Chipotle Mexican Grill Inc

NYSE:CMG

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon and welcome to the Chipotle Mexican Grill Second Quarter 2020 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ashish Kohli, Head of Investor Relations. Please go ahead.

[Ashish Kohli, Head, Investor Relations]

Hello, everyone and welcome to our second quarter 2020 earnings call. By now, you should have access to our earnings press release. If not, it maybe 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-K 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, our 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&A session.

And with that, I would like to turn the call over to Brian.

[Brian Niccol, Chairman and Chief Executive Officer]

Thanks, Ashish and good afternoon, everyone. Since our last earnings call, the world has continued to face unprecedented challenges with regard to health, economic and social issues. However, I am so proud of our employees those in the field managing and running our restaurants, our support center staff who are working remotely, as well as our supply partners for coming together to continue to provide our safe, delicious, high-quality food made from real ingredients. As a result, Chipotle is successfully delivering on its commitment to help cultivate a better world for our employees, guests, farmers, communities and shareholders.

Today, I want to focus my discussion on three key topics. First, our efforts to take care of our people and guests as restaurants reopen for in-room dining; second, provide details on our improving comp trends; and third, highlight how we have built an operating model that’s designed to generate strong performance in a wide variety of environments such that we can win today while we create a bright future. As I have mentioned previously, the health and well-being of our employees and guests has always been and will continue to be our top priority. Given our strong financial position, we are able to make investments in our people and the Chipotle business, which are not only helping us manage through this crisis, but set us up for a strong recovery and future success.

Our top priorities for the rest of the year include safely running our restaurants and reopening dining rooms, using best practices to support alternative restaurant support center working arrangements, ensuring supply chain consistency and strengthening our digital ecosystem. Within our restaurants, we have taken a number of steps to enhance our robust food safety and wellness protocols, including the creation of the steward role, which is focused on sanitization in high-touch and high traffic areas, providing mats for all employees and having a tamper evident packaging seal for all digital orders. We are also delighted to see many of our guests doing their part by wearing masks, socially distancing and where appropriate, leaving instructions in our app and online to request contactless deliveries and carryout. These initiatives give our employees and guests confidence that Chipotle remains steadfast in our commitment to keeping them safe, especially now that the dining rooms are starting to reopen.

As of last week, about 30 restaurants remain fully closed and these are mainly inside malls and shopping centers. We began to open dining capabilities in the middle of May and currently have about 85% of our restaurants offering limited in-restaurant and/or patio dining, with the remaining being open for to-go services, which includes delivery, order-ahead and pickup and coming into the restaurant and ordering a meal that is taken then off-premise. Encouragingly, since sales dropped in late March, we have been able to retain 70% to 80% of our digital sales gains, while recovering 40% to 50% of our in-store sales. This supports our thesis that digital tends to be highly sticky and was a key factor in helping improve our sales performance as the quarter progressed.

Our Q2 comp was down 9.8%, which includes a 1.9% headwind from closed restaurants. Our restaurant level margins were 12.2% and adjusted diluted EPS was $0.40, down 90% year-over-year. In terms of monthly comp cadence, April was down 24%, with May being down 7% and then June showing further progress to finish up 2%. July comps continue to improve and are up 6.4% month-to-date, including about a 1.4% positive impact from the July 4 weekend and about a 2.7% negative impact due to underperforming restaurants in the northeast and international markets as well as restaurants closures due to COVID-19. And keep in mind, we are comparing against the nearly 10% positive comp in July of 2019. Overall, these trends highlight that despite these unprecedented conditions, our five key strategies continue to resonate with guests and position us for success in the near-term as well as giving us more confidence in doubling our restaurant base, while ultimately expanding AUVs and margins above $2.5 million and 25% respectively.

Let me spend the rest of my time providing brief update on each of these strategies, which are making the brand visible and loved, creating innovations utilizing a stage-gate process, leveraging our digital make line to expand access and convenience, engaging with customers through our loyalty program, and running successful restaurants with a strong culture that provides great food, hospitality, throughput and economics. To begin with, our marketing team has been remarkably agile and proactive during the crisis by quickly pivoting from traditional television advertising to creative social and digital media to help keep the Chipotle brand relevant and drive awareness of our digital capabilities, whether it be healthcare heroes to support frontline workers, lifestyle goals to keep people healthy, while working from home for virtual events such as proms, concerts, e-gaming tournaments, and the virtual farmers market. These initiatives are helping support our customers, suppliers and communities in the time of need. These efforts continue to drive awareness, expand access and grow sales by driving culture, driving difference and ultimately driving a purchase.

In conjunction with marketing, our stage-gate process is a key enabler to develop innovation that leads food culture and meets guest requests. Over the last 18 months, lifestyle bowls, carne asada, Supergreens salad mix and Queso Blanco were all successfully validated by this process. Despite less marketing support than initially planned, our new Queso, which uses 13 real ingredients and has just the right spice level and texture, has been a hit with guests. Our current attach rate of high-teens is roughly 70% higher than with the previous Queso. The latest innovation to make it through the stage-gate process and upgrading existing item is a suite of tractor beverages. These are organic, non-GMO, less sugary and aligned well with our food with integrity ethos. We received terrific customer feedback and expect these to help improve our drink incidents moving forward.

While COVID of course has delayed testing menu items over the past few months, the pipeline of potential new options continues to build. Now, that regions are starting to reopen, we anticipate being able to test new items again, which will allow us to deliver on our goal of rolling out 1 to 2 new menu items on average per year. To give you a couple of examples, we have recently launched a pilot to test cilantro lime, cauliflower rice and began offering quesadillas as a digital-only entree, which we believe can overcome the throughput challenge presented on the frontline. These menu items are in various markets where we are gaining valuable guest and operational feedback. We will update you on our progress of all potential new menu items as they move through our stage-gate process.

