Chipotle Mexican Grill, Inc. (CMG) Earnings Call Transcript & Summary

Hello, and welcome to the Chipotle Mexican Grill First Quarter 2023 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Head of Investor Relations and Strategy, Cindy Olsen. Cindy, please go ahead.

Hello, everyone, and welcome to our first quarter fiscal 2023 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projections in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and in our Form 10-Q for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website. We will start today's call with prepared remarks from Brian Niccol, Chairman and Chief Executive Officer; and Jack Hartung, Chief Financial and Administrative Officer, after which we will take your questions. Our entire executive leadership team is available during the Q&A session. And with that, I'll turn the call over to Brian.

Thanks, Cindy, and good afternoon, everyone. 2023 is off to a great start, with first quarter sales and margins ahead of our expectations. For the quarter, sales grew 17% to reach $2.4 billion, driven by a 10.9% comp. In-store sales grew by 23% over last year. Digital sales represented 39% of sales, restaurant-level margin was 25.6%, an increase of 490 basis points year-over-year. Diluted EPS was $10.50, representing 84% growth over last year, and we opened 41 new restaurants, including 34 Chipotlanes. These results demonstrate that our focus on running great restaurants with exceptional food and exceptional people is driving performance. Additionally, we benefited from exciting new menu innovations, including Fajita Quesadilla and Chicken Al Pastor. Transaction trends were positive throughout the quarter, and the strength has continued into April. I would like to note that beginning this quarter, we are returning to our pre-COVID practice of providing annual comp guidance and anticipate comparable sales to be in the mid- to high single-digit range for the full year. We will also continue to provide quarterly comp guidance for the remainder of this year and anticipate second quarter comps in the mid- to high single-digit range. Now I would like to provide an update on our 5 key strategies that will position us to win today while we create the future, which include: number one, running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; number two, making the brand visible, relevant and love to improve overall guest engagement; number three, amplifying technology and innovation to drive growth and productivity at our restaurants and support centers; number four, expanding access and convenience by accelerating new restaurant openings; and number five, sustaining world-class people leadership by developing and retaining diverse talent at every level. First, starting with our restaurants. We recently held our field leader conference, which included all field leaders, team directors and regional vice presidents as well as leaders from our restaurant support center. The message was clear. We are focused on developing exceptional people and preparing exceptional food. It was truly inspiring to see over 600 highly motivated leaders aligned to deliver Chipotle standards of excellence, and I'm proud of the progress our restaurant teams are making. We had another outstanding quarter for turnover with both hourly and salary metrics being some of the best I've seen in 5 years. The stability of crew and managers and a return to shoulder-to-shoulder training is helping to translate Project Square One into results. As our teams are getting more experienced, we are continuing to see improvements in each of the Project Square One focus areas, including throughput on the front line, on time and accuracy on the digital make line, being prepped and ready with our delicious food and the overall customer experience. Specifically, on throughput, while we are making progress, we see opportunities to do better. One area we are focused on is deployment on the front make line and the digital make line during peak periods. We have noticed that when the digital make line gets busy, our managers tend to pull a crew member from the front line to help, which is impacting throughput. We are currently testing changes to the Smarter Pickup Times logic based on different sales and deployment levels in several markets, and early results show that we are increasing throughput on the front line and increasing on time on the digital make line without impacting sales. Leveraging our stage gate process, we will continue to fine-tune our testing before rolling it out in phases across our restaurants. We have also added an additional incentive for our teams as we recently rolled out digital tipping across our restaurants as part of our ongoing effort to enhance our crew member benefits. This will enable our teams to be rewarded for their efforts in preparing delicious food and providing a great experience for our guests. Overall, our focus on being brilliant at the basics and reestablishing our standards of excellence is resonating well. Our teams love to be held to a high standard because when you achieve it, you feel like you're part of a winning team with the ability to be rewarded through bonuses and growth within the organization. We are starting to feel this again in our culture and in our people. When operations are running better, it helps all other drivers of sales to perform better, such as menu innovation, which brings me to our brand. As we often discuss, we continue to look for ways for the Chipotle brand to be more visible, more relevant and more loved. And we had a couple of very exciting new menu innovations that did just that. We responded to a real-time opportunity to support our passionate TikTok fans who wanted Fajita Veggies, and Chipotle Honey Vinaigrette as options for our digital exclusive quesadilla. We work with 2 popular TikTok food reviewers who made the idea go viral at the start of the year and leverage our strength in digital marketing and culinary to create an exciting new menu item, utilizing all existing ingredients. The results have been outstanding. During the launch, we nearly doubled our quesadilla business and had 2 of our top digital sales days of all time. We have decided to make this a permanent menu item as the addition of Fajitas to our quesadilla along with dipping it in a combination of our Honey Vinaigrette and sour cream is really delicious. The best part is that it's made of all existing ingredients, which limits additional complexity in our restaurants, and we continue to see incremental quesadilla sales because of this launch. We also launched Chicken Al Pastor as a limited-time offer. Al Pastor has been gaining mass appeal in recent years, and we tapped into these consumer trends to offer our own spicy spin on Al Pastor with our freshly grilled chicken. As we mentioned last quarter, this is also operationally simple to execute as it is our existing Adobo chicken, cooked on the plancha and then mixed in an Al Pastor marinade. This has allowed for an exciting new menu item while still maintaining our focus on Project Square One. Additionally, this is the first time we've launched a new menu innovation globally as it was rolled out in the U.S., Canada and Europe. The launch has been a success and early indications show that it is outperforming Pollo Asado, which was our most successful protein LTO ever. Turning to rewards. We now have 33 million rewards members, and we saw a nice pick-up in enrollments as we rolled out Freepotle, which was the design to deliver a strong value proposition and attract new members to our transaction-driving rewards program. Throughout the year, members will receive 10 personalized free rewards, ranging from a side of guac to a bag of chips to a free fountain drink. In addition to driving enrollments, we also saw an increase in member engagement as Freepotle gained traction throughout the quarter. Shifting to amplifying technology and innovation. We continue to leverage technology to improve our in-restaurant and digital experiences. As we mentioned last quarter, we began testing a new grill to improve the overall cooking process for our chicken steak. The grill is much faster, allows for more consistent execution and maintains our high culinary standards as it cooks the chicken and steak to perfection with the same [indiscernible]. Feedback from our teams and our guests has been tremendous, and we are currently in the process of rolling out the growth to 10 additional restaurants as a part of further validation through our stage gate process. During the quarter, we also rolled out our advanced location-based technology for our app, which allows for a more seamless process for scanning rewards as the price reward members to scan while they are waiting in line. This has resulted in more rewards members scanning for points in our restaurants, which drives further engagement in our rewards program. For digital orders, it also alerts app users when it appears they are ordering from or heading to the wrong location, as one of our most frequent refund requests is due to guests arriving at the wrong restaurant. Since rolling out this feature, we have seen a meaningful reduction in those refunds. We are also investing in technology and innovation through our Cultivate Next Fund to help us scale and advance our "Food with Integrity" mission. We recently announced 2 new investments, including Local Line and Zero Acre Farms. Local Line is a leading local food sourcing platform, connecting local producers with buyers and helping them digitize their operations and sell products. We believe Local Line will help Chipotle increase the amount of local food for our 3,200 restaurants. And Zero Acre Farms is a food company that is focused on healthy, sustainable cooking oils made by fermentation that are more environmentally friendly. Additionally, we recently announced our new responsible restaurant design which includes features like rooftop solar panels, all electrical equipment and systems, LED lighting, cactus leather chairs and electrical vehicle charging stations at select locations. While the pilot will go through the normal stage gate process, we believe it will enable us to take successful elements and incorporate them into future restaurant formats. These investments and initiatives will help to further our purpose of cultivating a better world and reflects our commitment to inspire a real, sustainable change with the potential impact far beyond our company. And this brings me to expanding access convenience with a long-term target of 7,000 restaurants in North America. We remain on track to grow new restaurants 8% to 10% per year for the foreseeable future with at least 80% including a Chipotlane. The expansion of Chipotlanes adds additional convenience by adding our unique order pick-up channel, which comes with a larger digital penetration driven by the order ahead business. In Canada, we opened our first Chipotlane in Ontario, and we also expanded access and convenience with a recently announced partnership with SkipTheDishes, which is Canada's largest food delivery network. Finally, new openings in small towns continue to be a success with the recent opening of a restaurant in a small town in California that had the second-highest opening day sales ever. In fact, within the last year, we had our top 5 openings in the company's history of which 4 were in small towns. I'll turn now to sustaining world-class people leadership by developing and retaining the diverse talent at every level. Our recent field leader conference was a time to celebrate the achievements and career progression of our teams and I'm always amazed by all the inspiring stories of our leaders. In fact, one of our field leaders from the Arizona subregion, who won the award for best throughput has been with Chipotle for 20 years. She is clearly doing a terrific job leading [indiscernible] restaurants. However, what is even more incredible is that she has 2 sisters, one, a team director in Chipotle for 24 years and is consistently a top performer in her region, and the other is a recently promoted field leader who has been with Chipotle for 18 years. Each has a unique story, but all 3 sisters started as crew members and said that Chipotle changed their lives for the better and gave them the ability to develop and grow others within the organization. When you combine our industry-leading benefits, with our tremendous growth, performance culture and then layer on top, exceptional leaders who will help to grow and develop our future leaders, Chipotle really is a special company. In closing, I want to thank our restaurant and support center teams for all their hard work in delivering a great quarter. Our focus on getting back to the basics and reestablishing Chipotle standard of excellence is beginning to drive strong results. We will continue to develop exceptional people and prepare exceptional food and, of course, treasure our guests. In doing this, I strongly believe we can make Chipotle better than ever. With that, I will turn it over to Jack.

