Earnings Call: Q3 2020

Oct 21, 2020

Good afternoon, and welcome to the Chipotle Third Quarter 2020 Earnings Conference Call. All participants will be in listen only mode. After today's Please note this event is being recorded. I would now like to turn the conference over to Ashish Kohli, Head of Investor Relations. Please go ahead. Hello, everyone, and welcome to our Q3 2020 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward looking statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projected in the forward looking statements. Please see the risk factors contained in our Annual Report on Form 10 ks and in our Form 10 Qs for a discussion of risks that may cause our actual results to vary from these forward looking statements. Our discussion today will include non GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website. We will start today's call with prepared remarks from Brian Niccol, Chairman and Chief Executive Officer and Jack Hartung, Chief Financial Officer, after which we will take your questions. Our entire executive leadership team is available during the Q and A session. And with that, I'd like to turn the call over to Brian. Thanks, Ashish, and good afternoon, everyone. Today, we are sharing strong Q3 results that highlight ongoing progress in these unprecedented times. However, before I dive into the details, let me acknowledge and thank our incredible Chipotle team members who remain focused on great execution and on advancing our purpose of cultivating a better world for our employees, guests, farmers, communities and shareholders. I'm truly humbled to have the privilege to work alongside this team. Their efforts are helping us not only successfully navigate this pandemic, but highlight that Chipotle's business model is durable, flexible and can perform in a challenging environment. As always, the health and well-being of our employees and guests continues to be our top priority. We are benefiting from investments made a few years ago including advanced air filtration systems, sanitizers throughout the restaurant, wellness protocols and improved hand washing. In addition, we are closely following the recommendations of the CDC and local health departments and have implemented social distancing, wearing face masks, a tamper evident packaging seal for all digital orders, as well as creating the steward role to sanitize high traffic areas. Collectively, these efforts have made the pivot to enhance COVID-nineteen safety protocols much less complicated and give our employees and guests confidence that Chipotle remains steadfast in our commitment to keep them safe as we reopen restaurants for in restaurant dining. We continue to monitor and adhere to state and federal mandates and at present have roughly 10 restaurants closed and about 85% offering limited in restaurant and or patio dining, with the remaining being open for to go services. Since sales troughed in late March, we've been able to retain 80% to 85% of our digital sales gains while recovering 50% to 55% of our in store sales. The stickiness of digital is a key factor in allowing us to deliver strong results and we'll continue to invest in making the digital experience as easy and frictionless as possible. As illustrated by the recent launch of our group ordering feature on the Chipotle app. For the quarter, we reported sales of 1.6 $1,000,000,000 representing 14% year over year growth, which was fueled by 8.3% comparable restaurant sales growth. Restaurant level margins of 19.5 percent which is 130 basis points lower than last year and earnings per share adjusted for unusual items of 3.76 dollars representing a decline of 1.6% year over year. Comparable restaurant sales were strong in each month of Q3 with August being the high point. Sales trends remained strong in September even though beginning mid month we rolled over the successful 2019 Piranha Assata program. Beginning mid September, comparable restaurant sales impressively delivered mid single digits and this trend has continued in October. The 2 year compounded comp stack is a healthy 20.2 percent which is similar to the 20.4% pre COVID level we delivered in Q4 2019 and highlights that our digital system along with running great restaurants with the right leaders and the right culture can deliver outstanding performance despite external challenges. As you can see from the Q3 results, our key strategies continue to resonate with guests and position us to win today while we create the future. In fact, they give us confidence in ultimately having more than 6,000 restaurants and expanding AUVs above $2,500,000 with margins at or above 25%. Let me provide a brief update on each of these strategies, which are number 1, making the brand visible, relevant and loved number 2, utilizing a disciplined approach to creativity and innovation number 3, leveraging digital capabilities to drive productivity and expand access, convenience and engagement. Number 4, engaging with customers through our loyalty program. And number 5, running successful restaurants with a strong culture that provide great food with integrity while delivering exceptional in restaurant and digital experiences. Beginning with marketing where the goal remains to increase awareness, expand access and grow sales by driving culture, driving a difference and ultimately driving a purchase. Our team has shown a heightened sense of urgency since the beginning of COVID. They quickly adapted to the evolving environment and experimented with creative social and digital media initiatives designed to help enhance Chipotle's brand and purpose. Most recently demonstrated by our round up for change feature that has raised over $2,100,000 for organizations supporting underserved communities. We also connected and engaged with guests through our Behind the Foil TV campaign highlighting real ingredients, real cooking techniques and real employees. Innovation is a core component of Chipotle and our stage gate process is a key tool in which we test, listen and learn from customers and operations before moving to a national launch. Chipotle continues to explore menu initiatives that align with our food with integrity standards. A successful example is carne asada, which we're delighted to bring back for a limited time across the U. S. And Canada, as well as in France for the first time. Given that only 5% of U. S. Beef meets Chipotle strict sourcing standards, we have embarked on a year long mission to partner with new farmers whose practices emphasize quality and responsibility to ensure supply through Q4 and into Q1 of next year. This guest favorite is off to a great start helping drive sales and transactions again this year. In addition, our upgraded suite of Tractor Beverages that launched in July has been receiving terrific customer feedback. These organic teas and lemonades have elevated our drink options to match our food quality and food with integrity ethos. While their full benefit won't be seen until more customers visit our dining rooms, they have already helped improve drink incidents and position us for ongoing beverage gains. We have 2 other menu items currently being tested, cauliflower rice, which further enhances healthy eating options at Chipotle and quesadillas, the number one requested new menu item by our customers. The quesadilla is available as a digital only menu option in a few test markets. Given our digital