Chipotle Mexican Grill Inc
NYSE:CMG
US |
Fubotv Inc
NYSE:FUBO
|
Media
|
|
US |
Bank of America Corp
NYSE:BAC
|
Banking
|
|
US |
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
|
US |
C
|
C3.ai Inc
NYSE:AI
|
Technology
|
US |
Uber Technologies Inc
NYSE:UBER
|
Road & Rail
|
|
CN |
NIO Inc
NYSE:NIO
|
Automobiles
|
|
US |
Fluor Corp
NYSE:FLR
|
Construction
|
|
US |
Jacobs Engineering Group Inc
NYSE:J
|
Professional Services
|
|
US |
TopBuild Corp
NYSE:BLD
|
Consumer products
|
|
US |
Abbott Laboratories
NYSE:ABT
|
Health Care
|
|
US |
Chevron Corp
NYSE:CVX
|
Energy
|
|
US |
Occidental Petroleum Corp
NYSE:OXY
|
Energy
|
|
US |
Matrix Service Co
NASDAQ:MTRX
|
Construction
|
|
US |
Automatic Data Processing Inc
NASDAQ:ADP
|
Technology
|
|
US |
Qualcomm Inc
NASDAQ:QCOM
|
Semiconductors
|
|
US |
Ambarella Inc
NASDAQ:AMBA
|
Semiconductors
|
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
52 Week Range |
43.7822
68.5522
|
Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
Fubotv Inc
NYSE:FUBO
|
US | |
Bank of America Corp
NYSE:BAC
|
US | |
Palantir Technologies Inc
NYSE:PLTR
|
US | |
C
|
C3.ai Inc
NYSE:AI
|
US |
Uber Technologies Inc
NYSE:UBER
|
US | |
NIO Inc
NYSE:NIO
|
CN | |
Fluor Corp
NYSE:FLR
|
US | |
Jacobs Engineering Group Inc
NYSE:J
|
US | |
TopBuild Corp
NYSE:BLD
|
US | |
Abbott Laboratories
NYSE:ABT
|
US | |
Chevron Corp
NYSE:CVX
|
US | |
Occidental Petroleum Corp
NYSE:OXY
|
US | |
Matrix Service Co
NASDAQ:MTRX
|
US | |
Automatic Data Processing Inc
NASDAQ:ADP
|
US | |
Qualcomm Inc
NASDAQ:QCOM
|
US | |
Ambarella Inc
NASDAQ:AMBA
|
US |
This alert will be permanently deleted.
Greetings, and welcome to Chipotle Mexican Grill, Inc. Second Quarter 2018 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Chipotle. Please go ahead.
Hi, everyone, and welcome to our call today. By now, you should have access to our earnings announcement released this afternoon for the second quarter of 2018. It may also be found on our Investor Relations website at ir.chipotle.com.
Before we begin our presentation, I will remind everyone that parts of our discussion today will include forward-looking statements as defined in the securities laws. These forward-looking statements will include statements regarding the expected benefits from our strategic focus areas or specific business initiative; the potential opportunity for our digital sales; sales trends and forecasts for future comparable sales; expected new restaurant openings; estimates of future food, labor, marketing and maintenance and repair costs; statements about our expected effective tax rate and projections of the amount and timing of unusual cost items and stock repurchases as well as other statements of our expectations and plans. These statements are based on information available to us today and we are not assuming any obligation to update them.
Forward-looking statements are subject to the risks and uncertainties that could cause our actual results to differ materially from the forward looking statements. We refer you to the risk factors in our Annual Report on Form 10-K as updated in our subsequent Form 10-Qs for discussion of these risks.
Our discussion today will also include non-GAAP financial measures, reconciliations of which can be found on the presentation page of the Investor Relations section of our website.
I'd also like to remind everyone that we've adopted a self-imposed quiet period, restricting communications with investors during that period. The quiet period will begin on the 16th day of the last month of each fiscal quarter and continues until the next earnings conference call. For the third quarter of 2018, it will begin, September 16 and continue through our third quarter earnings release.
We will start today's call with some prepared remarks from Brian Niccol, Chief Executive Officer; and Jack Hartung, Chief Financial Officer, after which we will take questions.
In the room and also available during the Q&A period are Scott Boatwright, Chief Restaurant Officer; Curt Garner, Chief Digital and Information Officer; Chris Brandt, Chief Marketing Officer; Laurie Schalow, Chief Communications Officer; and Marissa Andrada, Chief Human Resources Officer.
And now, I will turn the call over to Brian Niccol.
