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Chipotle Mexican Grill (NYSE: CMG)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET
Overview of the Conference Call:
- Opening Remarks
- Q&A Session
- Leadership Participants
Opening Remarks:
Operator
Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.
I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.
Cindy Olsen — Head of Investor Relations and Strategy
Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it is available on our Investor Relations website at ir.chipotle.com. Please remember that some statements made today about our future financial results are forward-looking. These projections are based on current business expectations, and actual results could vary. Additional risk factors can be found in our annual report on Form 10-K and our Form 10-Q.
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We will now start the call with remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, chief financial officer. After their presentation, we will open the floor for questions. Our entire executive leadership team is present for this Q&A session. Now, I will turn the call over to Scott.
Scott Boatwright — Chief Operating & Restaurant Officer
Thank you, Cindy, and hello, everyone. Before I outline our quarterly details, I want to express gratitude for Brian’s leadership during his tenure. Over the years, we’ve built a remarkable team and developed successful strategies collectively. Now, I am both excited and honored to lead Chipotle as the Interim CEO.
First, I want to share three key points today. First, I am deeply passionate about our brand and mission. Chipotle is a unique company that values its culinary heritage and aims to cultivate a better world—a goal that resonates with our teams and guests alike. Second, I believe our team is among the best in the industry. The dedication of our staff is essential in delivering our fresh and customizable meals to millions daily. Third, our strategy remains unchanged.
Since joining Chipotle in 2017, I have had the responsibility of leading our restaurant teams as we grew from under 2,300 to over 3,600 locations, employing more than 125,000 people. I can attest to the hard work our teams put into providing quality service at accessible prices. The strategies we crafted with our executive team will continue, including the ambition to expand to 7,000 restaurants in North America, elevate our average unit volumes to over $4 million, enhance restaurant-level margins, and pursue international growth.
Now, let’s review our impressive performance for the third quarter. Sales increased 13% to $2.8 billion, supported by a 6% comparable store sales growth, with over 3% transaction comp growth. In-restaurant sales rose by 18% year-over-year, and digital sales made up 34% of total sales.
Despite a slight decrease of 80 basis points year-over-year, our restaurant-level margin stood at 25.5%. The adjusted diluted earnings per share rose by 17% to $0.27. We opened 86 new restaurants, including 73 Chipotlanes. The upward trend in business continued into the fourth quarter, as we achieved accelerating transaction trends, maintaining our full-year guidance for mid- to high single-digit comps.
Next, I will discuss our five key strategies propelling our success. They focus on running effective restaurants with a culture of accountability, leveraging technology for growth, nurturing diverse talent, boosting brand visibility to engage new guests, and facilitating access through expansion of new locations in North America and abroad. Let’s start with running successful restaurants and enhancing throughput—a vital objective at Chipotle that ensures we meet customer demand efficiently.
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Chipotle Enhances Operations and Employee Development for a Superior Dining Experience
Chipotle is focused on improving its restaurant operations and enhancing the experience for both guests and team members. The company has made strides in its throughput, which refers to the flow of service, particularly during peak hours.
Boosting Efficiency with New Roles
Last quarter, Chipotle zeroed in on the Expo position, a crucial role that links salsa preparation to cash handling. This position helps streamline order assembly and payment processes. Restaurants utilizing an Expo have reported an increase of five additional entrees during their busiest 15 minutes.
One challenge with this role previously stemmed from crew members juggling multiple tasks, including food prep. To address this, management has been reallocated to the Expo position during peak times. As a result, over 60% of restaurants now properly utilize an Expo, up from just over 50% last quarter. This adjustment not only enhances accountability but also boosts communication with guests, ensuring orders are accurately processed.
Prioritizing Food Prep
Despite improvements, the company recognizes that many crew members are still involved in food preparation during busy shifts. Effective food prep demands significant culinary skill and fast execution. Early morning starts at 6 or 7 a.m. are essential for preparing fresh ingredients, including hand-mashed guacamole and daily-fried chips.
Chipotle is also exploring technology to ease the prep work while maintaining high culinary standards. Innovations like the dual-sided plancha and new produce slicers are being piloted to make food preparation more efficient. The dual-sided plancha is expected to roll out to an additional 74 restaurants by next month, and the produce slicer has already generated excitement among staff, receiving enthusiastic responses during a recent conference.