Next, our digital platform has been a big beneficiary of the current environment. Order to digital sales from 216% year-over-year to $829 million which is by far our highest ever quarterly level and represented 61% of sales. Working from home, driving increased digital awareness via advertising, new delivery partnerships with Uber Eats and GrubHub as well as expanding our digital capabilities into Canada are attracting new customers and helping reduce friction, while increasing convenient access. Notably, partnering with all the major third-party delivery aggregators has led to an increase in orders, a reduction in delivery time and cancellations and an improvement in overall customer ratings. As you know, all digital orders from Chipotle are fulfilled via our digital kitchens, which are comprised of a dedicated make-line and operated by a special team in nearly all Chipotle locations. Recent digital investments such as pepper, our concierge spot on Facebook Messenger, group ordering and complete customization are further optimizing a seamless ordering experience for our guests.

Even with in-restaurant dining opening back up, we continue to see strong digital sales momentum in July, with a mix of nearly 50%. Breaking this down further shows that a little more than half is coming from order-ahead and pickup transactions, while the remainder is coming from delivery, both channels continue to perform well, but we are pleased that order-ahead is now our fastest grower due partly to being less promotional on delivery, partly to more customers realizing the value of a pickup transaction, as are no delivery fees, and to a lesser extent, more Chipotles. With free-delivery promotions likely to be less frequent moving forward and as pivoting more aggressively towards Chipotles, we are optimistic that the order-ahead transaction will continue to be a big driver of future growth, which should benefit both sales and margins.

Another element that has seen a meaningful acceleration over the past few months is our Rewards program, which now has nearly 15 million enrolled members, what an amazing accomplishment considering this program was launched only 15 months ago. The rate of enrollment has roughly doubled during the COVID crisis as customers flocked to Chipotle’s digital ordering channels. Today, the question I hear most frequently is how are we going to benefit from this? Interestingly, even in the early stages of utilizing the customer data, we are seeing a significantly higher frequency of transactions from members versus non-members. Its early days, but we are starting to leverage this growing installed base with personalized promotions to incent behaviors, especially considering more than 70% of current digital orders are from our members. We are also using this tool to help make our digital platform stickier by reengaging customers if their usage drops.

As we continue to enhance our CRM journeys, we are seeing incremental transactions across all frequency bands, not only as a result of the offers, but also from our brand, safety and purpose-driven messaging. We will continue to leverage our data over the second half of this year and expect loyalty to become a bigger tailwind over time as our install base expands and we increase our level of sophistication with this large base of consumers. Driving more people to Chipotle is only part of the equation. The other key is to ensure great restaurant operations so that guests have an enjoyable experience and continue to come back. As I visit our restaurants, it’s apparent that the investments we are making and our people are paying off as our food tastes great, employee retention continues to stabilize and service levels are improving. Not only is this benefiting us currently, but these factors should position us well to drive higher throughput post COVID as in restaurant demand returns to a more normal level.

What has always attracted me to Chipotle and what I believe is a key point of differentiation is our unique purpose of cultivating a better world and a culture that has always been committed to fostering diverse, inclusive and safe environment where everyone can belong and have the opportunity to build personal and professional success and make a positive difference in their family and communities. This isn’t always easy, especially given the unrest and uncertainty at the moment, but we must do what is right, even when it’s hard. More recently, Chipotle has taken several actions to help drive out inequality and injustice, including listening sessions with our employees, financial contributions to organizations advocating against systemic racism and forming a multicultural employee resource group. The bottom line is that we are all in this together and when we do our part we can make a difference to our employees, our food, our business practices and in our communities.

Before I conclude, I want to publicly welcome our two new directors, Mary Winston and Gregg Engles, both bring excellent experience to our board and will be valuable assets for Chipotle. Finally, I want to thank all of our employees for delivering excellent guest experiences and supporting our restaurants and each other. Their belief in our purpose, commitment to living our values and hard work is what’s pulled us through what we hope is the worst of the COVID crisis. By channeling our energy into programs and initiatives that help us become a stronger team, innovate and grow our business, I believe we will finish 2020 with good momentum and be well-positioned for the long run.

With that, here is Jack to walk you through the financials.

[Jack Hartung, Chief Financial Officer]

Thanks and good afternoon, everyone. Before discussing our second quarter results, I also must recognize and thank our incredible teams. I have personally been inspired to watch everyone come together to face our current challenges embracing new ways of working and decisively taking actions to safely serve our guests in the face of unprecedented conditions. From our operators doing a tremendous job managing the restaurants and providing guests a delicious customized meal, our supply chain diligently working with our partners to ensure there are no major disruptions and our support teams and development teams working virtually to keep the business moving forward. I could not be prouder to be part of this team.

Looking at our Q2 performance, while the comp was down 9.8% for the quarter, it improved sequentially every month and we are pleased to see this progress continue into July. Relative to the pre-COVID environment, in-store ordering currently is down around 37%, while order-ahead is up 140% and delivery is up 125%. We are also encouraged by the fact that there is a higher incidence of new customers, majority coming via the digital platform making their second purchase in the same month and spending more than before. It’s another example of our digital access being sticky, resulting in our July today digital mix staying nearly 50% of sales. Restaurant level margin for the quarter of 12.2% was negatively impacted by significant number of investments, including promotion to acquire digital customers through bonuses and assistance pay, along with costs related to COVID as well as higher supply chain expenses, most notably, the spike in beef prices that has since eased somewhat since the peak in May.

During the quarter, marketing and promo costs were elevated at 5% of sales due to free delivery. With this promotion behind us, we expect marketing spend to normalize during the second half of 2020 towards our typical target of 3%. While the investment in our people to acquire – and to acquire digital customers put pressure on our margins in the quarter, we are confident that these were the right investments to make and will make our brand and our culture much stronger over time. If you consider the month of June where our comp turned slightly positive and we are trending a little over $2.2 million AUV run-right, restaurant level margin was roughly 20%. The gap relative to the theoretical 22% margin we would expect at the sales level is primarily the impact of higher delivery mix and partially the result of the temporary costs I just mentioned, including higher beef cost. Similar to what many of our peers are already doing, we are about to experiment with delivery, menu prices as a way to potentially help offset this headwind and fully capture the margins expected at this volume.