scale as well as removing operational friction by utilizing our digital kitchens, we are optimistic about the potential for Quesadillas to be available nationwide at some point in the future. We are gaining valuable feedback on both of these items and we'll update you on their progress as well as other new menu items that are in early stages as they move through our stage gate process. Next, our digital platform continues to be a big beneficiary of consumers adopting the digital off premise occasion. A reduction of dine in services, more people working from home, increased advertising and digital awareness, recent partnerships with Uber Eats and Grubhub and expanded digital capabilities into Canada all have helped attract new customers into our digital ecosystem while increasing convenient access to Chipotle. As a result, Q3 digital sales grew 2 0 2 percent year over year to $776,000,000 and represented 49% of sales. Assuming this momentum continues in Q4, we believe digital sales could exceed $2,500,000,000 in 2020, more than double what we did last year. At this sales rate, our average restaurant delivers a digital AUV of well over $1,000,000 up from just a few $100,000 per restaurant a few years ago. During the quarter, about half of the digital sales came via the delivery channel with the remainder coming from order ahead and pickup transactions. Both channels continue to grow nicely with delivery benefiting from our expanded partnerships. Order ahead also remains robust as guests better understand the value offered by this channel, as well as the convenience of more Chipotlanes, which provide an extraordinarily fast experience. I am pleased to report that the strong digital momentum has continued into October with our digital mix remaining in the high 40s. Chipotle has transformed itself over the past 2 years to a real food and people company powered by technology. A prime example is our rewards program, which has expanded significantly since March and now has 17,000,000 enrolled members. To put this in perspective, this is more viewership than on a typical Monday Night Football broadcast and gives us a content distribution and engagement network that we can use to elevate engagement and awareness of brand initiatives. Additionally, many of these members are new for Chipotle, not just dining guests who switched to off premise. To date, our loyalty program is already proving quite fruitful. We are seeing an increase in frequency across the board with consumers resulting in an extremely strong return on investment. However, what really excites us is that we are in the early stages of using this valuable tool to understand consumer behavior that will allow us to enhance their journeys and ultimately drive higher sales. We can also utilize these learnings to reengage members if their visits decline, which should efficiently sustain the stickiness of our digital platform. Over the next few years, we expect loyalty to be a key enabler of our digital flywheel as we optimize the use of this important data set. Switching now to our great operations, where today more than ever guests demand and deserve a safe and enjoyable experience as they venture back into our restaurants. We now have 2 large and growing businesses to manage with digital now comprising roughly half of our sales. Despite COVID challenges, our operations team has done an outstanding job providing consistently prepared delicious food while improving service levels. Our GMs have maintained a strong presence and stay closely connected to our crew who are at the heart of our culture and our business. A strong culture is a critical part of running successful restaurants. As a leadership team, we continued our listening sessions with employees to understand their experiences and hear their ideas on how we can better support them. In response, we have further invested in our people, including diversity, equity and inclusion training, voter education, and most recently expanding debt free degrees to Paul Quinn College, the nation's 1st urban work college and one of the oldest historically black colleges and universities in the country. Of those enrolled in our educational assistance program, 85% are crew members and the benefit has a significant impact on their tenure and growth. We've seen a retention rate that is 3.5 times higher among employees enrolled in the program and crew members participating are 7.5 times more likely to move into a management role within the organization. In fact, nearly 70% of our GMs are internal promotions. This is extremely important as we promote and hire new leaders to help support continued growth in our digital business as well as a meaningful acceleration in 2021 new restaurant openings. As we look ahead, we still operate with some uncertainty regarding a potential second wave and the longer term economic impact of COVID. Yet I'm really hopeful that if we do the right things as a company and as a community, we can avoid major disruptions. I've never been more confident that Chipotle is a resilient brand committed to fostering a culture that values and champions our diversity while leveraging the individual talents of all team members. Our core purpose of cultivating a better world through food with integrity remains the guiding force in all company decisions and instills a great sense of pride among our employees, which will far outlast this pandemic. With that, here's Jack to walk you through the financials. Thanks, Brian, and good afternoon, everyone. Despite the ongoing external challenges, we're pleased to report outstanding Q3 results, which highlight the durability of our economic model and the strong performance of our restaurant teams. Sales were $1,600,000,000 in the Q3, an increase of 14.1 percent from last year as comp sales grew 8.3%. Restaurant level margin of 19.5% was 130 basis points lower than last year and earnings per share adjusted for unusual items was $3.76 representing a 1.6% year over year decline. The 3rd quarter had unusual expenses related to legal reserves, first time asset impairments and closure costs as well as our transformation that negatively impacted our earnings per share by 0.9 $4 leading to GAAP earnings per share of $2.82 We remain optimistic about the future given our strong Q3 results as well as a great start to this quarter despite lapping a 13.4% comp in Q4 of 2019. That being said, the uncertainty from COVID makes it difficult to provide comp guidance for the remainder of 2020 or for 2021 at this time. Food costs for Q3 were 32.3 percent, a decrease of 90 basis points from last year due primarily to a menu price increase and lower avocado prices that were partially offset by COVID related impacts, including elevated beef prices, increased incidence of steak and fewer sales of high margin. In Q4, we expect food cost to be in the low 32% range as the benefit from a full quarter of delivery menu price increases, which I'll discuss shortly, will be offset by the launch of Kearny Asada. Labor costs for the quarter were 25.3%, a decrease of 130 basis points from last year. This decrease was primarily driven by sales leverage, partially offset by labor inflation as well as expanded emergency leave benefits to accommodate employees who are directly impacted by COVID. We expect labor costs to be around 25% in Q4 as the benefit of delivery menu price increases will be slightly offset by lower