Thanks, Coralie, and good afternoon, everyone. I'm pleased to report a solid second quarter with sales and restaurant level margins ahead of our expectations. Total sales grew 8.3% to $1.27 billion, driven by comparable sales of 3.3% and 34 new restaurants opened in the quarter. This positive comparable sales trajectory enabled us to expand restaurant level margins, which were up 90 basis points year-over-year to 19.7%. Earnings per share adjusted for unusual costs grew nearly 24% to $2.87 and our GAAP earnings were $1.68.
While Jack will go through the financials in more detail shortly, I'd like to put these results into context by discussing how the work our 70,000 employees do every day contributed to these financial outcomes.
Last month, we shared with you that we would execute our strategy to win today and cultivate the future by focusing on these five areas: becoming a more culturally relevant and engaging brand that builds love and loyalty; digitizing and modernizing our restaurant experience to create a more convenient and enjoyable guest experience; running great restaurants with great hospitality and throughput; being disciplined and focused to enhance our powerful economic model and building a great culture that can innovate and execute across digital, access, menu and the restaurant experience.
Today, I'll focus on how innovation in digital and access and how improving our operations contributed to this quarter's results. Let me begin with operations. We know that strong sales growth and margins are dependent on great operations, which is the hallmark of any healthy brand. This brand was founded on outstanding operations and real food. We're getting back to our roots.
When we have the right people leading the right teams and when those teams are well trained and operating with confidence, they execute great guest experiences. It takes time to build a culture of accountability and I'm pleased that we're seeing some encouraging signs of progress in key areas; namely our restaurant AB scores, a measurement system we implemented 1.5 years ago to drive greater accountability is trending in the right direction.
We are doing a better job staffing our restaurants to match sales volumes and we have lower year-over-year hourly turnover, which tells us we are making progress on training and building great teams.
Additionally, we have seen a meaningful decline in guest complaints and with that our guest satisfaction scores have improved since we started measuring them last year. This tells us that we made progress and that our guests are noticing the difference.
We know that when the food is delicious, the field of the restaurant is great and we removed the friction from the flow of the order process, no matter the channel we delight customers.
While I'm encouraged by our progress, we still have a lot of work to do. We have an opportunity to improve through-put, consistent execution of great food and consistent delivery of a great atmosphere. I'll outline some of the initiatives underway to address those opportunities.
We are halfway through our Big Fix initiative, which is designed to bring our restaurants back up to standards and make them uniquely Chipotle. This not only improves the guest experience as the appearance of our restaurants is clean and well-maintained for every guest, but the team member experience improves as well.
We overhauled our training materials several months ago and have retrained three quarters of our field leaders through Cultivate University. That's an in-restaurant and in-classroom one week training session that we launched in April, that investment in the ongoing development of our field leadership continue to drive crew member engagement.
We are supplementing that training with a new hospitality training program in the restaurants and we are in the early innings of refining our training to teach and taste the details, so that we achieve the winning combination of great food, feel and flow with every guest experience. We are zeroing in on how to get back to great through-put as speed of service is a foundational element of convenience that our guests truly value.
Late last year, we rolled out what we call the owner's path, a comprehensive review of our restaurants performance, equipping our field leaders with these tools improving their powers of observation and allowing them to focus on the critical details of delivering improved guest experience.
In addition, the tool creates teaching moments for their general managers and documents the corrective actions are taken when needed. We are currently rolling out a digital version for mobile phones and tablets of this previous paper-based tool, that should result in more consistent operations across our restaurants. We'll have this in place nationally by October.
We're also in the process of redesigning our forecasting and labor scheduling tool. This is significant undertaking, but necessary for us to have accurate sales forecasting and deliver the right amount of labor at the right time to meet the needs of our guests. The new tool will have a best-in-class sales forecasting component that will leverage machine learning to remove the guesswork of determining sales and labor needs for our business.
In addition, our team members will have the ability to see their schedules remotely and swap shifts from mobile phones, taking these tasks out of the hands of the manager. We believe leveraging technology such as this makes us a more desirable employer as we work to create a better experience for our crew members. We will continue to make investments in our restaurants because a better experience for our team members directly translates to a better experience for our guests.
I'd also like to talk to you about the progress we are making around the innovation in digital and access, as this was a real bright spot in the quarter. Today, our annualized digital sales are approximately $0.5 billion, and we are in the early stages of this multi-billion dollar opportunity. Our digital sales grew 33% in the quarter and now account for 10.3% of sales, an acceleration from 20% growth in the first quarter.
We now have 4 million active monthly users across our app and our website, a 65% increase since the end of last year. Delivery in group occasions were particularly strong this quarter. Delivery sales quadrupled in the quarter and we know from our customer research that improving access to Chipotle is an important growth lever, whether it be through adding more restaurants or enabling more convenience, like delivery.
Today, delivery is available from 1,700 restaurants and we expect that to reach 2,000 restaurants by year-end. We're also pleased that delivery is now an option available directly from our app.