Investing in New Technology
In addition to these new tools, Chipotle has introduced other tech solutions to enhance efficiency. The augmented makeline, designed by Hyphen, and Autocado, used for avocado preparation, have begun pilot testing in select restaurants. The company is keen on learning from these innovations to make future iterations even better.
With these changes, Chipotle aims to allow team members to concentrate on achieving high throughput, ultimately leading to better dining experiences for guests every day.
Advancements in Recruitment
Alongside operational upgrades, a new AI hiring platform is set to streamline Chipotle’s recruitment process. This innovative system will automate communications and scheduling with applicants, reducing the hiring duration by as much as 75%. General managers will benefit from this automation, allowing them to focus on developing their teams and enhancing the guest experience.
Chipotle’s commitment to employee growth is highlighted by its ranking as the top company in the American Opportunity Index for high school graduates. The ranking reflects the company’s strength in hiring, promoting from within, and equipping employees for a successful career path.
A Culture of Growth
One inspiring story involves a team director who started her journey at Chipotle as a crew member after immigrating to the U.S. as a child. She now oversees 61 restaurants, contributing nearly $200 million in annual sales. Her progression within Chipotle illustrates the company’s dedication to nurturing talent and fostering leadership, with more than 90% of positions filled from within.
As Chipotle plans to expand to 7,000 restaurants in North America and enter international markets, the demand for new leadership roles will increase, offering vast opportunities for current and prospective team members.
Marketing Excellence and Brand Visibility
The marketing team has played a pivotal role in enhancing Chipotle’s visibility and reputation. Their efforts have solidified the brand’s standing in terms of ingredient quality and value. Campaigns such as “Behind the Foil” effectively highlight Chipotle’s commitment to fresh food and exceptional service.
Overall, Chipotle is on a path to improve restaurant operations, enhance employee experiences, and innovate its menu offerings, setting the stage for exciting growth ahead.
Chipotle Thrives with New Menu Items and Restaurant Expansions
Chipotle Mexican Grill is experiencing a surge in customer interest as they reintroduce fan-favorite menu items and expand their restaurant locations. This exciting development comes after a long wait for the return of Smoked Brisket, which has quickly become a standout for the chain, leading to increased sales and customer transactions.
Reviving Popular Dishes and Testing New Flavors
After three years, customers are eagerly celebrating the comeback of Smoked Brisket, which has significantly driven customer spending. The company undertook a huge effort to restock this favorite, amidst challenges in sourcing responsibly raised beef. The return has been so well received that expectations are high for it to remain on the menu through the fourth quarter. In addition to this, Chipotle is testing a new Chipotle Honey Chicken, a flavorful dish seasoned with Mexican spices and a hint of honey, which has also garnered positive feedback in tests conducted in Nashville and Sacramento.
Growth on the Horizon: New Openings and Market Expansion
With a robust start to the year, Chipotle has opened 185 new restaurants in 2023, already surpassing last year’s total of 149 new locations at this time. Looking ahead, the company aims to open between 285 and 315 new restaurants by year-end, setting a new record. Projections for 2025 indicate even more growth, with plans for 315 to 345 new locations, 80% of which will feature the popular Chipotlane service. In Canada, the success continues, highlighted by a record-breaking opening in Edmonton, pushing the total number of locations to over 50 soon.
International Developments and Future Prospects
Chipotle’s international strategy is also in motion, especially in Europe, where recent leadership adjustments have resulted in promising performance. The company is enhancing its menu and operational processes to align more closely with successful North American standards. Additionally, local and digital marketing efforts are being rolled out to boost brand visibility and customer footfall. Excitingly, Chipotle opened its first restaurant in Dubai this month, and it is performing exceptionally well, building further confidence in the brand across different regions.
Reflecting on Leadership Changes and Financial Results
As the company navigates leadership transitions, the culture and morale among teams have remained strong, with an emphasis on delivering quality food and service. Jack Hartung, the Chief Administrative Officer, addressed the recent change in leadership, noting the seamless transition as Scott assumes the role of Interim CEO. Financially, Chipotle reported third-quarter sales growth of 13%, reaching approximately $2.8 billion, while comp sales grew by 6%, driven by increased customer transactions.
