Title

Presentation

Chipotle Mexican Grill, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to the Chipotle Fourth Quarter and Fiscal Year End 2023 Earnings Conference. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead.

Cindy Olsen: Hello, everyone, and welcome to our fourth quarter and fiscal year end 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations Web site 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’ll turn the call over to Brian.

Brian Niccol: Thanks, Cindy, and good afternoon, everyone. We delivered outstanding results this year, driven by our focus on exceptional people, exceptional food and exceptional throughput. This is driving a much better experience for our teams and our guests and resulted in accelerating transaction growth throughout 2023. For the year, sales grew 14% to reach $9.9 billion driven by a 7.9% comp. Digital sales represented 37% of sales. Restaurant level margin was 26.2%, an increase of 230 basis points year-over-year. Adjusted diluted EPS was $44.86 representing 37% growth over last year and we opened a record 271 new restaurants including 238 Chipotlanes. We also ended the year with a lot of momentum as demonstrated by our fourth quarter results.

Our restaurant teams are making terrific progress in building a strong foundation around throughput and the return of Carne Asada as a limited time offer outperformed our expectations. For the quarter, sales grew 15% to $2.5 billion driven by 8.4% comp. Digital sales represented 36% of sales. Restaurant level margin was 25.4%, an increase of 140 basis points year-over-year. Adjusted diluted EPS was $10.36, representing 25% growth over last year. And we opened a record 121 new restaurants, including 110 Chipotlanes. As a reminder, we are returning to our pre-pandemic practice of only providing annual comp guidance. While January was impacted by weather throughout much of the country, as weather has normalized, our sales trends have strengthened.

For the full year, we anticipate comps in the mid-single digit range, as we continue to focus on the same five key strategies that help us to win today while we grow our future. Now let me provide an update on each of these strategies, which include, number one, sustaining world-class people leadership by developing and retaining diverse talent at every level. Number two, running successful restaurants with a people-accountable culture that provides great food with integrity, while delivering exceptional in-restaurant and digital experiences. Number three, making the brand visible, relevant and loved to improve overall guest engagement. Number four, amplifying technology and innovation to drive growth and productivity of our restaurants, support centers, and in our supply chain.

And number five, expanding access and convenience by accelerating new restaurant openings in North America and internationally. Starting with our world class people, I’m excited to share that Ilene Eskenazi joined my executive leadership team in November as our Chief Human Resources Officer, with over 25 years of experience in leading human resources and legal functions across a wide range of industries. I am confident Ilene will be instrumental in helping Chipotle develop and retain talent at every level of the organization and enhance the support we provide to our people, both in our restaurants and at our support centers. Strengthening Chipotle as a best-in-class employer. As I’ve said in the past, we want to attract and retain the best people that we can develop and grow.

Part of this includes listening to their needs and investing in ways that will help our employees thrive both professionally and personally. This is why we recently added new benefits to our industry-leading benefits platform, like enhanced mental health care, a student loan retirement match, and additional financial wellness tools for our workforce. In addition to our benefits, our long-term growth opportunity and promote from within culture provides a path for team members to advance quickly within Chipotle. In fact, in 2023, we promoted over 24, 000 people, and over 90% of all restaurant management roles were internal promotions. This includes 87% of field leader positions, which is one of the biggest jumps for our teams, going from running one restaurant to an average of eight restaurants.

The ability to achieve this rate of internal promotions is a result of our strong restaurant leaders, many of whom started as crew members and who are committed to training and developing our future leaders. A great example is one of our field leaders in New York who has been with Chipotle for over 16 years. He helped to develop and promote over 40 team members who have grown within Chipotle and have gone on to become some of our best general managers, field leaders, team directors, and even one of our regional vice presidents. This is the type of person who will help us to deliver on our goals of running great restaurants, delivering industry leading economics, and expanding to 7, 000 restaurants in North America longer term. Great people executing great culinary and throughput results in a terrific guest experience and drives performance.

And this brings me to our operations. Strong leadership is the key to running successful restaurants with fast throughput. So it is no surprise that the restaurants with the most tenured general managers are executing the best. The good news is our GM turnover is at some of the lowest levels that I have seen since I joined Chipotle. And over the last couple quarters, we have put the building blocks in place to deliver great throughput. As we mentioned last quarter, we have adjusted the cadence of orders on the digital make line to achieve a better balance of labor between the two lines. Additionally, we began collecting data on the execution of the four pillars of throughput in our restaurants and providing feedback and coaching on a weekly basis.

This is allowing our restaurant teams to see progress, which is energizing and motivating as the experience of winning catches momentum. And finally, our teams now have real time access to their Max 15 throughput results in the moment. So our GMs can coach and recognize great throughput while it is happening. Since we put these coaching tools in place in the third quarter, we have seen the number of restaurants with at least four crew members on the front line during peak periods improve from 30% to around 50%. This is driving an acceleration in our throughput performance as the number of entrees in our peak 15 minutes improved by a full point in the fourth quarter compared to last year. I am thrilled to see the progress we are beginning to make and continuing this momentum is critical as we approach our peak burrito season in mid-March.

We will also further strengthen our industry leading value proposition, which consists of delicious culinary, made with real ingredients, that is customizable, convenient, serve quickly, and an accessible price point. When we were executing on all parts of our value proposition, we were providing a great customer experience that would help all other drivers of sales perform better, such as menu and innovation. And last year, Chicken al Pastor and Carne Asada, both surpassed our expectations in drove incremental transactions. This is a testament to the cross-functional effort by our marketing, culinary, supply chain, and restaurant teams that do an outstanding job innovating, as well as bringing back past favorites that are more delicious each time and are executed seamlessly.