Our group ordering business was solid in the seasonally strong quarter for catering orders. In mid-July, we expanded our Build-Your-Own catering offer nationally, whereby we lowered the minimum size and offered more price tiers for group orders, therefore expanding access for more occasions. We tested this enhancement earlier in the year and found that group order sales in our test stores outperformed the base by mid to high single digits. Delivery availability for catering expanded to two-thirds of our restaurants in the quarter.
As I've mentioned, Chipotle's second make-line enables the business to handle the incremental growth without any impact on throughput or the in-restaurant experience. I'm happy to see progress on digitizing our second make-lines, which are now in roughly 500 restaurants. We are targeting approximately 1,000 restaurants to be enabled with the digital second make-line by year-end and we are accelerating our rollout to reach completion by the end of 2019. These digital second make-lines have a direct positive impact on the team member and guest experience.
Also, the digital pickup shelf test in several New York City restaurants continues to show great promise and based on the results to-date, we will be expanding the test to a larger number of restaurants in several markets next month.
We've mentioned before that we are undertaking a wide-ranging consumer research project, with the results available this fall. I did, however, want to mention a few interesting highlights that we've uncovered so far. Access is the number one lever we can pull to drive sales, which supports our new unit growth as well as the innovation focus around access via our digital channels.
Additionally, we sit at an interesting intersection between fast food and fast casual, with many attributes such as value and speed that are typically associated with fast food and attributes such as quality and freshness, which are typically associated with fast casual.
We're particularly strong with Millennial and Generation Z customers relative to most brands and when these groups try us, our odds of repeat visits are much higher. These early insights give us confidence that new news and the more engaging marketing that you're beginning to see will allow us to drive transaction growth.
Also, I'm pleased with the speed at which we're getting transaction-driving initiatives across digital, access, loyalty and menu into test markets. The combination of these test markets and our early insights from our consumer research will inform our plans in 2019 and beyond.
Before I turn it over to Jack, I want to thank all of our team members across the country that are working diligently to serve our guests real food, cooked to perfection and prepared in our restaurants with fresh ingredients just the way our guests like it. This hard work is the basis for all of our future success and we appreciate it tremendously.
Now over to you, Jack.
Thanks, Brian. I'm really pleased that our team is focused on our five strategic priorities, has contributed to a high quality quarter with comp sales of 3.3% and a 19.7% restaurant level margin. And underlying earnings were also strong after adjusting for a number of unusual costs during the quarter.
As we discussed on our call last month, we'll continue to see costs over the next few quarters associated with our restructuring, relocation and underperforming store closures. These charges also have a temporary impact on our tax rate, which I'll talk about in more detail later.
We generated revenue of $1.27 billion during the quarter, an increase of 8.3% from last year, on comp sales growth of 3.3%. That's on top of last year's strong 8.1% Q2 comp sales increase. Restaurant level margins of 19.7% expanded 90 basis points from last year and normalized earnings per share adjusted for the unusual items was $2.87. The second quarter had unusual expenses mostly related to the transformation and that negatively impacted EPS by about $1.19, leading to a GAAP earnings per share of $1.68.
In Q2, we expensed about $25 million in expenses related to restaurant asset write-offs, approximately $16.5 million related to office closures and $7 million related to the restructure of our organization and other unusual expenses. These charges were offset by a non-recurring benefit of about $6.5 million related to lower stock comp expense as a result of the restructure. As a result of these transformation expenses, our tax rate increased about 400 basis points, which I'll explain later.
The Q2 comp at 3.3% was primarily driven by higher average check due to the price increases taken over the last year as well as queso add-ons. The price increase average about 4% in the quarter and customer resistance to the price increase remains at or below 20%. The menu price impact was lower than Q1, as we lapped the first increase from April of last year in about 20% of the restaurants.
Sales trends in the first three weeks of July continue to mirror what we saw in Q2 with the comp increasing over the last week or so, as we've begun to compare against those softer trends from last year. So overall, comps should improve from the 3.3% in Q2.
However, keep in mind, that comparisons will get tougher later in Q3, as we lap the introduction of queso in early September, which initially added about 3.5% to the comp, before settling into a sustained benefit to the average check of about 2%. And in November, we will lap the price increase in about 1,000 restaurants, which added an additional 1.3% pro-rated impact to the comp.
Based on second quarter results and expected improvement in the Q3 comp, we're increasing our full-year comp sales guidance from low single-digits to a low to mid single-digit comp range.
We opened 34 new restaurants in the quarter and expect to be at the lower end of our 130 to 150 new opening guidance for the full-year. While we're still building inventory for next year's openings, we continue to expect 2019 openings will be at or above the 2018 levels. Our new restaurants this year have opened strong and we're continuing to emphasize high quality, high returning to restaurants as we build out our pipeline.
