Chipotle Mexican Grill Inc

NYSE:CMG

Earnings Call Transcript 2020-Q4

[Operator]

Good day and welcome to the Chipotle Mexican Grill Fourth Quarter and Full Year 2020 Results. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. 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 of Investor Relations]

Hello, everyone, and welcome to our fourth quarter and fiscal year-end 2020 earnings call. By now you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com.

I'll 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, 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'd like to turn the call over to Brian.

[Brian Niccol, Chairman & Chief Executive Officer]

Thanks, Ashish, and good afternoon, everyone. We are pleased to report a strong ending to what has been a challenging year. Even today a few Chipotle restaurants remain fully closed, while only about 60% of our dining rooms are open with reduced capacity, with the rest being available for to-go services.

Despite this challenging backdrop, our results demonstrate that Chipotle restaurants with the right leaders and culture, along with excellent culinary, can deliver outstanding performance in any environment. Most importantly, none of this would be possible without our dedicated team members that strive to deliver a great guest experience on a daily basis.

The pandemic has presented new challenges for all of us and our team has successfully navigated every one of them. I thank our team members for their ongoing commitment to serving our guests, as well as supporting each other and could not be prouder of their efforts.

Before we dive into our financial results let me reflect back on 2020 and highlight a few key accomplishments that have helped propel Chipotle's mission of cultivating a better world. These include, a paramount focus on industry-leading protocols that help ensure the safety and well-being of our employees and guests, providing jobs with industry-leading benefits to nearly 88,000 people and paying out nearly $40 million in discretionary bonuses and assistance pay to our restaurant team members, as well as over $13 million of tuition costs for employees furthering their education; prioritizing diversity, equality and inclusion efforts across the company; and raising nearly $4 million in support of organizations; helping underserved communities; and investing in the future of farming through grants, long-term contracts and the Aluminaries Project 2.0.

As a purpose-driven organization, we're already hard at work identifying ways that we can make a positive impact on the world in 2021. We are optimistic about the future and look forward to continuing to deliver on our promises and passionately play an active supportive role in our communities.

Now, let's focus on our business performance where for the fourth quarter we reported sales of $1.6 billion, representing 11.6% year-over-year growth, which was fueled by 5.7% comparable restaurant sales growth; restaurant-level margins of 19.5% which is 30 basis points higher than last year; and earnings per share adjusted for unusual items of $3.48, representing an increase of 21.7% year-over-year.

Comparable restaurant sales were fairly consistent in each month of Q4, due to a combination of factors, including healthy demand for Carne Asada, strength in our digital platform and the delivery menu price increase. Q1 has also started on a very positive note, with comparable restaurant sales for January accelerating to around 11% despite a double digit comparison.

Even with a resurgence in COVID cases the two-year compounded comp stack in Q4 was a robust 19.9%, which is similar to the 20.2% we delivered last quarter and highlights the resiliency of the Chipotle brand.

In light of the ever-changing environment we all experienced in 2020, our full-year performance showed good progress with sales growing 7.1% to reach $6 billion, driven by a 1.8% comp, 161 new restaurant openings and digital sales of $2.8 billion, which grew 174% versus the prior year.

As you can see from these results, our key strategies continue to resonate with guests and position us to win today, while we create the future. What really excites me and the entire leadership team is our vision of having more than 6,000 restaurants and expanding AUVs above $2.5 million, with margins at or above 25%, all of which is a question of when, not if.

Let me now provide a brief update on each of these strategies, which I believe still have plenty of runway. These are: number one, making the brand visible, relevant and loved; number two, utilizing a disciplined approach to creativity and innovation; number three, leveraging digital capabilities to drive productivity and expand access, convenience and engagement; number four, engaging with customers through our loyalty program; and number five, running successful restaurants with a strong culture that provides great food with integrity while delivering exceptional in restaurant and digital experiences.

Beginning with our marketing programs which are generating attractive returns by driving culture driving a difference and ultimately driving purchase. Our creative marketing initiatives across both traditional and digital channels continue to be successful in attracting new users to Chipotle, as well as motivating existing customers to come more often.

Whether it was switching our Halloween celebration to an entirely digital offering for the first time unveiling a new line of Chipotle merchandise ahead of the holiday season or launching Real Foodprint a sustainability impact tracker that shows how Chipotle ingredients are better for the planet, the marketing team did a terrific job consistently enhancing our brand and purpose using the right message with the right vehicle.

Traditional advertising also remains an important marketing tool for Chipotle. We connected and engaged with guests through our Behind the Foil TV campaign and a new avocado journey spot highlighting real ingredients, real cooking techniques and real employees. We also featured our making an order spot that highlights the ease of customizing your order on our app to continue to drive awareness of digital ordering.

And last week we announced our first-ever Super Bowl commercial that will air during the second quarter beginning this Sunday. The spot is titled Can a Burrito Change the World and highlights Chipotle's commitment to cultivating a better world through its real food, sustainable sourcing and commitment to the farming industry.

Supplementing these efforts are a steady flow of new menu innovation that is validated by our stage-gate process which gives new and existing customers even more reasons to visit Chipotle. Since our initial offering of carne asada ended last year we continued hearing from our guests that they wanted it back.

So we found a way to source more tender cuts of steak that met our Food with Integrity standards and brought it back for a limited time across the U.S. and Canada as well as in France for the first time. The relaunch which we expect to last through early March is going well and we're encouraged that the incidence mix is similar to what we saw last year.

In addition, in January we launched Cilantro-Lime Cauliflower Rice for limited time across the U.S. and Canada. We're excited to introduce this plant-powered better-for-you option that aligns with the latest health trends and emphasizes the benefits of real food.

With only four grams of net carbs per serving, it puts a delicious twist on Chipotle's classic rice recipe by using the same fresh real ingredients and culinary techniques. Early feedback has been outstanding. Cauliflower rice is definitely on trend a great reason for new guests to try Chipotle for the first time or entice existing guests to visit more often and it keeps our Lifestyle Bowls platform top of mind.