2024 will be another exciting year for menu innovation, including one to two limited time offers and rolling out creative ways to shine a spotlight on our core menu throughout the year. As part of highlighting the core, we recently launched our latest lineup of lifestyle bowls, which shows how the customization of our real ingredients allows Chipotle to embrace all interpretations of wellness, whether it be plant-based, high protein, keto, paleo, and more. In connection with the launch, we announced a partnership with Strava, the leading digital community for active people with more than 120 million athletes, to encourage and reward healthy habits with a chance to earn free lifestyle goals. This is giving our fans the right tools to sustain healthy habits in 2024 and beyond.

In addition to menu innovation, our marketing team continues to do a fantastic job of making the Chipotle brand more visible, more relevant, and more loved to drive difference, culture, and drive a purchase. Our Behind the Foil campaign is a great example as it highlights key differentiators of Chipotle. This includes our restaurant teams preparing our real ingredients, made fresh every day using classic culinary techniques, such as dicing onions and jalapenos, hand-mashing our signature guac, and grilling our adobo chicken, steak, and fajita veggies on the Plancha. We will continue to evolve the Behind the Foil campaign in 2024, and it’s really exciting to see that our best performing ads are an authentic, behind the scenes look into a day in the life of a Chipotle team member.

This certainly demonstrates one of our core values, which is authenticity was here. Our food is real, and so are we. Shifting to amplifying technology innovation, we have made a lot of progress this year on improving the digital experience. We made several enhancements to our app functionality, including order readiness messaging, wrong location detection, reminders to scan for points to check out, prior order history and more. This has helped to reduce friction points and improve the overall experience for guests. We also launched Freepotle for our rewards members, which was successful in driving engagement and enrolling new members as we were able to surprise and delight our guests with free rewards such as guac, a beverage, or double meat.

From the Freepotle drops, we were able to learn more about our rewards members to improve our ability to deliver relevant experiences in the future. Finally, we recently rolled out suggestive upsell on our app at checkout, based on data we have on our rewards members including prior order history. Going forward, I believe we are on a multiyear path to commercializing our customer data and insights into more targeted marketing campaigns and improving the overall digital experience that will drive increased frequency and spend over time. I also wanted to spend a few minutes providing an update on our Cultivate Next Fund which launched two years ago with an objective of making early-stage investments into strategically aligned companies that further our mission to cultivate a better world and accelerate our strategic priorities.

Since launching this fund, the amount of innovation that we have seen across the food tech landscape has surpassed our expectations and encompasses everything from farming to supply chain to alternative proteins and oils to in-restaurant automation and more. We have reviewed hundreds of innovative companies and have made seven investments of which there are many opportunities for commercial engagements. This includes Hyphen, which we are partnering with to develop our automated digital make line and Vebu which we are partnering with to develop Autocado that cuts cores and scoops avocados. Both Hyphen and Autocado could help to improve the overall experience for our teams by removing less favorable tasks and for our guests by providing on time accurate and delicious food.

We continue to work on iterations of each technology at our Cultivate Center. And the good news is that we plan to pilot the automated digital make line and Autocado in a restaurant in 2024 as part of our stage gate process. Last month, we announced two more investments in Greenfield Robotics and Nitricity. Greenfield Robotics provides regenerative agriculture solutions without chemicals using fleets of autonomous robots to weed fields. And Nitricity uses technology to tackle greenhouse gas emissions by creating natural fertilizer products that are better for fields, farmers, and the environment. We believe both Greenfield Robotics and Nitricity could play an important role in ensuring a more sustainable future for farms within our supply chain.

Our suppliers are a key enabler of Chipotle’s growth and help us to further our purpose of cultivating a better world. We will continue to find innovative ways to support their ability to grow, harvest, and supply the high quality, sustainably raised real ingredients that Chipotle serves. Our final strategic pillar is expanding access and our development team has done an incredible job of meeting our development targets despite the timeline challenges we continue to see. In the fourth quarter, we opened 121 new restaurants and for the full year, we opened 271 new restaurants, which is the highest number of openings in the company’s history in a single quarter and in a single year. We have now surpassed 800 Chipotlanes and continue to see very strong results with Chipotlanes driving higher new restaurant productivity, margins, and returns.

Additionally, this year, we had some fantastic openings in new markets with our first restaurant in Calgary breaking an opening day record and sustaining very high volumes post opening day. When we serve delicious food with exceptional operations and execute great local marketing, our brand gains traction quickly, and Canada is a testament to this. We will continue to accelerate our growth in Canada in 2024, with 10 to 14 new restaurant openings planned, representing 25% to 35% growth for the country, and in total we continue to target 285 to 315 new restaurant openings in 2024, mostly in North America, with over 80% including at Chipotlane. So, to conclude, I want to thank our 115, 000 employees for their hard work which drove strong results in 2023.

We hit some big milestones, including surpassing 3, 400 restaurants, 800 Chipotlanes, $3 million in AUVs, and forming our first international partnership. As I look forward, I see the opportunity longer term to more than double our restaurants in North America, increase our penetration of Chipotlanes, surpass $4 million in AUVs, expand our industry leading margins and returns and further our purpose of cultivating a better world globally. As I mentioned in the beginning, this ambitious plan will require exceptional people, exceptional food, and exceptional throughput. The good news is that I am certainly at the right people and the right strategy to achieve it. So with that, I will turn it over to Jack.

Jack Hartung: Thanks, Brian, and good afternoon, everyone. Sales in the fourth quarter grew 15% year-over-year to reach $2.5 billion as comp sales grew 8.4% driven by over 7% transaction growth. Restaurant level margin of 25.4% increased about 140 basis points compared to last year, and earnings per share adjusted for unusual items was $10.36 representing 25% year-over-year growth. The fourth quarter had unusual expenses related to elevated depreciation and changes to illegal contingency. Looking at fiscal 2024, we anticipate comps in the mid-single digit range for the full year. As a reminder, we were impacted by unusually cold weather throughout the country in January. As the weather has normalized, our underlying sales trends remain strong and they support our full year guidance range.

