Chipotle Mexican Grill (CMG) — Q3 2025 Earnings Call Transcript

Hello, everyone, and welcome to our third quarter fiscal 2025 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 projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and in our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website. We will start today's call with prepared remarks from Scott Boatwright, Chief Executive Officer; and Adam Rymer, 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 it over to Scott.

Thanks, Cindy, and good afternoon, everyone. Our third quarter performance fell short of our expectations due to persistent macroeconomic pressures. However, we are moving quickly with a clear actionable plan to accelerate transaction growth. Let me first review our third quarter results. Sales grew 7.5% to reach $3 billion, including a 0.3% increase in comp. Digital sales were 36.7% of total sales. Restaurant-level margin was 24.5%, a decline of 100 basis points year-over-year. Adjusted diluted EPS was $0.29, an increase of 7% over last year. And we opened 84 new restaurants, including 64 Chipotlane. Now I want to spend a minute addressing a few of the consumer headwinds we have experienced. Earlier this year, as consumer sentiment declined sharply, we saw a broad-based pullback in frequency across all income cohorts. Since then, the gap has widened, with low to middle-income guests further reducing frequency. We believe that this guest with household income below $100,000 represents about 40% of our total sales. And based on our data, they are dining out less often due to concerns about the economy and inflation. A particularly challenged cohort is the 25- to 35-year-old age group. We believe that this trend is not unique to Chipotle and is occurring across all restaurants as well as many discretionary categories. This group is facing several headwinds, including unemployment, increased student loan repayment, and slower real wage growth. We tend to skew younger and slightly over-index to this group relative to the broader restaurant industry. Finally, the promotional environment has intensified with value as a price point and menu innovation escalating throughout the year. Despite these headwinds, Chipotle maintained stable wallet share in the third quarter, but we aim to get back to consistent share gains. While value as a price point is not and will not be a Chipotle strategy, we are using this challenging period to strengthen our consumer flywheel by improving execution, enhancing how we communicate value, and accelerating menu and digital innovation. I will give you more specifics on our initiatives to drive transactions in just a moment. But first, I will review our 5 key strategies that will help us win today and grow our future. And these include: running successful restaurants with a people accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; sustaining world-class people leadership by developing and retaining top talent at every level; making the brand visible, relevant and loved to acquire new guests and improve overall guest engagement; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. I will start with a combination of operations and world-class people leadership. We recently held our team director conference with our leaders who each oversee a subregion or region of the country. What is incredible about being in a room with these 80 leaders is that 85% were promoted internally and the average tenure is nearly 15 years. Additionally, 29 started as crew members and grew within the organization. So this group understands that during challenging times, experience in the restaurant is more important than ever, and improving it will build loyalty and drive higher frequency in the future. During the meeting, we discussed that Chipotle has experienced slowing transaction trends several times since going public. During each period, we doubled down on getting the fundamentals right in our restaurants, which reinforces and strengthens our value proposition through execution, not discounts. And this enabled Chipotle to exit each period stronger with accelerating transaction trends that followed. As a reminder, our value proposition includes food made fresh with the highest quality ingredients, prepared using classic culinary techniques, served in generous portions with reliable accuracy and fast, friendly service. Currently, all of this is delivered at a price point that is 20% to 30% below our peers. This gap has widened over the last few years as our pricing has consistently trailed the broader restaurant industry. In fact, our pricing has tracked more closely with food at home and food away from home. Bottom line, our value proposition has never been stronger. Now it is important that we deliver this exceptional experience consistently across 4,000 restaurants every day for every guest. With this in mind, we renewed our problem detection survey. While we improved in key areas like dining room cleanliness, friendliness, and portion sizes, we have room to be better. For example, in my visits to our restaurants, I still see inconsistencies in delivering Chipotle standard of excellence, including digital order accuracy, ingredient availability, and the cleanliness of our dining room and drink stations. To address this, we are reemphasizing standards with system-wide retraining and are resetting quarterly bonus incentives to align better with digital order accuracy and the guest experience. Additionally, we are upgrading our restaurants with a high-efficiency equipment package, or HEAP, as we call it, to improve the team experience and throughput, while maintaining or improving upon our high-quality culinary. As a reminder, these include the dual-sided plancha, the three-pan rice cooker, and the high-capacity fryer. While throughput reviews continue to show progress on expo and the 4 pillars, we believe the rollout of HEAP will drive the next step function change in throughput as it simplifies prep, enabling our teams to be properly deployed at peak periods more consistently. In restaurants where our high-efficiency equipment package is live, feedback from the field has been positive. Our teams report more consistent, higher-quality culinary execution, more efficient prep, and an overall improved team experience. For example, the new plancha cooks chicken and steak to perfection in less than half the time, expanding morning capacity and helping us to keep up during peak. In these restaurants, we are seeing the taste of food and guest satisfaction scores improve in addition to yield savings and greater labor efficiency. We remain on track with the rollout of HEAP across the country, which we anticipate will take around 3 years. Shifting to marketing and menu innovation. In the third quarter, we accelerated our marketing spend to communicate the brand's extraordinary value through menu innovation, our rewards platform, and high engagement promotions like the college football BOGO and Chipotle IQ. Based on our data, these initiatives successfully drove transactions and deepened guest engagement, helping to offset some of the incremental consumer headwinds in August and September. This response reinforces our focus on transaction-led growth going forward. I will start with menu innovation. Through our research, we found that over 90% of Gen Z consumers say they would visit a restaurant just for a new sauce. Adobo Ranch proved this to