As mentioned on our last call, we expect to close between 55 and 65 underperforming restaurants; and today, we're closing 29 Chipotle restaurants. During the second quarter, we closed five Pizzeria Locale in Kansas and Ohio and we also closed three Chipotle restaurants including one relocation. So, today's closures about half of the underperforming restaurants have now closed.
Food comps for the quarter were 32.6%, a decrease of 150 basis points from the 34.1% in Q2 of last year. The decrease from last year was driven by the menu price increase and more favorable avocado prices. The decreases were slightly offset by elevated prices for our steak and barbacoa.
We expect food cost to increase to the low 33% range in Q3, due to the seasonal shift to source higher cost avocados from California and an uptick in paper and packaging costs. We expect to be closer to the 33% in Q4, as we begin to shift the supply of avocados back to Mexico.
Labor costs for the quarter were 27%, an increase of 80 basis points from the 26.2% in Q2 of last year. The increase from last year was driven primarily from wage inflation of about 6% and increased restaurant manager bonus cost as we returned to normalized bonus payouts, rewarding our managers for delivering strong results. These increases were offset by leverage from the menu price increase.
I expect labor cost to increase to the high 27% range in Q3 and to the mid 28% range in Q4 and these increase are driven primarily by seasonally lower sales in Q3 and Q4 and by general wage pressures.
Occupancy cost for the quarter were 6.9%, which is flat with last year. Other operating costs for the quarter were 13.8%, a decrease of 20 basis points from Q2 of last year. Our marketing and promo cost were 3.2% in the quarter, a decrease of about 40 basis points compared to Q2 of last year. We expect marketing and promo cost to be at or slightly above 3% of sales for the full-year with elevated spending continuing in Q3 and Q4.
Other operating cost continue to include about 30 basis points of higher maintenance and repair cost, which we first discussed on our Q4 call and we expect M&R to continue with this elevated level for the rest of the year.
G&A in the quarter increased by $8 million compared to Q1 of this year. The increase compared to last quarter was primarily due to the stock comp forfeitures and the timing of the 2018 equity grant that we discussed on the last earnings call.
As I mentioned earlier, G&A also included $7 million in charges related to the restructuring and additional unusual charges in the quarter, but those were offset by a $6.5 million non-recurring benefit related to revising our estimates of forfeitures, related to stock grants from employees expected to leave the company.
G&A increase compared to Q2 of last year was primarily in support of our restaurant growth, digitizing our restaurant experience and operational leadership changes in the field.
Depreciation expense for the quarter was 3.9%, an increase of 40 basis point from the 3.5% in Q2 of last year. This increase is due to the accelerated depreciation for items we're replacing were related to the maintenance and repair refresh as well as capital initiatives that we described on our Q4 call.
We expect the increase related to the refresh to fall off in the second half of the year. However, it will be replaced by accelerated depreciation and restaurant closures we detailed earlier. As a result, we expect depreciation to remain at this elevated level for the rest of this year.
Our pre-tax income was $70 million and our reported effective tax rate was 33.3%. Our tax rate was higher than the 29% underlying rate we discussed on our last earnings call and is a direct result of the $42 million in unusual expenses this quarter. Without these charges, our tax rate would have been right around at 28.5% effective rate and we expect to return to a roughly 29% rate next year when the transformation charges are fully behind us.
This underlying rate of about 29% may be affected in future years by stock comp vesting and exercises when the benefit realized by our employees varies from our accounting treatment and we'll fully call out these impacts as they occur.
We continue to expect the transformation cost on the restructuring, restaurant closures and other unusual cost will total between $115 million and $135 million with most of that amount hitting in 2018.
We estimate that about $50 million to $55 million will hit in Q3 with most of the remainder in Q4. There will likely be some charges related to terminating restaurant and office leases that will spill into 2019. We'll also write-off about $10 million in deferred tax assets, beginning in Q4 with most hitting in 2019 as fully vested, but underwater options will likely expire as we complete the restructure of the organization.
In Q3, we expect our effective tax rate to be right around 30.3%, or about 130 basis points higher than we guided last quarter. In Q4, we expect our tax rate to be as high as 43% or about 450 basis points higher than we guided last quarter. Both of these increases are due to a lower pre-tax income as a result of the transformation expenses.
As mentioned during our Q1 call, our Q4 rate is impacted by performance shares that will likely expire in that period, because their performance shares will only vest if the stock price is over $700. We took deductions on these performance shares over the years, but if they prove worthless, we won't get a tax benefit contributing to the estimated 43% tax rate.