Additionally, Q1 will include the benefit of an extra day due to leap year, but this will be offset by Easter shifting into Q1 this year compared to Q2 of last year. I’ll now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 29.7%, an increase of about 40 basis points from last year. A larger mixed shift to beef due to the success of Carne Asada as well as elevated cost across the board most notably beef produce and queso was partially offset by the benefit of menu price increases and lower paper costs. For Q1, we expect our cost of sales to be in the low 29% range as the benefit of the mixed shift out of Carne Asada will be partially offset by higher costs across several line items, most notably avocados and tortillas.

We anticipate cost of sales inflation to be in the low to mid-single digit range for the full year. Labor costs for the fourth quarter were 25%, a decrease of about 60 basis points. points from last year. The benefit of sales leverage and better labor execution more than offset wage inflation and higher performance-based compensation. For Q1, we expect our labor costs to be in the low 25% range with wage inflation and the low to mid-single digit range. And we anticipate wage inflation will tick up to the mid-single digit range as California wages go up around 20% in April this year. Other operating costs for the quarter were 14.7%, a decrease of about 100 basis points from last year. The decrease was driven by sales leverage as well as lower marketing and promo cost which were 3.1% of sales in Q4, a decrease of about 30 basis points from last year.

In Q1, we expect marketing costs to be in the low 3% range with full year to come in right around 3%. In Q1, other operating costs are expected to be in the high 14% range. G&A for the quarter was $169 million on a GAAP basis or $170 million on a non -GAAP basis, excluding about $1 million change in illegal contingency. G&A also include $122 million in underlying G&A, $36 million related to non-cash stock compensation, $10 million related to higher bonus accruals and payroll taxes on equity investing and exercises, and $2 million related to our upcoming All Manager Conference, which is scheduled for Q1 of this year. We expect our underlying G&A to be around $127 million in Q1 and step up each quarter as we make investments in people and technology to support our ongoing growth.

We anticipate stock comp will be around $32 million in Q1, although this amount could move up or down based on our actual performance and is subject to the final 2024 grants which are issued in Q1. We also expect to recognize around $7 million related to employer taxes associated with shares divest during the quarter and $21 million for costs associated with our bi annual All Manager Conference in March, bringing our anticipated total G&A in Q1 to around $187 million. Adjusted depreciation for the quarter was $79 million or 3.1% of sales, and for 2024 we expect it to remain right around this level as a percent of sales. Our effective tax rate for Q4 was 26.2% for both GAAP and non-GAAP and for 2024 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 enter the quarter with $1.9 billion in cash, restricting the cash and investments with no debt, and during the fourth quarter, we repurchased $144 million of our stock at an average price of $1, 936. For the full year, we repurchased a total of $590 million at an average price of $1, 827, and going forward we’ll continue to opportunistically repurchase our stock. During the quarter, our Board authorized an additional $200 million for our share authorization program, and at the end of the quarter we had $424 million remaining. We opened a record 121 new restaurants in the fourth quarter, of which 110 had a Chipotlane, and as we mentioned last quarter, we anticipate opening between 285 and 315 new restaurants in 2024, with over 80% having a Chipotlane.

We continue to see developers delaying projects due to macro pressures and high interest rates, along with permitting, inspection, and utility installation delays. The midpoint of our guidance range assumes these challenges persist, and we remain on track to move towards the high end of the 8% to 10% range by 2025, assuming conditions do not worsen. In closing, Chipotle is a purpose-driven company that has been able to scale over the last 30 years into one of the largest restaurant brands in the world. An exciting part is that we still have a long growth runway in front of us. Our strong economic model gives us a high degree of confidence that our ambitious growth objectives are achievable, if not beatable. And as we continue to protect and strengthen our economic model, our long-term growth opportunity will only expand just as it has over the last 30 years.

So thank you to all of our employees for their hard work and their dedication to Chipotle, and let’s keep the momentum going in 2024. With that, we’ll open the lines for your questions.

See also 15 Highest Quality Tea Brands in 2024 and 11 Best Gold Stocks For Inflation.

Operator: [Operator Instructions] The first question comes from Andrew Charles with TD Cowan.

Andrew Charles: Great, thanks. Brian, I appreciate the ambitions that you talk about the $4 million AUVs and I think the same drivers that were used to reach the $3 million level are still the largest drivers to get to the $4 million level which includes operations, marketing, loyalty to Chipotlane and many innovations. But if you look back from several years from now and you get to that $4 million fast and expected, what driver do you work better than it has in recent years or maybe you think about it differently, are there new drivers that will help you get to the $4 million level such as catering, breakfast or automation and then Jack, I have a follow-up?

Brian Niccol: Yes, thanks for the question. Look, I do believe at the end of the day the thing that will get us to $4 million and probably beyond that is going to be great execution in the restaurant meaning focusing on great culinary, great people and great throughput. I think we’re very fortunate that it doesn’t require another day part, it doesn’t require something that we aren’t currently doing today to achieve that result. I do think things like automation like Hyphen and Autocado and continuing to do things with our rewards program, the menu innovation, the marketing will obviously be things that push us further and further but one thing I think that we demonstrated this last quarter is when we perform better on the operation front all those things I just listed off, have a, I would call it almost like a multiplying effect.

So the good news is we still have a lot of headroom to go on operational execution, and I think we’ve got the right things in place for the long term to get us to that $4 million and beyond.