We have two other menu items currently being tested. The first is quesadillas which is available as a digital-only menu option in a few test markets. We continue to make operational progress and remain optimistic about the potential for quesadillas to be available nationwide in the near future.

The second item is our smoked brisket which is currently being tested and showing encouraging results. I personally love the richness of our smoked brisket recipe as it delivers a flavor unlike anything else at Chipotle. We are gaining valuable feedback on both of these items and we'll update you on their progress as well as other menu items that are in early development as they move through our stage-gate process.

Moving to the next strategic driver our digital platform which continues to be a big beneficiary from guests adopting the digital off-premise occasion. Q4 digital sales grew 177% year-over-year to $781 million and represented 49% of sales. This was consistent with Q3 digital sales and mix highlighting our ongoing momentum and the fact that Chipotle is top of mind for a lot more eating and dining occasions than we were in the past.

We are not stopping there. We've made our digital channel even more convenient with easy ordering in the Chipotle app and website enhancements such as unlimited customization, contactless delivery and group ordering. As a result and I mentioned this earlier, full year digital sales were $2.8 billion representing 46% of total sales and growing 174% year-over-year.

What an amazing accomplishment. At this sales rate our average restaurant delivers a digital AUV of $1.1 million. With this success we will not allow complacency to set in. Rather we will continue to look for ways to further enhance our digital ecosystem. For example, we just announced a car-side pickup pilot in San Jose as an additional access point for our guests.

In addition we are opening up more and more Chipotlanes and are in the early stages of testing alternative formats like our first-ever digital-only restaurant outside of West Point. This new prototype allows us to enter more trade areas that wouldn't support a full-size restaurant and allows for greater flexibility with future locations. It's early days but this location has outperformed our expectations thus far.

During the quarter about half of the digital sales came via order-ahead and pickup transactions or digital pickup orders as we refer to them with the remainder coming from the delivery channel. However, our overall digital mix moved up about 50% late in the quarter as COVID restrictions toughened, largely driven by an increase in digital pickup orders. I'm pleased to report that the strong digital momentum has continued into January with our digital mix remaining in the low-50% range.

Another area where we saw a big benefit in 2020 is our rewards program which added over 10 million members in the last year and currently has nearly 19.5 million enrolled members. This gives us the ability to communicate organically with a large and passionate community of Chipotle fans.

We have focused on strengthening our creative and analytical capabilities by using predictive modeling to ensure that our members feel known and valued as we elevate their relationship with Chipotle. We strategically share brand and promotional messages with personalized content weekly. In addition we reach customers with dedicated journeys focused on welcoming new members growing frequency and minimizing lapsing behavior.

There are preprogrammed touch points in place to drive customer value across their life cycle including a keen focus on retaining digital customers who have experienced the brand in new ways over the last year. Although Chipotle Rewards and its CRM capability have been active for less than two years, we have already made significant progress and have further enhancements planned in the coming months that we expect will continue to drive frequency increases across our customer segments.

Finally, I want to spend some time on our restaurant operations, where the team stayed focused on safety, reliability and excellent culinary, as it seamlessly adapted to abrupt changes in guest needs and ordering patterns. This hasn't been easy, especially as the number of COVID cases began to spike and at times impacted our staffing capabilities. But they have been up to the challenge and I'm so proud of our operational leaders and team members. They have been unwavering in the desire and execution of the right things for each other, our customers, our community and our business.

And as I mentioned at the beginning of my remarks, Chipotle has continued to reward and invest in our team members to ensure we are creating an environment that allows our employees to develop and thrive in their career not only today but also in the future. We offer best-in-class benefits, coupled with training, development and promotional opportunities that foster a learning culture for continual growth.

Turnover continues to be relatively stable and we are seeing plenty of great applicants for open positions to staff our expected growth in AUV and new restaurant openings. In fact, we held our first national hiring event of the year called Coast-to-Coast Career Day in mid-January with a goal of employing 15,000 new restaurant team members across the US. We had an overwhelming response and feel fortunate to have a reputation for attracting and developing great talent.

In closing, I believe our performance in 2020 was in some ways even more impressive than what we achieved in 2019 and highlights that the Chipotle brand has remained visible and flexible in order to stay relevant. Our ability to pivot and adapt to the rapidly changing needs of our guests is a testament to the durability of our model and the strength of our team members.

My sincere thanks to our employees for their passion to make Chipotle a welcoming place for all and a special place to work. As we look ahead, the rollout of vaccines gives us hope that the world can return to a more normal environment at some point during 2021. And I'm optimistic that resiliency will prevail as people want to get back together to share a meal and share some stories.

In the meantime, we're ready to navigate through any potential challenges. With world-class talent, an inclusive culture, strong business fundamentals and deep financial strength, we feel well prepared to emerge even stronger post-COVID and continue to serve and delight our guests.

With that here's Jack to walk you through the financials.

[Jack Hartung, Chief Financial Officer]

Thanks, Brian and good afternoon, everyone. Despite ongoing challenges related to COVID, we're pleased to report solid fourth quarter results with sales growing 11.6% year-over-year to $1.6 billion as comp sales grew 5.7%. Restaurant-level margin of 19.5% was 30 basis points higher than last year and earnings per share adjusted for unusual items was $3.48, representing a 21.7% year-over-year increase.

The fourth quarter had a non-recurring tax benefit was partially offset by expenses related to legal reserves, restaurant asset impairments and closure costs, transformation expenses and other adjustments, which netted to positively impact our earnings per share by $3.21 leading to GAAP earnings per share of $6.69. For the full year, sales increased 7.1% to $6 billion on a comp increase of 1.8%. Restaurant-level margins were 17.4%, a decrease of 310 basis points. And we generated earnings per share adjusted for unusual expenses of $10.73, a decrease of 23.6% over last year.

We had non-recurring tax benefit that was partially offset by expenses related to legal reserves, restaurant asset impairment and closure costs, as well as our transformation that positively impacted our earnings per share by $1.79 leading to GAAP earnings per share of $12.52.