Looking Ahead
For the remainder of the year, Chipotle anticipates continued strong transaction trends, particularly as they focus on easing competition with previous sales promotions. Overall, the chain expects comp growth in the mid- to high-single-digit range for 2023 and remains optimistic about its strategic expansion plans both in North America and globally. The commitment to becoming a purpose-driven global brand continues to shape their vision for the future.
As Chipotle pushes forward, they thank their teams for a successful quarter and emphasize their vision of ongoing growth and exceptional service.
Continued Growth and Strategic Adjustments for Company in Upcoming Quarters
Q3 Performance Overview
The company’s cost of sales for this quarter was 30.6%, marking an increase of about 90 basis points compared to a year ago. This rise is primarily due to inflation affecting various items, particularly avocados and dairy. To mitigate these impacts, the company has emphasized maintaining consistent and generous portion sizes and has introduced a premium smoked brisket limited-time offer (LTO).
Future Projections for Costs
Moving into Q4, the estimated cost of sales is expected to exceed 31%, influenced by the full quarter impact of the Smoked Brisket LTO. Management believes that a portion of this cost can be offset—approximately 60 basis points—through improvements in efficiencies and innovative practices. These strategies will target optimizations in the supply chain and in-restaurant operations, such as the use of produce slicers. Though some of these benefits may manifest in Q4, a complete offset is not anticipated until the latter half of 2025.
Labor and Operating Costs Stability
Labor costs were reported at 24.9%, remaining steady from the previous year due to sales leverage countering wage inflation. For Q4, labor costs are projected to hover in the low 25% range, influenced by lower seasonal sales while wage inflation continues in the mid-single-digit range. A significant contributor to wage inflation stems from California’s minimum wage increase, which has raised wages for restaurant employees by nearly 20% since April. Other operating costs have improved slightly, decreasing by about 20 basis points to 13.8%, driven primarily by sales leverage and a reduced delivery mix, even as marketing and promotional expenses rose slightly.
General and Administrative Expenses Outlook
General and Administrative (G&A) costs reached $127 million on a GAAP basis, amounting to $149 million on a non-GAAP basis after excluding a net $22 million benefit related to forfeited equity awards from the former CEO. The underlying G&A costs also included $126 million in standard expenses, $25 million for noncash stock compensation, and a $2 million adjustment for bonuses. Moving forward, the company expects G&A to rise to approximately $130 million in Q4 as it invests in staff to facilitate growth.
Financial Stability and Stock Repurchase Strategy
Stock compensation for Q4 is forecasted to be around $28 million, while additional bonuses and associated employer taxes are expected to total about $4 million. Including costs related to an upcoming field leadership conference, overall G&A is projected to reach approximately $163 million. Depreciation for the quarter was reported at $84 million (3% of sales) and is expected to increase slightly as more restaurants are opened.
Tax Rates and Fiscal Position
The effective tax rate for Q3 stood at 22.9% for GAAP and 23.8% for non-GAAP, benefiting from a decrease in nondeductible expenses tied to the CEO’s departure. For fiscal 2024, the estimated underlying tax rate is expected to be between 24% and 26%. The company’s balance sheet remains robust, concluding the quarter with $2.3 billion in cash and investments, with no outstanding debt.
Stock Repurchase and Leadership Remarks
During the quarter, $488 million of stock was repurchased at an average price of $54.55. The board’s approval of an additional $900 million in share repurchase strategy has left nearly $1.1 billion available at the end of the quarter. In closing, the CEO expressed gratitude for Jack’s mentorship over the past 15 years and highlighted a commitment to supporting the company’s 125,000 employees in restaurants and support centers.
Commitment to Value and Experience
The company continues to prioritize its unique economic model, allowing for investment in quality ingredients while providing exceptional value and maintaining industry-leading margins. This competitive edge demands a consistent dedication to excellent experiences for both restaurant teams and customers, which the leadership intends to uphold. Now, let’s proceed to the question-and-answer session.
Questions & Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Andrew Charles of TD Cowen. Please go ahead.
Andrew Charles — Analyst
Thank you. First off, congratulations, Adam, Jack, and Scott, on your new roles. Last call, you hinted at a potential price increase in Q4. Has the recent traffic increase and the labor cost pressures influenced your decision on this?