Andrew Charles: Helpful. And then, Jack, my questions are on the mechanics to get to that $4 million level. I mean, do you expect staying within, with the same store sales to get there, or do you think the law of large numbers kicks in at some point in the out years that low single digits the right rate of same store sales growth? And similarly, what kind of margins do you think the business can support at $4 million volumes assuming normalized commodity and labor inflation?

Jack Hartung: Yes, Andrew, it’s really hard to predict over a long period of time into the future what comps are going to do. I think for the foreseeable future, our guidance next year in the mid-single digit I think makes sense. But if you look at our history, we have a history of having outsized comps when the economy is going well, I think makes sense. But if you look at our history, we have a history of having outsized comps when the economy is going well, when our operations are going well. I would argue even the acceleration we saw in the fourth quarter was we had a great combination of demand being created by Carne Asada, what’s become a favorite of our customers, and throughput allowing those sales to flow through. Those are the — and I would expect those things to happen in the future that are very hard to predict how and when they’re going to happen, Andrew.

But those are the things that Chipotle has seen in the past, and I think that will likely happen in the future as well. So the $4 million while it’s in a mid-single -digit is something we think we definitely will get there. From the margins, I would expect margins to continue to expand. We still expect to see a pass-through every time we grow our transaction, grow our sales through additional customers. About a 40% flow-through, as that 40% gets averaged in against the 26% we delivered last year, I would expect the margins to go up. And as we get up to $4 million, I would expect we’d be in the high 20%, maybe even in a 30% range. Again, you’re talking about predicting something over a very long period of time, but our margins will definitely get stronger over time, which means our returns will get stronger as well as we move from $3 million to $4 million.

Operator: The next question comes from David Tarantino with Baird.

David Tarantino: Hi. Good afternoon. And congratulations on a great 2023. My question is really about the unit growth, and I’ve got two parts to that. I think you’ve been talking about 7, 000 restaurants in North America for a while, and as you build more and more Chipotlanes and see the returns you’re getting, I’m just wondering if that number could prove low in your mind. Is there upside to the 7, 000 over time? And then I guess the second part of the question is I know you want to grow faster and Jack, you mentioned getting to 10% unit growth next year is a goal. I’m just wondering what line of sight you have to that at this point that you can share with us. Thanks.

Brian Niccol: Yes, why don’t I go ahead and get started, David, and then I’ll let Jack fill in. Look, the way we’ve come to the 7, 000 number is we’ve looked at, what our penetration levels are. And in some of the places where we had the most penetration, we continue to build restaurants with success, which then gives us the confidence to do the exercise to say, okay, well, if you just apply that math to the rest of the country, we quickly add up to 7, 000. So we think it’s a very practical goal. Some might say conservative, but we definitely think it’s a practical goal. And, probably as we get closer, I think Jack’s talked about this in the past. At one point we were talking about having 3, 000 Chipotlane then we said 4, 000 and we said 5, 000. Here we are at 7, 000. I hope it does prove to be conservative. I think the brand’s got a lot of upsides in it, but that’s how we get to the 7, 000.

Jack Hartung: Yes, then David, on how do you get to 10 %? Our visibility is quite good. Our inventory building that the teams have been doing is really, really strong. In fact, the team has had to build more inventory than we normally would need to basically offset these timelines. These timelines have really delayed everything so that you’re talking about instead of 15, 16 months, from when you get a deal to open. It’s not more like 21, 22 months or so. But each year the team builds a stronger inventory. The result of the new openings has been outstanding. So the quality has been very, very high. So the inventory itself looks really, really good. And if we get any break in terms of timelines with the quality has been very, very high.

So the inventory itself looks really, really good. And if we get any break in terms of timelines with developers moving a little bit faster with local authorities in terms of utilities, in terms of permitting, if that was a little bit faster, we actually can get to that clip even a little sooner. But we built in the exact same extended timeline that we’re seeing today with the current very robust inventory. And that will get us, if not all the way, very close to that 10% figure.

David Tarantino: And just a quick follow-up, Jack. Are you seeing any signs at all that the timelines could be getting a little bit shorter? Any signs of life there?

Jack Hartung: Not anything sustained, David. So, I mean, our teams are working really, really hard at it. The most recent challenges been developers with high interest rates. They’re pausing a little bit. I do think if interest rates improve this year, I do think that will help. But nothing that I would bank on right now. We’re certainly working hard at it, though.

Operator: The next question comes from Lauren Silberman with Deutsche Bank.

Lauren Silberman: Thank you. So, I wanted to ask too, one on throughput, clearly a big area focus driver of traffic this year. Can you talk about how you see the potential traffic opportunity in ‘24 driven by throughput and just the priorities to get there to further unlock that opportunity?

Brian Niccol: Yes, well, obviously, we’re really delighted to see, over seven points of transaction growth in the fourth quarter. I think that’s a testament to operations teams in the field having a focus on getting great throughput. And we’ve talked about this quite a bit. Now, there’s the four pillars of great throughput. I’d say we’re kind of still in the early stages of this because we’re just getting people in position. So, I think you heard my comments about, hey, we now have four people on the front line, almost 50% of the time. That’s only one component of the four pillars. And I’ll, if you really think about it, right? It’s that’s part of our idea of nascent some class. Like we want to be prepared, people in position ready to go.

So we still have a lot of upsides on making sure that we have the expo, the linebacker in position and ready to go. So we’re — we still think we’re early, early days on this. There’s a lot of upsides to it. I am delighted to see the progress though. We’ve increased our Max 15 pretty much every month throughout 2023 and saw some of our best results in December and those trends continued into January. So lots of space to still grow into. But the thing I love is that the teams are laser focused on getting after it. I think we’ve now given them more tools that they have better visibility on how they’re performing real time. And, I get to visit restaurants is the first thing that’s on people’s minds. How are we doing on our throughput? How are we doing on our culinary?

