Chipotle Mexican Grill Inc

NYSE:CMG

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, and welcome to the Chipotle Mexican Grill Third Quarter 2022 Results Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead.

[Cindy Olsen, Head of Investor Relations and Strategy]

Hello, everyone, and welcome to our third quarter fiscal 2022 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com.

I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projections in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and in our Form 10-Q for a discussion of risks that may cause our actual results to vary from these forward-looking statements.

Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website.

We will start today's call with prepared remarks from Brian Niccol, Chairman and Chief Executive Officer; and Jack Hartung, Chief Financial and Administrative Officer, after which we will take your questions. Our entire executive leadership team is available during the Q&A session.

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

[Brian Niccol, Chairman & Chief Executive Officer]

Thanks, Cindy, and good afternoon, everyone. Our third quarter results demonstrated the resiliency of the brand and strength of our organization in managing through a difficult consumer environment along with the inflationary headwinds we have experienced over the past 18 months.

For the quarter, sales grew 14% to reach $2.2 billion, driven by a 7.6% comp. In-store sales grew by 22% over last year. Digital sales represented 37% of sales. Restaurant-level margin was 25.3%, an increase of 180 basis points year-over-year. Adjusted diluted EPS was $9.51, representing 35% growth over last year. And we opened 43 new restaurants, including 30 Chipotlanes.

In the third quarter, we continue to see a widening of trends by income level with the lower income consumer further reducing frequency. Fortunately, for Chipotle, the majority of customers are from higher-income households, which continue to increase purchase frequency. While it is difficult to predict the macro impact on future spending trends, we know our value proposition remains strong and we experienced minimal resistance to our price increase in the quarter.

To put it into perspective, our average chicken burrito or bowl, which makes up about 50% of our orders across the U.S., is below $9 in our restaurants. This is a tremendous value when you consider the quality of our food, including our food with integrity standards, the fresh preparation utilizing classic cooking techniques, the customization, generous portions and of course, the convenience and speed.

Our fresh preparation is particularly unique when comparing Chipotle to other restaurants. There are not many restaurant options that prepare their food fresh daily, and we do it in all 3,000-plus restaurants. Our restaurant teams begin preparation at 7:30 in the morning to be able to serve our delicious food by the time we open.

We only use 53 real ingredients, all of which you can pronounce and our dedicated employees prepare the food in our open kitchens using classic cooking techniques. This includes grilling Fajita Veggies and Adobo Chicken on the Plancha and mashing avocados to make our signature guacamole and making our chips fresh every day.

So again, when you combine all these elements, you get an industry-leading brand with a tremendous value offering. And our five key strategies will continue to help us win today while we create the future.

Now let me provide an update on each of these strategies, which include: number one, running successful restaurants with a people accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; number two, amplifying technology and innovation to drive growth and productivity at our restaurants and support centers; number three, making the brand visible, relevant and loved to improve overall guest engagement; number four, expanding access convenience by accelerating new restaurant openings; and number five, sustaining world-class people leadership by developing and retaining diverse talent at every level.

First, starting with our restaurants. We remain focused on being brilliant at the basics, including staffing our restaurants with talented team members focused on the foundations of the business. These include having great culinary prepared and ready to serve, open to close in a food-safe environment, improving order accuracy and timing for the digital business and increasing throughput in hospitality for the in-restaurant business.

At the end of last quarter, we rolled out an updated training program called Project Square One, which includes training around throughput, digital execution, food quality and hospitality to deliver an exceptional customer experience. We've made some progress during the quarter, but we are not where we need to be. The capabilities of our teams needs to and will improve. Chipotle is a restaurant business with high standards, and we need to train and develop our teams so that these standards are met.

Additionally, in these uncertain times, it is critical that we treasure the guest, and this will be a primary focus of everyone in operations and across our company. With so much change over the past couple of years brought on by the pandemic, it has been refreshing to focus on the foundation which Chipotle was built.

We do see that our highest volume restaurants are meaningfully outperforming lower-volume restaurants in terms of throughput. What these restaurants have in common is experienced managers include that understand the importance of the foundations. As our newer restaurant employees go through the training and get more real-time reps, we believe we will see consistent improvement over time.

As we discussed last quarter, we continue to look for ways to enhance our tools and systems to support in-restaurant execution and improve the overall experience for our employees and guests. I am excited to share a pilot that we recently announced as well as an update on Chippy. We are piloting advanced location-based technology to enhance our app functionality and provide a seamless, convenient experience for our guests.

For guests who opt in, the program can engage with Chipotle app users upon arrival to our restaurants and utilize real-time data to enhance their experience with our order readiness messaging, wrong pickup location detection, reminders to scan the Chipotle Rewards QR code to checkout and much more. And I'm happy to share that Chippy is now in one of our restaurants, and we are excited to test and learn from the autonomous robot that helps our teams make tortilla chips, bringing up their time to serve and support our guests. Chippy is trained to replicate Chipotle's exact recipe to cook the chips to perfection, finishing with a hint of lime juice and a dusting of salt. Additionally, Chippy can make chips throughout the day, which results in fewer outages and improves freshness.

Moving to our branding, our Real Food for Real Athletes platform continues to expand as we rolled it out to football, America's most watched sport. The campaign focusing on athletes that love to eat at Chipotle as part of their training and lifestyle as it helps them to perform their best by providing proper nutrition through real ingredients. At the pearl level, we brought together The 88 Club for the first time in an ad with Dallas football greats who were the #88: CeeDee Lamb, Michael Irvin, Dez Bryant and Drew Pearson. The 88 Club TV ad premiered during Sunday night football and all of the athletes go-to Chipotle orders were featured in our app. Chipotle's 88 Club content achieved great engagement with millions of views across channels.

Additionally, at the college level, we took a local approach with the Real Food for Real Athletes campaign in Ohio, which is one of our biggest markets and where we have our largest restaurant support center. We partnered with Ohio State offensive lineman and running back TreVeyon Henderson, on an ad narrated by former Buckeye running back great Archie Griffin.