As Brian mentioned, we believe our powerful and durable economic model remains very much intact. In fact, our performance through the COVID crisis, particularly the strength of our digital business, is giving us confidence hitting the $2.5 million AUV mark earlier than we have previously expected. We continue to expect margins of around 25% at that sales level. Same time, we are aware that the uncertainty surrounding the coronavirus pandemic makes it difficult to predict the near-term and medium-term impact and therefore we are not providing fiscal 2020 comp guidance. Having said, Q3 margins and EP S will likely remain bumpy as we continue to make further investments in our people, our business and our communities.

Specific to the margin, we expect it to be in the high-teens based on continued price volatility and a few ingredients, including avocados as we transition from Peruvian to Mexican fruit as well as higher labor cost given the reopening of our dining rooms. However, if we see no major COVID-related market regression in the fall, we expect our sales to continue building, which could lead to Q4 being the first quarter where margins and earnings begin to normalize. And this should help set us up for a successful 2021. We ended Q2 with $935 million in cash, restricted cash and short-term investments and no debt, which gives us a strong balance sheet, along with a $600 million untapped credit facility with which to continue to navigate the crisis.

Our team remains focused on reducing non-essential controllable costs and judiciously spending and return generating projects to preserve liquidity. I am pleased report that we generated positive free cash flow in the second quarter despite essentially normal level of growth CapEx investment, which we believe is the right thing to do and will payoff in the long-term. Furthermore, assuming a comp improvement, we are seeing continues that gives us greater confidence in our potential to generate positive cash flow for the rest of this year, which will help support ongoing strategic investments. While we didn’t buy back any stock in Q2 in order to preserve cash and we likely won’t over the foreseeable future, we are open to revisiting the program and returning excess cash to shareholders once the environment stabilizes.

During the second quarter, we are delighted to have opened 37 new restaurants, with 21 having a Chipotlane. We recently announced a milestone with the opening of 100th Chipotlane and these formats continue to perform very well and have a higher overall digital mix and recent weeks is approaching 60%, but about two-thirds being from the higher margins, order-ahead and pick up. Also, if you look at the sales of our Chipotlane cohort, of the 13 Chipotlane that are in our comp base and therefore opened well before COVID, sales are over 10% higher than the non-Chipotlane comp restaurants in the same opening period, while the more recent openings during COVID are actually 30% higher. We recently relocated 3 restaurants out of Chipotlane and we remodeled 3 more and all are seeing higher sales so far. These great results are fueling our desire to open more than 60% of new restaurants to Chipotlane this year, with the goal of exceeding 70% in 2021. Opening more Chipotlanes will enhance customer access and convenience as well as increase new restaurant sales, margins and returns.

Given factors out of our control, there was a pause in new ground breaks during April, but we started construction again as soon as regions began reopening, but we continue to build the units currently and expect to have a sequentially higher number of openings in Q3. There remains uncertainty around a potential spike in COVID cases in the fall, which makes it difficult to offer 2020 new restaurant opening guidance at this time. However, we remain confident in the long-term opportunity to more than double the number of Chipotle restaurants in the U.S. And in fact, our strong financial position along with less competition for high-quality sites as our other businesses pulled back is allowing us to build a robust new unit development pipeline. As a result, we expect to see an acceleration in the number of new units open in 2021. In closing, despite uncertainty about the near-term impact of COVID, we are very excited about our future given the strength of our brand, our talented employees, a solid liquidity position and the resiliency of our economic model. And with that, we are happy to take your questions.

[Operator]

[Operator Instructions] Our first question comes from David Tarantino with Baird. Please go ahead.

[David Tarantino, Baird]

Hi, good afternoon. Congratulations on learning the business so quickly. Brian, I have a question about some of the new customers that you think you have acquired since the start of the pandemic. I was wondering if you could perhaps give us a sense of how big of a contribution to sales that new customer layer has brought? And then secondly, I guess what is your tactic or plan to try to keep those folks in the fold as you move forward? Thanks.

[Brian Niccol, Chairman and Chief Executive Officer]

Sure. Yes. Thanks, David. So, the bulk of our digital customers that we have gained as we mentioned in our comments, a lot of them are new customers to the business. And obviously, since dining rooms have not reopened, they have yet to experience the business or I should say dining is reopen fully right. They have yet to experience the business from that access point. The good news is because so many of these new customers came through our digital business, the bulk of them also signed up for our rewards program. And so we have created these journeys that are targeted to new customers, existing customers, whether they are light, medium or heavy. And what we are seeing already with these journeys is we do have the ability to influence behaviors, whether it’s getting another occasion or getting them to add on to an occasion that they are already doing with us. So, what I would tell you is a lot of the digital growth came from new customers. The thing that’s nice about that is they are in our rewards program, a lot of them. And what we are seeing already is really great progress on using the data to then influence their behavior going forward.

[David Tarantino, Baird]

Got it. Makes sense. And maybe I will try a slightly different angle, so I think you mentioned your dine-in business or traffic way down 37% or running down 37%. First, can you clarify was that for the quarter or for the – I guess the quarter to-date period in July? And then I guess what – what I guess percentage of that number do you think is people that maybe you have shifted into the digital channel versus not?