And how are we doing with the people and culture? So it’s nice to see.

Lauren Silberman: Great. Thank you. And if I could ask on quick one on menu innovation, how you’re thinking about it. I know you mentioned one to two this year. I know you typically do an LTO on chicken and this spring and then beef later in the fall. Any change to how you’re thinking about cadence, especially as you consider sort of throughput and operations?

Brian Niccol: Yes. I mean, look, I think what we demonstrated this past year is that’s definitely a cadence that our operators can execute great throughput with. So, they delivered Pollo Asado with excellence. And then they did the same thing. I’m sorry, Chicken al Pastor with excellence. And then followed that up with Carne Asada. So, we feel really good about doing one or two a year. I think you’re also going to see us this year do a little bit more spotlighting, even on the core menu, which we’re doing right now with our lifestyle bowls. And then you’ll see us do that as well during the year. So we think we’ve got the right cadence, we think we’ve got the right innovation pipeline, and also the things that we’ve done in the past we’ve demonstrated, we can revisit those with success as most recently with Carne Asada.

Operator: The next question comes from Brian Harbour with Morgan Stanley.

Brian Harbour: Yes, thanks. Good afternoon. Brian, you mentioned just suggestive up self at checkout, and I was curious on that theme or maybe just a bar theme, what are some things that you think you could do to drive check, right? I think we’ve talked a lot about transactions, but what do you think could be check drivers as we think about this year and beyond?

Brian Harbour: Yes, look, I think one of the things that’s been really nice to see is the incidence of our sides has continued to go up, like queso and chips and salsa, we’re continuing to see people adding onto their entrees. And I think that has a lot to do with what we’re able to do digitally, both at the point of checking out as well as how we communicate with people through our rewards program, right? So, the suggestive sell example I’m talking about, we’ve now turned that into a smart suggestive sell. So I’ll give you the best example, or a really simple one. Historically, you get a Mexican Coke with your order. When you get to check out it, if you don’t have Mexican Coke in your basket, we will serve you a suggestive sell off, hey, you forgot your Mexican Coke.

Versus before, we might have just been saying, hey, maybe you should think about chips and queso. So what we’re seeing is that type of insight into the individual results in more commercialization or higher check as they check out, because we’re serving a lot of things that they historically have usually added to their ticket. So we’re seeing that make great progress. And then obviously I think our queso, chips, and guac are pretty darn special. So the more people learn and experience it, the more they want to add it to their check.

Brian Harbour: Okay, great, thank you. Jack, are you willing to comment just on kind of the levels of, I guess, 1Q, maybe it looks similar to the fourth quarter, but are you willing to comment on the level of pricing you’ll see just factoring in kind of California as we start to think about, perhaps the second quarter?

Jack Hartung: Yes, Q1 will be similar. Call it in that 2.5% to 3% range in Q1. We haven’t made a final decision, in terms of pricing with a FAST Act. We know we have to take something as a significant increase when you talk about a 20 percent-ish increase in wages. And I think we talked in the past that there’s one approach where you would cover the profitability. So you would breakeven from a profitability standpoint, but not protect margins. So another word, margins would go down, profitability would not, or you could take a higher price increase and you protect margins as well. We haven’t decided within that range. We’ll wait and see just what the landscape looks like, what the consumer sentiment is, what other companies are going to do.

So I would say in terms of the impact California represents about 15% of our restaurants. So depending on where we end up, there’d probably be an extra 80-ish, 90-ish basis point to maybe something over 100 base point in terms of additional menu price across all of our 3, 400 restaurants just to give you kind of an order of magnitude.

Operator: The next question comes from John Ivankoe with JPMorgan.

John Ivankoe: Hi, thank you. I was thinking about the amount of time, attention, labor hours that you spend in morning prep every day at the store level. And as the system grows, gains scale, potentially benefits from more equipment, more technology, more automation, maybe some more centralization. I was wondering for you to talk about opportunities to maybe reallocate some of this prep labor that you may have longer term, how big of a bucket is that? And obviously, Autocado is one identified solution. How much more is there and how much more could that mean to the overall business model of the future?

Brian Niccol: Yes. Look, thanks for the question. Obviously, prep in the morning is a critical piece of the puzzle. If we get our prep done correctly, we usually have a great lunch. Actually, we always have a great lunch when we get the prep done correctly. Usually what we run into problems is if we’re running behind on prep. So things like Autocado, other robotics to help us cut the onions and the jalapenos, these things would be huge enablers. That’s why you continue to see us look at all these robotic ideas to make prep even more efficient. One thing I know for sure is if we could get every restaurant 100% of the time to have their prep done on time and ready to roll, our throughput would go up. So we’re going to do everything we can to ensure we’re investing in prep both more efficiently and then also effectively to get it done.

How you reallocate that time, we’ll figure that out as we get closer to it. And that’s part of the reason why we’re using the stage cake process. As we put Autocado into stores, we will see how that plays out. But you mentioned centralizing kitchens on this. That’s something we’re not contemplating. We believe to keep the freshest food, the best culinary that needs to happen in the restaurant.

Operator: The next question comes from Sara Senatore with Bank of America.

Sara Senatore: Thank you. A couple of follow-up questions. The first is, I wanted to go back to your comment about restaurants with for in the make line going from 30% to 50% is still a long way to go. I’m wondering if you can maybe quantify what the contributions to that seven, that increase of transaction growth, which is to say, presumably it’s not like, every 20 points of staffing improvement gets you seven points of transaction growth. But if you could just maybe rank order, is it staffing or are there other things that are also going into this? And, parallel that perhaps is what you saw in the last decade when you also saw a real focus on the four pillars and improvement and throughput.