seasonal sales. Other operating costs for the quarter were 16.8%, an increase of 400 basis points from last year due primarily to higher delivery fees and marketing costs in the quarter. Delivery expenses were elevated year over year given the significant growth we've experienced in our digital business, a trend we expect to continue. Therefore, to help improve economics on this important access point, we're currently testing delivery menu price increases. Remember that we have reduced delivery fees on white label from $3 per order before COVID to just $1 so the net increase to our guests is relatively small, typically about 2% to 3%. We expect this new delivery pricing strategy to be dynamic and evolve over time as we gauge consumer response. And we'll make adjustments needed, including perhaps during the approach market by market. Our goal is to ensure we provide convenient access to our guests, they can enjoy Chipotle how and where they choose to. And when customers choose a premium convenience channel that attracts higher costs, our objective is to largely cover those costs within that channel. Marketing promo costs for the quarter were 2.6%, an increase of 60 basis points from last year, due primarily to advertising campaigns to support our digital growth. For Q4, we expect marketing and promo costs to be in the mid to high 3% range to support carne asada and for the latest brand messaging under our behind the foil campaign. As a result of higher anticipated marketing spend and ongoing momentum in our delivery business, we expect other operating costs to be in the low 17% range in Q4. Looking at overall restaurant margins, we expect Q4 to be at a similar level to what we saw in Q3, while underlying margins are expected to improve by around 200 basis points sequentially in Q4 due to the delivery menu price increase and other efficiencies. These will largely be offset by higher food costs associated with carneosata as well as the roughly 100 basis points incremental marketing spend relative to the Q3. Normalizing to a 3% ad in promo spend and without the near term margin impact of Carnet, our Q4 underlying margin would be in the 21% range. Looking down Q4, expect COVID related direct and indirect costs to ease over time and we have a number of plans in place to ensure we are able to deliver our full margin potential. G and A for the quarter was about $133,000,000 on a GAAP basis or $102,000,000 on a non GAAP basis, excluding $29,000,000 for settlements of older legal matters and $2,000,000 related to transformation expenses. G and A also includes $84,000,000 in underlying G and A expenses and $18,000,000 related to non cash stock compensation, which includes a $3,000,000 cumulative life to date downward adjustment on our 2018 PSUs relative to COVID impacts. As expected, our underlying G and A increased sequentially as we grew headcount and invested in technology to support our growth. Looking ahead to Q4, we expect a similar underlying G and A expense, while stock comp will likely be around $22,000,000 although this amount could move up or down based on actual performance. Turning now to the balance sheet. We ended Q3 with nearly $1,100,000,000 in cash, restricted cash and investment in no debt along with the $600,000,000 in untapped credit facility. Our financial strength gives us the opportunity to make ongoing strategic investments in our people, in our business and in our communities, which we believe will benefit us for years to come. While we didn't buy back any stock in Q3, we'll continue to evaluate the operating and economic environment each quarter and we'll return excess cash to shareholders when the environment is more stable and more predictable. Another area of strength for Chipotle is restaurant design and development. And during the Q3, we're delighted to have opened 44 new restaurants with 26 including a Chipotle lane. We now have a total of 128 Chipotlanes, including 5 conversions. And performance for these formats continues to be stellar. The digital GAAP versus non Chipotle restaurants remains around 10%, and that's driven entirely by the higher margin order head and pick up transaction. Also, if you look at the sales of our Chipotlane cohort, of the 17 Chipotlanes that are in our comp base and therefore open well before COVID, sales are over 10% higher than the non Chipotlane comp restaurants from the same open period, while the more recent openings during COVID are actually 25% higher. These results further reaffirm our strategy of an accelerated pivot towards Chipotlane sites going forward. And while we continue to expect about 60% of new restaurants with Chipotlane this year, our goal is to have more than 70% openings included Chipotlane in 2021. Opening more Chipotlanes will not only enhance customer access and convenience, but it also increases new store restaurant sales, margins and returns. It's hard to predict the external environment, but if we assume there are no further COVID related construction stoppages, we expect to have a sequentially similar or perhaps slightly higher number of openings in Q4. And while the current environment prevents us from being able to provide reliable new store opening guidance for 2021, our development team has built a very robust new store inventory, which under normal circumstances would lead to opening around 200 restaurants next year. As the permitting process and ground breaks become more certain in the coming months, we'll provide as much visibility as we can around expected openings by quarter and for all of 2021. Longer term, we remain confident in our ability to more than double the total number of Chipotle restaurants in the U. S. In closing, I want to thank our incredible teams who continue to collaborate and finally to safely serve and delight our guests in the face of unprecedented conditions. With a strong brand, a team of committed employees and broad financial strengths, we feel well prepared to weather any near term COVID related headwinds, and we remain excited about Spolle's powerful economic model and therefore our long term potential. With that, we're happy to take your questions. And our first question will come from David Palmer of Evercore ISI. Please go ahead. Thanks. Jack, you mentioned some two things. One was the how COVID related costs were hurting margins. Could you lay that out and how you expect those to taper off? How many basis points margin is that? And then also just when it comes to the inevitable tapering off of mix on digital, how do you see that playing out in terms of your margins for next year? So for example, if the sales were flat to this in Q3 of 2021 and the digital mix was say 25% versus roughly 50%, what impact would that have on your margins as well? Thank you. Okay. Thanks, Dave. Let me take the first one first. When we look at the direct and direct costs that we can identify related to COVID, there's about 100 basis points of margin drag. There's direct costs that we mentioned in the script, for example, that talk about this is COVID pay when people are excluded. They either have been exposed or they tell us that there's a family member that tested positive or may have been exposed. We pay those people to not work. And so that is the piece and that's the most direct piece. There's also things like during this process as new customers have come in and they've shifted to digital, there's a higher mix