be true and it was our first new dip in 5 years that helped acquire new guests and drive incremental transactions. Earlier this month, we rolled out Red Chimichurri, which pairs exceptionally well with our limited time offer carne asada. The sauce is prepared with only real ingredients, no artificial preservatives, colors, or flavors, and made fresh in our restaurants every day. As we rolled it out, it drove a step-up in transactions and is around low double-digit incidents. It also drove an acceleration in trial of carne asada. Our culinary team is working hard to meaningfully accelerate our pace of innovation for 2026 to deliver new flavor experiences that are on trend, on brand, and operationally friendly to execute. In addition to sides and dips, our innovation will include 3 to 4 limited time protein offers. Our past cadence of 2 offers a year has helped to drive a step change in transactions. In fact, we see in our data that new and existing guests who purchase LTOs increase frequency and spend over the following year compared to guests who do not purchase an LTO. Adding 1 or 2 more will keep Chipotle more visible, relevant, and loved throughout the year. Moving forward, we also plan to build awareness around new occasions that we believe could scale and be sizable pieces of our business over time. A few weeks ago, we launched a 60 restaurant catering pilot in Chicago. The test includes the high-efficiency equipment package to expedite prep and increase capacity in addition to a new technology stack to better manage orders. We also plan to make a full marketing push to drive demand into catering, including third-party platforms. As a reminder, our goal is to scale the catering business within our restaurants without disrupting the core operations. With catering at 1% to 2% of sales versus our peers at 5% to 10%, it could represent a meaningful opportunity in the future. And last month, we rolled out Build Your Own Chipotle, our version of a family or group occasion with the ability to build custom bowls and tacos for a party of 4 to 6. Early guest feedback has been positive and we are seeing little cannibalization as it is bringing new guests and driving higher frequency. We believe the family or group occasion is another big opportunity over time as groups of 4 or more only make up about 2% of transactions. Finally, we are elevating how we communicate Chipotle's value. Despite our extraordinary value proposition, we are seeing examples where this is not reflected in consumer perception. We are planning to launch a new creative campaign that spotlights what sets Chipotle apart, including clean ingredients, freshly prepped in our restaurants each day using classic culinary techniques, served in abundance at a speed and price point you can't get anywhere else. You will see new ads that address these aspects of our value proposition in really creative ways rolling out over the coming quarter and into 2026. Now turning to digital. We believe we have an opportunity to create more engaging experiences that drive consumers into the rewards funnel, increasing our active members and resulting in higher frequency and spend. We learned from the Summer of Extras that gamification is a great way to drive frequency, even with our most infrequent guests. Combination of Summer of Extras as well as incremental promotions like Chipotle IQ and Freepotle resulted in loyalty comps accelerating versus non-loyalty comps over the last several months. Additionally, our College Rewards program or Chipotle U, is off to a good start as enrollees are increasing their spend after joining the program. We will continue to build awareness around Chipotle U and believe the program will be a great way to increase engagement throughout the year with this important cohort. Going forward, we are planning to make some significant additions to the rewards program to drive an increase in active members and improve engagement. We'll have more to share in the coming quarters. Now moving to expanding access. Over the past several years, we have made tremendous progress scaling our new restaurant openings from 140 openings in 2019 to an expected 315 to 345 this year, all while delivering industry-leading economics and returns. On average, that is nearly 1 new restaurant opening every day. In North America, our new restaurant openings remained strong with consistent new restaurant productivity around 80% and year 2 cash-on-cash returns around 60%. We remain confident in our ability to reach 7,000 restaurants long term. In Europe, we have made great strides in culinary and operational execution, and we continue to grow comps, restaurant margins, and cash-on-cash returns. Next year, we will begin to expand new restaurant openings in the region, and we continue to believe Europe is a big opportunity for Chipotle over time. In the Middle East, we opened 2 partner-operated restaurants with the Alshaya Group bringing our total to 7 restaurants, including our first in Qatar. Additionally, this week, we opened our first Chipotlane outside of North America in Kuwait, and we will open 2 additional partner-operated restaurants in the Middle East next month. The familiarity, excitement, and fandom for the brand delivered at U.S. standards has been strong, reflecting opening volumes that rival the best we have seen in the U.S. and Canada. And in September, we announced our first joint venture partnership in Asia with SPC, with restaurants in South Korea and Singapore anticipated to open in 2026. South Korea is a trendsetter for pop culture across Asia with growing influence in the United States, and the response to our announcement has been exceptionally strong. With high brand familiarity in both markets, a passion for exceptional culinary experiences, and a rapidly evolving dining-out landscape, these are ideal entry points for Chipotle in the region. In 2026, we anticipate opening between 350 and 370 new restaurants. In addition to growth in North America, this will include 10 to 15 new partner-operated restaurants in the Middle East, South Korea, Singapore, and Mexico, and 1 to 2 new company-owned restaurants in Europe. To close, I want to reiterate that our brand and value proposition are in a great place, and we are leveraging this challenging time to refocus and provide clarity for our organization. Through our rigorous ground-up review of the business, we have identified ways to accelerate our flywheel of operations, marketing, and digital that will further strengthen and grow this great brand. In operations, we are elevating hospitality and throughput. In marketing, we are sharpening our message to highlight our extraordinary culinary and strong value proposition, while expanding menu innovation and growing new occasions. And in digital, we are creating more engaging personal experiences that deepen our guest loyalty and grow our rewards platform. We are also working to define the next evolution of our long-term strategy, which we are calling the recipe for growth, and we'll have more to share in the coming quarters. As we execute this plan, we are confident that we will return to consistent, positive transaction growth, putting us on a path to surpass $4 million in AUVs over time, expand to 7,000 restaurants in North America long term, and accelerate international expansion as we make our way to becoming a global iconic brand. With that, I will turn it over to Adam.