Brian Niccol: Yes. So great question. Here’s what I’ll tell you is for sure you’ve got to be staffed. You’ve got to have stability in the teams, right? That’s how we get the reps so that we execute better every time. The other thing I’ll say is when we looked back and we were doing maybe our best throughput, these numbers can easily go from 50% to 60%, 70%, some odd percent in execution. So it’s not unrealistic for us to believe we can get better than where we are today. And I think the teams know that. The other thing that I think is also helping the teams is to have the visibility. So they know how they performed in their 15 minutes, allows them to course correct real time versus finding out what happened that day. And then they kind of missed out on being able to course correct for a later part of lunch or dinner time.

How it contributes to the comp. Here’s one thing I’ll tell you is we’re executing better. And when we’re executing better, people feel better about the food, they feel better about the brand. We just got back some brand metrics that frankly are just terrific. And I think that shows up in our value scores. And then it shows up in the way that people are feeling about the brand. So the brand has got really strong perceptions. I think our team members feel really good about the success they’re having, which is also really important, right? When the crew feels like they’re going fast or giving people what they want, they feel better. Which then I think in result turns into like kind of this ongoing system where everybody believes they’re now achieving and getting what they want.

So our customers are happier, the team members are happier, the brand is stronger. And I think these are all the things that contribute to seven points of transaction growth or said it another way really strong value proposition that we’ve gotten in today’s environment.

Sara Senatore: Got it, okay, thank you. And then just on the Carne Asada, I mean, I know in the past you’ve gotten questions about how do you lap a really successful LTO, but here you have it for like the third time and it was better than you expected. Is that marketing, is that digital? Because you actually, as a percentage of revenue, spent less year-over-year. So I’m just trying to understand, again, what the runway is for these already very successful LTOs.

Brian Niccol: Yes, look, I think our teams executed Carne Asada, better than we ever have. I thought the experience of Carne Asada was terrific. I also do think the advertising and the communication around it was really good. So I think our ads are communicating what makes Chipotle special, which is this team member that’s committed to doing great culinary in the restaurant. And then when you layer in a great product like Carne Asada that gets executed with excellence, good things happen. And, it was kind of, I think Jack mentioned this earlier, great demand generation with the advertising and the Carne Asada initiative. And then the folks in our restaurants were doing a really terrific execution so that people got down the line faster, they experienced great culinary and they got exactly what they wanted. So I think it’s the combination of really having compelling menu news with great advertising and our operations team executing the fundamentals really well.

Operator: The next question comes from Danilo Gargiulo with Bernstein.

Danilo Gargiulo: Thank you. Can you please provide maybe some color on the key drivers of the traffic comp being procured by income cohort or maybe by channels? And if you can also comment on the average check, how much was the contribution from pricing versus contribution from mix and what’s your expectation given that the delivery mix impact should be normalizing at this point?

Brian Niccol: Yes. So, look, one of the things that we’re really delighted to see is every income cohort we saw sales grow. So whether that’s below 40, 000, between 40, 000 and 100, 000, over 100, 000, we saw progress with every income cohort. So, clearly, the brand is resonating in a meaningful way. What was the other part of this question?

Jack Hartung: The channels and in-store with by far strongest channel which supports the throughput that we saw.

Brian Niccol: Yes. In-store was the strongest. Order ahead was next and then delivery was third. And I think Jack was just mentioning this. The in-store experience, when we have the culinary ready to go and you go down the line, it’s tough to beat. I mean, there’s no better experience than walking down the line, seeing the rice and chicken that you want and then giving one of our team members the look like, how about a little more when they do it? So, I tell you, end up with these big bowls and big burritos. And so, I think the value proposition is just really strong in store, especially when we’re executing great culinary and great speed.

Jack Hartung: And then, Danilo, just on the check, the check impact was a 1%, plus 1%. That’s about 2.5% price offset by about 1.5 on the mix and the mix is driven by group size.

Danilo Gargiulo: Got it, thank you. And then you recently significantly improved the benefits and you really are offering a very strong employment value proposition to your employees. Can you talk about the labor cost and maybe productivity improvement implications that you’re expecting from that initiative? And it would be great if you can maybe frame where you are in turnover levels today relative to the rest of the competition in the fast-casual industry?

Brian Niccol: Yes, look, I appreciate you taking notice. It’s really important to us to make sure that we surround our employees with the right pay, the right growth opportunities and the right benefits. And I do think some of the things that we’ve added, like being able to help people or incentivize people to pay off student loans and then match them with a 401-K contribution, I think is a really good idea for the generation of people that we are hiring, the Gen Zs. And also the growth opportunity. Folks can join our company in crew and in three, four years, quickly find themselves leading one team and in some cases, being a multi-unit leader. So I just had the opportunity to meet a young lady. I think she was like 24 field leaders, newly promoted.

She was at one of our cultivated university sessions and the young lady’s very ambitious. I guarantee she’ll be a TD the next time I see her. So I’m excited to have these growth opportunities for people surrounding them with great benefits and I think a great culture. How does that play out in stability? We’re seeing some of the best stability we’ve seen, frankly, in my time at Chipotle. If you go back and look, the fact that we’ve got General Manager turnover in the low 20s, crew turnover kind of in the low 100s, that’s really good. And relative to the industry, I think that’s ahead of the industry, but I don’t know those numbers for sure. But what I do know is we’re getting more stability; we’re seeing less turnover. And what we hear back from people is they love the purpose; they love the culture and they love the growth opportunity.

And that’s what we’re going to continue to provide people.

Operator: The next question comes from John Tower with Citigroup.