Scott Boatwright — Chief Operating & Restaurant Officer
Thanks for the question, Andrew. We’re keeping a close watch on consumer trends and the competitive market landscape. Currently, we’re not planning a price increase, but we may reconsider pricing actions in the future.
Adam Rymer — Chief Financial Officer
To add on inflation, we’re observing low single-digit inflation in cost of sales. After accounting for certain factors, we expect the remaining inflation pressures, particularly influencing labor costs, to remain manageable.
Andrew Charles — Analyst
That clarifies things, thank you. Jack or Adam, regarding your earlier ambition for 10% net restaurant growth in 2025—the guidance for 315 to 345 openings seems a bit shy of that goal. Could you elaborate on what is influencing this development guidance?
Scott Boatwright — Chief Operating & Restaurant Officer
This is Scott again. I’m confident that we will see year-over-year growth in restaurant openings in ’25, with numbers coming closer to the 10% mark than in previous years.
Company Confident in Future Restaurant Performance Amidst Challenges
Leadership Discusses Growth Targets and Current Metrics
Company leaders express confidence in maintaining a growth rate between 8% and 10%. They are optimistic about potentially edging closer to that 10% target. The team reports consistent project timelines of around 21 months and highlights the strength of their project pipeline.
The development team, coupled with an efficient operations team, assures strong performance in upcoming years.
Andrew Charles — Analyst
Great. Thank you so much.
Operator
Thank you. Our next question comes from David Tarantino with Baird. Please go ahead.
David Taratino — Analyst
Hi. Good afternoon. I’m interested in how new units are performing. This quarter, it seems the performance is a bit lower compared to previous ones. Can you explain what’s happening there?
Adam Rymer — Chief Financial Officer
I’ll start and then let Scott join in. There’s nothing particularly unusual this quarter. We’re still observing productivity around 80%. We remain enthusiastic about the performance of our new units.
Scott Boatwright — Chief Operating & Restaurant Officer
Moreover, the Year 2 return on investment has stabilized, keeping us optimistic about this class of restaurants.
David Tarantino — Analyst
Great. Thanks. Additionally, can you provide insight into how you’re planning to regain high 20s restaurant margins? You’ve indicated that this is a goal at current average unit volumes.
Scott Boatwright — Chief Operating & Restaurant Officer
Yes, I’ll begin, then hand it over to Adam. We believe in our potential to return to high margins in the coming years. We anticipate initiatives around supply chain improvements, efficiency enhancements, and new technology in equipment will contribute to our goals.
Adam Rymer — Chief Financial Officer
Within the margin framework, the 40% flow-through on incremental transactions is still valid. We did see an 80-basis-point decline year over year in Q3, but considering various factors like portion investments and promotional timing, we would have shifted from a negative to a positive margin.
David Tarantino — Analyst
Great. Thank you very much.
Scott Boatwright — Chief Operating & Restaurant Officer
Thanks, David.
Operator
The next question comes from Sara Senatore with Bank of America. Please go ahead.
Sara Senatore — Analyst
Thank you. I need clarification on comparable store sales and also want to discuss throughput. You mentioned that carne asada comparisons are tough, but didn’t it remain on the menu last fourth quarter?
Can you explain if you expect traffic trends, which improved in October, to decline for the rest of the quarter and how seasonality may factor in?
Scott Boatwright — Chief Operating & Restaurant Officer
Yes, we’re observing an upward trend in sales, even while evaluating the results of our carne asada promotion. We recently rolled off 20% pricing, and we’re optimistic moving forward, thanks to our strong product offerings and effective marketing.
Our operational teams are executing at levels I haven’t seen in 30 years, contributing significantly to our business success.
Adam Rymer — Chief Financial Officer
Regarding throughput, we’ve seen notable progress recently. For example, Expo execution improved from 50% to 60% of our restaurants. This improvement contributed to an increase of approximately 1.2 entrees served within a 15-minute timeframe, positively impacting our overall results.
Sara Senatore — Analyst
Great insights, thank you. On throughput, do you anticipate significant change due to the technology and equipment upgrades? Will this mostly enhance portion sizing or will there be a noticeable bump in throughput as well?