[Brian Niccol, Chairman and Chief Executive Officer]

Yes. I mean, one of the things to keep in mind, David, is our entrees per transaction are significantly up. So, we have not seen as you think about our sales performance, we still have kind of the same gap that we historically have had on call it check and number of entrees if you use entrees as a transaction proxy. And so what we are definitely seeing is people are slowly, but surely returning to the dining room. But the bulk of what we are seeing is all the huge gains are in, I would say, more entrees per transaction coming from our digital business. So, the in-store ordering obviously we only have reclaimed about 40% to 50% of that business. And a lot of the opportunities still will be reclaiming that in-store business as people get more confidence to come back into the restaurants. But the same token, what we are seeing is a nice increase on entrees per transaction order with the digital business. So, I think some of the customers that have shifted from in-store to digital, what we have seen is their tickets have gotten bigger as they are ordering as groups. So, that helps explain why we are down in the dining room, because you just don’t have the same occasions that you used to have with people driving to work and having that lunch individual occasion, but we are picking up the entrees, I think, through our digital business is the way it is way to think about it. So I think we mentioned in the script right order-ahead is up like 140%. Delivery is up 125%. And then obviously, as we continue to get the dining rooms, operating closer to full capacity, I think we will continue to make progress on the transactions that occur in the restaurant as well.

[David Tarantino, Baird]

Right, Brian. Thank you very much.

[Brian Niccol, Chairman and Chief Executive Officer]

Yes.

[Operator]

The next question is from Peter Saleh with BTIG. Please go ahead.

[Peter Saleh, BTIG]

Great, thanks. I want to ask about the Queso Blanco, I think you guys had indicated that you saw pretty substantial high teens attach mix with that just talk about what you did differently there and how you can apply some of those learning’s to maybe some of the new products you plan to launch over the course of the year?

[Brian Niccol, Chairman and Chief Executive Officer]

Yes, sure. Well, for starters, the Queso Blanco, I think was a huge improvement over the prior Queso. And then I think that the team did a really nice job of doing was doing the marketing to those that were already Queso users, as well as people that you may have tried it in the past, but have not purchased it in a long time. And so, I think the team did a great job of using our data to do very targeted marketing, and then the advertising, I think that they ran on a more broad scale based did a nice job of bringing to life. What was different about this Queso and look, the learnings that we have gotten with using our data to drive attachment, I think is something we will be able to use with beverages we will continue to use, frankly, with all sorts of programs coming down the pike. So we feel really good about how Queso Blanco has performed. And I am also really proud of what we have learned in how we can use up this database to better inform our customers what is available and what is right for them so that we get a better attachment in each ticket.

[Peter Saleh, BTIG]

Thanks. Very helpful. Just a question on the development going forward, I think in the past, one of the governor’s on development and growth, going faster has been just finding enough people. I think the environment that was such that it was tough to find enough employees. Do you feel like that has changed for you? I know capital is not an issue seems like real estate is not the issue. So do you have any restraints on finding enough people to go faster on the development side?

[Brian Niccol, Chairman and Chief Executive Officer]

Yes, I would say, it’s two things on the people. One was having access to hire the additional people and then two was having, I think the people culture and capability in place that when we brought these people on they quickly could be trained and learned he Chipotle way of executing our business. And I think Scott and our HR leaders, Marisa, and all the folks in the field have done a phenomenal job of doing a really good job of recruiting the right people. And then when we recruit them, we are able to train them so that they are ready to go to open a new restaurant or takeover a restaurant in the event, we need to move with an apprentice or a manager to a new restaurant. So we feel like we got all the components to really continue to have success with opening new restaurants, access to really good people the right people capability in the operating model for these people to get trained and ready to roll. And then as you mentioned, the returns continue to be really, really strong because we are able to have access to really good real estate and then we have got all the different access points whether it’s Chipotle just a traditional Chipotle.

[Peter Saleh, BTIG]

Alright, thank you very much and congrats on the quarter.

[Brian Niccol, Chairman and Chief Executive Officer]

Thank you.

[Operator]

The next question is from Katherine Fogertey with Goldman Sachs. Please go ahead.

[Katherine Fogertey, Goldman Sachs]

Great. Thank you. The quesadilla being offered as a digital-only item in test, can you walk through maybe the learning’s of prior Stage Gate tests, maybe what you saw with carne asada when you launched it initially as digital only, that gave you confidence that this digital only strategy will work. And kind of in that same vein, are there other items or even other day parts now that you are committed to kind of digital only offerings that might fit well here? Has that expanded or changed the potential for menu innovation going forward? Thanks.

[Brian Niccol, Chairman and Chief Executive Officer]

Yes, thanks. Thanks for the question. Yes. So one of the things it’s been a nice benefit of all the growth in our digital businesses, we now have scale where, we are doing over a million dollars of business of this digital make line, right. And we have got some restaurants doing well beyond that. And what we have found is, we can have success providing digital only menu items. So, we started – we kind of dipped our toe in the water when we did lifestyle bowls. And we have kept that going. And what we have seen early days is people are willing to do the app/digital experience in order to have access to a quesadilla. And we feel really good about what we have seen in the early days of the test that we have got going. Obviously, we want to finish the test out. But what I would tell you is the things we have learned in the stage-gate process was just that, which is a huge improvement over making a quesadilla on the frontline with our new approach. But once we started to get meaningful scale, we realized you know what, we don’t even need to put that challenge in front of our operators on the frontline, because we can run it through this digital business. And everybody gets a better experience. The team member has a better experience in the restaurant. The customer gets a better experience from a speed and having the product ready to go when they show up and then the product itself I think you might have heard me talk about this with our digital business, you kind of make your reservation for when you are going to get your quesadilla. I mean, it is Chipotle’s food is really good. And this quesadilla is really good. But when it’s really hot and it’s right there when you reserve your time, it’s extraordinary. So, we feel like it’s hitting on all the marks you would want, better operational experience, better experience for the customer, arguably better food experience. And then operationally, it plays really well in our throughput initiative so that folks in the frontline can really continue to stay focused on speed and that our digital make line is really focused on being on time and accurate. So, we are feeling really bullish. The good news is this does open the door for additional innovation. And Chris and the team are working through what are things we could be doing that are dedicated to the digital make line. And you will see us continue to test those in our stage-gate process. While we still do things like cauliflower rice, which, frankly are going to be both on the frontline and the digital make line. So, we are feeling very optimistic about what our ability is going to be to your point to open kind of that innovation spectrum using the digital make line, whether it’s state parts or menu while we can protect the integrity of our throughput model on that frontline.