We'll continue to provide more specifics on future transformation-related costs, when we have more certainty around the timing and we will continue to break out the unusual costs for normal cost you can follow the underlying trends.
We're encouraged by our second quarter results and the contributions of our restaurant teams have delivered an excellent guest experience. We're also encouraged by our guest response to our digital initiative so far along with the solid sales and restaurant-level margin performance during the quarter.
We're confident that significant changes we're making to our organization will enable us to continue to improve operational excellence in our restaurants to be more nimble and innovative in digital, access, menu and the restaurant environment and to execute better to deliver on our commitments to our guests, our employees and our shareholders.
And now, we're happy to take your questions.
Our first question comes from the line of Sara Senatore with Bernstein. Please proceed with your question.
Yeah. Hi, thank you. Just on the 2Q, the implication is with four points of price, I think that you saw some negative traffic and I guess how do you turn that around? And, in particular, you talked about really a lot of growth in digital usage. But do you think you're substituting – just substituting from walk-in orders? Or can you actually tell that these orders are incremental? And are you starting to build a database of your customers that might allow for better targeted marketing? Thanks.
Yeah. Thanks for the question. Obviously, I think I did mention in the early remarks, a lot of our new transaction driving initiatives are getting ready to head to pilot and we also are working on some new marketing communication as well.
So, I think as those things start to enter markets and then we gain learnings on how to improve those programs and then plan for national execution, the goal is to use the stage gate process than to inform what our sales transaction performance is going to be going forward. The good news is our price increase that we passed-through has passed-through nicely.
We're not seeing customer accounts retreat versus anything we've seen historically when we take pricing. I mean regarding your question on digital sales, obviously there's multiple elements to that, right? There's the delivery aspect. There's our catering and then there's also the app or website orders. And we see varying degrees of incrementality across each of those spaces. The thing that we do know though is, when we get a digital orders through that second make-line, the economics of that order are very attractive and then our customer satisfaction scores also are very attractive.
So, we continue to see improvements on accuracy and speed at which we're getting people the food they want, when they want, where they want it. So, still a lot to learn and actually when we get the pilot going on our loyalty program, I think that's going to give us another level of insight in understanding on exactly how all these transactions are interacting with each other and that's a new skill we're going to be building for the organization going forward.
Thank you.
Our next question comes from the line of David Tarantino. Please proceed with your question.
Hi, good afternoon. Just maybe a clarification question on the comps for the quarter. Could you maybe explain how the trend transpired as the quarter progressed? It's not as if on the last call you might have started a little slow and then maybe picked up later in the quarter. But is that accurate? Or how should we think about that?
Yeah, David. I think that is accurate. We talked on the last call that in April because of weather and the seasonal shift of Easter that we got off to a slow start. May was a great month for us. That's when we had the DoorDash promotion, so May looked great.
And then June settled in right at about the overall average for the month, so I would say the overall comp of 3.3% is a good kind of gauge for what the underlying trend was, a little less in April more in May, but then we settled out right in the middle in June. So, we feel good about the way that we ended the quarter and how we're entering the third quarter now.
Great. That's helpful. And then I guess, Jack or Brian, that does suggest a little bit of underlying improvement in at least the way we look at the business on a sequential basis on traffic. So, could you maybe talk about what you think drove that improvement, whether it was the operations improvements you talked about? And then on the operations improvement, in particular, is there any sort of deeper look at that data that would suggest that's moving the needle as you kind of split the restaurants that are doing the best from the worst apart from one another?
Yeah. Look, I don't think it was just one thing. The good news is, though, as I mentioned earlier, we've seen improvement in our operations on all the key metrics. And we continue to hear more and more positive customer feedback on their experiences and fewer, or a reduction in customer complaints.
And we believe there's even more opportunity for us to get even better on throughput going forward, so we're pleased with the progress we're making on ops. We also saw in the quarter people really responded positively to the advertising that we put out there, and then obviously, we've seen very positive responses to varying elements of our digital program.
So, I think it was a combination of multiple things, not one thing that drove it and that's what has us excited about how we're moving forward with all the pilots across the business. We're making progress, I think, on ops. We're making progress on digital, and we're making progress on really understanding our customer base better. So that, look, we get the brands, the right message then with the right food at the right place with the right value. I think we'll continue to see improvement in our performance.
Great. Thank you very much.
Our next question comes from the line of Nicole Miller with Piper Jaffray. Please proceed with your questions.
(26:09-26:14) culture of accountability. Could you talk a little bit more about maybe how it's changed to work in the store day-to-day and how are you aligning that with incentives to have the employees make these changes?
Hey, Nicole, I think we missed the first part of your question. Could you just start from the beginning?
