Good day and welcome to the Chipotle Mexican Grill Fourth Quarter 2022 Results Conference Call. All participants will be in listen-only mode. 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 Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead.

Hello, everyone, and welcome to our fourth 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 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 discussions 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.

Thanks, Cindy, and good afternoon, everyone. We delivered another year of strong results in 2022, expanding AUVs and restaurant-level margin despite facing one of the highest inflationary periods on record and an uncertain macro environment. These results demonstrate Chipotle's resiliency driven by our talented teams, delicious food made fresh daily, convenience, customization, and of course, our tremendous value. For the year, sales grew 14% to reach $8.6 billion driven by an 8% comp. Digital sales represented 39% of sales. Restaurant-level margin was 23.9%, an increase of 130 basis points year-over-year. Adjusted diluted EPS was $32.78, representing 29% growth over last year, and we opened 236 new restaurants, including 202 Chipotlanes. Turning to the fourth quarter. While we are pleased with our overall growth, our results were impacted by a few factors that were unique to the quarter, including a lower-than-expected benefit from garlic guajillo steak and a headwind from loyalty accounting. For the quarter, sales grew 11% to $2.2 billion driven by a 5.6% comp. In-store sales grew by 18% over last year. Digital sales continue to represent 37% of sales. Restaurant-level margin was 24%, an increase of 380 basis points year-over-year. Adjusted diluted EPS was $8.29, representing 49% growth over last year, and we opened 100 new restaurants, including 90 Chipotlanes. Our transaction trends improved throughout the quarter as we lapped brisket, and I'm pleased to report that our underlying trends have further improved entering 2023, with transaction trends turning positive. For the first quarter, we anticipate comps in the high single-digit range. Our focus on getting back to the basics and running great restaurants is beginning to pay off, and we plan to further emphasize this in 2023. Additionally, we will continue to build upon our five key strategies that will 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, sustaining world-class people leadership by developing and retaining diverse talent at every level; number three, amplifying technology and innovation to drive growth and productivity at our restaurants and support centers; number four, making the brand visible, relevant, and loved to improve overall guest engagement; and number five, expanding access and convenience by accelerating new restaurant openings. Beginning with our restaurants. As we discussed on the last call, Chipotle is a restaurant business with high standards, and it is critical that we treasure the guest and deliver an exceptional experience, including great culinary and in-restaurant execution. During the pandemic, there were unforeseen challenges, such as supply outages, staffing challenges, and exclusions from COVID that resulted in a need to create workarounds. We have been eliminating the workarounds and reestablishing operational standards with Project Square One while continuing to build a culture of excellence in every aspect of our business. This means ensuring all ingredients are in stock, that our teams are fully staffed and properly deployed during peak periods to drive throughput, that our delicious food is prepped and cooked on time, that we are improving throughput on the frontline and improving on time and accuracy on the digital make-line; and of course, that we are delivering exceptional customer hospitality. Project Square One has helped to lay the foundations, including training in each of these areas. We are also bringing back more shoulder-to-shoulder training. One thing that I believe everyone has learned from the pandemic is that virtual training is not the only tool needed. So we are reducing the amount of virtual training and bringing new crew members into our restaurants sooner for on-the-job training. This helps to accelerate onboarding and gives more confidence to our new crew members as they are learning by doing. Shoulder-to-shoulder training by experienced managers is an essential process. I'm also happy to see an improvement in turnover with December being one of our best months in the past two years for both hourly and salary turnover rates. And our staffing levels continue to improve with 90% of our restaurants fully staffed. This, combined with better stability, leads to more experienced teams. When you combine this with Project Square One training for the past two quarters, positive signs are emerging across the operation. We are focused on operational excellence and have intensity and collaboration to achieve it, great people and great culinary drives performance. And speaking of great people, I'm proud to share that in 2022, we promoted over 22,000 people, surpassing 2021, and 90% of all restaurant management roles were internal promotions. And we have tremendous growth ahead. In 2023, to open our new restaurants, we will have the opportunity to promote over 1,800 hourly manager roles, over 255 GMs, and over 40 field leadership positions. These numbers will continue to grow as we expand our restaurants by our targeted range of 8% to 10% per year. As we have said in the past, our goal is to be the employer of choice. In addition to career advancement opportunities, industry-leading benefits, and competitive wages, we will continue to look for ways to improve the overall experience for our teams. We know one way is to continue to invest in technology and innovation. There are a couple of new stage gate initiatives that I'm excited to share along with an update on improvements to our app functionality. First, we are currently testing a new grill to improve the overall cooking process for our chicken and steak. The grill is much faster and has consistent execution, which lowers the learning curve significantly. Importantly, we