Thanks, Brian, and good afternoon, everyone. Sales in the first quarter grew 17% year-over-year to reach $2.4 billion as comp sales grew 10.9%. Restaurant-level margin of 25.6% increased about 490 basis points compared to last year. Relative to our guidance, restaurant level margin benefited from leverage from higher sales, labor efficiencies and lower avocado prices. Earnings per share was $10.50, representing 84% year-over-year growth. The first quarter did not have any material unusual expenses, so our GAAP earnings and non-GAAP earnings are the same. As Brian mentioned, we are going back to our pre-COVID practice of providing annual comp guidance. We anticipate comps in the mid- to high single-digit range for the full year, assuming we do not see further deterioration in the macro environment. As a reminder, for Q2 and the full year, our comps stepped down when we lapped the menu price increase we took in late March of last year, and we anticipate comps will step down again when we lap the menu price increase we took in early August of last year. We'll continue to provide quarterly comp guidance for the remainder of this year, and we anticipate comps in the second quarter in the mid- to high single-digit range as the transaction trend for the first quarter has continued into April. I'll now go through the key P&L line items, beginning with cost of sales. Cost if sales in the quarter were 29.2%, a decrease of about 180 basis points from last year. The benefit from last year's menu price increases and lower avocado prices more than offset a mix headwind from the Garlic Guajillo Steak limited-time offer, which ended in mid-February as well as higher prices across several items, including queso beans, rice, salsa and tortillas. For Q2, we expect our cost of sales to remain in the low 29% range. The mix benefit from the Chicken Al Pastor limited-time offer [indiscernible] will be offset by higher costs in other areas, most notably avocados. We anticipate avocados to increase from the current favorable levels, which are some of the seasonally lowest we have seen in the past few years. Labor costs for the quarter were 24.6%, a decrease of 170 basis points from last year. The benefit from sales leverage was partially offset by wage inflation. For Q2, we expect our labor cost to remain in the mid-24% range as continued labor inflation will be offset by leverage from seasonally higher sales. Other operating costs for the quarter were 15.3%, a decrease of about 110 basis points from last year. This decrease was driven by sales leverage and a decline in delivery expenses due to lower delivery sales partially offset by higher costs across several expenses, including natural gas and maintenance and repairs. Marketing and promo costs for the quarter were 3.2%, and in Q2, we expect marketing costs to step down to the mid-2% range with the full year to come in right around 3%. In Q2, other operating costs are expected to be in the low 14% range. G&A for the quarter was $148 million, which includes $119 million in underlying G&A, $19 million related to noncash stock compensation and $10 million primarily related to payroll taxes and equity vesting and exercises, higher performance-based accruals and costs associated with our field leader conference. We expect our underlying G&A to be around $122 million in Q2 and continue to grow slightly thereafter as we make investments in technology and people to support ongoing growth. We anticipate stock comp will be around $22 million in Q2, although this amount could move up or down based on our performance. We also expect to [indiscernible] $4 million related to performance-based bonus accruals and payroll taxes and equity vesting exercises, bringing our anticipated total G&A in Q2 to around $148 million. Depreciation for the quarter was $77 million or 3.2% of sales, and we expect depreciation to increase slightly each quarter as we continue to open more restaurants. Asset retirement stepped up to $8.4 million in the quarter. This includes charges related to the replacement of equipment such as fryers, grills, rice cookers and other restaurant equipment as we have been more proactive under Project Square One and preventing ingredient outages. In the near term, we expect asset retirements to remain around this level as we continue to prioritize the guest experience and focus on great ops. Our effective tax rate for Q1 was 22.5%, which benefited from option exercise and share vesting and stock prices above the grand values. We continue to estimate our underlying effective tax rate will be in the 25% to 27% range though it may vary each quarter based on the discrete items. Our balance sheet remains strong as we ended the quarter with nearly $1.5 billion in cash, restricted cash and investments with no debt along with a $500 million untapped revolver. During the first quarter, we repurchased $132 million of our stock at an average price of $1,553. We increased our level of stock repurchases during the quarter when our share price fell with the overall market, and we'll continue to opportunistically repurchase our stock. At the end of the quarter, we had $282 million remaining under our share authorization program. We opened 41 new restaurants in the quarter, of which 34 had a Chipotlane, and we remain on track to open between 255 and 285 new restaurants this year with at least 80%, including a Chipotlane. We continue to experience challenges, including utility installation, component and raw material shortages and permitting and inspection delays, which have extended our development time line. And while we anticipate these challenges to persist throughout the year, our pipeline remains strong, and we expect to move towards the high end of the 8% to 10% of opening range once the time line challenges subside. In closing, 2023 is off to a great start as our focus on strong operations and treasuring our guests is driving an improvement in sales and margin trends. While we are proud of the progress our teams have made in a short period of time, we recognize there is still opportunity for us to be even better. We believe that these efforts will position us to successfully navigate through macro uncertainty and more importantly, strengthen our foundation for sustained long-term growth. With that, we're happy to take your questions.