While the uncertainty from COVID makes it difficult to provide comp guidance for full year 2021, we remain optimistic about our future prospects as evidenced by a great start to Q1 with January comps accelerating to roughly 11%, despite a very difficult comparison.

Sales in last week of January were in the high-single digits with winter weather across the country contributing to the lower comp. Assuming the pandemic doesn't worsen, we expect our Q1 comp to be in the mid- to high-teens range given an easier comparison during the second half of March.

Food cost were 31% in Q4, a decrease of 210 basis points from last year and this was due primarily to menu price increases along with better waste control, partially offset by fewer sales of high-margin beverages and higher dairy pricing. In Q1, we expect food costs to remain right around 31% as the benefit from a full quarter of menu price increases will be offset by higher cost menu items such as cauliflower rice as well as slightly higher avocado prices.

Labor costs for the quarter were 25.4%, a decrease of 110 basis points from last year. This decrease was driven primarily by sales leverage and efficiencies related to digital orders, partially offset by COVID-related expenses including exclusion pay as well as normal labor inflation.

We expect labor costs to be right around 25% during Q1, as expected benefit from sales leverage is offset by ongoing COVID-related expenses. Other operating costs for the quarter was 17.9% an increase of 310 basis points from last year, due primarily to higher delivery fees in the quarter.

Delivery expenses were elevated year-over-year given the significant growth in delivery with delivery sales now nearly 25% of total sales. To help improve the economics on this premium access point, we have implemented several delivery menu price differentials with a weighted average being right around 13%. We have seen modest resistance thus far and we'll continue to monitor and adjust pricing as appropriate at the market level or at the restaurant level.

Marketing and promo costs for the quarter were 3.9%, a decrease of 20 basis points from last year. But as expected, it was 130 basis point sequential increase from Q3 to support Carne Asada and the latest brand messaging under our Behind the Foil campaign. We expect marketing spend to be near 4% in Q1, which would be the highest quarterly level during 2021 in order to support new menu items as well as the upcoming Super Bowl ad.

As a result of the higher anticipated marketing demand and ongoing momentum in our delivery business, we expect other operating costs to be right around 17% in Q1. The Q4 restaurant-level margin was 19.5%, while our trailing 12-month average unit volumes were roughly $2.2 million, which is back to our pre-COVID level. We expect to close much of this margin gap versus the 22% expected at this volume in 2021 as COVID-related impacts and delivery economics normalize and as quarterly marketing expenses even out.

Note that, some of this gap relates to delivery accounting as increased delivery menu prices as well as delivery and service fees had the effect of grossing up which may create the appearance that margin algorithm gap is widening. Therefore, we now disclose our AUVs with and without the delivery menu price increase to provide better clarity and transparency.

G&A for the quarter was $124 million on a GAAP basis or $114 million on a non-GAAP basis excluding roughly $7 million for settlement of several older legal matters and nearly $3 million related to transformation expenses.

G&A also includes $90 million in underlying G&A $21 million related to non-cash stock comp, and a $4 million bonus performance adjustment due to our strong performance in 2020 despite the pandemic. We are still in the early innings of our growth life cycle and therefore continue to make important G&A investments in 2020 despite the COVID pandemic. We saw an uptick in Q4 underlying G&A due to technology investments, customer service enhancements, increased headcount as well as higher medical claims.

Looking ahead to Q1, we expect underlying G&A expense to carry forward in the $90 million range as we continue to make tech investments the majority of which are revenue-generating to bolster our expanding digital and loyalty platform. These include initiatives that are customer-facing like app upgrades as well as behind-the-scenes initiatives like a new labor scheduling tool.

In addition, we also plan to increase headcount in order to support our expected accelerated growth. Even with this elevated spend our goal remains to deliver leverage on this line item relative to our sales growth. Stock comp will likely be around $23 million each quarter in 2021 although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million of employer taxes in Q1 associated with shares that vest at the beginning of our fiscal year.

Lastly, our 2018 performance shares were modified to account for unplanned effects of COVID. This will result in a GAAP accounting charge of about $24 million for both Q1 and Q2, and about $8 million in Q3 and Q4. We plan to present non-GAAP results without these unusual charges to clearly show our underlying business performance.

Our effective tax rate for Q4 was negative 62.2% on a GAAP basis and 24.6% on a non-GAAP basis. The difference is due to recognizing a net operating loss for tax purposes in 2020, which we expect to carry back to the preceding five years. We generated an NOL for tax purposes due to several factors, including the impact of COVID increased tax deduction for equity, vesting and exercises accelerated tax depreciation deductions and various tax planning initiatives.

An income tax benefit is generated due to the difference in federal tax rates between 2020 and the years that the federal NOL will be carried back to. For fiscal 2021, we estimate our underlying effective tax rate to be in the 25% to 27% range though it may vary based on discrete items, such as stock option exercises. This range assumes no change to current income tax rate. And if corporate tax rates change, as a result of tax reform under the Biden administration, we'll revisit our estimated effective tax rate.

Turning now to the balance sheet, where we ended Q4 with $1.1 billion in cash restricted cash and investments and no debt along with a $600 million untapped credit facility. We're privileged to have this financial strength with which to make ongoing strategic investments in our people, our business, and our communities to further differentiate Chipotle brand and support our expected growth for 2021 and beyond.

We didn't buy back any stock in Q4, but if our business continues to improve and economy continues to stabilize we will likely begin buying again in late Q1 or early Q2. One area that definitely benefited from our strong cash position is restaurant design and real state development, where we remain diligent and aggressive while many of our peers pulled back. I'm really impressed by the hard work of our development and operations team as they opened 61 new restaurants in the fourth quarter with 42 including a Chipotlane.

For the full year, they successfully navigated construction and permitting challenges and opened 161 new restaurants with 100, including a Chipotlane. Remarkably, this was towards the high end of the 150 to 165 range we provided before the onset of the pandemic.