Tapping into the passion, the fans have for their favorite teams and game day excitement, the ad showcased TreVeyon's journey before he runs onto the field and was amongst our highest engaged videos in social media channels.

Shifting to LTOs. We remain comfortable with our cadence of one to two LTOs a year as it excites our guests and is driving both higher frequency and spend. As you may have seen, we launched Garlic Guajillo Steak in mid-September, which is an entirely new flavor profile featuring tender cuts or freshly-grilled steak with the bold flavor of garlic and guajillo peppers and finished with fresh lime and cilantro. In maintaining our relevance in the Metaverse, we premiered the Garlic Guajillo Steak to our community on Roblox where users could grill, season, cut and virtually taste the steak. The first 100,000 users who successfully completed the Chipotle Grill simulator, received a promotional code that can be redeemed in our restaurants. Again, showing our ability to blend the Metaverse with real life.

Complementing the Roblox experience, we also provided early access to our 30 million Rewards members as we continue to provide Rewards members with added value. While still early days, Garlic Guajillo Steak is getting excellent customer feedback and is driving a higher check as a premium protein experience. However, it is faced with the challenge of rolling over our highly successful Brisket program last year. As a reminder, Brisket ended in mid-November and the Garlic Guajillo Steak program will go through the end of the year.

Additionally, following the success of Pollo Asado, we began testing Chicken Al Pastor in Denver and Indianapolis. Chicken Al Pastor adds an exciting level of spice to guests' go-to orders. And if successful in the stage-gate process, it could be available for rollout in 2023.

Our next strategic pillar is expanding access, which is still a top request from consumers. We remain on track to open 235 to 250 new restaurants in 2022 and anticipate opening between 255 to 285 restaurants in 2023 barring any further delays in construction or equipment availability.

Our pipeline remains strong. And as these challenges ease, we are confident that we can get to the top end of our targeted 8% to 10% range.

In addition to expanding in our core markets, we remain excited about new opportunities, including Alberta, Canada and small towns in the U.S. We plan to enter Alberta, Canada in 2023 with our first location in Calgary. Alberta makes the most sense as our next market to open in Canada as it has two of the main cities, including Edmonton and Calgary, each with relatively large populations. Additionally, there is brand recognition as people from Alberta have visited Chipotle restaurants in British Columbia and Ontario.

In the U.S., our small town strategy is also performing very well. Overall, small town restaurants have comparable margins and returns to the company average, and we're excited about the growth opportunity, which is included in our 7,000 long-term restaurant target. I'm also proud to share that opening day sales for a restaurant in a small town in Texas was a new company record. I would like to express my congratulations and gratitude to the restaurant and development teams for making that one happen.

And speaking of teams, our purpose of cultivating a better world starts with our people. The importance of developing our people is paramount to running great restaurants as well as developing future talent to grow. I'm delighted that over 90% of our promotions are internal, and I believe we will continue to see that percentage go up. There are many examples of senior leadership roles that started out as crew members.

In fact, one story that particularly moved me was about our team in the Mid-Atlantic region, where our Regional Vice President, Team Director and Field Leader were all promoted from within the organization in March. Our RVP immigrated to the U.S. from Egypt and his first job was as a crew member in 2009. He is another person that has worked his way up from a crew member to Regional Vice President overseeing $1 billion in sales. For perspective, that would be the fourth largest company in Egypt.

His successor as Team Director immigrated to the U.S. from Palestine in 2017 with his first job as a crew member and now oversees a $200 million business. And finally, his successor is a field leader who is a woman, who immigrated to the U.S. from Ethiopia in 2015, who also started as a crew member and now oversees 7 locations totaling $20 million in sales.

Their perseverance is inspiring to many and a great example of how our growth and brand changes lives and communities for the better. Each of these individuals is also developing terrific talent that has the ability to become future leaders. For perspective, each year just in the United States and Canada, we have the opportunity to promote more than 1,500 managers to open our new restaurants.

In addition to career opportunities in industry-leading benefits, we also believe that communication between leadership and our restaurant teams is critical. We do this through several ways, including chitchats, where members of our executive leadership team meet with our restaurant teams to listen to their feedback. Through this feedback loop, we were able to identify that our teams wanted more educational benefits, which is why we implemented debt-free degrees and career certificates. And team members who have participated in our educational programs are 2x more likely to be retained and 6x more likely to be promoted. Supporting, developing and growing our people will remain a core focus for Chipotle and is key to growing to 7,000 restaurants.

In closing, I want to thank our employees for another great quarter. We remain committed to getting back to the basics and running great restaurants. I believe these actions will position us for strong performance in any environment and more importantly, is key to delivering an excellent customer and employee experience. I'm excited to see everyone back in our restaurants next week for our 22nd year at Boorito.

And with that, I'll turn it over to Jack.

[Jack Hartung, Chief Financial and Administrative Officer]

Thanks, Brian. Good afternoon, everyone. I want to start by reiterating Brian's commentary about treasuring our guests and earning every single transaction.

During past periods of economic challenges, focusing on our guests, getting the details in the restaurants right and providing a great dining experience has served as well. As Brian mentioned, this will be the primary focus of our organization and what we believe will lead to building an even stronger brand for the future.

Now moving to our third quarter results. Sales in the third quarter grew 14% year-over-year to reach $2.2 billion as comp sales grew 7.6%. Restaurant-level margin of 25.3% increased about 180 basis points compared to last year and earnings per share adjusted for unusual items was $9.51 representing over 35% year-over-year growth. The third quarter had unusual expenses related to onetime employee separation expenses, corporate and restaurant asset impairments, corporate restructuring and our previously disclosed 2018 performance share of modification.

