good balance of males and females. While we have a skew towards higher income, when we refer to higher income, we're talking about over $75,000. We want to engage with culture, which is why we focus on platforms like Roblox. We want to keep a position of strength with both young people and higher-income customers, as that serves us well.

Could we see a focus on snacking occasions or offering more value during shoulder periods when restaurants are underutilized? How do you think about your pricing strategy in the current macro environment?

We're not going to chase traditional discounting. We'll use targeted CRM initiatives to connect well with consumers. We've seen success in the past with this approach, and thus, we believe that executing our foundational strengths is our strongest point of differentiation.

Regarding cost expectations for 2023, we're seeing stabilization. Areas with upward pressure include beef and cooking oil. However, we still feel good about our chicken costs. Overall, we hope for stabilization in commodity costs, offsetting some pressures with labor inflation. My prediction for labor cost inflation is mid-single digits with some regional variances.

Can you discuss the potential for restaurant growth, considering development headwinds on equipment and construction materials?

While the inventory is there, opening restaurants is taking longer than before due to supply chain challenges. If there's easing in supply chain and permitting issues, we can get back to profitable openings at a quicker pace.

Can you give an update on labor and efficiency tools and where you are today on throughput compared to historical levels?

We're currently running in the low 20s on throughput measures. Our higher-volume restaurants are in the high 20s, showing potential for improvement toward the mid- to high 20s. Focused training and employing technology are critical to achieving those targets.

Higher-volume locations outperform on various metrics, leading to better overall performance. By providing more training to new staff at all levels, we aim to make consistent improvements in throughput and customer experience.

Thank you, and thanks for the questions. I appreciate all the conversation on pricing and value. Obviously, it's front and center for us as we navigate the most recent challenges. The one thing I want to reiterate is the proposition related to value for Chipotle remains very strong, whether comparing our pricing to competitors or alternatives like grocery stores. We continue to demonstrate in all areas that the Chipotle brand is strong, and we have a compelling value proposition. It's crucial we focus on staffing, training, and executing against the standards that provide great experiences for our customers and employees. My confidence in our strategies and Project Square One positions us for sustained growth moving forward.