John Tower: Great, thanks for taking the question. I’m just trying, you mentioned earlier, the idea that the suggestive selling is starting to work pretty well within the app in terms of getting some incremental attach for orders. But I’m curious if you’re doing anything within the stores coaching people up to kind of work that as well, especially it looks like your digital sales mix, while not slowing remarkably is coming down quite a bit. So thinking about kind of the check growth from this point forward, are there means for you to be able to encourage greater attach for consumers in the store? Is there anything you’re doing now?

Brian Niccol: Look, I think in the restaurant, just the simple fact that I think our teams are doing a much better job of having chips and queso and guac all the way until close is making a big impact. I think we talked about this six, nine months ago. We weren’t as good as we should have been call it after six, seven o ‘clock at night with being ready to go with chips or guac and queso. And now we are. And our teams are very aware that they should be ready to go with those side items. And I think as a result, you’re seeing more people attach them. We aren’t doing anything out of the ordinary other than making sure we’ve got great product ready to go. And when people know it’s there, they order it. And when our crew knows they have it, they’re more willing to say, hey, do you need chips with this order?

if it’s seven o ‘clock, eight o ‘clock at night, and you don’t have chips, you usually don’t say to somebody, do you need chips with that? When you do, it comes pretty natural in the conversation to say, hey, do you need chips to go with that, or do you need a queso to go with that? So it’s really been more focused on executing great culinary available from open to close.

John Tower: Got it. And then just, further the delivery a little bit. It looks like that might be moving lower as a percentage of sales as well. And I’m just curious if from your perspective, you’re getting any indication from those consumers that this is the way that they’re better managing their own spend at the store, effectively trading that higher cost channel for a lower cost channel going directly to you. And actually, could you provide the delivery mix as well?

Brian Niccol: Yes, look, I think intuitively, I think the answer is yes, right? If you’re tighter on money, the most expensive way to experience Chipotle is through delivery. So I think consumers know that and they manage accordingly. But I will say that delivery channels have been pretty stable for the most part. It’s in that 14%, 15% range for marketplace and then like 4% or 5% for white label. So you get like 20% delivery. But it’s been pretty stable. And at the end of the day, though, if you need to manage your money, yes, delivery is the most expensive access point.

Jack Hartung: The one thing, Brian, we have is Chipotlane. Chipotlane is one example where when you offer the convenience of Chipotlane and then the value that Chipotlane and the customization that Chipotle, you normally would expect to get. You do see that the delivery will drop like 10 points. So it’ll drop to the low, call it 10%, 12% something like that, several to 10 points. And then our order ahead and pick up will move open at high 20s. So to us that’s a clear indication that if we offer extreme convenience along with the value that you Chipotle have that people will choose that access channel as opposed to delivery.

Operator: The next question comes from Dennis Geiger with UBS.

Dennis Geiger: Great. Thank you. Brian, just wanted to follow up on sort of the strength across income cohorts and the strength in the brand’s value scores. Any other commentaries sort of on how you think that the strength in those value scores maybe is having, I don’t know, an outsized impact perhaps on the customer, on traffic that you’re seeing particularly in this environment where we’re hearing about some softness in various parts of the consumer cohort? Any commentary on that based on data that you guys have related to those value scores?

Brian Niccol: Yes, I mean look, I think it’s the thing we’ve always talked about which is relative to, I would say, our peer food offerings, right? So other fast casual folks that have the same, or attempt to have the same quality food as us, now we’re usually 20% to 30% less expensive. And then when you look at some of these other categories where, you traditionally view them as more value and convenience, the price delta that you have to pay in order to get our quality, our convenience, our customization, it’s not that big of a leap up. So I think that’s why we’re positioned really well. If you want to move up, it’s not a crazy leap up. And then when you look across, we’re at a nice value relative to alternatives. So, I think that’s why our value scores are as strong as they are.

And we’re very fortunate that we’ve been able to maintain that through the last couple of years. And, look, that’s why we’re maybe a little bit slower sometimes to take price. But when we took it, we thought it was because now the time was right, inflation wanted to doing it. But we’ve always wanted to do it from a standpoint of protecting our value proposition. And I think we’ve navigated that one pretty well, at least where we are right now. So we’ll see what is in store for us. But I think we’ve talked about this all the time. Maintaining that value is a really important piece of the puzzle for us. And I just love the fact that we’ve got quality, we’ve got value, and we’ve got speed, and we’ve got customization. We’ll protect all those things.

And I think we’re going to continue to do very well in regardless of what the environment is.

Dennis Geiger: That’s great. Thank you. And then just quick, Jack, anything more on mix on kind of looking ahead to ‘24, even at a high level, how to think about the mix component of the check and how that might trend? Thank you.

Jack Hartung: Yes, hard to predict because we’re in kind of an uncharted territory here, I would expect to see a similar kind of mix going forward that the pricing, I already talked about what the pricing will be. And I still think there’s going to be continued adjustment to the group side for the next several quarters. I would expect it to just ratchet down. It’s been ratcheting down over the last several quarters. So I’d expect it to ratchet down from the 150, but hard to predict. I don’t know exactly what quarter will be at base and that we won’t be seeing the group size decline at all. But it’s down to, I think, a very manageable amount, this 150. I think the fact that it’s combined with a 7.4% transaction growth and it’s got very modest pricing, we think it’s a really healthy balance right now.

Operator: The next question comes from Brian Bittner with Oppenheimer & Company.

Brian Bittner: Thanks. On Chipotlane, I mean, you have over 800 Chipotlane in your portfolio now. I think you built a record 238 of these in 2023. So the prototype is really starting to gain some scale here. And so now your learnings are so much deeper on these assets. So can you just update us on maybe the margin profile now of the Chipotlane portfolio, maybe versus the rest of the system? And are we at a point where there’s enough Chipotlane and enough being built in the future where as they continue to increase as a percentage of the business that they can actually have an impact on the overall company’s restaurant margin?