with steak and steak is a lower margin than chicken. People are buying more burritos and this is something that 100% due to the digital channel. We're bringing a lot of new customers into the digital channel. They're starting their journey with Chipotle with burritos. And also, the other thing that we know that our customers tell us is that the burrito travels better than a bowl and so they're buying more burritos. They're also adding tortillas in digital as well. And until recently, those were free. And we've got fewer beverages. We only, David, have about 5% of our customers. Even though 50% are coming in the restaurant to order, only 5% are staying in the restaurant and so they're buying a lot fewer beverages. So those are the direct and indirect impacts that we're seeing and they have about 100 basis point impact. Hard to tell how these will cycle in and cycle out. Some of these things we can control like we can stop giving away free tortillas and if somebody wants to buy the tortilla, they can pay a slight premium of $0.25 Other things like steak mix, we're going to have to watch and see how that plays out. In terms of looking forward a year from now, really hard to answer that question. I will tell you this, it all depends on delivery. Delivery is the channel that attracts a premium. And the way I would think about this is our margins were hit and the other line item, other expense line item was hit because we had about a 15% shift that was in store customers that went to delivery. And we all know that delivery brings much higher cost. So between now and next year, and your question, if delivery shifts into in store and shifts into order ahead and pickup, then I would say our margins for sure are headed on the way up. If delivery stays the same or increases, we'll have some challenges. But we think that the experimentation that we're doing with menu prices, we think we can offset those prices and get back onto our algorithm that we've always talked about with our margins. Thank you. Our next question comes from Catherine Fogarty of Goldman Sachs. Please go ahead. Great. Thank you. And Jackie walked through some of the details about passing on delivery prices through digital channels. I wonder if we could dive into that a little bit more. When you have your initial findings around this, are you seeing any shift in consumer preference here? And then are you treating white label the same as marketplace? Thank you. Yes. Katie, we are treating white label and marketplace the same in terms of menu prices. So in a given market, we do have different prices in different markets, different delivery prices. But if we raise prices, for example, 7% with our white label, we're doing the same with marketplace. So everyone's on equal footing there. And then in terms of I'm sorry, what was your other question? Are you seeing any decline in consumer demand as you are No. It's early still, Katie, but no, we're not seeing any decline. There might be a slight shift into order head and pickup, which we'd be absolutely delighted by because that's our highest margin transaction, but no noticeable moves to call out so far. Great. Thank you. Our next question comes from David Tarantino of Baird. Please go ahead. Hi. Jack, just a quick clarification on your Q4 commentary on the margins. I think you mentioned restaurant margin on an underlying basis at 21%. Is that a 4th quarter number? Because I know 4th quarter usually is a seasonally lower margin quarter. So I guess would that annualize as something higher? Yes, David, great question. That's correct. The walk forward that we did was for the Q4. And you're right, Q4 and Q1 are typically seasonally lower margin quarters. Okay, great. And then on the comps, I'm curious on your thoughts on you mentioned you're cycling much tougher comparisons now related to the launch of carne asada. As you look underneath the surface and look at kind of seasonally adjusted sales trends on a daily basis or however you want to answer this. Do you think you're seeing a softening of the trend line or do you think the underlying business really hasn't changed? Or maybe it's even improved, it's just lower because of the comparison? Yes. Listen, Dave, I'll start and then Brian may want to add on as well. When we shifted from August into early September and then we started a tougher comparison in the middle of September, we saw the dollar sales trends hold up really, really well. And so we can look at those sales trends. We understand what we expect from a seasonality standpoint. It's a little more difficult with COVID, but the sales trends themselves held up really well. So the only call out that we had was as we compare to these tougher comparison, the comp is we're delighted with the fact that through the second half of September and into October so far, we're still solidly in that mid single digit. So the adjustment in the comp percentage is merely because of a tougher comparison to last year. Yes. The only thing I would add, David, is hopefully you saw this as we were talking about the 2 year compounded performance. We're getting close to being back to where we were performing pre COVID, even though we're still in a COVID world. And clearly, the composition of our sales are different coming from our much more significant digital business. But we're feeling really good about the trends we're seeing in the business. And as Jack mentioned, the good news is, the feedback we get from customers on carne asada coming back is they're really excited to have it back. And as a result, they're coming back to Chipotle to come get carne asada. Great. Thank you very much. Our next question comes from Jon Tower of Wells Fargo. Please go ahead. Great. Thanks. Just wanted to dig a little bit into the Chipotlane stores. I'm curious if you could talk a little bit about the profitability piece of those stores. I think the 17 or so you had mentioned in the comp base. You had talked about the sales side of the equation where they're doing much better on a comp basis and the digital mix is higher. But obviously, you're seeing in some of your stores today due to the higher delivery fees, some margin pressure. So can you talk about where that sits today on a comparable basis versus the average store base out there? Yes. I was just going to say there's a couple of different angles to this. First of all, we look at our comp base. The Chipotlane restaurants are about 10% higher than non Chipotlane for our comp restaurant in the same cohort or open for more than 12 months. So right out of the box, that 10% equates to about $200,000 in volume. That's about 200 basis points in margin right there. The other thing is even though we have about 10% higher overall digital, our delivery in each of our lanes is actually lower, okay. So while overall digital is 10% greater, the order ahead and pickup is more like 15% greater. So there's a shift from the delivery component into the order ahead, and that enhances margins as well. So it's at a minimum, just the sales volume alone is 200, and then that mix shift adds a meaningful margin as well. So it's a meaningful change in margin and therefore a meaningful improvement in returns as well because the Chipotlane is around $75,000 to $100,000 more expensive than a non Chipotlane. And obviously, when you go through the math, the returns are extraordinary on that extra $100,000 investment. The only thing I