[Katherine Fogertey, Goldman Sachs]

Great, thank you.

[Brian Niccol, Chairman and Chief Executive Officer]

Yes.

[Operator]

The next question is from Nicole Miller with Piper Sandler. Please go ahead.

[Nicole Miller, Piper Sandler]

Thank you. Good afternoon. Could you dig in a little bit to direct and indirect, so I understand digital order-ahead is up 140%, delivery is up 125%. If you isolate delivery, how able are you to keep the consumers coming directly to your app? And I imagine clearly that changes from month-to-month, quarter-to-quarter, but how do you keep that in balance, please?

[Brian Niccol, Chairman and Chief Executive Officer]

Yes, sure. So, right now, it’s pretty evenly split between marketplace and our own app experience. And the thing that I think you have seen us done is over time we can run very targeted efforts within our app into our rewards customers to incentivize them to stay within our app for that delivery occasion. The thing we also like about our – frankly our delivery app execution is we can control more of the variables on delivery fees as well as menu prices, so that we can also incentivize behaviors towards our app as well. And then obviously, the big differentiator is you continue to get rewards points when you do delivery through our app versus using a third-party. So, we are feeling really good about the growth that we have seen in our white label business and continues to be an access point that we are going to continue to drive, because it does still appear to be a unique occasion.

[Nicole Miller, Piper Sandler]

That’s very helpful. I will just ask the second and last question and admittedly, it’s as much about Chipotle as it is trying to understand the consumer behavior at a very high level. When you think about July there is many reasons for your rebound, I just want to understand, what would you be willing to tell us about week-to-week or region-to-region? So, in big restaurant geographies, there is less mobility, I know, California would be the most obvious. I am very curious to understand if the customer maybe doesn’t go back into a dining room that’s understood. And I am wondering if that drives them more and more to Chipotle or a drive-thru in general and more and more to digital?

[Brian Niccol, Chairman and Chief Executive Officer]

Yes. I mean, look, what we have seen Nicole is the regions that opened the earliest, I would say we have made the most gains in comp. And the thing that has been really promising is the digital business has remained sticky, even while we have seen dining room business make a come back, okay. And I think we have mentioned this, our Chipotlanes, we just now have 100 of them or just over 100. We have seen that Chipotlane business stay robust and outperform our system. And I think there is a consumer behavior, where even if they want – even if they are going into the dining room, they are still taking it for takeout. They are not sitting down and eating at least what we are seeing to-date, it’s come in, get your food and go for the most part. And digital was still I think, perceived as even more convenient, that coming in, building it and then going. So I think you are going to continue to see that. And obviously California rolled back some of the in-dining room experience So, we have quickly pivoted to just relying more heavily on our order-ahead business, which fortunately Chipotle has those access points where we can pivot depending on what happens, state by state, municipality by municipality. So, I am hoping that we don’t have to go backwards before we can go forward on this proposition, but I think we are positioned nicely to be able to weather whatever way we need to bop in order to get through the next couple of months.

[Nicole Miller, Piper Sandler]

Great. Thank you so much.

[Operator]

The next question is from Sara Senatore with Bernstein. Please go ahead.

[Sara Senatore, Bernstein]

Great, thank you very much. I wanted to just follow-up on questions about the delivery the decision to kind of pullback on promotions and anything you might be seeing there early on, just is the easiest way to think about it that now order-ahead is growing 20 percentage points faster than delivery and that’s how we should think about the elasticity or is that not really the full weight of that? And are you seeing those sales shift to order-ahead, so kind of from your lowest margin sales to your highest margin, just any kind of color? And on that front, the implication is that, that should be helpful for margins. So I was just trying to sort of square that with Jack’s guidance for kind of high-teens versus the 20% run-rate that we saw when you were kind of spending heavily behind non-delivery. So, just anything on the top line and then how to think about the implications for the margin?

[Brian Niccol, Chairman and Chief Executive Officer]

Yes. So hey, Jack, why don’t I start and then I will hand it over to you. Does that sound good?

[Jack Hartung, Chief Financial Officer]

Perfect. Yes.

[Brian Niccol, Chairman and Chief Executive Officer]

Okay. So obviously, one of the things that occurred as soon as if we kind of rewind on the quarter, right, everything moved to off-premise and you had a huge shift to delivery that over time as we got people into delivery and into the digital business, they learned about the other access mode of order-ahead and pickup. And so what I think people have discovered is, you know what, from a value proposition standpoint, I can skip the delivery fee, I can skip some of the waiting if I order-ahead. So we have heard from our consumers as you look at like qualitative side of this, hey, look the convenience of ordering ahead and picking up was something they discovered as a result of bringing them into our business through the delivery channel, which I think is kind of surprising. I don’t think people would realize that people would join the Chipotle digital system because they came in through the delivery occasion. We brought them into the system and then we gave them the experience of the order-ahead. And what’s been nice is we have seen that there are occasions where people want the convenience of delivery, because I can’t get to a Chipotle, but they also really value the ability to order-ahead and go pick it up, because it frankly puts them even in more control of the convenience that they want. And look, they can avoid some fees, right. They don’t have to pay delivery fees, service fees or what have you when you look at whether it’s marketplace or white label. And so what we have pivoted to now is we did put in the dollar delivery fee versus being free the whole time. And I do think some people view and always it worth paying the delivery fee or should I go ahead and just hop in my car and pick it up. And luckily for us, we have made it very convenient for people to make that trade-off. With that said, the delivery occasion appears to be a very unique occasion that when people want to do it, they are willing to pay the delivery fee or the added price associated with delivery. So, we see them as working really well together. But over time, we obviously want to migrate that delivery business to not just be an acquisition tool, but to also be an occasion where we don’t mind the trade-off between delivery or order-ahead over time. And I think that’s what Jack was alluding to in his comments. So Jack, I will hand it over to you.