believe it maintains our high culinary standards and can cook the chicken and steak to perfection. We look forward to further validating it through our stage gate process. Second, you may remember that in the second quarter, we announced Hyphen as one of our first investments in our Cultivate Next Fund. Hyphen is a food service platform that automates the assembly of meals on the digital make-line and could help fulfill our promise to deliver on-time, accurate orders for our digital guests. This would allow our restaurant teams to focus more on our in-restaurant guests on the frontline, further improving throughput. I'm thrilled to share that together with Hyphen, we are developing our first automated digital make-line prototype, which we will test and learn on, and we expect to have it in our Cultivate center in the first half of this year. Speaking of our digital business, it is over $3 billion in revenue and represents 39% of our sales, and we're constantly looking for ways to improve the experience for our guests. Last quarter, we started testing advanced location-based technology to enhance our app functionality. 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 order readiness messaging, wrong pickup location detection, reminders to scan the Chipotle Rewards QR code at checkout and more. The results from the stage gate process were very encouraging, including an improvement in delivery speed, a reduction in customers going to the wrong location, and an improvement in the experience for our rewards guests, allowing them to quickly scan for their rewards points without impacting throughput. As a result, we rolled it out nationwide last month. Moving on to making our brand more visible, more relevant, and more loved. Our Real Food for Real Athletes platform has been a success as we partner with athletes of all levels who are fans of Chipotle and focus on helping them perform their best by providing proper nutrition through real food and real ingredients. During the fourth quarter, we teamed up with U.S. Men's National Soccer Team stars, Christian Pulisic and Weston McKennie, to showcase their journey to soccer's biggest international tournament while featuring the athletes' go-to orders in our app. We also continue to leverage social media to remain relevant with our consumers, especially Gen Z. This year, we surpassed 2 million TikTok followers, which to put into context rivals some of the largest brands in the world, and we were the first brand to launch on the new social media platform, BeReal. Shifting to menu innovation. As we mentioned last quarter, 2023 will consist of one to two limited-time offers (LTOs). I'm delighted to share that Chicken Al Pastor has been validated and ready to be rolled out in the near future. This new menu item is operationally simple to execute while still providing a new exciting flavor that drives transactions and sales. We also recently launched a new lineup of Lifestyle Bowls that cater to contemporary wellness habits of Gen Z and millennials. The lineup spans a wide range of healthy habits such as our Balanced Macros Bowl, our High Protein Bowl, and our Grain Freedom Bowl. Lifestyle Bowls are a great way to show our customers that they can create balanced meals made with our existing ingredients that taste great and that they feel great eating. Turning to our Rewards program. In 2022, we increased our rewards members by 20% to 31.6 million. Our program continues to get more sophisticated as we better understand who our members are and serve them with relevant content, targeted offers, and gamified badging to help drive transactions. In 2022, 60% of our rewards program promotions were personalized, and we plan to increase this going forward. To drive engagement and enroll new members, we recently introduced Freepotle, which offers each rewards member 10 personalized free rewards throughout the year. Our fifth strategic pillar is to expand access, and our development team has done an outstanding job of navigating headwinds such as material shortages and permitting and inspection delays while successfully opening 236 new restaurants in 2022, including 202 Chipotlanes. In fact, we opened 100 new restaurants in the fourth quarter, which was a record for the company. We also opened our 500th Chipotlane during the quarter as we expanded access and convenience through our unique digital drive-through format, and the performance of Chipotlanes continues to be strong. In fact, since we began opening Chipotles in 2018, our new restaurant productivity has improved by about 1,000 basis points. We plan to open 255 to 285 new restaurants in 2023 with over 80% including the Chipotlane. Within our 2023 expansion plans, we will accelerate new restaurant growth in Canada and continue to open restaurants at a measured pace in Europe. In Canada, we have built out a strong local field leadership team that works closely with our U.S. team to ensure best practices and a consistent culture, while adapting to local needs. We are now ready for accelerated growth and plan to add around ten new restaurants in 2023, which will be the fastest development growth rate since we entered the Canadian market. We also remain encouraged by the performance in Europe despite a challenging macroeconomic backdrop. In 2023, we plan to add a few additional locations in the UK, and we are also rolling out our digital capabilities to further expand access. We remain optimistic about the growth opportunity, and we will continue to update on Europe's progress of the stage-gate process along the way. In closing, I want to thank our restaurant and support center teams for another terrific year. Our focus on getting back to the basics is starting to pay off. Our teams are energized, and I'm excited to see further progress over the coming quarters. We have a long growth runway ahead with the ability to more than double our restaurant count, grow AUVs beyond $3 million and expand margins. I believe we have the right team and strategy in place, and we will remain focused on meeting the standards of excellence that make Chipotle, Chipotle. And with that, I will turn it over to Jack.