[Operator Instructions] Today's first question comes from Dennis Geiger with UBS.

Congrats on the strong results. Brian, I want to ask a little bit more about throughput and the operations opportunity. Could you frame up a little bit more some of the gains that maybe you're starting to see over this past quarter from Project Square One and some of the other initiatives that you spoke to? And then kind of more importantly, just thinking about the opportunity from here based on initiatives currently in place and maybe even some of the technology that you guys have highlighted in recent months.

Yes. So Project Square One has been something we've been working very aggressively for probably, I guess now we're going on almost 9 months. And our operators have done a terrific job. Scott and the team have really, I think, retrenched on getting back to the basics and some of the things where we make great progress on are just being in stock with great culinary. We are experiencing too many times where we're out of guac, we're out of chips, we're out of chicken. So we've made tremendous progress on that front. We also have made a lot of progress on keeping both lines open from open to close. And both of those reasons that we've improved dramatically are driven by, I think, more stability in the restaurant with better training and then holding people accountable to those standards. On the throughput side of things, we've made some progress on the front line. We definitely made some progress as it relates to being on time and accurate digitally, but we still believe there's a lot of room for improvement. I think you heard in our prepared remarks, we're still working through, I would call it, better deployment in managing during peaks, so that we service [indiscernible] business effectively without jeopardizing the service of the people that are right in front of us in the restaurant. So we still believe there's a lot of runway in front of us on great throughput. We won't get to great throughput, though if we don't have great stability, great culinary, having both lines open from open to close. And we've made tremendous progress on those foundational elements. So really proud of where the team has moved the organization, but I'm really optimistic about where they can get to.

I appreciate that, Brian. And then just a quick follow-up on that. Just some of the tech stuff that maybe is still a little bit early days. How exciting is that for you and what you'll have to do either for throughput as well as maybe some cost efficiencies as we think about the potential there?