[Jack Hartung, Chief Financial Officer]

Yes. Thanks, Brian. Yes, Sara. So, when you look at I talked about June being a pretty clean month, our margin was 20%. I think that gives an idea that when we normalized the P&L, we can bounce back, we are only 12% during the quarter, but the first couple of months of the quarter had big investments in terms of free delivery. We did start charging the dollar delivery. So, we went from zero to $1 in June and that helped contribute to the higher margin during that period. There is no question that our margin potential as we experiment with and we figure out which levers to pull with between delivery fees and the menu price with delivery that we think there is more upward potential with that margin going from 20% and getting back to more like a 22% when we are at a $2.2 million volume, but we are going to experiment in Q3. So I would call Q3 more of a learning quarter, not a recovery of the margin quarter. That’s why I signaled that Q4 could be the first quarter that we actually see a more normalization of that, of our overall margin. So, we will learn in Q3, we will figure out what to do in Q4. And then also, Q3 is going to be hit by avocados. We have to do that transition back to Mexican avocados. And we are looking at potentially higher prices. We are still picking up some of the higher price of beef, even though beef has begun to normalize, that’s going to hit us as well. So I just want expectations in Q3 to be – there will be some bounce back on the 12%, but it’s not going to stay at that 20% and then we are going to looking ahead to Q4 in the next year and everything that we are saying we have confidence that our March potential is as intact as it’s ever been.

[Sara Senatore, Bernstein]

Okay, great. I just – if I can ask one housekeeping you said that there is a 2.7% negative impact that come from the Northeast and international, are we right in thinking that Northeast is about 20% of your stores and maybe bit more than that in sales, is that sort of the order of magnitude?

[Jack Hartung, Chief Financial Officer]

It’s in – I would say, Sara, it’s in that maybe 15% to 20%. It’s one of 8 regions. And so it obviously was hit the hardest. So, I would have to go back and check 20% might be a little on the high side.

[Sara Senatore, Bernstein]

Okay, thank you.

[Operator]

The next question is from John Glass with Morgan Stanley. Please go ahead.

[John Glass, Morgan Stanley]

Thanks very much. I wanted to just go back to delivery as well. How incremental has – the adding the extra incremental third-party delivery provider spend to comp? How do you measure that? Are they all providing the right level of delivery service, you are just using the one, DoorDash for that service and really just relying on the marketplace? And Brian, I just want to also make sure I understood, you are saying 50% of sales in June are delivery, half of them – 50% are digital, half of that is delivery. So, 25% of your sales now is delivery, is that right and what would that have compared to pre-COVID?

[Brian Niccol, Chairman and Chief Executive Officer]

Yes. So let me unpack that. To answer your first question, we use all the major aggregators for the third-party delivery. We are only using DoorDash for our in-app, white label delivery. And what we have seen is as we brought on GrubHub and Uber Eats. And we obviously already had Postmates with DoorDash. Each time we brought on people, we have seen incremental customers come into the business for the delivery channel. Specifically, we are watching this from delivery transactions. And it’s pretty consistent. I think we have heard over and over again and from what we have done our analysis on the others 20% to 30% overlap with some of the big players. So we definitely have seen a nice uptick in our delivery business. Then to answer your question on our digital business, think of the digital business as roughly 50% of sales and half of that or almost a little more than half is order-ahead. And then within that other half that right now is delivery, think of that as another like, call it 60:40 split of marketplace and white label is kind of the way to think about it. So – and we have seen nice growth, I think, as we highlighted in both the order-ahead business and the delivery business.

[John Glass, Morgan Stanley]

Thank you. And then as a follow-up, you talked about the dine-in business being down, how many – what percentage of your store base is in urban cores that rely on that lunch business that probably doesn’t exist in much more fashion, how much headwind is that and how much therefore could that come back as we go back to work over the next 6 sort of months?

[Brian Niccol, Chairman and Chief Executive Officer]

Yes. I think, John, I think it’s around 150, maybe a few more restaurants where there are in those really, called the dense urban setting. But I think in general dining rooms will benefit as that lunch occasion comes back with people going back to work in a more normal pattern versus the heavy skew right now, which is the work from home environment.

[John Glass, Morgan Stanley]

Got it. Thank you.

[Brian Niccol, Chairman and Chief Executive Officer]

Sure.

[Operator]

Your next question is from Jake Bartlett with SunTrust. Please go ahead.

[Jake Bartlett, SunTrust]

Hey, thanks for taking the questions. My first is try to let me better understand that the performance of stores when they open dining rooms, how much of an overall lift that is? And then you mentioned that 85% of the stores have dining room or patio? Did you break that down to tell us what percentage are the dining rooms open, just alone right now?

[Brian Niccol, Chairman and Chief Executive Officer]

Yes, sure. So the last part that’s pretty 70% are dining rooms and then there is like 15% that are patio only. Okay. And then your question on when the dining room opens, what type of lift do we see? It’s a gradual build back. What we have seen today, on average is we have recaptured about 40 to 50% of that dining room business. But it’s a gradual thing, it’s like every week goes by, I think consumer psyche starts to build with the idea of going back into the dining room. Again, the bulk of that is people end up still taking it off premise to eat versus actually sitting down in the dining room because remember, even when we have these dining rooms open, in some cases only 25% of our seats available. So, it’s very limited seating to sit in the dining room.

[Jake Bartlett, SunTrust]

Got it. Just to understand that that better, having such a kind of it seems like there is a minimal impact of people sitting. So what’s the big change in terms of the consumer behavior when you open up the dining room, you have already had people, able to come in and in order by standing in line so I mean, I guess I am a little confused as to why would change the sales so much yet it doesn’t seem like the actual dining in is very material?