Absolutely. Thank you. So asking about the culture of accountability, and I thought it was helpful how you talked about how that translated to the customer engagement or improved guest satisfaction. So, what I'm wondering is from the employee perspective, in that store, how is it different to work there today than before, and what are the incentives that you have put in place to keep them aligned with your culture of accountability?
Yeah. Thanks for the question. Obviously, one of the things that I think Scott has done a nice job in the field is the accountability is both on developing a great team as well as being accountable to providing a great experience for the customer.
So, I think we're starting to see our teams being more staffed correctly, engaged at another level than where they had been over the last couple years, and everybody has clarity on what their role is on the team. And I think we've talked about this in the past. But, we've given everybody their kind of top five responsibilities, which then gives the team the ability to trust that each other is going to be doing what they need to do for them to be successful.
And then to your question on incentives, yeah, we moved to some quarterly bonus programs. And we've seen that actually have a material impact on our employee satisfaction with – when they make great progress then they get rewarded much closer to when they have that success.
So, I think it's a combination really of making sure that we're holding ourselves accountable to great experience, but also holding ourselves accountable to develop a great team and then obviously rewarding them when they have successes.
And then just a final question, when you think about the structural framework previously of a $2 million AUV translating loosely to a 20% store level margin. You're doing that, yet you have over 3 percentage points of marketing that is at least twice as much as what it had been historically. So, it seems that there might be more leverage in the model. Is there any kind of framework you could give or update for us to think about as we model going forward? Thanks.
Yeah, Nicole. We've also got M&R just a little high as well. So, I mean, the results we're seeing in the last couple of quarters, give us even more confidence that the model at $2 million gets you right about in that high-teens to 20% margin. And as we grow the volume from there, we think we can move back up into the 20-plus percent margin. So, the things that we thought the model can do, I think we're starting to see that they're coming to life.
Thank you.
Our next question comes from the line of David Palmer with RBC Capital Markets. Please proceed with your question.
Thanks. Good evening. Brian, you mentioned some statistics earlier about how the fast casual occasion perhaps overlaps with that of fast food in some ways with younger generations and that trial seems to be important with those consumers. I'm trying to understand, what you're seeing and saying about the opportunity there in the past?
I think Chipotle tried to get trial going coupons and the like with this understanding that if you get trial they'll come back. But how are you thinking about marketing perhaps different than that and using the data you're seeing? Thanks.
Sure. Yeah. So, I think I mentioned this in our call a couple weeks ago. We've got a big foundational consumer study out and we're starting to get some top line in. And what we have definitely seen is when people try the brand and have a positive experience with it, their intent to stay with the brand is much higher than a lot of our competitors in both fast casual as well as fast food. And it's very exciting because when we look at younger people we're getting even more positive response to intent and then intent to stick with us. So, that's what I was referencing.
And in the brand obviously, I think we all instinctually see this, it is very much a purpose-driven brand that syncs up nicely with Gen Z and Millennials and we're seeing that play out in our research as well. So, we're going to want to continue to build on that strength as we move forward.
And Jack, you mentioned the restructuring expense that you expect. I know, it's not typical necessarily in the sector, but could you talk about the dollar savings you anticipate, or maybe the return on investment from these store closures and restructuring expenses and the timing of that? Any color would be helpful. Thanks.
Yeah, David. The restaurants we're closing, these are all cash flow losing restaurants. We've got about half of them closed right now. So kind of take before we can see the full effect, we're going to have them all closed. But we should pick-up somewhere in the 20 basis points, 30 basis points of margin once they're all closed. So, there's a definite improvement in our margin returns from that standpoint.
Most of the other costs that's more with restructuring the organization, they're going to be returned on that. It's not going to be as black and white or linear. The return is going to be on having a culture that's more innovative, a culture that's more results-oriented and we think there's going to be lots and lots of benefit there, but it's going to be less of a cause and effect where we can tell you what the actual return is.
Thank you.
Our next question comes from the line of Karen Holthouse with Goldman Sachs. Please proceed with your question.
Hi, this is actually Jared on for Karen. Can you guys give us a sense of maybe delivery as a percent of your total sales at this point and maybe just some context about how delivery is contributing to stronger comp in 2Q versus 3Q?
Yeah, delivery is a piece of that 10% number that I mentioned earlier on our digital sales and what we're seeing is, today we're in 1,700 restaurants. We'll be expanding closer to 2,000 here shortly. Really, the delivery performance not surprising right now what we're seeing is it really is impacted by how we promote it, because we're in the early days of getting people to understand that it's available.
I think at the last number I saw we still have over 50% of customers not realizing Chipotle is available for delivery. So, we're seeing some variability in the delivery performance based on how we promote with these partners. The thing that is exciting though is, we are seeing – when we hit that bump, we don't fall below where we were. So, we're continuing to see progress. And I think over time as we build awareness, build a habit, I think we'll see this play a bigger and bigger role in getting us into an on-premise engagement.