Yes. No, I forgot to answer that part of your question. So thanks for the reminder. Look, tremendously excited. That's why we're investing in it, right? These clamshell grills that we're rolling into 10 restaurants now make the job easier, make the culinary better and make the culinary more consistently better. So that's a huge win for our customer and our employees. And I think I've talked about this, it makes the cooking time dramatically go down. So chicken goes from 12, 13 minutes to 2, 3 minutes and you get perfect [indiscernible] just really delicious culinary. So that's a big unlock for us because the grill position is one of the hardest positions to train. So if we can make that job easier and then we also free up more space on the plancha, it just eliminates any potential bottleneck for our future growth. The other thing that's a huge exciting one for us. It's a little further out as hype. We talked about this quite a bit, which is automating the digital make line. That will enable us to be even more accurate, I think probably go a little bit faster and I think give people more consistent experiences. So all these things are driving towards hopefully, better guest experiences, but also a better work environment for our employees. And then obviously, with that, I think we'll be more efficient in both cases. So really excited about both initiatives. Obviously, the clamshell grills are a little bit closer [indiscernible] a little further out. And then we've got some other exciting initiatives on making our prep easier, right, frying chips, or cutting and coring avocados. So we're making a lot of investment, and we're going to continue to experiment. Not all of it will work, but I'm confident having innovation in this space is a big unlock for our brand in the long run.

The next question comes from David Tarantino with Baird.

Jack, I have a question on the margin outlook. I think based on your guidance for the second quarter and what you delivered in the first quarter, it looks like maybe the business is doing about a 26% restaurant margin for the first half of the year, or at least that's what you expect. Is that the right run rate to think about for the year at the current sales levels? Or is there anything maybe on the horizon in the back half that might, I guess, surprise one way or another?

Yes, David. In the first half, you're thinking about it right. We definitely expect our margins to step up from here, Q2 from a seasonal sales standpoint is a stronger quarter for us. So we typically see higher margins in the second quarter. We also have relatively lower marketing in the second quarter. And there's some offsets like a little bit of inflation and the labor [indiscernible] but still, you're thinking about it right for the first half of the year. What's unknown in the second half of the year is inflation. We're still thinking there's going to be continued labor inflation in the mid-single digit. And even though our commodity has been largely [indiscernible] we've had some pluses and minuses that have largely offset each other, we think in the second half of the year, there's still the possibility of inflation. For example, we don't necessarily expect we'd love avocados to remain at this level for the rest of the year, but we're being realistic and thinking that may not happen, and there may still be inflation on beat. We haven't seen it really yet in what we buy, but there's that possibility as well. So it's really a wildcard about inflation. Inflation is pain in the second half of the year, that will obviously lead to even better margins in the second half of the year, but I think you're thinking about it right.

Great. And then the follow-up is about your pricing philosophy and I don't know if Brian or Jack, do you want to take this one. But I guess how are you currently thinking about your pricing as you think about the inflation you just referenced? And I think now that you've rolled over the pricing in April, you're running one of the lowest year-over-year price increases in the industry. So just wondering how you're thinking about when you pull the lever on pricing again?

Yes, David, this is Brian. We're staying the course on our approach to pricing, which is if we see inflation that warrants us needing to take additional pricing, we'll take it. And I think we've now demonstrated -- we do have pricing power. We have a really strong demand. And we don't want to be in front of the inflationary environment, but we also don't want to fall behind. So the good news is we're in a really strong position and when we're ready, and we believe it's necessary to pull that pricing lever, we can, and we continue to have a really strong brand to do it. So we have not made any definitive plans on pricing for the balance of the year, but we're going to stay the course on the approach we've taken over the last, I'd say, 18, 24 months.

The next question is from Sara Senatore with Bank of America.

A question on labor and then as a follow-up on loyalty. Can you maybe talk a little bit, labor was, I think, better than you had expected or we had anticipated, certainly. I was wondering if you could just talk, is that just because transaction growth was better? I don't know if you can decompose the same-store sales for us. Is it the lower turnover? Just trying to understand where the improvement came from. And then a question on loyalty is you mentioned kind of improved sign-ups. I guess when I look at loyalty membership growth year-over-year, it looks like it's still kind of in that 20% range. Do you have any thoughts about how big that could be or what share of your unique customers, you're seeing members of loyalty. Just trying to understand like sort of the run rate for that as a comp driver.

Yes. Yes, I'll take the labor piece first, Sara. First of all, it was most of the benefit that we saw was sales driven in the quarter. We saw our transaction turn positive. We're still running menu price increase compared to last year and about a 10% range. So when you have that kind of a flow-through where transactions are flowing in and menu prices are flowing as well, that was a significant benefit in the quarter. We did have some labor inflation, so that was an offset to it. And then we did see some efficiencies. So we did see, really, for the first time, the labor scheduling tool we put into place last year was really starting to pay off. And then the fourth thing I would just say is normally this time of the year as our sales begin to increase seasonally, that is the time where our labor tends to be more efficient. It tends to happen where the weather starts to get warmer, our sales start to grow and our managers are trying to keep up on the schedules, but they end up basically driving a little bit of efficiency. They always seem to be maybe a step or 2 behind. The good news is, as Brian mentioned, operationally, we feel like the restaurants ran really well, and we drove that additional labor efficiency.