[Brian Niccol, Chairman and Chief Executive Officer]

Yes, I think it has more to do with the consumer psychology of going to restaurants versus doing it all from home. or in your car. Okay. Again, in even I think I might have shared this with some of you in prior meetings. As I’ve gone into the restaurants and talked to folks that are in the restaurant, a lot of them are like, thank heavens, you guys are opened for me to sit down because I’m just tired of eating in my car. I am tired of eating at home. There is a consumer psychology to the idea that more things are open. And therefore are more mobile, and I’m out and about. So that’s what our research shows. And, as you talk to consumers, that’s the feedback we get.

[Jake Bartlett, SunTrust]

Got it. And then real quick just on pricing and I was hoping you could provide what I don’t think you have what traffic and overall check growth was. And we also found some menu pricing recently taken in markets like California, if you could maybe confirm that or just talking about your strategy for taking menu price. This year I know in years past, it’s been kind of concentrated over a month or two any color on your strategy for taking price this year?

[Brian Niccol, Chairman and Chief Executive Officer]

Yes, sure. So we have been very limited in our pricing, because of just I think the nature of the consumer psychology right now. But one thing we have done from a pricing standpoint is we have gotten very strategic with our partner at Fishbowl. And there are places like California where minimum wage moved. And accordingly we did some pricing action to go along with some of the minimum wage movement. So that might be what you are picking up. But it’s very and even that is not market wide. It’s very still strategically executed, on a restaurant by restaurant basis. But I think that’s what you are referencing is you probably saw some of the pricing moves in conjunction with recent minimum wage movement that we are pretty significant minimum wage movements.

[Jake Bartlett, SunTrust]

Right. And then adjust the traffic in the check?

[Brian Niccol, Chairman and Chief Executive Officer]

We don’t bring that out. Go ahead Jack, sorry.

[Jack Hartung, Chief Financial Officer]

Yes, I think Brian alluded to it earlier, the transaction has changed the group size has changed significantly, both because people have moved to digital and digital is a higher group size and then even within the order in the restaurant, the group size has changed and I think that’s because we set up, the person working and going out to lunch, maybe with a group, but they are all paying themselves. Now, it’s going to the restaurant and then ordering for the family. So, I think a better way to look at it is when we have the 9.8% negative comp during the quarter, if you look at just entrees, because an entree kind of lines up with a person, entrees were down about 15%. And what that suggests is there is a 5% effective lift in the check and that would have come from a couple of points from menu prices. We also saw a bigger incidence of steak. People are buying steak more and that is a higher priced item. And then the attachment with queso so – I think that’s the best way to think about it. And I think as we go from a negative 10 into a positive comp situation, it’s going to be a similar gap where people are still buying steak more, they are still buying queso and we still have this small menu price. So, I think you are going to still see a kind of 3%, 4%, 5% gap between our sales and our transactions. I think that’s probably the best way to think about it.

[Jake Bartlett, SunTrust]

Great. Thanks a lot.

[Operator]

The next question is from Andrew Charles with Cowen. Please go ahead.

[Andrew Charles, Cowen]

Great. Thank you. Jack, a two-part question for you. Now that you are at 100 Chipotlane locations, I am curious what the early read has been on cannibalization if you prefer sales transfer are relative to what you see typically when you open a traditional store near an existing store. And then my follow-up was just now that you have line of sight to development plans through 2021 and perhaps at this point even visibility into 2022 although not finalized. Are you able to extrapolate out or express your desire for what mix of stores Chipotle will represent, will you reach that milestone 5,000 U.S. locations?

[Jack Hartung, Chief Financial Officer]

Yes, Andrew, thanks for the question. We are not seeing anything unusual in terms of impact. We open up a Chipotlane versus another restaurant. I mean, you might see the impact that we expect to be a little higher, a little lower, it might be higher, but the volume is higher. The volume in the totaling is higher, so nothing unusual or nothing concerning there whatsoever. We do have internally what we would like to see over a, call it a 3 to 5-year period. And it’s not ready for us to disclose yet. But we are looking at individual markets, some of our oldest markets and looking at we may not be opening up a lot of restaurants in our Denver, our Kansas City, some of the earliest markets, but we do have old restaurants there, where we can look at relocations and rebuilds. In fact, in my prepared comments, I mentioned that we did 3 remodels and added a Chipotlane and 3 relocations and added a Chipotlane. And the way I think about that is we are doing some early tests, call it, running it through the stage-gate to see how these restaurants perform. And as they perform well in the first 6 that we have done, have come out of the box with a higher sales. We are going to look to add more relocations, more remodel so that we can bring more Chipotlane, not just through new stores, but through these other approaches as well. And the good news is in this environment our landlords are more willing to work with us to do a remodel and if they are not willing to work with us on a remodel, there is a site across the street that we will take a look at as well. So, we think the opportunity to move more Chipotlane over the next 3 to 5 years is pretty encouraging.

[Andrew Charles, Cowen]

Jack, I also just have one bookkeeping question I have. Can you speak to labor costs that 28.2%, the implied labor dollars per store actually declined 90 basis points? It’s obviously a very impressive dynamic when considering the investments that were made in supplementing team member wages as well as manager bonuses. Can you speak to some of the talent in the quarter to help better understand what is temporary and what is enduring within that favorable labor expense?

[Jack Hartung, Chief Financial Officer]

Yes. Well, listen, our labor as a percentage of sales was up and it was up because we had the assistance bonus and we have some discretionary bonuses for our managers, but we have some stores that were closed for a while, we have lower sales. And so the labor hours we will schedule with lower sales is going to go down and that might be why you are seeing a just lower absolute number. When you look at just as a percentage of sales, about two-thirds of the increase as a percentage of sales was from the bonus and assistance pay, about one-third of it is because of de-leverage going forward. And the other piece that’s in there, we have some labor efficiencies, Scott and his team out in the field, did a really good job on navigating making sure we had the right number of people show up. Early on, that was hard to get the store staff, our stores were staffed, they were efficient. When you see volumes move up and down, it’s very hard to staff the stores. Well, they did a great job. And I think part of that is also we expected and we saw some efficiencies with the digital make line as well. So now in terms of Andrew, what carries forward in terms of those efficiencies – some of that depends on how much of the business stays digital. If 50% of the sales stay digital or somewhere in that ballpark, let’s say even 40% some of those efficiencies will pass through, too early to put a number on it yet, but I think our teams did a great job and to do an average of $1 million. And in some cases, Brian alluded to it $2 million and even greater on that digital make line, with fewer labor just gives us a lot of optimism about what we can do in terms of sales and what we can do in terms of profit margin as well.