Looking ahead to Q4, our current comparable sales trends are choppy as we lap our Brisket LTO from last year and we expect our October comps will likely end in the mid-single-digit range. Assuming current sales trends continue, we expect our comps to be in the mid- to high single-digit range for the full fourth quarter as Garlic Guajillo Steak will be in restaurants through the end of the quarter compared to Brisket, which ended in mid-November of last year.

Earlier this month, we took a price increase in around 700 restaurants to address pockets of outsized wage inflation. Menu prices in each restaurant increased between 2% and 3%, which had a company-wide impact of about 0.5% overall. And I'll go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter were 29.8%, a decrease of about 50 basis points from last year. The benefit of menu price increases offset elevated costs across the board, most notably in dairy, packaging and tortillas. In Q4, we expect our cost of sales to remain at about the same level as the benefit from the menu price increases will be offset by higher beef, chicken, dairy and tortilla.

Labor costs for the quarter were 25.1%, a decrease of about 70 basis points from last year. This decrease was driven by sales leverage and somewhat offset by wage inflation as well as lapping the employee retention credit that we received in Q3 of last year. In Q4, we expect our labor cost to be in the mid-24% range due to leverage from our menu price increases as well as our premium price Garlic Guajillo Steak.

Other operating costs for the quarter were 14.5%, a decrease of about [60] basis points from last year. This decrease was driven by sales leverage as well as a decline in delivery expenses due to lower delivery sales, partially offset by higher costs across several expense categories, most notably utilities, including natural gas.

Marketing promo costs for the quarter were 2.2% or 20 basis points below last year. And in Q4, we expect marketing costs will be in the mid-3% range with the full year to come in right around 3%. In Q4, other operating costs are expected to be around 15%.

G&A for the quarter was $141 million on a GAAP basis or $136 million on a non-GAAP basis excluding about $4 million in employee separation and corporate restructuring costs and $1 million related to the previously disclosed modification to our 2018 performance shares. G&A also includes $115 million in underlying G&A, $21 million related to noncash stock compensation, a $1 million benefit related to the reversal in lower performance-based bonus accruals, mostly offset by payroll taxes on equity vesting and exercises. We expect our underlying G&A to be around $120 million in Q4 and continue to grow slightly thereafter as we make investments in technology and people to support our ongoing growth.

We anticipate stock comp will be around $25 million in Q4, although this amount could move up or down based on our performance and $1 million for costs associated with our field leader conference in early 2023 bringing our anticipated total G&A in Q4 to around $146 million.

Depreciation was $71 million, and in Q4, we expect it to increase slightly to $73 million. Our effective tax rate for Q3 was 24.4% for GAAP and 23.4% for non-GAAP, and both rates benefited from option exercises and share vesting at elevated stock prices. For Q4, we continue to estimate our underlying effective tax rate will be in the 25% to 27% range, though it may vary based on discrete items.

Our balance sheet remains strong as we ended the quarter with over $1.2 billion in cash, restricted cash and investments with no debt, along with a $500 million untapped revolver. During the quarter, we repurchased $107 million of our stock at an average price of $1,438 and we've repurchased a total of $628 million year-to-date so far. We increased our level of stock repurchases during the quarter when our share price fell with the market overall, and we will continue to opportunistically repurchase our stock. During the quarter, the Board authorized an additional $200 million to our share authorization program, and at the end of the quarter, we had $413 million remaining.

We opened 43 new restaurants in the third quarter, of which 38 had a Chipotlane, and we remain on track to open between 235 and 250 new restaurants in 2022 with at least 80%, including a Chipotlane. As Brian mentioned, we anticipate opening between 255 and 285 restaurants in 2023 with at least 80%, including a Chipotlane. Development delays remain a headwind, including equipment and construction material shortages, construction labor challenges as well as permitting, utilities and inspection delays. While we expect these challenges to persist into 2023, our pipeline remains strong, and we expect to move towards the high end of our targeted 8% to 10% openings range once these headwinds subside.

To conclude, we believe we have a tremendous growth opportunity ahead of us with room to more than double our current presence in the U.S. and Canada over the long term. We will remain focused on what makes our brands special. And that is our purpose of cultivating a better world, our food integrity standards, a strong unit economic model and of course, our talented and dedicated teams.

With that, we're happy to take your questions.

[Operator]

[Operator Instructions] And our first question will come from David Tarantino of Baird.

[David Tarantino, Robert W. Baird]

I have a two-part question related to your pricing and traffic trends. So first, I was wondering if you could share what your transaction trends were in the third quarter and what the guidance implies for the fourth quarter? And then I have a follow-up related to that.

[Brian Niccol, Chairman & Chief Executive Officer]

Yes, sure. So in the third quarter, I think of transactions were down roughly 1%. A lot of the additional headwinds we've had with kind of the mix shifting as people return to their kind of normal course behavior has resulted in smaller group sizes. So that's kind of consistent with what we've seen. And then in the current quarter, obviously, we've got Garlic Guajillo Steak, launching right now going over top of the Brisket. And then I think as we mentioned, we're continuing to see some pressure on the low-income consumer. So we're still seeing transactions be pushed in that negative range. And obviously, we'll continue to keep an eye on it as we go forward.

Jack, I don't know if you want to add anything to that.

[Jack Hartung, Chief Financial and Administrative Officer]

Yes, just pricing during the quarter, Dave, we're running right around 13%, and that will move up a bit in the fourth quarter. So that's part of our guidance as well. I think the big thing in the fourth quarter to note is just Brisket was very successful last year, and we ran out of inventory in the middle of November. And so the comparison actually gets easier in the second half of the quarter.

[David Tarantino, Robert W. Baird]

Great. That's helpful. And then my follow-up, Brian, is I think you're aware there's been a lot of concern about the pricing strategy hurting the traffic. And I think you mentioned in your prepared remarks that you're not seeing resistance to the price increases yet. So I just wondered if you could comment on, I guess, how you're thinking about your price position now and how you think about the traffic trends you're seeing and whether or not you think that you've seen any resistance. It doesn't sound like you think you are, but I guess the traffic being slightly negative, just wanting you to have a chance to address that.