Scott Boatwright — Chief Operating & Restaurant Officer
I believe there will be an improvement. Our teams face challenges, especially during busy morning hours, related to food preparation, which can slow us down. New technologies will help streamline these processes, ensuring our staff can focus on delivering quality service and enhancing throughput.
Sara Senatore — Analyst
Thank you very much. That’s very helpful.
Operator
Thank you. Our next question comes from David Palmer with Evercore ISI. Please go ahead.
David Palmer — Analyst
Thanks. Good evening. Scott, I recently heard your insights on CNBC regarding AI-enabled custom marketing. Can you elaborate on what this might look like for your company?
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Chipotle Executives Discuss Innovations and Labor Efficiency During Earnings Call
Executives from Chipotle Mexican Grill addressed innovative changes while emphasizing their commitment to labor efficiency amidst rising consumer traffic.
Labor Efficiency and Digital Enhancements
In a recent earnings call, Scott Boatwright, Chief Operating & Restaurant Officer, highlighted the potential benefits of enhancing digital experiences. He noted that with a 1.2 improvement in entrees served every 15 minutes, labor hours remained flat despite a 3% increase in customer traffic. Analysts inquired whether this relationship indicated a direct correlation between increased throughput and labor optimization.
Boatwright responded, indicating that while digital improvements are critical, managing labor deployment within restaurants is equally important. He emphasized that proper distribution of labor tasks, such as food preparation and guest service, could maximize efficiency and customer experience.
A Focus on AI and Customer Loyalty
Boatwright also mentioned ongoing efforts to enhance customer relationship management (CRM) and loyalty programs through artificial intelligence (AI). He stated that the early stages of AI implementation aim to provide personalized experiences for customers based on their interaction history. This experimentation is expected to drive greater loyalty and improve performance over time.
Challenges in Portion Management
As questions arose regarding the impact of portion sizes on brand equity, Boatwright explained the importance of maintaining high-quality ingredients and satisfying portion sizes. He shared that customer feedback has shown positive trends, with improved perceptions about portion sizes and value for money. These responses are reflected in the brand’s social channels and several third-party metrics, indicating a resurgence in customer satisfaction concerning portion sizes.
Insights on Inflation and Future Costs
Chief Financial Officer Adam Rymer addressed concerns about inflation, predicting low single-digit increases for food and wages in the coming year. He noted that labor costs have remained steady and reiterated that anticipated costs of sales would likely remain unchanged.
Equipment Innovations and Long-Term Strategy
In discussing new equipment and automation, Boatwright elaborated on various initiatives aimed at enhancing efficiency. Innovations such as a dual-sided plancha and a new produce slicer are currently being tested to improve workflow in kitchens. As these technologies are deployed, the focus will be on creating a better employee experience while maintaining competitive pricing in the market.
The call concluded with an optimistic view on the future of Chipotle, reflecting a commitment to continual improvement in both customer experience and operational efficiency.
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Chipotle Discusses Future Innovations and Growth Strategies
Understanding Plans to Improve Efficiency and Guest Experience
Chipotle is committed to reducing repetitive tasks in its restaurants to enhance the guest experience and improve profit margins. The company is optimistic about advancements being made with its technology partnerships, including those with avocado and Hyphen. These collaborations focus on creating tailored technology solutions that will benefit the organization in the long term. As these innovations are tested in restaurants, the company continues to refine them for optimal effectiveness.
Insights from Morgan Stanley’s Brian Harbour
Thank you.
Operator
Thank you. Our next question is from John Ivankoe with JPMorgan. Please go ahead.
Exploring Chipotle’s Investment in Emerging Concepts
John Ivankoe — Analyst
Hi. Thank you for taking my questions. My first question is regarding your recent investment in Brassica, based in the Mediterranean and Columbus areas. Should we interpret this as Chipotle expanding as a platform company? Is this a singular endeavor, or can we expect more investments in unique businesses that align with your Food with Integrity philosophy?
Scott Boatwright — Chief Operating & Restaurant Officer
This investment comes from our Chipotle Next Fund, which focuses on finding emerging concepts aligned with our food ethos. This passive and minority investment is intended to provide guidance on growth strategies, without becoming a distraction for Chipotle’s operations. We view this as a potential growth platform in the future, possibly enhancing business opportunities in 10 to 15 years.