Thanks, Scott, and good afternoon, everyone. Sales in the third quarter grew 7% year-over-year to reach $3 billion, including a comparable sales increase of 0.3%. The restaurant-level margin of 24.5% declined about 100 basis points compared to last year. Earnings per share grew 4% year-over-year to $0.29 on a GAAP basis and grew 7% to $0.29 on a non-GAAP basis adjusted for unusual items. During the quarter, we experienced another step down in our underlying trend. While we did see encouraging results as we accelerated our marketing spend and rolled out carne asada and Red Chimichurri, our underlying trends remained challenged throughout the quarter and into October. Taking this into consideration as well as the ongoing macro uncertainty, we now anticipate full year comps to decline in the low single-digit range. As a reminder, we will be rolling off 2 points of price in early December. Additionally, inflation is accelerating into the mid-single-digit range, primarily due to tariffs and rising beef costs, and we anticipate it will remain in this range in 2026. We do not plan to fully offset this incremental inflation in the near term. And while this will pressure margins, we think it's the right thing to do to continue to provide extraordinary value to our guests during this challenging economic backdrop. I will now go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter were 30%, a decrease of about 60 basis points from last year. The benefit of our menu price increase from last year and cost of sales efficiencies more than offset inflation, primarily in beef and chicken as well as the impact of tariffs. Tariffs impacted the quarter by about 30 basis points, and we continue to estimate that we will see about a 50 basis point ongoing impact from tariffs which does not include any impact from Mexican or Canadian imports that fall under the USMCA exemption. For Q4, we anticipate cost of sales to be in the high 30% range as we have a full quarter of our premium carne asada limited time offer as well as higher beef prices. Labor costs for the quarter were 25.2%, an increase of about 30 basis points from last year, as higher pricing was more than offset by lower volumes and wage inflation. For Q4, we expect our labor cost to be in the high 25% range with wage inflation in the low single-digit range. Other operating costs for the quarter were 15%, an increase of about 120 basis points from last year, primarily driven by higher marketing costs and lower sales volumes. Marketing costs were 3% of sales in Q3, an increase of about 90 basis points from last year. As Scott mentioned, we accelerated our marketing spend in the quarter, which helped to offset some of the slowing underlying trends we experienced in August and September. We expect our marketing costs to remain around 3% of sales for Q4 and for the full year. For Q4, we anticipate other operating costs to be about 15%. G&A for the quarter was $147 million on a GAAP basis or $139 million on a non-GAAP basis, excluding about $8 million related to retention equity awards granted to key executives in August of 2024. G&A also includes $137 million in underlying G&A, $8 million related to noncash stock compensation, which included a reduction in our performance share accruals, $1 million related to payroll taxes on equity vesting, $1 million related to our upcoming All Manager Conference, which will be held in Q1 of next year, offset by $8 million in lower bonus accruals. We expect G&A in the fourth quarter to be around $161 million on a non-GAAP basis, which will include $145 million in underlying G&A as we make investments in people and technology to support our ongoing growth, around $26 million in noncash stock compensation, although this amount could move up or down based on our actual performance, around $2 million related to our upcoming All Manager Conference offset by $12 million in lower bonus accruals. Depreciation for the quarter was $91 million or 3% of sales. For 2025, we expect it to remain around 3% of sales. Our effective tax rate for Q3 was 23.1% for GAAP and 22.8% for non-GAAP. Our effective tax rate benefited from lower nondeductible expenses. For fiscal 2025, 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 strong as we ended the quarter with $1.8 billion in cash, restricted cash, and investments with no debt. During the third quarter, we purchased $687 million of our stock at an average price of $42.39 bringing our year-to-date total to a record $1.67 billion at an average price of $47.74. During the quarter, the Board authorized an additional $500 million to our share repurchase authorization and at the end of the quarter, we had $652 million remaining. To close, I want to thank all of our restaurant and restaurant support teams for their hard work and commitment to Chipotle. In times like these, our strong economic model gives us the flexibility to invest in our brand, our guest experience, and our value proposition. And as we have seen in the past, this will further strengthen Chipotle and allow us to emerge from this period of consumer uncertainty even stronger than when we entered it. We are confident in our path forward, and we are ready to take your questions.