Yes, I can say on the loyalty, your question there. What we've definitely seen is we see people higher enrollments when we make it easier to be engaged in the digital system. So a couple of things happen, right? I mentioned this in my earlier remarks. The team improved your ability to redeem rewards by alerting you so that you don't forget [indiscernible]. We also improved your ability to end up going to the right restaurant for your order, which was a big deal. That's one of the biggest misses we seem to have with customers where they didn't realize they were ordering from different restaurants than where they were intending to go. So those types of things made the engagement easier for people, which then they stay in the program. And now doing things like Freepotle, Fajita Quesadilla, digital-only just attracts new people to come into that space. And that is what we want to do. We want to continue to have acquisition and then we want to dial up the personalization and make it super easy to stay active and engaged because we know the more engaged you are, it plays out in more purchase frequency and higher ticket. So we'd love to get $33 million to $40 million. I don't know where the ceiling is on this thing, but we're going to continue to push towards getting as many people involved and then work very hard to turn it into a very personalized program that keeps them engaged.

The next question comes from David Palmer with Evercore ISI.

I wanted to double-click on that labor productivity stuff. In the past, you've talked about the number of orders you could do in a 15-minute block during those peak hours in the front make line. Could you give us a sense of where you are now and where you think that can go realistically over the next one or 2 years? And then what that would mean to your sales if you got there?

I may offer a couple of stats, and then Brian, you can add on as needed. First of all, in terms of first quarter, we did push past our 15-minute max compared to last year. So it was nice to see as our transactions turned positive during the quarter, that we did push past last year. We actually, at the end of the quarter and as we moved into April, we actually pushed past where we were in the second quarter of last year as well. So we're seeing nice progress, but we're still in that low 20s range, David. We think we can get into the mid-20s. Mid-20s is comparable to what we were doing in 2019 before the pandemic, if you adjust for the shift in our digital business. But beyond that, if you go back even a few years before that, we don't think there's any reason why we can't get back into at least the high 20s or maybe even into the low 30s as well. Now that will take a few years. But we think this one project that Brian mentioned, this idea of experimenting with how can we make sure that we've got basically the labor deployment, and we've got the cadence of orders coming through to the DML to be set such that our teams can be confident that they can run both lines without feeling this pressure to pull from one line to the other. And typically, what happens, the DML, if the orders are coming through pretty hot on the DML, there's a tendency to pull somebody from the front line. And I think we're basically seeing some good early results to tell us that we think there's going to be a way to break through and allow our teams to really execute at a really high level on both lines. So I think that's potentially and a lot to get to some of these higher number 15-minute throughput figures.

And if I look back a decade, your labor as a percentage of sales was in the 23% area. I know a lot's changed in the labor market since then, but you're working on a lot of stuff, not just the focus and the training, but also the double-side grills and hopefully some breakthroughs with Hyphen. I mean do you think you could get back there? Is that the sort of labor productivity that's possible that you can imagine over the next few years?

It's theoretically possible. I think the one thing, David, that is different now is labor rates are much, much, much higher. And our menu pricing hasn't really stayed caught up all the way with the labor over the last few years. And in fact, the biggest move that we made in the second quarter of 2021, we basically raised wages by 15% and only raised price by 4%. So we basically offset the dollar value of that. We didn't try to protect the margins and certainly didn't try to protect the labor line at all. So I think there's been a bit of a dislocation there. Having said that, we do have a very efficient labor model. We do have a lot of investment in technology. We do have a lot of things that I could see over time as we grow to 3 million volumes and then $3.5 million volumes. And as we really create solutions so that our teams can be more efficient, I think it's certainly possible. It's not necessarily a goal of ours, but we could land there some day.

The next question comes from Lauren Silberman with Credit Suisse.

My question is on transaction. Great to see the positive transactions in the quarter. Within the mid-single to high single-digit comp guide for the year, what are you embedding for transactions? And what do you see as the most meaningful drivers of positive traffic growth through the rest of the year?

Yes. Look, I think the drivers for traffic growth are going to start with Project Square One. We have to have great operational execution. We staffed, trained, deployed, lines open from open to close and giving people great experiences. So that's initiative number one, to keep the traffic moving in the right direction. Obviously, doing things with our loyalty program, our CRM database. We continue to talk about how we're on that journey of continuing to engage with our customers at another level and we'll continue to invest in there, continue to experiment and continue to execute. And then as I've talked about these in our strategies, having the brand visible for what makes Chipotle truly unique, its purpose around "Food with Integrity", that resonates with our customers, it resonates with our team members because it's -- our employees feel great about the food they're serving and our customers, this is the food they want to be eating. And a great example of that are just some menu innovation things that we've added, right, the Fajita Quesadilla. Right now, we're doing Chicken Al Pastor. We made the Fajita Quesadilla program permanent. And we'll continue to do menu news. I think we've talked about this for one or 2 years. So it's the combination of all those things, that will continue, I think, drive great traffic. And I don't want to walk past the fact that we continue to have tremendous value scores. When you look at what you get from Chipotle for what you pay relative to your alternatives, we continue to get feedback that we're one of the best, and whether you're comparing to other restaurants in our space or even the grocery stores. So we love our value position, and then we love the initiatives that we've got in place.

Great. And just a follow-up on traffic. Where is it coming from? Is it primarily your existing customers, new or lapsed customers, anything notable to share in terms of what you're seeing across income cohorts?

Yes. I mean fortunately, it's broad-based. So we're seeing new customers come in, and we're also seeing existing customers increase their frequency. So the operational focus, combined with kind of the marketing and menu innovation is doing exactly what we would want to do.

The next question comes from Andrew Charles with TD Cowen.