Thanks. And if I could just follow-up with one more. Have you guys seen any learnings early on the new menu test items that you have in test right now? Thanks.
Sure. I think I mentioned this earlier. We're actually – you've seen the products in our NEXT Kitchen where that's really just the look of operational execution and we're just getting ready to use our stage gate process to move a handful of initiatives into an actual test market, where we'll be at scale, where we'll start to really have true learnings of customer experience, team member experience and then how that plays out on total Chipotle performance. So too early to comment on any of those items right now.
Thanks for the color.
Our next question comes from the line of Andy Barish with Jefferies. Please proceed with your question.
Hey guys. Two things. Just on – can you help us understand as you start to lap, I think, you mentioned, Jack, the July issues last year in Virginia just how we should think about that maybe 500 basis points or 600 basis points decline in traffic kind of coming back?
Yeah, Andy. There's a couple things going on right now. We're also comparing against, right now, SAVOR.WAVS. So, we did see a nice uptick in a comp in the last week or so as we compare it to the soft tail from last year, but SAVOR.WAVS happened as well which there was a big BOGO, a lot of buy-one, get-one and so that's creating a little bit of noise, but we do expect to see much more attractive traffic and much more attractive sales comps over the next several weeks. And that'll only be slowed a bit as we compare to the launch of last year, which I talked about in my prepared comments. So, yeah, we're already seeing the positive effect from the comparison to last year, to the softness from last year.
Got you. And then anything on sort of pricing as you do the research on the brand? The ability to be a more regular menu price increase taker instead of every several years as has been the case in the past?
Yeah. So one of the things, we're definitely looking to understand is exactly the health of our value equation. The good news is our value continues to be very strong, and what we're assessing right now is, what is the right approach to sequence in pricing over time, making sure, we don't ever get ahead of a great value equation. So, that's part of the consumer research, frankly, that we've got going on right now. As we get those learnings back, it will inform, how we approach pricing going forward.
Thank you.
Our next question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question
Hey, guys. This is actually Jeff Priester on for Jeff Bernstein. Operationally, given all these initiatives, including your potential new items coming from the NEXT Kitchen and I know in New York some of the pickup shelves around the end of your actual make line. Is there going to be an issue down the line where implementing some of these initiatives, where you need to expand the line or reorganize it to get some of these things out there? And then I have one follow-up.
Yeah. Sure. So, I think I mentioned this before. Obviously, everything we're looking at has to be thoughtfully executed, so that the throughput engine of Chipotle is not jeopardized. And I think I mentioned this earlier, there's some projects that frankly just are bolt-ons. So like a digital shelf pickup. That actually improves the customer experience and the team member experience, because it eliminates that confusion for where the mobile order person is supposed to go, that awkward moment at the cashier. It eliminates a lot of that.
So, that in our opinion is a throughput enabler, because two things happen. One, it merchandises the fact that you can do this mobile ordering and not have to go through the line. And then the second piece is, it really takes advantage of our second make-line, which is I think a huge advantage to open up an off-premise business.
But look, the varying initiatives, if it comes with needs for new equipment, we'll test out the new equipment and make sure that it works and plays nicely with the throughput engine that we have. If it doesn't, then that's why we use the stage gate process to learn and figure out how we try again.
And it's going to be an iterative process with us. So, I'm very excited that we're going to start the process of seeing some of these pilots get into market, so that we protect the integrity of what's made Chipotle great, while we figure out how we enhance relevance and dial up engagement.
Great. And then on delivery, can you give us a sense of the average check you're seeing relative to your dining customer and then as well as the number of customers per order, the number of entrées per order, however you want to approach it?
Yeah. I mean, we see obviously a nice increase in our digital orders. So the mobile and delivery orders are in that $16 to $17 range versus our traditional check is in the $12 range. And we're still learning, frankly, what is the order size that comes with it versus additional attachments like chips and guac and queso and so on and so forth. But we're really seeing a blend right now of both. There are times we see more add-ons and then there are times where clearly it's a larger group occasion that's off-premise that's ordering through the app or through the delivery third-party.
Great. Thanks.
Sure.
Our next question comes from the line of John Ivankoe with JPMorgan. Please proceed with your question.
Hi, this Brandon (39:38) on for John. I believe on the first quarter call, you mentioned that you expected marketing and promo to be elevated throughout the remainder of the year. Do you still expect that to play out throughout the back half of 2018 here?
Yes, it will be a little elevated. We were light in the first quarter. We were 3.2%. This past quarter, we'll be right at about that same 3.2%. So, overall for the year, we'll average right at about 3% for the overall year.