This is Zach Ogden on for Andrew. So Adam, last quarter, you brought up the idea of changing the pricing strategy from one per year to more of a learn and go approach. So one, is that the strategy for 2026? And then two, is this a change in philosophy that you're prioritizing traffic growth over margin expansion? Or is, say, the high 20s restaurant margin at $4 million AUV still feasible and I guess, assuming normalized inflation?

Yes. So as you know, we're currently running price of about 2% from the increase that we took in December of last year. And that's been enough to really offset the underlying inflation that we've seen so far this year. And that compares to the 4% that the industry is running as a whole. And so it's been really great how we've been able to offset underlying inflation while also increasing our value gap. And that's something that we've done historically, and we want to continue to do in the future. But as we look into next year, as we mentioned in our prepared comments, inflation is stepping up into that mid-single-digit range. So given the elevated inflation and the ongoing consumer uncertainty, we're going to take a slow and measured approach to pricing in 2026. And I think that's kind of what you're getting at is we're going to kind of take it over time rather than all at once. And at this point, we don't plan to fully offset inflation in 2026. And so this will pressure margins in the near term, but we believe it's the right thing to do for our guests in this environment, and it will further increase our value proposition. And we'll create a temporary dislocation, but we believe that we can get that back over time.

I believe, Zach, you also had a question, a follow-up question about our long-term algorithm that we've talked about quite extensively. It will always be our endeavor, regardless of what's going on with the economy, to expand our margins responsibly based on the flow-through historically we have stated, which is around 40%.

Got it. And Scott, the last couple of calls, you've expressed confidence in returning to mid-single-digit same-store sales. So is that still the case for 2026? Or I guess what would be a reasonable time to get back there?

Yes, I believe that it is. It will all depend on what's going on in the consumer backdrop. The economists we have spoken to over the last several quarters say Q4, Q1 likely to be the toughest for the consumer. Specifically, the cohort under $100,000 annually, which I talked about in prepared remarks. And then some easing in Q2. So I don't have a crystal ball, but here's what I will tell you, our aim is to continue to be a transaction-led growth company, full stop. And we're confident in our ability to get back there through the acceleration of the consumer flywheel I talk about often, operations, digital, and marketing.

If I could just start on the comp. I guess it's a fairly wide range of outcomes for Q4 with a down low single digit for the year. Can you just help level set where you exited the quarter and what you're seeing from a traffic perspective?

Yes. Sure, Lauren. I'll start off on this one. So towards the end of July and into August, we experienced a step down like we talked about in our prepared comments. And that was somewhere around the 200 to 300 basis point range. And then as Scott mentioned in his prepared comments, we increased spend on our media as well as our promotions that helped offset some of the softness that we were seeing specifically in August and September. And we also saw a strong reaction when we launched carne asada and even Red Chimichurri in early October. However, during this whole time, the underlying transaction trend remained under pressure. And in recent weeks has softened even further. So when you account for this recent trend as well as the ongoing uncertainty in the economy, the way that we're kind of looking at Q4 is really with a much more conservative view. And right now, at this point, we expect comps in Q4 to decline somewhere in the low to mid-single-digit range.

Okay. When you look at what's going on with traffic, where are the losses really coming from? I understand some of the cohort commentary, but do you think you're also losing customers that are trading down or out of the space, losing frequency of transactions with your more loyal customers?