As of year-end, we had a total of 170 Chipotlanes, including five conversions. Performance for these formats continues to be stellar. The digital gap versus non-Chipotlane restaurants remains around 10% driven entirely by higher-margin digital pickup orders. And sales at the Chipotlane cohort continued to outperform the non-Chipotlane results from the same open period.

In fact non-comp Chipotlane sales are opening close to our existing restaurant AUV versus historical peak productivity in the mid to high 80% range. These results reaffirm our strategy of an accelerated pivot towards Chipotlane sites. Not only will this enhance customer access and convenience but it also helps increase new restaurant sales, margins and returns.

While 62% of new restaurants in 2020 had a Chipotlane, our goal is to have more than 70% of openings include a Chipotlane in 2021 where we anticipate opening around 200 new restaurants. Of course this development guidance assumes no major COVID related delays in 2021. Guidance also includes remodeling or relocating 10 to 15 restaurants this year to add a Chipotlane. This will allow us to learn and ensure we're getting a superior return on this investment before potentially ramping up the number of remodels and our relocations in the future.

Let me end by also expressing my gratitude to all of our team members in our restaurants and in support roles as they overcame countless challenges and embraced change to safely serve and delight our guests. It's through this collaborative effort that we've been able to achieve such an impressive performance in 2020 and continue to build momentum at the start of this year.

With that we're happy to take your questions.

[Operator]

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Nicole Miller with Piper Sandler. Please go ahead.

[Nicole Miller, Piper Sandler]

Thank you, and congratulations on a great year despite all the challenges. I wanted to just talk about the go-forward estimates and opportunity around unit growth. If you remove the barriers to development that are COVID related and certainly there's no financial hurdles from a cash perspective, how fast can your current team go with a fully formed bench? Just essentially what are stretch goals that you look at internally?

[Brian Niccol, Chairman & Chief Executive Officer]

Yeah. Thanks Nicole. Look, I think what we're really excited about is we definitely see the opportunity getting back above 200 restaurants. And the good news is part of the reason why we're accelerating is because our operations are running so well, and we know we've got the people benched to run those restaurants. We'll continue to look for great sites. The good news is we have a lot of inbound desire for Chipotle coming from a lot of different places and we know we still have lots of places to build. So we're very optimistic about how we can accelerate from where we finished this year to 161 to getting to 200 and beyond.

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

[Jack Hartung, Chief Financial Officer]

No Brian. I think you said it well. Our -- Nicole, our record for a year was right around 250. We certainly can get up to that point. I don't know if it will take us a couple of years or not. But I think the sites are coming to us. As Brian mentioned, we've got the deep bench now. But we're going to do it a step at a time. We're going to go from 161 to something around this 200 level, but we certainly can go beyond that.

[Nicole Miller, Piper Sandler]

And the cauliflower rice is outstanding. I've tried it in multiple channels. When I go into the restaurant it's a $2 upcharge. When I order through the marketplace it's a $2.25 upcharge. Is that how you're getting the pricing power? Can you just establish for us today that you're not taking 13% across the board right? There's a strategic I imagine algorithm that helps produce that pricing power?

[Brian Niccol, Chairman & Chief Executive Officer]

Yeah. That's exactly right Nicole. We're basically testing a lot of different pricing levers, but we are very strategic in where we choose to implement that pricing. And you're right the only place that we've taken that 13% is in the delivery channel. And effectively it plays out the way you just described it like on a cauliflower rice add-on or to your total ticket depending on what you're ordering. So -- but it's an ongoing process, it's a fluid process and we're not done working on it.

[Nicole Miller, Piper Sandler]

Thank you. Appreciate it.

[Brian Niccol, Chairman & Chief Executive Officer]

Sure.

[Operator]

And our next question will come from David Palmer with Evercore ISI. Please go ahead.

[David Palmer, Evercore ISI]

Thanks. I actually had three little small questions. One you mentioned in the release that delivery added a point or so to comp in that quarter. Does that -- was that for the entire quarter, or will that be a bigger tailwind in the first quarter and beyond? I didn't catch that. Forgive me if you said that.

And then Jack just the restaurant level margins you touched on that as well about how the $19.5 million or so was short of that relationship that you would have for a $2.2 million box, i.e. that should be 22% if you get your delivery economics up to speed. Should we be thinking about -- what is the buildup that -- in that margin through the year? How fast can you close that gap in that relationship?

And I guess the last thing is when it comes to the two-year trend in comp basically if you look at The Street numbers people are thinking a mid-teens two-year or thereabout after we get vaccines. And I'm wondering how you -- I know you're not giving guidance, but how do you think about the net of people having more options but yet you're having perhaps a better daytime traffic and walk-in traffic than you would. Sorry for the three questions.

[Brian Niccol, Chairman & Chief Executive Officer]

Hey, Jack, you want to take the delivery and margin and then I can touch on the last piece?

[Jack Hartung, Chief Financial Officer]

Yes. Sure thing Brian. I'll start with the margin because I might David ask you for a little clarity on the delivery comp question. But on the margin you heard it right. Right now we're being bogged down by some of the COVID-related expenses. There's also delivery ends up being a drag right now. But we can see as COVID-19 begins to be in the review mirror and as we have taken some action and we consider other action and how we're going to offset the margin impact of delivery I would expect by the end of the year.

And remember COVID is going to be with us for at least a quarter or two. I mean the vaccine is not going to be widely available until more like midyear. So, it's going to be more second half of the year. But I feel good about by the second half of the year that we should be closing the gap. If not all the way we'll be knocking on the door on what the margin algorithm would be. And then David maybe you can clarify parts about delivery comp.

[David Palmer, Evercore ISI]

Yes. And maybe I'm misunderstanding this but I think you talked about a 13% increase -- or 13% higher prices for your delivery menu.

[Jack Hartung, Chief Financial Officer]

Right.