[Brian Niccol, Chairman & Chief Executive Officer]

Yes. Sure. Well, I mean, look, the simple fact is the absolute price point in the business is still very competitive and frankly, very attractive relative to -- you look at regional players. The -- when you look at the fast casual competitors, we're anywhere from 10% to 20%, 30% less than what you see on their menu. So you've seen, unfortunately, in all this inflationary environment, everybody is taking price. So our costs, I think, are up over 20% over the last two years. Not surprising, other people are experiencing something similar and they've taken pricing accordingly.

So our relative position to our competitors or the alternatives for what you can get when you read out, really, we stayed in a really strong position. So that value proposition remains strong. And then when you look into the business, we're not seeing people all of a sudden not buying guacamole or also changing what they typically add to their order or switching between proteins. Things have stayed pretty consistent.

And then the last piece I'd add to that is if you go to the grocery store, there's a lot of inflation there, too. So if you think about all the places where you can get food, they're way up. And our relative performance in that environment is one where we're still a great cost opportunity, I guess, for the consumers, the way I would describe it. So getting a chicken burrito exactly how you want, at the speed at which we can provide with the culinary and the ingredients that we provide for roughly $9 or less. That's tremendous value.

[Operator]

The next question comes from Nicole Miller of Piper Sandler.

[Nicole Miller, Piper Sandler]

On that point of price, components of mix and traffic. Can you just talk about the price piece? So what is the art and science that you blend for the here and now? And how do you think about using that tool to protect margin? But then also long term, how do you exercise that pricing power or not against the long-term like unit opportunity, which I imagine really is requires affordability, right, appealing to the masses. So if you could talk about that a little bit, that would be great?

[Brian Niccol, Chairman & Chief Executive Officer]

Yes, sure. So I mean, that's exactly right, Nicole. The way we're trying to balance this is really only use price as the last lever to pull. And I think that's what we've done throughout the course of the last, call it, two years because we like having the strong value proposition, frankly. I like being in the position where we have the best culinary with the best ingredients and arguably the best price. And so it's a position of strength and it's a position we want to hang on to as we go forward.

The reality is in an inflationary environment, you're going to have to pull that lever. And that's why I think it's really important to look at how your pricing stacks up relative to people's alternatives. Those alternatives are either the grocery store or other restaurants. And when you look at those, our value proposition remains in a really strong place. So we're delighted to continue to see new units opening at a terrific opening rate. They're still achieving 80%, 85% of what our typical restaurants do. Our Chipotlanes continue to outperform. And then frankly, even in our small towns, we're continuing to see just tremendous opening.

So I think that tells me we're getting signals in all different fronts that our value proposition remains really strong whether it's a new restaurant coming to an area or an existing restaurant competing in an area that we've been competing in for a while. So that's the needle we're trying to thread.

[Nicole Miller, Piper Sandler]

And as that applies to the fourth quarter commentary then, is that just price that's flowing from August into 4Q? Or could you speak to incremental price in the fourth quarter to get above that 13%? And is that essentially being used to protect margin, even though, I guess, you're really hitting that 25% profile or algorithm margin you'd be looking for?

[Jack Hartung, Chief Financial and Administrative Officer]

Yes, Nicole, there's actually three things that are going on when you move from the third quarter to the fourth quarter. First, we took our last price increase around August 1. So that hit part of the third quarter. So the rest of it, the fourth quarter is going to get a full hit. We also, on a very targeted basis, we identified pockets throughout the country, and there were 700 restaurants that had accelerating wage pressures. So if you look at what our typical wages are across the country and we took that very large 15% increase, we got everybody up to $15 or more in the second quarter of 2021, we have individual pockets in these restaurants that we identified that were going $1, $2 and $3 above what the rest of the country was doing. And that's just because the labor market was so tight there. So what we did, we just tried to up the menu prices just to cover some of that, not to get our margin back. But just to try to cover some of that, then ended up being somewhere between 2% and 3% in those 700 restaurants. That's about 50 basis points or so overall to the company.

And the third piece, Nicole, is we took our price increase in the fourth quarter of last year around that December 7, December 8, something like that, and that rolls off. So those are the pieces. So you'll actually see for the quarter, the pricing will bounce up a little bit before it drops back down in the first quarter. So it will move from 13% up closer to call it 14.5% or approaching 15% before it drops down to 11% in the first quarter of next year.

[Operator]

Our next question comes from David Palmer of Evercore ISI.

[David Palmer, Evercore ISI]

Two questions. The first one is a question on food costs that those costs are down under 30%. And obviously, that's well off where they used to be. I'm wondering if that's just all pricing net of commodity inflation? Or is there something else going on in there? For example, the fact that more is being made off the digital make line that's helping your portion sizes, your portion control or the rebound in beverages or something like that. I'm wondering if there's more than just price net of commodities and I have a quick follow-up.

[Jack Hartung, Chief Financial and Administrative Officer]

Yes, David, there's really -- there are two other things. One is, remember, we're pricing -- we've got higher menu prices for our delivery business. Our delivery business is about 17%, 18% of our business. And so we actually rest in charging fees. We charge virtually no fee. We charge $1 fee, then plus a small commission. So our menu prices are much higher there. So that gives you what appears to be a much lower food cost, all right? So you get a benefit on the food line.

The other thing when we talk about inflation over the last two years, food inflation has been about 20%, but labor inflation has been more like 24%. So any time we take price increase to cover labor when labor is inflating at a higher rate than food cost, again, you get some of that benefit in the food cost. So that's why it's under 30%. You're right, historically, we've generally not seeing our food cost under 30%.