Yes, Lauren, I'll tell you based on the data that we have, we're seeing that significant pullback from that cohort under $100,000 annually. And also that age group 25 to 34, which we over-indexed to is about 25% of our total sales has pulled back meaningfully. Based on our data, both purchased and in-house data, it shows that we are gaining market share, but that cohort, meaning we're not losing them to the competition. We're losing them to grocery and food at home. And so that consumer is under pressure. It is one of our core consumer cohorts. And so they feel the pinch, we feel the pullback from them as well. We were able to reengage them through the Summer of Extras promotion that we ran both through our loyalty rewards campaign as well as some digital initiatives that we did around Chipotle IQ as well as Freepotle. So we know with the right activations, we can get that consumer back into our business. And we're going to leverage what we've learned from Summer of Extras to really inform the 2026 digital strategy.

I wanted to delve into the kind of HEAP throughput that you're seeing at the pilot locations. Can you talk about how meaningful that has been, I think you referred to potentially yielding a step function and throughput? And I'm curious as to what the actual results are.

Yes. So we're still in early innings, unfortunately. We're in 175 restaurants today, another 100 this quarter. And then we'll start with all new restaurant openings, as I said on the previous call here going forward. And so what gives us a lot of optimism around the project is we're already seeing labor efficiency gains, we're seeing better culinary, better food scores, better guest experience scores, we're seeing better delivery of distribution of labor during peak hours, which is leading to improved throughput for those restaurants. I can't get into specifics at present, but all signs are pointing up and to the right.

And a follow-up on the price question. Is it fair to assume that you're going to exit the year with no price at this point?

And I'd say, at this point, we're going to look maybe later in the quarter and starting to understand some of the impacts of price. So you might see us test in a small number of restaurants. But expect the 2 points of price that we're running right now to fall off in December. So that's kind of how we're looking at it towards the end, but it's still kind of fluid at this point.

Scott, it seems that the consumer environment is deteriorating and the many marketing efforts are not fully offsetting the traffic retraction. So while the LTO dips and marketing uplift may be helping traffic in '26, can you help us understand and maybe expand on the operational actions that you are taking in the near term to be inflecting the traffic regardless of the macro action?

Thank you for the question, Danilo. We conducted a problem detection study last quarter, which revealed some key operational concerns that we are currently addressing. Jason Kidd has been with us for a little over 120 days as Chief Operating Officer, and he has quickly rallied the team. They respect his leadership and approach. The issues we've identified are actively being worked on, alongside modifications to our quarterly bonus program and incentive targets specifically for our restaurant teams to align with the outcomes we want to achieve moving forward. This is all part of a new strategy focused on growth, which has three main components: operations, digital, and marketing. From an operational standpoint, we are examining the main friction points for consumers today, as their preferences have shifted compared to a year ago. I believe today’s consumers are more discerning, seeking value not just in terms of price but benefits over price. We need to exceed their expectations in this environment, and I'm confident that my operations team under Jason's leadership is progressing in the right direction, focusing on the appropriate activities to enhance our restaurant experience. Additionally, we have identified that we need to reimagine our loyalty program and digital presence. There is significant work happening behind the scenes to improve rewards for Chipotle customers, particularly to attract those who are not yet part of our funnel, as we know that once they enter, we can effectively drive transactions. Lastly, we are focusing on better communicating our value proposition and brand uniqueness. Chris and his team are developing new ad campaigns to achieve this. Furthermore, we are rapidly increasing the pace of culinary innovation, so you can expect to see more in 2026, given that new offerings are resonating well with core consumers today.

Excellent. And maybe, Adam, I was wondering if you can update us on the ROIC of the incremental units being built. Specifically, if today, you're seeing more cannibalization on your existing stores versus the past and if the 8% to 10% net unit growth guidance that you shared for the long term is still reasonable today? Or if there is any capacity constraint or return constraint that will make you think that the 8% to 10% may not be achievable going forward?

Yes. Thanks, Danilo. So no, in terms of impact that new restaurants are having on our existing restaurants on a per restaurant basis or a per new restaurant basis, we're seeing very similar levels to what we have in the past. The overall impact as it impacts our overall comp is increasing as we increase that percentage growth over time. But that's natural as you kind of go up in that. And then plus the new restaurants drive a much higher comp. They comp much better than our existing restaurants. So that helps offset that. So net-net, you're seeing about a 100 basis point or so impact to our overall comps from this NRO growth. Scott, do you want to talk about in terms of kind of the pace that we're at. I think that was the second part of the...