would add to that is I really do think, as Jack mentioned, when you hear the results of our order ahead business, the additional convenience, the incremental sales, I really think we're in the phase of proving really the digital drive through of the future. And I'm glad we're on the front end of it. So obviously, we're very optimistic about where this can take us. Great. Thank you. Our next question comes from Andrew Charles of Cowen. Please go ahead. Great. Thanks. And Brian, great segue to my question. You spoke about the opportunity for 6,000 Ultimate Chipotle locations. And I think you once mentioned during quarter that Chipotlanes could ultimately be featured at the majority of Chipotle locations when you get to that 6,000 number. So I'm just curious how many conversions of existing traditional stores to Chipotlanes would this entail the long term? And as you're presumably getting ready to do some conversions in the coming years, how are you prioritizing which stores are going to be converted from a traditional store to a Chipotlane format? Yes. So I'll start and Jack feel free to add here. We've mentioned this I think in the prior calls because of the success we're seeing and the return on the investment that we're seeing, we've pivoted aggressively into our pipeline to have Chipotlanes be the majority of what we're going to build going forward. So that will be a big driver of why the portfolio mix will change in the future. And then we're in the early days of working through conversions. We've done a handful of conversions. And the thing that is, I think really good news here is before, I would say there was some resistance by landlords and such to convert end caps, let's say. We're not seeing that resistance. And we're also having some success with the idea of even relocating when it makes a lot of sense to do that. So it's going to be a combination of we've got Chipotles that are now 20 years old. And when the opportunity presents to relocate, we look at it from a standpoint of relocating so we can add Chipotlane. And then we're starting to see much more traction with landlords being willing to work with us on the conversion. And we're also seeing nice results from the conversions that we've tested to date. So that's what gives us the confidence of saying that Chipotle Lane is going to play a major role in our portfolio as you look out into the out years. Jack, I don't know if you want to add anything. No, Brian, I think you said it perfectly. The key there is even our oldest markets, those are the sites that are coming up for renewal. Either they're coming up to either exercise an option or they're coming up to the end of the term. And so the nice thing there is because landlords are more agreeable, even in our oldest markets, which don't have a whole lot of new stores over the coming 3 or 5 years, We can do a lot of conversions and a lot of relos. So we're very optimistic about it. Just a follow-up to that, is the conversion relocation opportunity for 2021 going to be greater than what you saw what you're able to achieve in 2020 from a from RELO and conversion opportunity perspective? It's early to tell, but I would expect that we would see a step up in conversions and reloads next year compared to this year and then a step up the year after that as well. Because when you just go back to 10 20 years ago and these are the leases that are coming up, we had an increasing number of openings back in that 10 year period, that 20 year period. So the opportunity should increase every year. So I would expect to see a step up each and every year. Hard to exactly quantify at this early stage though. Got it. Thank you. Our next question comes from Nicole Miller of Piper Sandler. Please go ahead. Thank you. Good afternoon. Just one point of clarification, and it might be self explanatory, but I hate to make assumptions at this point. Jack, can you just go ahead and define what a mid single digit comp is for you? I mean, I'm tempted to take the comp this quarter and just shave off about 200 basis points from year over year compares, But maybe you'll help us figure that out if you're at the lower or the higher end of that range? Yes. Nicole, listen, at this early stage of the quarter, when I say mid when we say mid single digits, we're thinking kind of about 4%, 5%, 6% within that range. Of course, week to week, it's going to change based on weather and other things, but it's solidly within that range. Thanks for that. And then the question, Brian, you had mentioned 17,000,000 loyalty members more than some sporting events. It really begs the question, at least for me, what is the appropriate level of spend? I think you're in around the 3% range for this year. And understandably, you would be getting with more sales and more units, more dollars to spend. But the big global brands, which it seems where Chipotle is headed, they're spending 5%. So when would you pull the trigger on marketing? Yes, look, I think the good news is we're starting to get a lot of leverage out of that 17,000,000 database. And obviously, it's served us very well, especially during kind of the environment where more traditional marketing channels probably haven't had the viewership that they've had in the past. So, I think the way we've approached it, Nicole, is we want to look at where we're getting a return for every investable dollar. And the good news is Chris and the team continue to find great ways to drive purchases with our marketing dollars. So we're less fixated on in the future with the right percentage. We're more fixated on what's going to be the right dollar amount so that we can continue to get great returns and continue to drive sales the way we have to date. So, I think I've mentioned this in the past, not opposed to spending more, one we know we've got opportunities that would result in great return. Our next question comes from Sharon Zackfia of William Blair. Please go ahead. Hi, good afternoon. I guess, a point of clarification. Could you help us understand after the delivery price increase kind of what the gap is between non delivery and delivery price points? And then on development, is $200,000,000 kind of the right yearly cadence at this point? Or is there some pent up kind of flow over units that are flowing into 2021? And so we shouldn't think of 200 as maybe the right number beyond next year. So I'll tackle the first one and then tackle your prior question too and then Jack chime in. So look, I think what we've been doing is continuing to test out alternative formats. And the good news as we've gotten more and more scale in our digital business, the alternative formats like a Chipotle lane are proving to us that we've got more viable opportunities for Chipotle both in developed markets and emerging markets. So we're feeling really good about getting back to 200. And I think I've mentioned this in the past, we think we've got the opportunity to go beyond 200. So as we get further along and we better understand the impact that COVID is going to have on building going forward, we'll be able to give you better guidance. But I think what we're trying to share with you guys is we've got a great pipeline. We've got great formats that give us great returns and we're feeling really bullish on the ability to get back to building 200 restaurants. And then our hope is we'll go beyond that in the future. And then your other question