[David Palmer, Evercore ISI]

And just a follow-up, whether the weakness in the low end is -- pertains to your pricing or the fact that certain customers are getting priced out or not. I'm wondering what actions you think you have in your stable of potential tactics that you can deploy to correct that? Are there -- is this something where you really dial up the CRM and start doing tax to keep people sort of in the tent and keep their -- get people back in the flow again? How do you think you'll address that weakness, if at all?

[Brian Niccol, Chairman & Chief Executive Officer]

Yes. I mean, look, one of the things we're definitely evaluating is how do we separate these groups into understanding their current situation. And then what do we need to do to ensure that they can still have access to the Chipotle experience. And the team is hard at work in figuring out how best to use our CRM/rewards program to be very targeted with the different cohorts that we have. Some of it is obviously the low-income consumer. Some of it is also what they're interested in, whether it's having more access digitally or having a different experience when it comes to coming into our restaurant. So -- that's one of our key tools that I think that's one of the big advantages that we have, frankly, going forward is we've got this tremendous database that we can then smartly communicate with customers so that we're giving them relevant messaging that keeps them engaged with Chipotle.

[Operator]

The next question comes from John Ivankoe of JPMorgan.

[John Ivankoe, JPMorgan]

The question was on Project Square and, Brian, you specifically mentioned in your prepared remarks that there is still more to do there. And I just wanted to get a sense or improvements that you could still make relative to how you're currently executing. I wanted to get a sense of how much of that is just giving the employees and the managers more time to work with the current system? I mean, is it just muscle memory that needs to increase? Or are there changes that you can make or would consider things like increasing staffing levels, increased pay, technology, what have you? Anything that you can do on your end that can, in the near term, improve some of the customer metrics that you're striving to achieve?

[Brian Niccol, Chairman & Chief Executive Officer]

Yes. Thanks for the question. Obviously, one of the things that has been, I guess, a breath of fresh air is we've now had the ability to get back to focusing on the basics of Chipotle. And obviously, it starts with great culinary and then it starts with great teams being trained and developing each other. And look, I think the other thing that we're now surrounding these teams with is technology to have more real-time information on the performance of the restaurant so that our field leader, our General Manager and our team knows either where there's an opportunity to be better or where there is success, let's put more energy to where that success is.

The fact remains, since January, we've got roughly 50% of our field leaders are new to the company. And -- I'm sorry, not new to the company -- new enroll, right? So 90% have been promoted internally. But we've got a lot of new people in the Chipotle business at new levels of responsibility. And so that's what Project Square One's all about is making sure if you're a newly promoted field leader, you know how to do the job. You're newly promoted General Manager, you know how to do the job. Maybe you're new to our company all together at the crew level, you know how to do the job. And over the last two or three years, we've had to flex based on different regulations coming at us for how we wanted to run the restaurants.

Now we're getting back to what we believe is the right way to run a Chipotle in an environment that allows us to execute our standards, our processes and our culinary. And so there's still opportunity for us to get better at it because the teams need more reps. But I think we're also surrounding them now with, I think, clarity on what the standards are as well as tools to give them clarity on how they're performing real time.

[John Ivankoe, JPMorgan]

And have you actually noticed any changes in your guest satisfaction scores? Or is that something that you're just trying to achieve internally?

[Brian Niccol, Chairman & Chief Executive Officer]

Yes. No. I mean we've seen improvements definitely in our in-store experiences. And I think that's a testament to folks getting back to the business of running the front line. We still have opportunities to get better on that digital business when it comes to accuracy, specifically. And it really that accuracy shows itself more in a delivery occasion but we're seeing evidence where we're continuing to make great progress. I think I mentioned this earlier, in our higher-volume restaurants where you have more tenured field leader, more tenured general manager, more tenured crew, they're really outperforming on all these metrics and their satisfaction scores are higher. Their volumes are higher, the turnover is lower. So we know when we get teams to stabilize have high levels of capability, we get great results. And that's what Project Square One is all about. It's just reestablishing those processes, those standards and then ensuring that people have the capability to deliver on those processes and standards.

[Operator]

Our next question comes from John Glass of Morgan Stanley.

[John Glass, Morgan Stanley]

Brian, can you talk about the efficacy of the LTOs you're running today versus a year or two or three ago? Is this driving incremental traffic? Or is this just like a check benefit, right, as people sort of purchase these new, but you're not really driving as much in terms of new customers. I guess where I'm going with this is you're on kind of a treadmill now of sorts, right, where you have to continue to innovate to make sure that you're covering last year's promo. Is there an off-ramp to that? Do you think about ways to broaden or differentiate promotions beyond just protein differentiation into other things that might help you as you start to -- eventually, you're going to have a protein that doesn't do as well as the year ago then what?

[Brian Niccol, Chairman & Chief Executive Officer]

Yes, sure. Look, this is something that, obviously, we evaluate. But I don't think of our business is relying on one thing. When we are executing, like for right now, we're doing Garlic Guajillo Steak. I think there is incremental business to be had because we have better throughput, better execution in the restaurant. There's incremental business to be had because we have better digital execution. And then there's business to be had because we give people some menu variety. And then frankly, in this environment, you're dealing with some macro headwinds on a lower income consumer.

So I never really think of this as -- it's just one thing to lap the prior year. I think of it as like how are we growing our brand every month, every year, every day. And that's why I think one of the advantages Chipotle has is we have these layers of business that continue to grow with us. Obviously, we've got some macro issues that we're dealing with between inflation and the challenges in the lower-income consumer. But I think our strategy still has a lot of growth in them, and it's not one is overwhelming the other.

[John Glass, Morgan Stanley]

Can I just clarify when you made the comment about traffic and the dynamic between mix and more people are coming back to the restaurants? Shouldn't that benefit traffic and maybe to the detrimented mix? I think you made the comment that, that was impacting traffic. But I would have thought that would have been a positive to order accounts even if it was hurting mix. Do you see it that way? Or do I have that wrong?

[Brian Niccol, Chairman & Chief Executive Officer]

Go ahead, Jack.