[David Palmer, Evercore ISI]

And you said a point -- I think it was in the release that it was about 100 basis point help to your comp in the quarter. Maybe that was because it was only there for part of the quarter because I would imagine that if delivery was about a quarter of your business I'm just trying to understand if that could be -- if delivery pricing could be a bigger lift in the coming quarters. That's basically what I'm getting at there.

[Jack Hartung, Chief Financial Officer]

Yes. So, here let me say what delivery actually did drive in the quarter. The 13% because delivery is about 25% that ends up being an effect of like 3.25% like call it 3% 3.25% price increase. That's the impact in the quarter. And the price increase we had two, we had one in August one in early October. So, we had a full effect during the quarter. So, that's more of the impact that we had during the quarter.

[David Palmer, Evercore ISI]

Got it. Okay. Thanks.

[Brian Niccol, Chairman & Chief Executive Officer]

And then David just in regard to your question about our -- I think it's really our confidence in where the business goes from here is kind of what you're getting at which is look I think the thing that I'm really optimistic about is we have really grown a meaningful digital business that's got access for just about every occasion you can think of. And currently we're even testing now a car-side access.

What I've seen is in the markets where we start to open those dining rooms up, you don't lose those occasions. You pick up the occasions that kind of got impacted by COVID. And it really is an and situation not an or.

Now, it's not 100% back in the dining room in some of these regions. But we're seeing 50%, 60% of the dining room business come back and we're hanging on to 85%, 80% of our digital business. And as you walk into 2021, our digital system now has 19.5 million members. And what we have seen is they like the additional access, the convenience that it provides. And they like our ability to communicate with them through that rewards program.

And so look I think January is a great example of the strength of Chipotle's business still being impacted by COVID rolling over a year ago that didn't have COVID. And I think it just shows the power of the new access points, the way we're running our restaurants, the culture that we have in our restaurants. And then ultimately our customers believe in the food believe in the purpose. So, very optimistic about where we get to.

And as Jack pointed out, I think as the year goes on you're going to continue to see us make progress on getting that algorithm back to where we said it will get to as COVID wanes and some of these expenses go away. And the delivery channel we kind of normalize it into our business going forward.

[David Palmer, Evercore ISI]

Great. Thank you.

[Brian Niccol, Chairman & Chief Executive Officer]

Yes.

[Operator]

And our next question will come from Chris Carril with RBC Capital Markets. Please go ahead.

[Chris Carril, RBC Capital Markets]

Hi, thanks for taking the question. So, I think last quarter you quantified about 100 basis points of direct and indirect margin drag from COVID-related costs. Can you provide an update on how these costs impacted the margins in the 4Q? And then any thoughts on how we should think about these costs over the course of the year? That would be really helpful.

[Brian Niccol, Chairman & Chief Executive Officer]

Why don't you take that one Jack?

[Jack Hartung, Chief Financial Officer]

Yes Chris. Yes they're still in that ballpark. There's direct and indirect. Like for example we had -- pay during the quarter. So, that's where our employees have been or may have been exposed. And so they don't work. We don't want them at the restaurant but we pay them anyway. That all by itself was 50 basis points.

There's indirect items as well. Like for example we're selling less beverages. We're selling like a few more burritos and more steaks. That seems a little counterintuitive why would COVID drive that, but we have a lot of new customers coming in and they've been moving into those items.

Unclear whether that will fully normalize after the pandemic. But I would say with the direct and indirect that we know about that comp delivery, it probably stays at 50 to 100 basis points range. And then delivery all by itself [Technical Difficulty]

[Brian Niccol, Chairman & Chief Executive Officer]

Jack, we're losing you. I don't know if your microphone--

[Jack Hartung, Chief Financial Officer]

Sorry about that. Okay. I'll take it off speaker. Can you hear me a little better now?

[Brian Niccol, Chairman & Chief Executive Officer]

Yeah. That's a lot better. You were kind of – you said roughly, the same and then you started to trail off.

[Jack Hartung, Chief Financial Officer]

Yeah. So it's – I would call it in that of the direct impact, it's going to be in that 50 to 100 basis point impact. And that counts things like the exclusion pay which is very direct and then product mix shifts and then does not count delivery. Delivery all by itself is going to be a pricer in this. You probably call it the 60 to 80 or 90 basis point impact. But I think the key to all of this is, we believe as COVID is starting to move into the rearview mirror as we're starting to move out of it, and combined with actions that we will take to either offset some of these costs or find other efficiencies we do think we can capture all this margin.

[Chris Carril, RBC Capital Markets]

Okay. Great. Thanks. I’ll pass it on.

[Operator]

And our next question will come from David Tarantino with Baird. Please go ahead.

[David Tarantino, Baird]

Hey, good afternoon. Brian, I want to come back to this question on the interplay between the delivery channel and your in-restaurant business. And I wanted to get a gauge for what you think is possible in terms of the in-restaurant transactions returning? And I think you said, you're recapturing 50% to 60%. And I think maybe 60% of your dining rooms are still closed. So I guess, what do you think the upside is on the in-restaurant business coming back? And how much of the digital channel do you think has replaced those in-restaurant transactions I guess said differently. So?

[Brian Niccol, Chairman & Chief Executive Officer]

Yeah. Sure. What I would say David is, we're still seeing like that lunch occasion have a real opportunity. And what we've seen is in places where you have people moving around more for whatever their routine is, you see that occasion still happening, where they want to come into the restaurant. And look, I still think, the occasion of the dining room experience gives you something unique. It's got another level of customization, because you get to be face-to-face with how we're making your food versus the online occasion. And so when we talk to customers, there is a fair amount of people that when they have the opportunity, they will want to go back to their dining occasion. The thing that I find really promising in that is, they've also adopted new off-premise digital occasions that they're not going to abandon. And when we look at the Venn diagram, the world where it used to be they were exclusive. I only did online, and I only do in dining and there was a few that did both. That's changed. You've got a lot more people doing both. And we've got people that historically probably would not have tried it, if not for unfortunately COVID.