on was it delivery margins, was that right relative to that? No, it was really from a consumer standpoint. So what would be the average difference in price points right now with the test between delivery and non delivery? Yes, we've got a couple of different tests in place, anywhere from a 7% test that we've got, a 13% test that we have and we even have 17% test in menu prices. The thing I would remind you is remember before COVID, we were charging $3 for delivery. In all those scenarios now, what we've done is we've kept the delivery fee at $1 So the effective price on the transaction is only 2 to 3 points higher. So like when you look at the total cost, it ends up being about 2% to 3% more than what they were used to paying for delivery before we started promoting the delivery channel, which obviously COVID, I think was the right thing to do to pivot to that channel and get the digital business going. So all in all, it flows in the totality of about 2% to 3%. Jack, was there anything on that one? No, that was it, Brian. And just Sharon, to give you an idea, the 7%, the 13% and the 17%, they wash out to on average to be a low double digit kind of increase. But Brian made the key point about, we offset that in our white label with lowering the delivery fee from 3 to $1 So for folks that are shopping in our white label, it's a really, really good value. If they're shopping in marketplace, it depends on what the others are charging for their delivery fee, which we don't have control over. Yes, that's a good point, guys. Our next question comes from Jeffrey Bernstein of Barclays. Please go ahead. Great. Thank you very much. Two questions. One, just as we think about the volumes versus the margin correlation, which you've talked about many times in the past, it seems like the 2 are back to moving lockstep. I think you've noted that this Q3, the AUVs are in the $2,200,000 range. And I think you said the underlying margin would have been 21 or actually 22 if you back out the 100 basis point kind of COVID hit. So one, I just want to make sure I'm getting that right. And then it seems like your peers are talking more and more about maybe doing more with less, perhaps seeing some cost savings through COVID that seem like they're sustainable. So I'm wondering whether you're seeing some of those cost savings, whereas there is potential to see restaurant margin reaccelerate faster than any AUV? And then I had one follow-up. Yes. Go ahead, Diego. I think you're thinking about it right. The key to note is that we know that there is a gap, a temporary gap, some driven by COVID, some driven by other things. But we know that what it will take to get from where we are today to what the algorithm is. The key to note is that we're not going to be in a hurry to get there. We know what levers to pull. We know how to close that gap. So we get all the way to that algorithm. We'll pull those at the right time in the right place so that we don't, for example, disrupt consumer demand for Chipotle. But it's important for you guys to know that these are levers that we know that we can pull. We know that we can deliver the margin that the full margin potential that we know is there. But we'll be very, very patient in doing it. Got it. And then just a follow-up in terms of the if there was a silver lining to come out of this very difficult pandemic, it does seem like commodities not a big issue and you're seeing nice leverage, labor inflations easing seemingly and you're seeing some leverage. Real estate costs sounds like things are getting better and maybe locations are becoming more favorable. So I'm wondering whether you see that the same way and maybe how you prioritize the magnitude of those benefits, whether you believe they're all sustainable or not? Thanks. Here, I'll get started, Jack. Okay. Yes. So I think the way we would look at it is in our business, we always plan for the unexpected. So our approach has been when opportunities present itself, we want to make sure we take advantage of it. When challenges present themselves, we want to make sure we have plans in place to handle them. You mentioned some things that may prove to be some tailwinds going forward. But one thing I've learned about these businesses, we can expect the unexpected. So, but where there's tailwinds, we'll make sure we capture it. Where there's headwinds, we'll figure out how to maneuver through it. So, Jack, I don't know if you want to add anything specific to that. Yes. Brian, I think that was well said. And we are seeing, for example, our teams in the field are doing a fantastic job, not just the peeping their team safe, not just making sure the customer is safe, but also running the business well. And so they really are doing a very great job. You hinted at this in your first question about opportunities or some savings. They're doing a great job of managing things like M and R, managing things like food costs. The fact that digital has become a much bigger part of the business. We always charge when somebody orders extra steak in digital. That's the only way to do it. So there are some advantages there and those are helping us along the way. Our goal will be to Brian's point is to make sure that we can hold on to those as we deal with the future challenges ahead of us. Thank you. Our next question will come from Peter Saleh of BTIG. Please go ahead. Great. Thanks. Brian, I wanted to ask about the Chipotle's value proposition. Historically, Chipotle has been a better value for the consumer relative to many of its peers and its competitors. Over the past couple of years, you guys have been raising menu prices and introducing higher price point items like carne asada. And now I think you're talking about raising delivery menu prices somewhat. So can you talk about the value proposition, how you see it and any insight you may have into the value scores, especially through the pandemic? Yes, sure. So here's the great news is our value proposition continues to only get stronger. So you got to remember 60% of what we sell are chicken burritos and bowls. And those are still great meals purchased for less than $8 on our menus. And even when you look at other channels like delivery where there's some additional costs associated with it, we still then maintain our same value gap relative to peers because a lot of people are pricing a lot higher than what we are in the delivery channel. So the feedback we get consistently is the food is delicious, the customization is unlike anywhere else I get and the price I have to pay for that at the speed at which I get it, this is still a tremendous value proposition. And I think it's well, I know based on the surveys we put out there, we're continuing to get feedback that our trust is going up and our value is going up. So these are obviously customer surveys, but we feel really good about the strength of the brand because of those metrics where we have strength, which is food qualityfood integrity, trust, speed, customization, and then not surprising when you have all good things in those areas, you get really good value scores. So it remains very strong. Thank you very much. Our next question comes from Dennis Geiger of UBS. Please go ahead. Great. Thanks for the question. Brian, I wanted to ask a bit more about new product innovation and whether there's much else that you can share on kind of takeaways from some of the products