[Jack Hartung, Chief Financial and Administrative Officer]

Yes. The main mix we're seeing, John, is group size. So as we're seeing customers kind of return to more normal habits, so it's less digital more in-restaurant. And even in the in-restaurant channel, there's a slight decline in the group size. So what's happening, what seems to be happening is people rather than working from home and going with like family, for example, we're bringing dinner home for their family. They're kind of back to eating more on their own as an individual that they might be out with a group of 4 people, but they're all paying for their own lunch. So the group size across all the channels and then because there's still a shift moving from digital to in-store. The group size is the biggest mix thing that we're seeing. And that ends up meaning we're selling less burritos per transaction. So it's got a negative mix impact.

[John Glass, Morgan Stanley]

But a positive traffic impact?

[Jack Hartung, Chief Financial and Administrative Officer]

It does have a positive traffic impact. That's right.

[Operator]

The next question comes from Danilo Gargiulo of Bernstein.

[Danilo Gargiulo, Sanford C. Bernstein]

So I would like to understand a bit more whether the demand and the comp is coming from mostly new customer acquisition versus essentially like improving on the throughput in your high-volume stores.

[Brian Niccol, Chairman & Chief Executive Officer]

Well, so we definitely have -- as we look at our data, at least in the digital space, we have an understanding of new customers versus -- and as we define a new customer that hasn't been at Chipotle in the last year. And we continue to see that group be highly represented. Where we're seeing the most gains in frequency is what not surprisingly, our more heavy user. And so that continues to be the case -- that's one of the things I think that the digital business fit for us. If you go back three or four years ago, one of the big surprises for us is it really attracted a lot of new users. And then obviously, during COVID that ramped up quite a bit because of our digital business growing. So we continue to stay focused on bringing in the new user, but we also have an equal effort on how do we get more frequency out of our medium and heavy users.

[Danilo Gargiulo, Sanford C. Bernstein]

Got it. And then one more question. I know you mentioned there is a comparable level of margin between the kind of small town store versus the kind of the urban store. I wonder if you can also like compose for us kind of the high-level economics. And if we were to talk about pricing versus traffic, are you seeing any major differences between the urban stores versus the small town stores?

[Jack Hartung, Chief Financial and Administrative Officer]

Yes. I mean just at a very high level, the small town restaurants, on average, I mean, we've had some barn burners that are breaking records in terms of sales. But in terms of as a group, all of our small town restaurants are a little bit below what our average restaurant would be, so maybe by $150,000 or so. But the cost structure is more favorable in the small town. So our margin, actually, even though it's kind of smaller volume is actually higher. The investment costs tend to be lower as well. So the cash and cash returns in these small towns are stronger than what you're seeing in a typical average Chipotle.

Now if you go back to urban, urban is still, if you're talking about real central business district, those restaurants are still not all the way back. They're much better and they're outcomping the nonurban locations. But if you go all the way back to 2019, they still have not quite kept pace. And so the urban restaurants, they tend to have higher cost of doing business. They tend to have higher rents. And because the volumes aren't keeping pace with the nonurban locations, those are under a little bit more pressure. But again, they're out comping their non-urban cohorts. So we think give enough time that hopefully will come all the way back.

[Operator]

The next question comes from Dennis Geiger of UBS.

[Dennis Geiger, UBS]

Brian, wondering if you could highlight the biggest opportunities a bit more from a transaction perspective. The -- you mentioned kind of running slightly negative in the quarter. I mean, quite frankly, all most all brands are running negative transactions right now. And so you guys actually look fairly solid relative to the industry. But I guess in looking ahead, curious if you can just highlight some of the bigger levers that support transaction growth rest of the year and into '23. I know you just commented that it's not one thing. But just in thinking about the throughput, the innovation, dining room traffic can still improve, thinking about the macro improvement. Just wondering if there's any more detail on kind of unpacking that and kind of how you think about transactions improving again from here?

[Brian Niccol, Chairman & Chief Executive Officer]

Sure. I mean, look, obviously, one of the biggest opportunities for us is to make sure our restaurants are staffed and trained. And I think Jack mentioned this, we still have pockets of areas or we're still battling that very challenge. And I think as long as we have the ability to attract people and use obviously all of our benefits and purpose of the brand. But at the end of the day, you have to make sure the wage is attractive and retain people. So the ability to keep these restaurants staffed, have the teams fully trained and then executing against our standards, I think there is a lot of transaction opportunity in that, both on the frontline as well as in the digital business. And doing both of those things really well. I know there is upside in the business going forward. I think we've made tremendous progress coming out of kind of the COVID challenges and then coupled with the labor challenges and the inflationary environment.

So we're in a position of strength, but I think we can be a lot stronger and better going forward and that will manifest itself, I think, in some additional transactions in a tough environment. That's why you hear us talking about, hey, look, we've got to treasure every guest because we got to get it right, because it's going to be a tougher environment for the consumer going forward. So that's a big opportunity without a doubt.

And then obviously, we'll continue to take advantage of our CRM tools, our marketing capabilities to continue to keep people engaged and hopefully loving the brand so that they want to come as well.

The other thing I should mention, too, is we're going to open a lot of restaurants in the fourth quarter. just the fact that we're going to be opening more restaurants gets us more new users and gets people to have more experiences with Chipotle, which continues to build on itself a positive kind of vibe for a growing vibrant brand. And people like to work there, people like to eat there. So we're going to keep pushing that path forward too.

[Operator]

The next question comes from Sara Senatore of Bank of America.

[Sara Senatore, Bank of America]

I wanted to just ask a little bit about your customer base. It's kind of a two-part question. The first is that among -- in smaller towns, you're talking about kind of lower volumes. Typically, I think of those as a slightly lower income cohort, but we spent a lot of time talking about low-income consumers. So I just wanted to see if you could kind of reconcile those and whether this means something different about your value proposition in small towns.