But they still really love that in-restaurant experience and now we're top of mind for that occasion when they're not going to be in the restaurant. So we're seeing a scenario where digital is going to prove to be very sticky and people look forward to getting back out and going into our restaurants.

[David Tarantino, Baird]

Great. And then, I guess, the second question is you mentioned something about with your digital marketing efforts or your loyalty program making it a priority that some of those digital customers stick. Can you just elaborate on what you're doing there?

[Brian Niccol, Chairman & Chief Executive Officer]

Yeah. Sure. So this is what I mentioned. We've got 19.5 million folks in this. And the team has really done a terrific job of setting up I think the right cohorts, understanding the frequency of how they need to communicate with those cohorts, and then drive home the idea of engagement and/or driving home frequency or purchasing behaviors. And we've got various journeys taking place.

I mentioned it in my prepared remarks. And what we're seeing is it does have a powerful impact on people's frequency. And the good news is we believe we're learning more every day. But what we've learned to date, I think is going to have a powerful tailwind for us going forward.

And if you think about 2020, we started the year with I think it was less than 10 million in our system. So you've got twice the amount of people that we can influence behavior with on a pretty one-to-one basis. So that's why you hear me talking about why I see this being a driver going forward.

[David Tarantino, Baird]

Great. Thank you.

[Operator]

And our next question will come from John Glass with Morgan Stanley. Please go ahead.

[John Glass, Morgan Stanley]

Hi. Thanks so much. First, just to follow up on the delivery costs. Jack, you said the 60 to 80 basis points of pressure or 69 – 90 whatever it was. Is that inclusive? Is that after you've taken this price increase, or was that prior? And is there – when you think about offsetting it is there a way to offset it fully? Are you thinking about you can recapture the margin elsewhere and delivery will always be of some dilution to margin but you just get it somewhere else, or is there a way you think within delivery specifically that you can fully offset that – those delivery cost outcomes?

[Jack Hartung, Chief Financial Officer]

Yeah, John, here let me kind of walk through the pieces. The price increase that we took it covers the dollar cost of delivery like there's an increase in delivery this year versus last year, because so many people moved into that channel. And so the price increase we took so far it gets us to about a breakeven versus last year in terms of a dollar – from a dollar standpoint. But if you go through the math, and it's easiest to do this like on an annual basis, if you – this 13% on 25% of the business ends up being about $80,000. And so look at the average cost of delivery being about $80,000 on average per restaurant. When you take that price increase, it ends up being a 3%, 3.25%, your sales will go up by about $80,000. And so you cover those dollars, your cash flow on a per restaurant basis are the same. But if you go through the math and take the same cash flow and take 25%, which ends up being $625,000 of cash flow, that's $2.5 million at a 25% margin. And if your costs go up $80,000 and your revenue goes up by $80,000, your margin is going to go down by 80 basis points.

And so we don't make any less money, but the margin does end up being diluted just because of the math. Now we think there are things that we can do either levers, we can pull other efficiencies we can file. We think over time we can offset that, but that's just a math challenge that we're dealing with.

[John Glass, Morgan Stanley]

That's helpful. And then Brian maybe just bigger picture now. You've got some more Chipotlanes under your belt. You're looking at maybe it's just early days, but a digital-only restaurant. When is the time to reexamine kind of the total opportunity of units in the US? And you haven't -- we haven't spoken about international in a long, long time. I think, France was thrown into one of the comments. Is it a moment now where you start to really think about a global opportunity and start to talk and engage with either master franchisees or your own organization how you do that, or is that still too far in the future and you've got too much on your plate right now to really engage in that?

[Brian Niccol, Chairman & Chief Executive Officer]

Yes. Sure. So look the first part of your question around the opportunity in the US is, we're very optimistic about Chipotlane and then the various executions we can pull off to bring Chipotle to every trade area in the United States that we think makes sense for Chipotle. And I think we've talked about that as hey, we're accelerating, we're going to get back above 200. We're within striking distance of where the max level of development we did in the past.

And so the economics look great. The new restaurant openings are opening really strong. Chipotlane continues to perform. And you see us experimenting with digital only. You'll see us experimenting with Chipotlanes only. But at the end of the day, I mean, the full business of Chipotle where you got both lines, a Chipotlane as an access point with this digital system, it's just really winning economics and there are a lot of those sites available in the US.

To your question about international, obviously, we believe Chipotle can travel beyond the United States. We're already seeing some success in Canada. And then, obviously, we've got some plans in place for places that we already have our foot in the door. So think of the UK, France specifically. And so you're going to see us starting to really use kind of our stage-gate process to move those markets along. And then we'll evaluate other regions accordingly. We've not made decisions on how we want to enter those other markets. And frankly, we haven't laid out exactly the order of how we're going to do it.

For now, we want to deliver the US. And where we already have some presence, we're going to start leaning into to see how much more upside there is. We have an idea. And then, obviously, we're going to evaluate where we go beyond the markets that we currently are. But when we've done some research, what is clear is people love the purpose of Food with Integrity. They love the customization. They love the food. And frankly the whole value proposition, I think has legs well beyond the United States.

[John Glass, Morgan Stanley]

Okay. Thank you.

[Operator]

And our next question will come from Jared Garber with Goldman Sachs. Please go ahead.

[Jared Garber, Goldman Sachs]

Hi. Thank you very much for taking the question. It's really great to see the results this year. I wanted to ask Brian quickly on the marketing side. One of your goals when you joined the company was to boost the visibility of the brand and you talked about that at top of the call. So you'll be running the Super Bowl ad this year, which is the first for the company. Can you talk about the brand's visibility now and where it stands versus maybe several years ago when you took over? And how you're thinking about continued opportunities going forward? And I have a quick follow-up on the carne -- rather the cauliflower rice, and if you're seeing new customers joining the brand. Obviously, it's only been a couple of weeks, but if you're seeing new customers visit on the back of that? Thanks.