Yes. And I'll tell you that 1% has been historical for the last 10 or 15 years is what we typically see in a given year regardless of the number of openings. But I'll tell you, Danilo, it's a great question. We believe we've reached the right pace that enables us to consistently open the best locations, staffed with the most talented teams to maintain industry-leading unit economics and returns. And I don't know if anyone else in the space is growing at that clip. If you frame it in this reference point, it's a restaurant every 24 hours, which is incredible growth. And we feel really comfortable in that as a sweet spot. And it doesn't mean we won't flex up, Danilo, but we feel great in that range today.

Great. I'm trying to formulate a question here. In the short term, it seems like you're sacrificing some incremental margins, which might be due to various factors. You're indicating low to mid-single-digit same-store sales declines this quarter, along with significant inflation. However, it appears you are trying to avoid passing all that inflation onto consumers in order to offer better value, with the hope of being recognized for that in the long run. I'm curious about what this might mean for your plans. You mentioned that you expect to maintain a long-term incremental margin of around 40%, but it seems that in the near term, reaching that target might be challenging. Will you be working to achieve that incremental margin by possibly restructuring restaurant margins by 2026 as traffic stabilizes and consumers regain their economic footing? I'm just wondering how we should consider the potential for stabilizing restaurant margins. Also, on a broader scale, do you believe the primary solution will rely on providing better value to consumers? You've tried various strategies, and is it essentially going to come down to enhancing food value to eventually see strong comp growth again because of the brand's strength? I'm interested in your thoughts on this.

Yes, David, you're heading down the right path. I'll tell you the core value proposition that is Chipotle is still firmly intact. And the business fundamentals are still strong. And what we're faced with today, and we talk a lot about this is while we have opportunities, we believe that the consumer slowdown is really affecting our business in a meaningful way. But we would never let a good crisis go to waste, David. I think you and I talked about this in the past. We are going to double down on our efforts on the consumer flywheel and ensure we are delivering on value in the most meaningful way in this environment, and we will emerge stronger as an organization than we were when we went into this consumer slowdown. And so if we need to invest some component of margin to really drive top line transactions in the near term, David, there could be something there. Again, not being able to price against the inflation that we'll see next year is one leg of that. And so once we believe that the consumer is on better footing, we'll do what's right and appropriate for the business and for the consumer to get back to our long-term algo. Anything you would add to that, Adam?

No. I mean, just a reminder that, as you know, David, I mean, we take price to offset the impact of inflation and then we're going to drive that margin north with transaction growth. I mean, this has been our approach in the past. It will continue to be our approach in the future, and it has led to us lagging the industry when it comes to price on pretty much every comparison, 1 year, 5 year, even 10-plus years. So the fact that our pricing will lag 2026 inflation, I mean, just look at that as a temporary dislocation that we know we can get back over time and then we can return back to that ideal 40% flow through over time as we get back to mid-single-digit comps and are driving transactions again.

One thing I want to mention, David, is that while it's unfortunate, it's also encouraging to see that the fast casual sector is currently out of favor and considered unaffordable. We are a part of that sector. However, I want to emphasize that we still maintain a 20% to 30% discount compared to our fast casual competitors. Therefore, we need to improve our efforts as an organization to communicate our value effectively and highlight what makes Chipotle unique and special.

Great. I wanted to ask another one on 2026, maybe asking it in a different way, but Adam or Scott, any guardrails on how you're thinking about 2026 from a comp perspective or maybe traffic and the timeline getting back to positive traffic? Or maybe how you're thinking about the shape of the year when considering the comparisons, pricing dynamics and all the internal initiatives for next year? Just trying to help frame up the right expectations there as we look out to next year.

Yes, I'll start and kind of frame up the baseline, and then I'll let Scott kind of take it in terms of initiatives. So we're obviously not guiding to 2026 yet. We'll do that in February. But one thing that I would say that's important to note is, as you know, we've had several underlying step-downs throughout the year. I mean, February and May and August and then this most recent one in October, and despite many initiatives helping to offset most of these step downs, obviously, as we've guided, 2025 will be in that negative low single-digit range. So we're ending the year at a lower sales level than we began. And so that's going to create a tougher compare until we fully lap each of those step downs. So you've got to take this into account. And if you do that, you'll come up with a baseline in 2026, that starts negative, but then we're confident that we can build upon that with the initiatives that we have in place for 2026 to get that north of there. And Scott, if you want to comment on some of those.

Yes. Here's what I'd tell you, in the Recipe for Growth strategy, just think about it as we're developing a roadmap of initiatives with clear ownership, expectations, and deliverables that will serve as our top enterprise priorities for the year. The good news is it aligns with our 5 strategic priorities, and we'll use it to accelerate the consumer flywheel that you hear me talk about often, which will strengthen our value proposition and really get us back to mid-single-digit comp growth. In the end, it's meant to inspire our teams to think boldly, act with urgency, and more importantly, deliver on a growth mindset for 2026.