Great. Brian, would you be able to talk a little more about what you attribute the sales strength in March and April to that exceeded your guidance at the time when the fast-casual industry slowed? If you had to tease it out, just -- not looking for specific numbers, of course, but just direction of magnitude. Is it the improved staffing? Was it Chicken Al Pastor? Or something else that perhaps externally, we may not be appreciating?

Look, I hate to just kind of repeat myself, but I'm going to repeat myself here, which is Project Square One and getting the foundational elements of Chipotle's execution back to Chipotle standard of excellence. I can't emphasize enough how important that is. To have our digital make line open from open to close, to have ingredients on that line from open to close, to being staffed and trained on the front line, so to get people down the line really fast with exactly what they want. I can't emphasize enough how important that is because everything then builds from there, right? Our digital personalization program builds on that. Our menu innovation builds on that. Talking about a brand with purpose builds on that. And I just think a myriad of things worked really well. The Fajita Quesadilla program was received really well. The Chicken Al Pastor program was received really well. But I know they wouldn't be as powerful if we didn't have Project Square One driving behind it. So I think we've talked about this a lot, Andrew. One of the things that makes Chipotle really special is its operational ability to achieve tremendous throughput with unbelievable culinary and unbelievable customization. We've got to nail that. And we have to nail it both on the front line and in the digital experience.

That's helpful. And one thing I wanted to revisit as well as just the international opportunity. Obviously, a lot of the focus in the last 5 years has been domestically and recognizing how much strength you guys have domestically as well as opportunities to further spread the domestic momentum and further enhance [indiscernible] momentum, what do you need to see to lean in more on international, whether it's accelerating development, you're entering new markets, potentially testing out franchising? I would love your thoughts as we think broader beyond Canada.

Yes, sure. Well, I don't want to just walk by Canada. We're getting ready to expand into Alberta. We'll open probably 10-plus restaurants up there, which is like a 50% increase. So [indiscernible] team in Canada are doing a fabulous job. We're going to continue to drive that market. Specifically on Europe, [indiscernible] and the team have done a great job. Our U.K. business has got great momentum. Not surprising. There's a lot of inflation in the P&L there and we have not priced for it because we think a lot of it is temporary, and we're still establishing ourselves in those markets. And I'm optimistic because if you can get the top line, usually, the rest works itself out. And we're putting in place the digital system, the operational excellence, the great culinary. So I'm optimistic we're going to get there where we'll move this thing out of the [indiscernible] process, but we're going to take our time because we want to get it right. We don't want to just be fast. And that's what the team is after, and they're making great progress.

The next question comes from John Ivankoe with JPMorgan.

I was hoping that if you could give a little bit more transparency in terms of especially the month of April, what's happening on the customer cohort level? I mean are you seeing more higher-income customers come? Are you seeing some lower income customers maybe coming a little bit less or changing their order patterns? Some people would say maybe attach is a little bit lower than it used to be or the consumer is becoming a little bit more price-sensitive, but clearly, that wouldn't be the case in the traffic numbers that you've talked about in April similar to the first quarter. So just wanted to -- just get a sense if there's anything kind of happening beneath the surface that you can talk about or maybe some shifting customer behaviors that actually might be positive for you longer term?

Yes. It's actually 2 things happened for us. One, the higher income consumer continue to come and hardly came at a little bit faster pace from a frequency standpoint. And then we did see some, I would call it, recovery in the lower income consumer, still not all the way back to where it was, call it, a year ago, but an improvement from where it was over the last 6 months. So we've seen nice improvements across all of our income cohorts, and we continue to see great strength in the higher income.

Interesting. And secondly, if I may, in terms of personalization on Chipotle Rewards, where are we in that journey? I mean how do you feel that you're doing, are there any near-term opportunities or some near-term functionalities that you're going to add as the system continues to learn and get better on an individual customer basis?

Yes. Thanks for the question. This, I think, is a big opportunity for us because we're still very much in the early days on this. I think the teams have done a great job of turning the data into action through, call it, like CRM programs. And we're just starting to dip our toe into the personalization opportunity. And I think you're going to see really kind of CRM evolve into personalization at meaningful scale. So I think there's a lot of opportunity to be had in this space. I'm proud of the work that's been done to date and where we currently are. But I just think there is tremendous opportunity going forward, assuming we can get this personalization program right.

The next question comes from Brian Harbour with Morgan Stanley.

Yes. In the past, you've commented just on kind of delivery sales and what that looks like for the quarter? And then maybe also just kind of what the mix component of your same-store sales for the quarter was? Would you be able to provide some color on that?

Delivery was still right around 20%, right?

Like high teens.

Yes, high teens. And we saw a nice strength in our digital business, a little bit of a rebound in the delivery business, more so probably in the marketplace. But we're feeling really good about how we're positioned in all those access channels. Order ahead, delivery and coming into the restaurant.

Okay. And then seeing how the Fajita Quesadilla did quite well. Are there kind of other opportunities like that where you lean into just existing menu items and do something akin to that. You've obviously done very well with kind of protein LTOs, but what else could be further afield that kind of continues on that success?

Yes. Look, we are really delighted by how well the Fajita Quesadilla performed for the very reason you just mentioned, right? It's all existing ingredients. It required some work on the digital side of things. But for the most part, this was a really easy one for operators to execute. So the team is doing some work to figure out other opportunities like that within our menu and maybe could apply for both the frontline and the digital line. I do believe there's still a lot of hidden gems within the Chipotle menu. And I think we have the opportunity to talk about them in a more visible way. So more to come. I know Chris and the team are working through, can we find something that can perform as well as Fajita Quesadilla following those kind of requirements.