[Brian Niccol, Chairman & Chief Executive Officer]

Yes. Sure. Thanks Jared and welcome. So look, first of all, I just believe our message is a strong message that differentiates our brand and it's a message that's very much on trend with how young people want to eat and the future of how people want to eat. So you're going to see us continue to push the visibility of Chipotle and the idea of real food, with real cooking, real culinary done frankly every day.

And what I can tell you is, when I rewind the tapes, when I first got here back in 2018, we were arguably spending about the same percent of dollars and nobody saw the brand. If I would have asked you, what's Chipotle up to? You would not have been able to give me a good answer. Frankly, it would have been somebody else's narrative. And I think fast forward to where we are today.

I know our brand is stronger from an awareness standpoint for what we stand for. I know the brand is stronger from a trust standpoint. I know the brand is stronger, when it comes to our menu innovation, as well as our approach to culinary. So we've made tremendous progress. The marketing team I think has done a fabulous job of keeping the brand in culture and leading culture. And you're going to continue to see us do that.

I'm excited about bringing our message to the Super Bowl platform. I think it's going to be a very widely watched Super Bowl. And a lot of customers say to us, I feel good about eating at Chipotle, but they can't articulate why. We're going to tell them why they feel good about it. Obviously, they love the culinary aspect. But now they're going to get clarity on why they feel good about, why they choose the brand Chipotle. And you'll see it in the advertising around our approach to farming, animals, sustainability and frankly the communities that we support and operate in.

And then your second question about cauliflower rice. Look, I love it. It's really good. I highly recommend it, if you haven't tried it. I'd recommend going 50-50, a little brown rice and cauliflower rice. But with that said, the good news is about 25% of our orders are coming from new or infrequent customers, which is really terrific. So it's off to a great start and our operators are doing a great job of making the cauliflower absolutely perfect. So we're really happy with how that's come out of the gate.

[Operator]

And our next question will come from Andrew Charles with Cowen. Please go ahead.

[Andrew Charles, Cowen]

Great. Thanks. I had two questions: one on quesadilla and one on catering. So Brian you mentioned that the national launch of quesadillas are in the near feature, but it doesn't look like it's contemplated in 1Q same-store sales guidance given it implies a deceleration to your trends from January to the combined February and March time frame.

Does guidance reflect uncertainty over the course of the pandemic or more so conservatism as quesadillas are expected to launch later in the quarter? And then my second question on catering. As we look towards the reopening, how big of an emphasis do you plan to place on catering given the gap you guys historically had with 1% of your sales coming from catering before the pandemic versus fast casual peers that were typically in that 8% range?

[Brian Niccol, Chairman & Chief Executive Officer]

So to answer your first question look, I think there's still – as much as I'm optimistic that the vaccine program is getting better as every day goes by and it really is amazing to see the efficacy of these vaccines. There still is – we want to be cautious about where COVID goes from here. So we're being careful on that front.

And then obviously, as we are able to lock and load on new initiatives, we'll share that with you guys. We're still in the phase of making sure we've got the equipment rolled out everywhere. And we're feeling really good about the training, we're going to do around quesadilla. So more to come on that front. But I would say more of it is just there's still a lot of unknown.

Luckily every day seems to be better with this – with the whole COVID issue both – vaccine rates seem to be going up and COVID cases seem to be going down. And luckily less and less people are ending up in the hospital. So I'm optimistic but we wanted to be conservative on that front.

And then regarding catering, yes, look Andrew, I think it's a huge opportunity. Once people want to get back together I think it's going to be a real big opportunity for our business. And it's one of the areas we're thinking about. And we're going to figure out the right time to start pushing that once obviously people can get back together in groups in a meaningful way. So it's a big opportunity. I wish we – the first step will be getting back to 1% of our sales doing catering. And then the next step will be tracking down numbers that I think are much higher than where we were with 1%.

[Andrew Charles, Cowen]

Thanks helpful. Thanks, Brian.

[Brian Niccol, Chairman & Chief Executive Officer]

Yes.

[Operator]

And our next question will come from John Ivankoe with JPMorgan. Please go ahead.

[John Ivankoe, JPMorgan]

Hi. Thank you. As usual you kind of gave the metrics, which we could interpret. Revenue at over 6,000 stores, average volumes at least 2.5 million, at least 25% store margins. But the G&A number would be obviously a really important part to kind of having a sense of what run rate operating income might be at the company.

Brian are you thinking in any way of kind of thinking about an appropriate at that level G&A per store, G&A as kind of a percentage of sales that as you think about longer-term revenue goals and longer-term operating income goals that we could perhaps start to anchor around?

And I do ask that somewhat in the context of what you put in your press release and I'm sorry if I missed it in the previous press release or forgot about it, reducing non-essential – focusing on reducing non-essential controllable costs. If you could elaborate on that and kind of how much focus that I guess phrase is receiving within the organization. Thanks.

[Brian Niccol, Chairman & Chief Executive Officer]

Yes. Sure. Look, I will tell you, I don't know if you've had the opportunity to meet Scott Boatwright. He's in charge of our operations. And Scott and all of our leaders in operations, their goal is to give people a great culinary experience and also give our team members a great culture and the opportunity to grow in our organization and do it in a way where we flow the revenue to the bottom line. So wherever we see an opportunity to get rid of unnecessary costs or frankly labor allocation, we go after it and we'll continue to go after it. And that's why I've got a high level of confidence – a very high level of confidence that the algorithm is going to be intact as we move throughout the year. Because as we continue to regain sales, we do things with our labor scheduling technology. And frankly our operators are laser-focused on giving people great experiences and then flowing to the bottom line accordingly.

Of course, it's something we keep an eye on. So I don't think it's necessary to pick a certain point because there's always going to be opportunities where, if we see an investment that makes sense to grow our business we're going to make that investment. There's just way too much growth in this company to constrain us that way. So Jack I don't know if you've got anything else to add to that.