that you mentioned that are in and maybe what that's done to your excitement level, what we'll call it, as it relates to broader rollout eventually? And just related to that, I guess, as the result of this Day Date process to date, have they increased the rate of new products rollout as you kind of hone the process, the rate of success as you've honed that process over time? Just curious your thoughts there. Thank you. Yes, sure. Well, look, we're feeling really good about the process. We've had some really powerful initiatives. Chipotle Lane is one of them that went through the process. Obviously, menu items like carne asada, queso, tractor beverage, these things are all proving that our process works to identify the winners so that we bring those forward. And we do it in a way that protects the integrity of our financial model and the integrity of our operating model, while giving the customer what they want and sometimes leading the customer in food. Some of the things that I'm really excited about is, look, I'm really fired up about this cauliflower rice. I'm really fired up about the quesadilla for two reasons. 1, the quesadilla is proving to be very effective in our test markets in a digital channel execution, which keeps the channel very much engaged for the customer. And I think we'll continue to make it a sticky and acquisition tool for people to come into the business. And then the cauliflower rice, I think is just in Chipotle's wheelhouse of continuing to push real wholesome ingredients done in a delicious way. And I'm fortunate that we've got that in Orange County. So I get to have the cauliflower rice with some frequency and it's just that, it's delicious. And the guys are working on some additional things that I think we mentioned that you'll see us continue to roll out into various test markets. But the good news is the ones that didn't do so well, we haven't rolled those out nationally. So the stage gate process is working. The ones that work, we move forward to national. The ones that don't work, we learn from it and stop the trains from just moving down the tracks. So it's working. Thank you. Our next question comes from Sara Senatore of Bernstein. Please go ahead. Great. Thank you. Just two clarifications, if I may. The first is, Brian, you said that people are coming back for carne asada, that's what you're hearing from your customers. I guess, so the implication as I understand it is that even though your compares are still tough, you do have this extra pull, if you will, on your menu. So I don't want to put words in your mouth, but is that right? There are people who maybe don't come from the menu without the carne asada, but come when it's on. So that was the first clarification. And then just on the margin, I know you've gotten a lot of questions there. Was there any savings from not having dining rooms open? We've heard that from some other companies that just being able to sort of funnel most of the sales through either drive through or carryout does allow some labor savings. And I was just curious if that's true as we think about more normalization of sales. Thanks. Yes. So the first question on carne asada, here's what I think you should know is the good news is even when people come in for the first time for carne asada, what we do see is their second or third purchases, they move within the menu. So they experiment with chicken or they experiment with our regular steak and it proves to be pretty sticky. So it's yes, I'm sure we can pull forward some frequency with carne asada. We get some new users in with carne asada. But the good news is it proves to be sticky because they love the Chipotle experience. They love the carne asada, but they love the Chipotle experience. And so I think that's why you're seeing us in a COVID environment being able to lap a carne asada initiative that was wildly successful a year ago because we're getting both. We're getting frequency play and we're getting some new users into the business. And then your second question was, can you remind me what the second question was? Yes. Just on margins, were there any kind of savings from a different labor matrix because you don't have dine in? Yes, yes, yes. So I think Jack kind of outlined some of these things where our teams have done a really great job of flexing between the frontline and the digital line. The good news is our frontlines now are open in I think it's like 90% of our restaurants almost. And obviously we're doing really smart things from a labor management standpoint. But we still operate our dining rooms and we've committed to making the dining room experience really safe. So we've invested in things like the Steward and that's an important position to get people the confidence to come in and get takeout. So there's some places where we've seen efficiencies and we've captured those efficiencies and the teams have done a great job of managing the labor effectively for where the business is which is now split fifty-fifty between digital and the frontline. So I think where we are able to capture the savings, we capture them. And then in the other areas where it's necessary for us to invest to ensure there's a confident work environment for the employee and customer, we do that as well. Jack, I don't know if you want to add anything to that. Yes? Brian, I think it was really well said. The other thing that I would just point out, Sarah, is that some of the other like traditional fast food, if they have 90 room. Room. If they can keep it closed, that will be great. That's not really an option for us for the reasons that Brian mentioned. We still want to have our frontline staffed and ready to go. We still have half of our sales that are going through that frontline. And so but having said that, definitely there is an efficiency inherent shift of the business going from 20% digital to 50%. And Scott and the team out in the field have captured that efficiency and that data has no proof. Understood. Thank you so much. Our next question comes from Lauren Silverman of Credit Suisse. Please go ahead. Thanks. Just a follow-up on the delivery menu prices. With $1 delivery fee, what menu price increase would be necessary for delivery transactions to be at parity with the dine in transaction? Is that something that you would explore assuming the delivery mix sustained at these levels? Yes. Look, I think what we want to do is figure out the best way in the channel to capture the additional cost. So we'll figure out how we do that, whether it's through the menu price or if there's other ways to even be more efficient. But we want to figure out how we understand the cost and then how we make sure we address those costs in the most effective and efficient way, because we want to give the consumer the access that they want. And so we obviously work through various iterations and that's why I think you heard Jack mention earlier, we're still experimenting with various approaches. Okay. And Brian, now 18 months into the loyalty program, what can you share regarding what you've learned about how customers across frequency cohorts use the Chipotle brand differently? And then specific to just customers using delivery, do you see any outsized usage among light users or new users to the brand? Yes. Well, what has been great is the delivery channel has proven to be a great access point and an acquisition tool for our digital