[Andrew Charles, Cowen]

That’s helpful. Thank you, Jeff.

[Operator]

The next question is from Lauren Silberman with Credit Suisse. Please go ahead.

[Lauren Silberman, Credit Suisse]

Hi, thanks. I wanted to follow-up on the commentary regarding the June AUV run-rate of Q2 and 20% restaurant margin the 200 basis points differential from the framework. Is it primarily driven by delivery costs? Or are there any other costs to consider? And then is there any offsetting benefit from the shift to the more margin accretive order-ahead occasions?

[Brian Niccol, Chairman and Chief Executive Officer]

The biggest piece is delivery for sure. There is some other pressure, Beef was a little bit of pressure our customers buying more Beef was a little pressure and we are selling fewer drinks. And so, drinks are very accretive to margins and we are selling fewer of them. So there is other things that we are in there. But by far the biggest piece, the piece that we can act on is the delivery piece. We know that if delivery stays at this, this current level, that that the higher delivery fees is going to be a permanent impact on our margins. And that’s why we are going to do some experimentation in Q3. The other pieces are going to work their way out. We do think that especially with tractor beverages we are going to sell more beverages. We suspect that there will be some shift back, away from beef to other menu items. If not, we will need to understand that a little bit more, but that there are a number of things but by far the delivery fees is the biggest piece.

[Lauren Silberman, Credit Suisse]

Great. And then with regards to the loyalty program, now 15 million members, one of the fastest, but not fastest, in restaurant history, what do you think is driving the outsized adoption of Chipotle, is it faster than you originally expected? And then just thinking about the composition of the loyalty program members what portion is light, medium and heavy users?

[Brian Niccol, Chairman and Chief Executive Officer]

Yes, so obviously the adoption of the rewards program has exceeded our expectations, and it’s gone really well. And, obviously, with the fact that so many people switch to our delivery and digital business over the last couple months, really enabled us to get people to engage in the rewards program. The thing that has been really refreshing is a lot of folks that have joined our rewards program have been new users or light users. And so, we are already using these customer journeys to start influencing behaviors, so that, we can have them be a more frequent customer. And I think that is going to prove to be a nice tailwind for us in the future. Because I don’t think we are done at 15 million, I think 15 million is going to become, you know, 20 million and so on and so forth. And as everyday goes by, we learn more and more on how to use that data to better influence, light, medium and heavy users behavior.

[Lauren Silberman, Credit Suisse]

Any color, I guess the magnitude of light, medium versus heavy, users in the program?

[Brian Niccol, Chairman and Chief Executive Officer]

We have not broken that out. So, what I can tell you is we are really pleased with the mix that we are seeing a light medium and heavy users.

[Lauren Silberman, Credit Suisse]

Thanks very much.

[Operator]

Next question is from Chris Carril with RBC Capital Markets. Please go ahead.

[Chris Carril, RBC Capital Markets]

Hi, thanks for taking the question. So I wanted to ask about how you are thinking about store formats going forward so clearly the current environments validating the opportunity with Chipotlanes. But are you rethinking at all any other aspects of the restaurant perhaps around? How much in restaurants eating is necessary going forward? And do you think there is an opportunity to drive new restaurant returns even higher by contemplating these different formats?

[Brian Niccol, Chairman and Chief Executive Officer]

Well, what I will definitely tell you is we are testing different formats, whether it’s a restaurant that is a Chipotlane-only to a restaurant that's all order-ahead with Chiptolane access point. So we are going to test various formats because our goal is to have a suite of assets that we can then put into a trade area to maximize totally sales out of that trade area. So, the good news is we are seeing these access points all to be truly viable. And I feel like we have got, terrific flexibility in what we want to build, whether it’s in line, tradition, traditional Chipotle all the way to, the freestanding Chiptolane. We’ve got a lot of flexibility in between those two call it bookends, so, and we are going to continue to experiment with what are the, besides we can put Chipotle and then maybe historically we would have said that, and we cannot put Chipotle there but now we can because we have got this different execution and also the scale of our digital business, which supports the additional access points. Jack, I don’t know if you want to add anything to that?

[Jack Hartung, Chief Financial Officer]

No, I couldn’t agree more. And I think this pull forward of the digital business is already allowing us to look in additional trade areas and you can flex the investment and you can flex the size and the access points within the restaurant and so – but we are going to be thoughtful like we have done with anything and take a stage-gate type approach. So you will see some different formats come out and then when they do well, you will see more of them.

[Chris Carril, RBC Capital Markets]

Right. That’s really helpful. Thank you.

[Operator]

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

[Brian Niccol, Chairman and Chief Executive Officer]

Alright. Thank you and thank you everybody for taking the time to listen and ask questions. Obviously, we are very proud of all of our employees, the way that they have managed the business, the way that they have taken high, high importance on the safety of themselves and their customers. Very fortunate to be a part of this company and leading this company of so many talented leaders, so many talented people that are so committed to Chipotle’s purpose and really honored to be where we are with the Chipotle business. Obviously, we are very proud of the investments we have made in digital and how that has played out for us over the last couple of months. I am very optimistic about how the Chipotle business with now the combination of a very robust digital business, combined with great culinary, great speed and just tremendous value is going to play out in the future. And we are very optimistic about what the future holds both for the health and well-being everybody in this country and then obviously the health and well-being of Chipotle of both the people that work in it and the business that we are going to lead going forward. So, thank you for taking the time and I look forward to speaking with you all soon. Take care. Bye.

[Operator]

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