[Jack Hartung, Chief Financial Officer]

Brian the only thing I would add – we expect to grow sales at a faster rate than our G&A. And so we did step up. We made some investments this year that will set kind of a new baseline for us for this next year. But you can expect to see leverage in that line. In terms of where it's going to be 2, 3, 4 years from now that's -- don't have that great of a crystal ball.

But if we make sure that sales grow faster than that line then three or four years from now the percentage of sales and the margin after G&A -- the operating margin is going to be better -- much better than it is today as we approach the 25% target on the restaurant level and we lever this line.

[John Ivankoe, JPMorgan]

Thanks guys.

[Operator]

And our next question will come from Chris O'Cull with Stifel. Please go ahead.

[Chris O'Cull, Stifel]

Thanks, good afternoon guys. Jack I was curious if you could frame up where the beverage mix is today versus pre-pandemic. And then Brian looking ahead to periods where consumer behavior normalizes is there an opportunity to relaunch the Tractor Beverage program to build awareness once consumers are kind of back in the dining rooms more consistently? And then I had a follow-up.

[Jack Hartung, Chief Financial Officer]

Yes just quickly...

[Brian Niccol, Chairman & Chief Executive Officer]

Go ahead Jack. Go ahead.

[Jack Hartung, Chief Financial Officer]

I was just going to say real quickly just on the mix before the pandemic our drinks were in call it the mid-30% range of transactions. And that dropped more like in the mid-20% range. So it cut out about 1/3 of our beverages. Our beverages also lean more towards bottled drinks now with the Tractor Beverage.

Tractor Beverage is a -- and Brian is going to talk about it but is more in line with our food ethos. And those have a lower margin as well. So those are the two things that have been a drag on our margins.

[Brian Niccol, Chairman & Chief Executive Officer]

Yes. And look we absolutely believe there's an opportunity to reintroduce Tractor Beverage once folks come back in the dining rooms. And look the good news is the feedback from those that have tried it they really liked it.

[Chris O'Cull, Stifel]

That's good. And then just assuming smoked brisket can clear the remaining operational hurdles, does the offering have the opportunity to be rolled out as a permanent offering, or are there supply constraints similar to carne asada?

[Brian Niccol, Chairman & Chief Executive Officer]

Yes. No smoked brisket will be one of our -- I would call it seasonal specials. It doesn't -- it won't be a permanent item.

[Chris O'Cull, Stifel]

Okay, great. Thanks.

[Operator]

And our next question will come from Brian Vaccaro with Raymond James. Please go ahead.

[Brian Vaccaro, Raymond James]

Thanks and good evening. Just a clarification and then a question, if I could. Jack I appreciate the monthly comp commentary. I was hoping maybe we could convert that into absolute sales volumes. And it seems that average weekly sales have stepped up more recently maybe into that 47-a-week range. Is that correct? And then does your Q1 comp guide in the mid- to high-teens does that assume any change in that absolute sales volume later through the quarter?

[Jack Hartung, Chief Financial Officer]

Yes. We don't really look at it internally that way on a weekly volume, but the volumes definitely stepped up. And if you looked at the weekly volumes, we all saw that COVID really came on pretty strong in December. We did see our sales bounce around. So even though our monthly comps were pretty even we softened at the end of November. Right before Christmas we started to pick up a little bit. We surged after Christmas and then surged again in January. So we're definitely at a higher level right now.

And in terms of the guidance Brian mentioned before the first quarter is still difficult to predict. We don't know where COVID is going next. We're optimistic because the vaccines are getting traction. But it essentially takes the last week trend which we talked about in the script. We -- while we did overall 11% for January we had moved down into the high single digits at the last week of January. If you take that trend and move that out over the rest of the quarter that's what we use to calculate that guidance of mid- to high-teens.

[Brian Vaccaro, Raymond James]

Okay. Great. That's helpful. And then my question is on the loyalty program. And I understand you're up to nearly 20 million members. But could you comment on how engagement with the program has been trending? Maybe you could give us a sense of how many active users you have and maybe how you define that or perhaps a comment on the percent of sales that are generated within the loyalty program in recent months.

[Brian Niccol, Chairman & Chief Executive Officer]

Yes sure. So I would say the way we look at it is, it's roughly about 60% are active. And those are the folks that obviously we've got an ongoing program with. We also have programs though with folks that we see that aren't active right to get them to reengage. So we're accessing the full database as well as other platforms on top of it.

So it goes well beyond that 20 million. But like I mentioned earlier we're seeing really good results in our ability to interact with those that are active and then we're able to also get people to be reactive -- or reactivated I guess is the way to think about it. So it's one of those things that we're very excited about because we continue to learn. And so when we see somebody that is no longer active we learn from it and then we figure out how to reengage them.

And then we're having some success in keeping a percentage of those people then becoming active as we continue to grow the total universe. So -- and the good news is we're also modifying the program as we go forward. We're going to continue to keep people excited. And we get feedback on how we can make it better and we'll continue to do that.

[Brian Vaccaro, Raymond James]

All right. Thank you.

[Operator]

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Brian for any closing remarks.

[Brian Niccol, Chairman & Chief Executive Officer]

Yes. Thank you and thanks everybody for taking the time and asking the questions. I'm just going to reiterate what I really said at the beginning of the call which is really proud of our team members the work that's happened in our restaurants and our support centers through a very challenging year.

I think it just demonstrates our purpose, our values, our culture and the caliber of the people that we have at Chipotle. It really demonstrates the resiliency of the brand and the leaders that we have. And very proud of where we are. And obviously I'm very optimistic about where we're going.

The digital system is strong it's growing and we have plans to continue to grow it. Our in-store business when it can come back I know people will want to come back because the culinary and the food is second to none. And you just put those two things together with the ability to continue to build more restaurants hire more people and grow our people accordingly I think the future is very bright.

And I'm optimistic that COVID is hopefully more in the rearview mirror going forward. So thank you for taking the time. Hopefully all of you are safe and your families have weathered 2020 well. And I look forward to continuing to share the story in 2021. All the best.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.