I have a two-part question. First, can you elaborate on the value proposition? Scott, you mentioned that fast casual might be perceived as unaffordable. However, it seems you're not really losing market share to quick-service restaurants, casual diners, or other competitors, suggesting the value proposition is still appreciated. I'm curious about where you're collecting feedback on fast casual since it doesn’t seem to reflect in your market share. Additionally, do you notice any differences between lunch and dinner? We've heard that weekday lunch is potentially weaker because it's easier for consumers to skip. Do you have any insights on that?

Sara, thank you for the question. The performance throughout different meal times is quite stable, with lunch and dinner split evenly. There hasn't been any significant change in that regard. However, during our problem detection study, some feedback indicated that consumers perceive the brand as unaffordable. This seemed to be a widespread sentiment, but I'm interested to find out if consumers associate us with other casual or fast casual options at the $15 price range, which isn't the case. While I won't criticize our competitors or run a price-focused advertisement, I do want to convey that Chipotle offers exceptional value for around $10, although communicating that without stating it directly is a challenge.

I see. So just to follow up on that. As you talk about things that you've trialed in terms of how do you communicate value, can you give me any sense, like as you're doing through social media or targeted marketing through your app, just the idea of communicating value without a price point, it seems a little bit tricky to me.

We did test an advertisement where we highlighted a sense of abundance, showcased classic culinary dishes, and featured consumers eating Chipotle. We concluded the ad with the message that you could enjoy all of this for around $10. However, during the testing phase, consumers did not grasp that message and indicated it wasn’t significant to them. What resonated more was the focus on innovation, culinary aspects, and what makes Chipotle distinctive. Therefore, we recognize there is more work to be done, and Chris will share that he has several initiatives in progress to determine the right approach. We are also involving other advertising agencies to bring fresh ideas and ensure we have the best perspectives. You will see new advertisements and a revised strategy in 2026.

Scott, I wanted to come back to some of the comments around menu innovation looking to 2026 for what sounds like at least 1, maybe 2 incremental LTOs that I think you've mentioned. Any other learnings maybe from the '25 LTO launches to help you think about those launches next year in the current environment to maximize impact, whether it's something with marketing or timing or anything like that. Obviously, you guys have a long track record under your leadership of successfully launching LTOs. So you've done it well historically. Just anything new given the environment that we're in, takeaways from this year as you think about ramping up those launches next year?

Yes, it's a great question. Here's what I'll tell you is the repeat LTOs still performed well. While the initial transaction lift seems to be muted because of the consumer backdrop, each one did drive transaction and spend in incidents. And we also learned this year that a consumer that buys an LTOs, lifetime value goes up exponentially. Meaning they're going to spend more throughout the year than a consumer that doesn't purchase an LTO. What gives me a lot of confidence in the 2026 strategy, what surprised me this year was the success around dips. And so Adobo Ranch was highly successful. Red Chimichurri is proving to be just as, if not more successful. And it's even driving an incremental trial on carne asada. What's exciting about 2026 is there could be a blend of new innovation as well as historic innovation that has worked very, very well. But at the end of the day, what we know is working is new news and new product news and product innovation. And so we're going to lean into that more meaningfully in the coming year. So you'll see not only LTOs around proteins, but you'll also see us pepper in sauces, dips, or sides that we think will have a step-change improvement in the consumer experience.

That's terrific. One more, if I may. Just on some of your comments just a few minutes ago about investing a component of margin potentially to help drive the top line drive transactions. Beyond the pricing piece, I'm not sure if I missed it, but any other aspects that you could share now and maybe what that might look like? Could there be anything else on portion size above and beyond what you've done? Anything else that you're contemplating that you'd share kind of on that opportunity to invest to drive the top line?

Yes. Thank you, and I appreciate you mentioning portioning because we are seeing incredibly positive transaction in social media around abundant portions at Chipotle, which we invested in, obviously, this year and have had a meaningful impact on. So that's one component of it. The other is you will see incremental ad spend. I think we've said historically, we'll spend around 3% annually. That number will remain intact, but there could be strategic opportunities. And again, I said, we will always have a return-focused approach to marketing. There could be strategic opportunities that present themselves where we could incrementally spend as long as we're driving. I think I've said publicly a 4-plus ROAS, return on ad spend, where we know we can drive top line and margin.

Scott, you mentioned the locations with the new equipment are seeing improved guest satisfaction scores. But have you observed any concerning trends in customer metrics for the rest of the chain, particularly regarding speed of service or food quality?