The next question comes from Sharon Zackfia with William Blair.

I was hoping to get an update on Chipotlanes. I think around this time last year, you gave us some ROIC metrics on Chipotlanes versus non-Chipotlanes and kind of the sales lift and digital mix component. I'm just curious now that we're a year later, how those compare the Chipotlanes versus the non-Chipotlanes? And then Jack, did you actually give us kind of what mix and traffic were in the quarter, that would be helpful to have.

Well, I'll do the first one -- or the second one first. And I'm surprised it didn't get asked before. So no [indiscernible].

[indiscernible].

[indiscernible]. So yes, listen, transactions were in kind of that 4-ish kind of mid, low single digit. It's a nice turnaround from what we saw in the fourth quarter that we saw a check, the net check was 7%, so that gets you to that kind of 10.9%. And of the check, it was about 10% pricing and then a 3% mix. And just as a further clarification, the 10% pricing is about 8.5% is in our in-store and our order ahead business. And then on top of that, there's a 1.5% for delivery. And then on Chipotlane, Sharon, largely the same. I mean, Chipotlanes still perform higher from a sales standpoint, higher from a margin standpoint and then higher from a return standpoint. I think we have mentioned in the past, it's -- the comparisons aren't as great anymore. So in other words, a few years ago, we would open up restaurants that could have a Chipotlane, but didn't as we were kind of executing the strategy. And today, when we have 80%, 85% of our restaurants have a Chipotlane, the 15% or 20% that don't can't have one, meaning it's an urban location, it's an in-line location. So it's really different trade areas. So we're starting to see that some of the sales comparisons are getting a little bit not necessarily relevant. We're still seeing the Chipotlanes perform at a higher level, but it's a little bit like comparing an apple to an orange, but still margin return and from a sales standpoint, they're still great. It still does generate higher digital mix by several hundred basis points, and there still is a shift where delivery takes a step down from something in the high teens into the mid or low teens, and order head steps up quite a bit from something in the low 20% up to the high 20s or even the 30%. So all the same kind of directional thing that we've seen, all the benefits that we've seen with Chipotlanes are continuing to show up.

The next question comes from Jon Tower with Citigroup.

Curious, Brian, you mentioned earlier in the call that your smaller market stores are coming in strong, perhaps even better than you had anticipated. So I'm curious, I know you've recently offered the 7,000-store TAM for North America. But given the success you're seeing as well as some of the new technology like the clamshell grills that you're still testing or you can heighten on the horizon, does that maybe alter that opportunity for new stores over time?

I mean look, obviously, as we get closer to that 7,000 number, we'll have a much better idea of whether or not we can grow beyond the 7,000. The good news is we've not seen any slowdown in our performance. So all the restaurants we're opening, they're opening with strength. And obviously, we look at this every year as we kind of take another look at our market planning. And the good news is we're opening restaurants in -- for Chipotle, I would say, somewhat penetrated markets, and they continue to perform really well. And that gives us confidence because then we can kind of start thinking through like, well, you start extrapolating that across the country, you could see how you could get beyond 7,000. But not ready to take the number up just yet. I love seeing great performance. It's great to see the small towns do really well. And it's great to see, frankly, the restaurants do really well in urban and are more penetrated markets. So lots of opportunity in front of us on new restaurant opening frontier.

Great. And just one more follow-up. Do you have any more planned LTOs for 2023?

We always think through kind of something in the front half and something in the back half. We haven't definitively made a decision on what we're going to do in the back half yet. The good news is our pipeline is really strong, and we've got some flexibility. But we want to see where the consumer is, the strength of Project Square One and that will inform what we choose to do in the back half of the year.

The next question comes from Peter Saleh with BTIG.

Great. Brian, I want to ask about the Hyphen automation. I think you mentioned that's for the digital make line. When you're thinking about this, and I know it's still early, is this more for new restaurants? Or can you fit this into your existing footprint in some of your existing locations?

Yes. No, one of the things that's great about this is it would fit in our existing locations. It's almost pull off the current line, put in the new line kind of idea, which is really exciting. Probably the first place you'd see us do it, it will be with new units just because it's easier to implement. But the good news is [indiscernible] and the team are designing this so that it will work with our existing restaurants.

Great. And then just one question on the Chicken Al Pastor LTO. It sounds like it's performed exceptionally well. Is it bringing in new guests to the brand that previously haven't come to Chipotle? And is there a level at which an LTO has so much success that it becomes a permanent item? Or do you always consider it as an LTO?

Yes. Well, the good news is Chicken Al Pastor has been broadly appealing, so both to new users and existing customers. The decision to make it permanent would be something we would do after we finish this LTO 1. So we haven't come to the conclusion that we would make this permanent, but your statement is correct, it's definitely performing really well. And crew member feedback is this is an easy one for them to make, and customer feedback has been really positive as well. So we did decide to make the Fajita Quesadilla permanent in our digital platform, but that's a little different than making Chicken Al Pastor permanent. So for this one, it's definitely planned to be an LTO, we'll execute it as an LTO, and then we can always revisit whether we make it a permanent menu down the road.

The next question comes from Jeffrey Bernstein with Barclays.

Great. Two questions. The first one is on the comp guidance. The fact that you're resuming guidance for full year. I assume that's an indication of stabilization that you're seeing maybe more week-to-week or month-to-month or your visibility -- just wondering if you can share why that has returned. And maybe what are the components you're assuming in that mid- to high single digit in the 2Q and full year? Just trying to gauge what the pricing would be if you took no further and what the traffic assumption is? And then I just have one follow-up.