John Ivankoe — Analyst
That sounds promising. Thank you. My second question involves the preparation work across stores that require staff to begin early in the morning. Could you consider centralized prep locations clustered within specific markets to streamline preparation for nearby stores? I’m not suggesting a traditional central kitchen, but perhaps one store could support several by handling their prep needs. Is that something you are exploring?
Scott Boatwright — Chief Operating & Restaurant Officer
That’s a thoughtful question. We’ve considered such models, but they come with complexities and risks. Maintaining food safety during distribution from a centralized location to multiple stores poses challenges. Previously, costs made this approach less viable. For now, we believe our existing model best supports Chipotle in delivering the unique customer experience our brand is known for, though we remain open to alternatives in the future.
John Ivankoe — Analyst
Thank you for the clarification.
Operator
Thank you. Now, we’ll hear from Lauren Silberman at Deutsche Bank. Please proceed.
Consumer Behavior Trends Across Income Levels
Lauren Silberman — Deutsche Bank — Analyst
Thank you. I’d like to inquire about consumer behavior trends in different income groups. Are you noticing any differences among low/middle-income versus high-end consumers, and are there regional variations as well?
Scott Boatwright — Chief Operating & Restaurant Officer
Currently, we observe strong performance across all income groups, even amidst a competitive landscape. This reflects our ability to deliver significant value to consumers. For example, the average price of a chicken burrito is still under $10, which is 15% to 30% lower than most competitors. Both low and high-income consumers show positive purchasing trends.
Adam Rymer — Chief Financial Officer
I would add that all regions are performing well. While California experienced a dip in sales post-FAST Act price increases, it mirrored trends seen across the industry, likely due to broader economic factors rather than the performance of Chipotle specifically.
Lauren Silberman — Deutsche Bank — Analyst
That’s helpful. A follow-up on your Fourth Quarter guidance: You mentioned modestly increasing traffic despite price adjustments. Should we anticipate a deceleration in traffic as the quarter progresses? Are you projecting a comparable growth range around 4.5% to 5% for this quarter?
Adam Rymer — Chief Financial Officer
Indeed, September’s comps were in the mid-7% range, with traffic in the low 4% range. We expect this trend to maintain into Quarter Four. Our projections also include price impacts slightly above 1% and some mix adjustments, which suggest our comps could settle around the mid-five percent range.
Lauren Silberman — Deutsche Bank — Analyst
Thank you for the clarity. That’s all from me.
Operator
Our next question comes from Chris O’Cull with Stifel. Please proceed.
Analyzing Future Performance Metrics
Chris O’Cull — Analyst
Thank you. Scott, could you clarify the expected improvement in the number of entrees prepared every 15 minutes after implementing your upcoming throughput initiatives over the next six to nine months?
Scott Boatwright — Chief Operating & Restaurant Officer
We aim to return to the performance levels experienced during Chipotle’s peak, ideally hitting low 30s in entrees per 15 minutes, compared to our current mid-20s. This figure accounts for digital orders as well, revealing the importance of digital channels in our operations.
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Chipotle Executives Discuss Strategic Growth and Menu Performance
Elevating the Dining Experience
Chipotle Mexican Grill’s management recently provided insights about the positive reception of their new menu offerings, particularly the Smoked Brisket, and how it compares to previous promotions. Chief Financial Officer Adam Rymer noted that the brisket has been exceptionally well-received, especially when stacked against the carne asada, making up a substantial portion of entree sales.
Strong Trends in Customer Behavior
Rymer emphasized the brisket’s performance, stating it is not only attracting new customers but is also encouraging repeat visits. He shared that the introduction of this limited-time offer (LTO) has driven increased customer frequency. The flexibility of customer choices has been beneficial—they sometimes return for brisket or opt for other popular dishes like chicken and steak.
Scott Boatwright, Chief Operating & Restaurant Officer, expressed enthusiasm about how this LTO positively affects check sizes, transaction frequency, and overall margins, illustrating the significant impact of the new menu item.