And then the other piece is just thinking about your marketing campaigns and emphasizing athletes and gaming. Could you talk a little bit about who your customer is? It seems like it's mostly targeting younger men, although I'm either young nor a man, so I can't speak to that from personal experience, but maybe just talk about those two components.

[Brian Niccol, Chairman & Chief Executive Officer]

Yes. Well, look, the first piece, just on the consumer. We continue to overindex with young people. It's pretty evenly split between males and females. We do have a little bit of a skew towards higher income. But when we talk about that SKU, we're really talking about north of $75,000. And we want to be showing up in the places that are a part of culture. So I mentioned Roblox, which is obviously a Metaverse type initiative. I mentioned athletes, which is, I think, just another way of talking about selecting the right nutrition for the performance you want to achieve.

So you got to think about these things as like how do you make sure you're staying relevant in culture and how do you both follow culture and then at times lead culture. And that's what we want to be doing. We know there's a lot of power in being with young people, and we're always going to be figuring out ways to stay young. That's not to say that we don't have all age groups eating at Chipotle. We do. But we like the idea of having a position of strength with call it, the teen to 20s and then also a position of strength with the higher income cohorts. So that serves us really well. That's going to be some of this continue to be a position of strength.

As far as small counts go, I mean, we're seeing tremendous success in these small towns. And that's why I think it's important to remind ourselves when we're talking about higher income, we're talking about $75,000 or higher as an overindexing. It's not to say that we don't have people that earn less than $75,000 coming to Chipotle as well. And I think when you demonstrate great culinary, great ingredients, great speed, great customization and people decide how am I going to spend my $10. It's hard to beat Chipotle in that equation. So I think that's why we continue to have units open very successfully, small town, urban, suburban. We're having a lot of success as we open new units, and we're continuing to have a lot of success within the four-walls of the units that we currently have opened. So we like the composition of our customer, and we like the economics that come with it.

[Operator]

The next question comes from Andrew Charles of Cowen.

[Andrew Charles, Cowen and Company]

Brian, I wanted to come back to your comment on the layers of business you're evaluating. And I know you noted continued confidence in Chipotle strong value offering, but with greater concern around the lowering consumer and your concerns on the consumer in the coming months from a macro perspective. Could we see this manifest in focusing more on the snacking occasions or perhaps offering more value during shoulder periods when restaurants are underutilized? And then I have a follow-up question.

[Brian Niccol, Chairman & Chief Executive Officer]

Yes. Look, I mean what we've really spent a bunch of time on is looking at what happened in the last kind of recession or slowdowns. And the good news for us is, yes, you had some low-income consumers step away, but we also had higher income consumers trade into our business. And then as economics improved, all cohorts came back to the business in a big way. So we didn't lose those that came in and we regained those that unfortunately got hit by some tough economic headwinds. So we're not going to be chasing with discounting in the traditional sense. We are going to use targeted CRM initiatives that we know get a great return and also play a meaningful role in the consumer that receives that message.

So we've seen it work in the past. We believe it will work going forward. And I think, the key thing for us to do through this whole period is execute our basics really well. That's our strongest point of differentiation. Our strongest point of differentiation without a doubt is our culinary, our ingredients, our customization and our speed. We do those things really well, we'll be rewarded with people's business.

[Andrew Charles, Cowen and Company]

Very helpful. Jack, just with October disclosure running around mid-single-digit comps. Can you talk about the scenario where you would hit the high end of 4Q same-store sales? The entirety of that driven transactions were to accelerate? Or is there a scenario where you'd look to take pricing in December similar to past years practices?

[Jack Hartung, Chief Financial and Administrative Officer]

No. Andrew, when we provided that guidance, we did the -- basically, the analysis and the forecast, it's really all about Brisket. The idea here is that we've got Garlic Guajillo Steak through the entire quarter. And Brisket was very, very successful. But then we ran out. We ran out in mid-November. So when we look at what's going to happen in the second half of November and then as we move into December, those comparisons alone getting easier, give us the confidence that we can get to -- we think we'll move up. That's why we kind of range-bounded the guidance from the current trend we're running today, which is mid-single digits, up to high single digits because we do think that easing of comparison is going to lift our comp. But we don't have any incremental pricing into that guidance.

[Operator]

The next question comes from Jon Tower of Citi.

[Jon Tower, Citigroup]

Two questions, if I may. First, Jack, I was wondering if you could talk about the total cost basket or buckets that you're looking at for 2023. Obviously, right now, we're seeing some commodities come off the boil and food prices are more favorable than where they were just a few months ago. So I'm curious how you see those persisting into 2023. And then more importantly, on the labor side of the equation, how you see that playing out 2023 versus 2022?

[Jack Hartung, Chief Financial and Administrative Officer]

Yes. It's tough to predict. I mean, in the last year, if you took a look at anybody's crystal ball, nobody really had this figured out and a place just kept coming and coming and coming. It does seem like things are getting closer to stable right now. The areas that I would say there is more upward pressure would be in terms of beef, in terms of our cooking oil. I mean that's still significantly affected by the situation going on in Ukraine and Russia because so much of the oil that we use comes from that area. And then tortillas as well is another area that we're concerned about.

Chicken, we feel pretty good about. We do have contracts for chicken. And so we feel good about that. Paper and Packaging, that's driven significantly by the cost of freight because most of the packaging comes from overseas, from Asia. And it looks like some of the crazy freight costs that we've been paying in the past are easing.

Dairy has been elevated, and so we're optimistic that there will be some additional supply into next year. So there's kind of some pluses and some minuses. Overall, what we're hoping is for mostly stabilization. So if some of the softening in commodity costs can offset some of the pressure we're seeing, especially in beef and cooking oil, and if we could break even for a while and not have to see either margins degrade or have to consider another price increase, that would be fantastic to be in that position for a while.

[Jon Tower, Citigroup]

And then just on labor?