Brian Niccol: Well, they’re already having that impact. But to your point, it’s relatively small because 800 is still, what is that maybe a quarter of our system. But it’s hundreds of basis points of higher margin. If you compare it to our non-Chipotlane, the volumes have actually come pretty close. They’re still a little bit higher for the Chipotlane versus non-Chipotlane, they close the gap a little bit. It was much, much higher during the pandemic. But when you combine volumes that are a little bit higher with margins that are hundreds of base points higher and the investment costs are virtually identical, it’s a much higher return. So from a shareholder value standpoint, as we open up, as we grow from the 3, 400 towards 7, 000, the cash on cash returns we’re getting from, the 80% or 85% of our new restaurants that have Chipotlane is much, much, much higher.

So it does have an accretive impact on our margin. It has an even more meaningful accretive impact on our returns. And you’ll just see it every time we open up new restaurants, you’ll see that our margins are going to, they’re going to continue to expand as long as our existing comp transactions grow and these new restaurants coming out board are just going to add fuel to the fire.

Brian Bittner: Thanks for that. And just a follow-up on labor margins. In the fourth quarter, your labor margins ended up being much better than you had guided to originally. So I’m curious what positively surprised you on that line item. Was it just the higher sales and the flow through from that? And then as we look towards 1Q, you are guiding to some deleverage on the labor line year-over-year. Is that mostly just driven by the softer January or is labor leverage just going to be much more challenging this year as we move forward?

Jack Hartung: Yes, no. Really the thing that happens when you turn the calendar, you have taxes because you have people that are hitting tax levels. So you kind of reset, this happens every year where our tax in Q4 is lower than they step up in Q1. So that’s the only deleverage that you’re saying. The leverage that we saw in the fourth quarter is a couple of things. One, when our volumes do, when our — or comp accelerate, we do leverage that line as we saw leverage on that line. Two, the ops teams did a good job of managing labor. And then the third thing is our teams did a better job of managing through dealing with like sick time and vacation time at the end of the year. That was a little bit of a negative surprise to us the year before, and our team did a much better job this year of just getting ahead of that.

So those are the three contributors, but you should expect that as we grow transactions next year, as long as wage inflation stays relatively benign, we should still continue to be able to delever the labor line.

Operator: And the last questioner today will be Sharon Zackfia with William Blair.

Sharon Zackfia: Hi, just under the wire. I guess I wanted to talk about how your most loyal customers are using Chipotle at this point, maybe if there’s a way to contrast the frequency of those customers versus five years ago when rewards even, didn’t exist or was very nascent. And then by the same token, we kind of talk about how new customers today are entering the Chipotle ecosystem and how they progress in frequency, maybe relative to what you would have seen pre-pandemic?

Brian Niccol: Yes, well, the one thing that definitely is clear is if you’re in the rewards program, you have higher frequency and higher check. And so obviously one of the things we’re trying to do is both existing customers and new customers continue to drive engagement within our rewards program. And so that continues to work really well. I think we’re now like 38 million or almost 40 million people in the program. So that is really powerful. And we didn’t have that five, six, well, I guess seven years ago we didn’t have that. And then when you think about pre-pandemic, one of the things that was kind of interesting is the pandemic kind of helped us move people into the digital system and get them going in the rewards program.

So over and over again, what we see is whether you’re a light, medium, or heavy user, when you’re in the rewards program, you come more frequently and you spend more. And so it’s a really powerful tool. And even when people are redeeming entrees, what we’re seeing is they’re still buying sites. They’re still adding other items. So it’s not just one of these things where when you accrue a free entree, you just show up and walk away with a free entree. So we’re feeling really good about how the rewards program is working with all these different, I guess, frequency users. And then obviously as we continue to, I think, derive the Chipotle message, we’re continuing to track new users. I don’t know if you’ve seen the ads, Sharon, but I think some of the advertising we’re running right now is the best we’ve done.

And I think that’s also helping to bring in new users. And then these new users are experiencing what I think is a great experience, great culinary, great throughput, great customization. So we’ve kind of got the system still early days. I think it could be better, but the system is working. And so we’ll probably never be finished working against making everything better, but the system seems to be working right now.

Sharon Zackfia: Can I ask a follow-up on LTOs? Do those overarch towards kind of improving existing customer frequency, or are they a real driver of new customers coming into Chipotle?

Brian Niccol: They’ve actually been a really good driver of new customers. So and that’s one of the things we look for when we do our testing is how well are they at bringing in new customers? And they’ve been a really nice tool to bring in new customers. And unfortunately, even when we have the LTO walk away, people are really hooked on the experience, that being culinary, right, that quality, the convenience, the speed, the customization. So it’s been a really good tool.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Brian Niccol for any closing comments.

Brian Niccol: All right, thank you. And thanks everybody for joining the call and the questions. I do want to start off with, again, thanking, our 115, 000 team members. We had an outstanding 2023. And without a doubt, it was because we led with, I think, much better performance in the restaurants. And this is a real testament to our employees, staying focused, getting after the basics and working towards hitting our standards. So we had some really big milestones, right? We surpassed 3, 400 restaurants. We opened 800 Chipotlanes. We got past 3 million in average unit volumes. And now we’re really excited about where we go next on this journey, which is we’ll be even better at throughput. We’ll be even faster. We’ll be even better on the culinary.

And I think that’s going to result in us achieving these 4 million average unit volumes in our 7, 000 restaurants in the future. So again, a big thank you to our team. And, obviously we’re excited about what’s next. So we’ll talk to you all here in the next couple of months. Thanks.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.