Understanding Cost Dynamics
Analyst Brian Bittner raised questions regarding the decrease in margins, particularly concerning the cost of goods sold (COGS). Rymer explained that the 90 basis points decline in COGS margin was anticipated, driven by two main factors: a 60 basis points effect from strategic investments and about 50 basis points due to last year’s low avocado prices. While the brisket contributes favorable sales, it has a temporary cost impact on sales due to food price constraints, slightly increasing costs by 40-50 basis points in the quarter. Overall, a pricing adjustment of 2% to 3% could be necessary to maintain profit margins heading into 2025.
International Expansion Plans
Sharon Zackfia from William Blair inquired about Chipotle’s international growth strategies, especially with its partnership with Alshaya, which is yielding positive results. Boatwright confirmed their satisfaction with the partnership and indicated a commitment to continuing ownership of Chipotle locations in Western Europe and North America to maximize brand value and shareholder returns. They aim to explore additional international opportunities strategically, particularly in Latin America and the Asia-Pacific region.
Innovations to Enhance Service Efficiency
Zackfia also asked about Chipotle’s new Hyphen tool, which has only been implemented at one location so far. Boatwright highlighted its potential to streamline service. The goal is to maximize efficiency by allowing staff to focus on high-demand items while the technology handles other tasks. This innovation could lead to improved service accuracy and customer satisfaction.
Looking to the Future
Danilo Gargiulo from Bernstein probed into the company’s future strategy under Boatwright’s leadership. He expressed that while maintaining continuity is vital, opportunities for growth could still emerge. Boatwright stressed his commitment to their strategic priorities, which have historically driven Chipotle’s success. He aims to foster a more consumer-connected organization, ensuring every team member understands their role in serving customers effectively and driving performance.
Chipotle Charts a Course for Global Expansion with Strong North American Base
Strong Foundation Driving Growth Goals
Chipotle Mexican Grill has seen remarkable success in North America, with ambitions set on expanding to 7,000 restaurants globally. The company’s leadership is focused on transforming Chipotle into a more iconic global brand in the coming years. This strategic vision indicates significant growth opportunities ahead.
Insights on International Expansion Plans
Danilo Gargiulo — AllianceBernstein — Analyst
Let’s delve deeper into Chipotle’s international ambitions, particularly in Europe. Given their existing successes, how close is the company to establishing units in that market? What needs to happen before Europe can match the performance seen in Canada and the U.S.?
Scott Boatwright — Chief Operating & Restaurant Officer
Reflecting on Chipotle’s journey in Canada, which began a significant turnaround around six years ago, one of the key moves was appointing Anat Davidzon as the new leader. Her efforts have tremendously improved operational efficiencies, resulting in margins comparable to those in the U.S. Currently, Chipotle experiences growth rates between 25% to 35% in Canada.
We’ve strategically placed Anat in Western Europe, aiming for similar success. She is already aligning culinary standards with those in the U.S. while optimizing cost and operational processes. We see potential for hundreds of locations in our current markets, and possibly thousands as we expand in Western Europe into the future.
Closing Remarks Highlighting Future Aspirations
Danilo Gargiulo — AllianceBernstein — Analyst
Thank you.
Operator
That concludes our Q&A session. We will now turn the conference back to the company for final remarks.
Scott Boatwright — Chief Operating & Restaurant Officer
Thank you for participating in today’s call. I want to express my genuine pride in the Chipotle team for driving impressive trends this quarter. Our culture, brand strength, and value offer are at an all-time high. We have exciting initiatives to further enhance our brand and company in the years ahead. We look forward to updating you in our fourth-quarter earnings call in February. Thank you.
Operator
[Operator signoff]
Duration: 0 minutes
Call Participants:
Cindy Olsen — Head of Investor Relations and Strategy
Scott Boatwright — Chief Operating & Restaurant Officer
Jack Hartung — Chief Administrative Officer
Adam Rymer — Chief Financial Officer
Andrew Charles — Analyst
David Tarantino — Analyst
Sara Senatore — Analyst
David Palmer — Analyst
Christine Cho — Analyst
Brian Harbour — Morgan Stanley — Analyst
John Ivankoe — Analyst
Lauren Silberman — Deutsche Bank — Analyst
Chris O’Cull — Analyst
Brian Bittner — Analyst
Sharon Zackfia — Analyst
Danilo Gargiulo — AllianceBernstein — Analyst
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