Yes. On the guidance, it assumes we don't take any additional pricing similar to the comment that Brian made before. Right now, we're staying the course. So what it assumes is we continue the same transaction trends that we've seen in the first quarter continue into second quarter. It recognizes that we took some menu price action last year, and those will roll off. And so that's, in essence, what we put together for the full year guidance. And the idea here, Jeff, is that you don't know if we're going to continue like beyond the next few quarters and give quarterly guidance all the time. You might remember a few years ago, we used to give just the annual and then not talked about what the quarterly guidance is. And so what we're doing right now is we're kind of doing both for a while, and then we'll see how the trends unfold. We'll see what happens to the macro. And we'll make a decision in terms of what our guidance is going to be. But we actually think about our business in terms of a longer-term approach than quarter-to-quarter. And so we think the guidance ought to match that as well. So that's the reason for the change.

Understood. And then just on the marketing front, I think you said the mid-2% range for the second quarter. I know it was in the 3s in the first quarter. I'm just wondering, just talk about the thought process around marketing, whether this is a conscious pullback for any particular reason or how you measure the returns, how happy have you been with the marketing you've had thus far and the outlook going forward?

Well, we've been really happy with how the brand has shown up and the initiatives that we've rolled out on the percentages, I think that has more to do with timing than anything.

It's timing, it's been planned, and we tend to spend more in the first quarter, first part of the year than in the back half of the year and typically to support these LTOs.

Well, I think, [indiscernible] you'd also say too, like the summer months aren't the best time for broad-based media, right? So I think that's part of the timing.

Today's last question comes from Jake Bartlett with Truist Securities.

Jack, I had a question on commodity inflation. I was wondering whether you could kind of handicap the likelihood of deflation in the back half. It feels like there's some big chunks of [indiscernible] deflationary. Just kind of wondering what the moving pieces are in your mind, how much visibility you have? And just what do you think the chances of deflation are in the back half?

Yes. It's not our -- it's a good question. It's not our base case. Our base case is to see modest inflation in the back half of the year. We're predicting somewhere in the low to mid-single digits. We've been really pleasantly surprised by what's happened so far. We have had a number of miscellaneous items where we've seen inflation like some of our oils, tortilla, some of our salsas and things like that but even offset by lower-than-expected avocado cost. So that's why our food cost has been steady for 2 quarters in a row. And it's been a number of quarters that that's happened where we haven't seen any net inflation. So I do think it's a possibility. It depends on what the Fed does. It depends on what happens to inflation broadly. The wildcard there is if inflation disappears, you have to also then wonder, okay, what's happened with the macro economy, what's happening with unemployment and consumer demand as well. So right now, we kind of like the environment we're in right now, where consumers have jobs. They have money. They're visiting restaurants, and the inflation that we're seeing is pretty modest. So that base case that we put together and how we plan the rest of the year feels pretty good to us. We wouldn't mind inflation going down, but we'd love it if it didn't [indiscernible] softness in demand.

Great. And that answer kind of flows into my next question, which was I think as you talked about the annual guidance for same-store sales, you talked about the macro environment staying as it is now. So I just wanted to kind of make sure I understood what your kind of base case is for the macro environment in the back half of the year. And should we think of the range kind of slight recession on the low end? How should we think about the macro outlook in your guidance? And maybe how you think you're positioned if we do see a deceleration in the consumer...

So first of all, in our prepared comments, we did say our guidance assumes that there's not a meaningful change in the macro environment, okay? Because obviously, [indiscernible] happens. But in terms of our outlook, our outlook does not -- our base case does not include a recession or certainly not a meaningful recession. Again, it looks like unemployment is holding up really well. It looks like consumer spending is strong right now. I mean Brian mentioned our -- we saw softness in the second half of last year, especially the fourth quarter in lower income consumer. We saw those consumers come back almost at the same rate as our higher income consumers. And so we see that as a positive macro sign. So we're cautiously optimistic about what's going to happen in the second half of the year. Now if there is a recession, we feel like we're really well prepared. We have -- we own all of our restaurants. We don't have any debt. So we don't have the possibility of franchisees under pressure if they have debt payments and that there is a softening of demand. And we don't feel like we have to run the business based on a quarter-by-quarter [indiscernible] so if we need to [indiscernible] a couple of tough quarters here or there, we certainly think we have the financial wherewithal and we have the long-term view to do that. But again, we're cost optimistic that the economy will hold up.

This concludes our question-and-answer session. I would like to turn the call back to Brian Niccol for any closing remarks.

Okay. Thanks. And thanks, everybody, for joining the call and all the questions. Obviously, we're very proud of the work that has gone into achieving these results. I think I mentioned this before, Chipotle has got one of those special brand strengths when you look out there. There aren't many companies, I think, that are growing top line, expanding margins and building new units to the tune of 8% to 10%. And then when you combine that with the strength of the balance sheet, the strength of our economics, we're very confident in the strategies that we're continuing to execute. We are not slowing down on Project Square One, and we're not slowing down on providing digital access, and we're not going to slow down on making the brand visible and loved. And the foundation of all this is we have great people, with great culinary, we usually end up with great experiences for our guests. So we're staying the course, and we believe the strategies and these focus areas are going to deliver results for the long term. And we're optimistic about our long-term future of getting to those 7,000 restaurants and AUVs well beyond 3 million. So thanks again for taking the time, and we'll talk to you in a couple of months, if not sooner. Thanks. Bye.

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