Got it, Okay. And then I just had a follow-up. You mentioned in your prepared remarks restaurant AB and guest set scores are beginning to trend in the right direction. Could you elaborate on that comment, maybe quantify some of those improvements?
Yes. So, the restaurant AB is the measurement tool that we use that's a couple of metrics that are very important to us that cover financials, people, guest experience and the team, okay. And what we're happy to see is we're seeing a nice move from Bs to As, and that's a good sign. So, it's a very important metric. It's one that Scott keeps a laser eye on and it's a good way for us to understand how we're performing in our restaurants and how we're actually making progress.
Thank you.
Our final question comes from the line of Jake Bartlett with SunTrust. Please proceed with your question.
Great. Thanks for taking the question. First, I just wanted to get a sense for how much of the initiatives are driving or how much the improved outlook in the back half is driven by the initiatives or driven by the easy compares?
And I know with in terms of the initiatives, there's a lot of unknown timing, but maybe if you could talk about what you do know. For instance, I believe when you get your study back on the consumer that that's going to be the source of a new advertising campaign, maybe some impact of the change in the new catering menu. I'm thinking about the shelf roll-out. You just mentioned how kind of a no-brainer it is. I mean is that really a test that's going on? Or is that just kind of, should we expect that to be rolled out here in the back half?
You know what, I didn't hear the last part of your question, but let me answer the first part, which is, as we talked about our guidance, it's got nearly zero on the initiatives that we've been talking about that we are putting into pilot and that we're going to start expanding over the course of the year.
And what we're seeing right now, I think is what I mentioned earlier, which is, I think we're seeing a nice improvement in our operational performance. I think we've got more visible, more effective, more relevant marketing out there and I think we've done a nice job of expanding access to our digital efforts.
I think it's going to continue to be the combination of all those things plus as we get some learning on loyalty and potentially some new menus items down the road, that we'll see initiatives play hopefully a bigger role going forward. But as of right now, there's – I think it's very minimal. And what was the second part of your question?
The second part was just your initiative like the shelves, the pickup shelves. You mentioned kind of it's a no-brainer operationally. I mean what is the obstacles to just kind of rolling that out and not considering the test, but kind of just seeing a roll out. What is there to test with them?
Yeah. So look I think as an organization we're going to be a test and learn organization before we go launch. And even though going into where we put it in these five stores, our early indication were it's a no-brainer. The good news is in the first five stores it went as we hoped. And as a result, we're expanding now four, five markets in virtual order and the goal is keep assuming we continue to see the positive performance. We'll get it across the system very shortly thereafter.
Great. And Jack a clarification on the tax guidance. I'm just looking if I think about adjusted earnings and comparable to the $2.87 that you mentioned today, I look at the adjusted tax rate there and it's 28.5% is my estimate. So, when you think about the third quarter effective tax rate that you've mentioned in the fourth quarter is that more relevant to GAAP earnings? Or is that relevant to the adjusted earnings we might be focused on?
Those rates are more GAAP earnings. The underlying rates are going to be more similar to what we talked about on our last call. So, the higher tax rate that you're seeing this time compared to what we talked about on our first quarter call are directly attributable to the fact that we've got all these charges. It's just pushing our income down and so it ends up pushing our rates up. When we normalize our earnings like, for example, in this quarter, our normal tax rate would be at that 28.5% range.
Got it. And then last question, just because I think there is some confusion around depreciation as I look at different estimates fairly-wide range. Could you help us understand what is accelerated depreciation in 2018 and will not going to occur in 2019? And maybe whether you think that depreciation as a whole would be potentially less in 2019 than the 2018 overall?
Yeah, 2019 will definitely be less. We're at a higher level this year. Let's call it 30 basis points or so. That's due to two things. One is due to retiring assets as a result of our refresh. We're investing in operating our restaurant. So that requires accelerated depreciation on the items that are going to be taken out of the restaurant.
And then secondly part of the restaurant that haven't closed yet, we leave a little bit on the books, GAAP requires that you leave a little bit of the asset on the books and then you right that off over the remaining time that you expect to have restaurants to be open.
And so as the M&R that we're doing the refresh that we're doing as that depreciation levels off, that'll be replaced by this higher depreciation from the stores that we're going to close, but that should fall off. Most of it should fall off this year, maybe in early next year and then our depreciation should go to more than normal historical rates.
Okay. Great. Thank you very much.
Ladies and gentlemen, we have reached the end of our question-and-answer session and I would like to turn the call back over to Chipotle CEO, Brian Niccol for closing remarks.
Okay. Well, thank you everybody. I know this is a busy earnings time, so I appreciate everybody taking the time to listening to our results and have a discussion of the business. And thanks again and I'm sure we'll be in touch. Take care.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.