system. And what we've seen is a nice increase of light lapsed new users into the business. Not surprising, we see more of a frequency gain with that cohort group versus somebody that's a heavy user. The utilization, which is also really nice to see is as they become more familiar with our app and the ability to order ahead and do the grab and go, we see people adopt that with some really nice frequency. So there are those occasions that are dedicated to delivery, but there's also these occasions for everybody in these cohorts where the order ahead proposition makes a lot of sense. And we're very bullish on being able to use the data and the insights to drive the behaviors around these various occasions that maybe Chipotle before wasn't top of mind that now they are. Our next question comes from Gregory Francfort of Bank of America. Please go ahead. Hey, thanks for the question. I just had one quick one and then another question. Just can you remind me if there's any big differences in the compares last year between the months? I just don't know if you're lapping a particularly tough or easy period in the 1st part of the month 1st part of the quarter. And then my question is on labor. Can you maybe give us a little bit of the backdrop on what's happening on the labor front in terms of turnover, the ability to source labor? And it seems like you guys have seen done a really good job of managing that. I'm just curious if you could talk a little bit about that environment. Thanks. Sure. So the first question is really easy to answer. The Q4 we're rolling over a +13, off of the heels of our successful carne asada launch last year as well as a lot of the throughput gains that we made operationally. So that's why we mentioned starting in mid September, the rollover got harder. The good news is when you look at the 2 year compounded growth rate, we're continuing to perform in that 20% range. So we feel really good about where we are. And then your second question was sorry, I forgot what the second question is. You're getting a lot from all of us. So just on the labor side, the ability to with new talent and turnover, just what that environment looks like for Chipotle? Yes. Look, I think we've got a great employee value proposition. So not surprising, we're attracting a lot of applicants. The investments that we've made and the way that we've handled, I think this COVID environment in regard to honoring bonuses, providing our employees with restricted stock and also giving them all the tools they need, whether it's mental health benefits, debt free degrees, obviously a lot of the work around diversity and inclusion. All these things I think make the job really exciting. And then you layer in the simple fact, we're a growth company, right? So you're going to come into this company, maybe you join as a crew member, maybe you join as a kitchen manager, but we're going to be building 200 plus restaurants and there's a growth opportunity for you where in the next 18 to 24 months, you could find yourself being a manager running a restaurant. So that creates stability because people want those opportunities and it also creates the ability to pull people in to want to become a part of the Chipotle culture and opportunity. So I think Scott and Marisa and all of our restaurant leaders are doing a terrific job of sharing the story of, look, we're a company that cares about cultivating a better world. We do it through food with integrity and we are a people business. We are going to invest in our people and do what we need so that they can be successful and that their development hopefully results in their ambitions that they have. So we're seeing a very positive situation out there right now. Thanks for the thoughts Brian. Appreciate it. Our next question comes from Andy Barish of Jefferies. Please go ahead. Yes. Hey, guys. Excuse me, a question on the carne asada price premium. I think you took it up this year. Can you just give us a sense of sort of on margin neutrality, how much higher would it go? And just comparing versus sort of your basket of product mix? And then how much of an impact do you expect in the 4Q versus I think it was about a 50 basis point headwind a year ago when you launched it? Yes. So obviously or go ahead, Jack. Go ahead. Andy, just real quickly. You're in the same ballpark. It's still we launched last year, we actually continue to make any profit, but it still is the price of card for Kami Asada comes at a very, very high capital expenditures. So it's still asked about so many of our customers in that customers are provided. Yes. I'm not sure if you heard Jack on that. He was kind of faint on that, but Yes. I didn't know if it was my phone or your phone. No, yes, he got faint there. But I think what he was saying is, the good news is, carneustat is proving to be incremental. And obviously, we priced it such that from a penny profit standpoint, it looks really good. And I think the numbers that you talked about are pretty consistent with what we see as the margin impact. Okay. Thanks, Mike. Yes. This concludes our question and answer session. I would like to turn the conference back over to Brian Niccol, Chairman and CEO for any closing remarks. All right. Thank you and thanks everybody for taking the time and for all the questions. I do want to just take a moment to recognize like even despite being in a COVID situation, this Q3 really I think talks to the power of our brands and the power of our culture. If you just stop and think for a second, we had record sales with a 2 year number close to 20%. We did over $1,000,000,000 in delivery now year to date or $1,000,000,000 of order ahead business year to date. And we have a really strong balance sheet with $1,000,000,000 of cash. So I think we are also at the same time moving our margins on our way to be consistent with the model that we've been talking about. And I think we've talked about that quite a bit. And obviously, we continue to invest in our creativity and innovation through the Stage Gate process. And I think one of the things that I'm really excited about is how we're proving, I think, the digital drive through of the future with Chipotlane, which I think is going to have a huge impact going forward. And I'm really excited to be talking about building over 200 restaurants again. So we're obviously going to continue to invest in our people, obviously continue to invest in our culture because we know that results in driving best in class operations. And our teams, again, I just want to say a huge thank you. They have stayed focused. They have committed to the COVID protocols so that we can keep each other safe and we can serve our customers in a safe way. And I think my takeaway from all this is the brand is powerful. Our future is really bright. We're going to continue to make progress on cultivating a better world, really through our intention around food with integrity. So I look forward to the next quarter when we can share our results, but so proud of where we are today and just so proud of our team and our culture for how we've navigated through these really challenging times of late. It's demonstrated that when you do the right things for your people, you do the right things for your community, you get rewarded with great results. So thank you for your time and we'll talk soon. Bye bye. The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.