Nothing that stands out as unusual. I want to explain that we are facing challenges with accuracy in our digital operations. This issue arises from a shift we made in our annual incentive plan to prioritize on-time delivery over accuracy. At the time of this change, our accuracy was satisfactory, but it has since declined. We are now redesigning the incentive plan to focus on the correct objectives. Specifically, the essential consumer expectations for digital services are that they receive their orders accurately, on time, with high quality and in sufficient quantity. Meeting these three needs is straightforward, but it requires properly incentivizing our 130,000 employees in the field. Therefore, we are reverting our focus back to accuracy, which is crucial. If something is delivered five minutes late but is complete, it's manageable. However, if a delivery arrives ten minutes early and is missing important items, that creates a significant issue. We need to ensure we are encouraging the right behaviors again to align with consumer expectations.

I understand the reluctance to price right now and to even talk about pricing in this environment. But I think we're trying to better understand what the action plan for pricing is when that 2% rolls off December into '26. I mean can you talk to us about how to think about the right base case or even the possible scenarios that you're thinking about for 2026 pricing against that mid-single-digit cost inflation?

Yes. Yes. So I can jump in here. So as we talked about earlier, we want to take a slow and measured approach. And so what that ultimately means is typically, in the past, you would see us take price across the country and one fell swoop maybe over a week or 2. We're going to look at this over time. It could be over 4 or 5 or 6 months. It could be over 12 months. It really depends on as we start to roll a certain amount of restaurants and get some good reads on what we understand the resistance to be, the reaction to be, will determine from there. So that's why we're being a little bit vague because the strategy is still very fluid. But we do know it's not going to be what we've done in the past, which is all at once. And then that's kind of the general strategy in terms of the rollout. And then in terms of this mid-single-digit inflation that we alluded to, which is driven mostly by cost of sales. That number is much higher than what we have seen in the past. I mean, typically, we've seen a low single-digit inflation of around 2%. And so that's given us some caution with the consumer environment to not go that high to offset that, like we typically have in the past. So we'll be more patient with that over time. But we'll continue to talk about this each quarter and give you updates as to kind of what we're at, what we're seeing and what we're running.

Yes. I don't think we've talked about or are prepared to talk about risk mitigation strategies as it relates to that inflation as well. And so it is not our intent to sit idly and accept 5% inflation in the upcoming year. We will work to offset that with our partner suppliers as well.

Regarding unit growth, you are planning to accelerate openings in '26 to an impressive level, indicating strong growth. Has this raised any concerns about the risk to your ability to maintain same-store traffic growth? Given the extended period of high growth and its acceleration, what gives you confidence in your ability to execute on a same-store basis while opening this many units?

Yes, I can address that. We are confident in our ability to maintain same-store sales growth, even if that growth levels off as we approach 7,000 restaurants. It's important to note that new restaurant openings typically affect our overall comparable sales by about 100 basis points, which will decrease over time. Our existing restaurants perform exceptionally well in terms of comparable sales, and we see positive performance even from those that have been operating for over 15 or 20 years when we increase overall transactions. Therefore, I don't anticipate any negative impact. In fact, this could provide a slight boost as we start to level off.

Yes. I'd add to that. One of the unique things about the Chipotle brand, having worked in other brands, the cannibalized restaurants at Chipotle recover inside of 12 to 13 months. And I don't think I've worked in any other brand that recovers as quickly. And those new restaurants are outcomping the current base restaurants. So we feel really good that we're in a sweet spot. We have the development machine prepared to develop enough ready talent leaders to run those business units, and we feel like we're in a really good spot today.

This is Anisha Datt, on for Jeff Bernstein. I wanted to ask a question on comp trends. To what extent do you attribute recent comp softness to Chipotle specific factors versus broader macro trends? And what levers are you considering to reverse the comp trend?

Yes, it's a great question. And when we look at this very analytically, there is sure there's some component of self-inflicted opportunity. As I talked about, the problem detection study and trying to understand how we better deliver on the consumer experience. I think there's a component of a more discerning consumer. And I think most of it, the majority of it is this massive pullback on who is a core audience of ours, 40% of our total sales, that household under $100,000 a year is pulling back. We're not losing that customer. They're just coming less often. We have data that shows that empirically. So that's what I would tell you. And we remain confident we can get those consumers back in transacting more frequently through better marketing messages, better digital campaigns, and better innovation.

Thank you. And thank you for all the questions, and thank you for your commitment to our great brand. I want to say thank you to the 135,000 people working in our field organization in what has been a very challenging year. This group continues to show up every day and works aggressively and very hard to deliver on great consumer experiences. I'll tell you, our brand is made up of people and we're people that sell burritos. But at the end of the day, we have the best people in the industry. We believe we have the best product in the industry and the brand remains as strong today as it ever has been. And so that said, we look forward to a new strategy in 2026 that will get us back to mid-single-digit comp growth, and we'll talk to you all in the next quarter.