[Jack Hartung, Chief Financial and Administrative Officer]

Labor is unpredictable because we thought it was settling into this normal kind of mid-single-digit range, and that's what I'd like to say. And yet as we did analysis, we found these 700 restaurants. So it's about 1/4, a little more than a 1/4, a little less than 1/4 in a restaurant that we're having to take $1, $2, $3 increase in starting wages just to make sure that the restaurants were staffed. So with what the Fed is doing, you think that the higher interest rates is going to have an impact on the labor market. And so that would be good news in terms of access to labor. But it's a bit of a well cut. Right now, if I had to put a stake in the ground. I would say the inflation expectation would be kind of mid-single digit but there's going to be a caveat to certain pockets throughout the country that we're going to have to do what we have to do. To Brian's point, to make sure those restaurants are staffed. We can train people and we hold on to them once we get to my board.

[Jon Tower, Citigroup]

Great. And then just on the comment regarding return to or a chance to get the 10% unit growth over time. I know in the past that the big governor of growth has been human capital, it doesn't sound like that's necessarily the problem any longer. It sounds like it's more related to development headwinds on equipment, construction material, et cetera, and construction labor challenges. So what sort of lead time do you have on that potentially improving? Meaning, how quickly could you ramp that growth if you started seeing, say, all of those things improve?

[Jack Hartung, Chief Financial and Administrative Officer]

Yes. I mean, the inventory is there. So we've got inventory right now that could get us close to, if not all the way to that 10%. But what's happened is two, 2.5 years -- like before the pandemic, we can open up a restaurant from the time that we go see a site, we like the site, we start serious negotiation to when we get that restaurant open, it could be a 14- or 15-month period. We're now looking at 20, 21, 22 months. So I mean it's a significant increase, and it's because of all the factors that I mentioned in my prepared comments. So the biggest challenge we've had is, frankly, supply. I mean, if it's components, for example, for a walk-in cooler or the HVAC, you can't get the restaurant open. There's just no chance of doing that.

So if we see some easing in the supply chain for the materials and the components that we need for the restaurant, that all by itself could knock off a couple of months. But then there's also construction labor. There's also permitting. And so we really need kind of all of those things are themselves. But our ability to get the restaurant to open on more of the time line we saw a few years ago was there as long as the rest of the piece is falling into place.

[Operator]

The next question comes from Jared Garber of Goldman Sachs.

[Jared Garber, Goldman Sachs]

Brian or Jack, I wanted to just get an update maybe on some of the labor and efficiency tools. I know you talked about it a little bit earlier, but I think on the last call, you had given some more specific updates on the throughput where you are sort of today versus where you were maybe historically and during your peak throughput years. So if you could give us an update maybe on where you are on that and how you see that going forward? And maybe a time frame of how you expect or when you expect maybe to get back towards those pre-food safety levels?

[Brian Niccol, Chairman & Chief Executive Officer]

Yes, sure. So right now, we're running in kind of the low 20s on that [max 15th] measure that we've been talking about. The thing that's nice to see though is in our higher-volume restaurants. Those guys are running now in the high 20s. So if you go back to like 2019, we think there's a real possibility for us to get the entire system in the mid- to high 20s. And then obviously, as we've talked about this many times, when that starts happening, everything around it starts going up too. And -- so that's what we're after. That's why we're making sure that we've got these restaurants staffed. They're getting trained and that the culture is focused on the standards and the processes that we know result in great throughput, which ultimately means great experiences for our guests.

[Jared Garber, Goldman Sachs]

And I guess, if I could just follow up, is there a way to maybe frame how -- what the traffic trends look like in some of those higher volume stores where you're seeing better throughput versus those lower volume stores just to contextualize it a little bit better?

[Brian Niccol, Chairman & Chief Executive Officer]

We'll just check. We've said every like 4 points, 5 points.

[Jack Hartung, Chief Financial and Administrative Officer]

Every five transactions gets you a point of comp.

[Brian Niccol, Chairman & Chief Executive Officer]

Every five transactions -- there it is. Every five transactions is a point of comp. So that's the way to think about it, Jared.

[Jack Hartung, Chief Financial and Administrative Officer]

Yes. And Jared, the higher-volume restaurants, they have not just higher volume, they tend to out comp. They tend to be much more predictable. But to Brian's point, they tend to also have more tenured management teams, more tenured crew. So they don't just have the reps in a few of the team. I mean the entire team has been attacked or been with Chipotle for quite some time. So that's why we're pretty confident that if we can get all of our new folks from field leader through the management ranks and into the crew, just get them more reps and more experience. They gain a lot of confidence. They gain skill, and we know the throughput numbers are going to go up.

[Operator]

That concludes our question-and-answer session. I would like to turn the conference over to the Chairman and CEO, Brian Niccol for any closing remarks.

[Brian Niccol, Chairman & Chief Executive Officer]

Okay. Yes. Thank you. And thanks for all the questions. I appreciate all the conversation on pricing and value. Obviously, it's front and center for us as we navigate kind of the most recent challenges.

The one thing I just want to reiterate is the proposition as it relates to value for Chipotle remains very strong, no matter how you look at it. Whether you look at it on a relative basis to what's competitive pricing look like or you look at it to alternatives like with the grocery store, whether you look at it how new units are opening and how we're performing on that front. But we continue to demonstrate in all areas that the Chipotle brand is strong, and we continue to have a really strong value proposition.

The other thing I just want to emphasize is the focus on having our restaurants staffed, trained and executing against the standards that we know provide a great experience for our customers and our employees is what Project Square One is all about. And the teams are focused on achieving it, which we know then will result in better throughput better experiences for everybody involved.

So the combination of, I think, these five strategies we've talked about with the focus on Project Square One and keeping a close eye on our value proposition, I think, sets us up for a very long runway of growth, and we couldn’t be more excited about where our future is headed. And obviously, we'll deal with the headwinds accordingly.

So thanks for everybody for taking the time. And we'll talk to you next quarter.