Thanks, Brian. And good afternoon, everyone. Sales in the fourth quarter grew 11% year-over-year to reach $2.2 billion as comp sales grew 5.6%, which included about an 80 basis point headwind related to our loyalty program. In Q4 of each year, we reevaluate the estimated loyalty breakage for points that will expire. This year, we decreased our estimate due to higher member engagement. Restaurant-level margin of 24% increased about 380 basis points compared to last year. In addition to loyalty program headwind, restaurant-level margin was impacted by a higher level of sick pay and medical claims in the quarter compared to our expectations. Earnings per share adjusted for unusual items was $8.29, representing 49% year-over-year growth. The fourth quarter had unusual expenses related to legal expenses, our previously disclosed 2018 performance share modification, and corporate restructuring. Turning to our sales outlook for 2023, as Brian mentioned, we've seen the transaction trends turn positive as we remain focused on delivering a great guest experience. January comps were in the low double digits. For Q1, factoring in momentum we've seen quarter-to-date as well as tougher comparisons as we move through the remainder of the quarter, we anticipate comp sales to be in the high single-digit range. While it's difficult to forecast comps for the rest of the year, considering economic uncertainty, including the possibility of recession, we expect comps to moderate as we lap menu price increases in early Q2 and the middle of Q3. I'll now go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter were 29.3%, a decrease of about 230 basis points from last year. The benefit of menu price increases and lower avocado prices offset elevated costs across the board, most notably in dairy, tortillas, beans, rice, and salsa. In Q1, we expect our cost of sales to be in the high-29% range due to higher prices across several items, including queso, salsa, spices, and oil. Labor costs for the quarter were 25.6%, a decrease of about 80 basis points from last year. The benefit of sales leverage was somewhat offset by wage inflation in addition to higher-than-expected sick pay and medical claims. For Q1, we expect our labor cost to improve slightly but remain in the mid-25% range due to seasonally higher employee taxes as employee taxes start the year at an elevated level due to the resetting of wage caps. Other operating costs for the quarter were 15.7%, a decrease of about 60 basis points from last year. This decrease was driven by a decline in delivery expenses due to lower delivery sales as well as sales leverage, partially offset by higher costs across several expenses, including natural gas and maintenance and repairs. Marketing and promo costs for the quarter were 3.4%, 20 basis points below last year. In Q1, we expect marketing costs to be in the mid-3% range with the full year to come in around 3%. In Q1, other operating costs are expected to be in the low 15% range. G&A for the quarter was $135 million on a GAAP basis or $129 million on a non-GAAP basis, excluding $4 million in legal expenses, $1 million related to the previously disclosed modification to our 2018 performance shares, and $1 million related to transformation expenses. G&A also included $119 million in underlying G&A, $18 million related to noncash stock compensation, which includes a reduction in the estimated payout levels of our performance-based stock awards, and was offset by an $8 million reduction in performance-based bonus accruals. We expect our underlying G&A to be around $121 million in Q1 and continue to grow slightly thereafter as we make investments in technology and people to support ongoing growth. We anticipate stock compensation will be around $25 million in Q1, although this amount could move up or down based on our performance and is subject to the 2023 grants, which are issued in Q1. We also expect to recognize around $7 million related to employer taxes associated with shares that vest during the quarter and $2 million for costs associated with our field leader conference in February, bringing our anticipated total G&A in Q1 to around $155 million. Depreciation for the quarter was $74 million or 3.4% of sales. For the full year 2023, we expect it to inch up slightly each quarter as we open more restaurants. Our effective tax rate for Q4 was 26.3% for GAAP and 25.1% for non-GAAP. For 2023, 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 $1.3 billion in cash, restricted cash, and investments with no debt, along with a $500 million untapped revolver. During the fourth quarter, we repurchased $199 million of our stock at an average price of $1,487. We repurchased a total of $827 million in 2022, which was the largest amount ever repurchased in a single year. We increased our level of stock repurchases during the quarter when our share price fell with the market overall, and we'll continue to opportunistically repurchase our stock. During the quarter, our Board authorized an additional $200 million to our share authorization program, and at the end of the quarter, we had $414 million remaining. We opened a record 100 new restaurants in the fourth quarter, of which 90 had a Chipotlane. We remain on track to open 255 to 285 new restaurants in 2023 with at least 80% including a Chipotlane. Development delays remain a headwind, including utility installations, permitting and inspection delays, construction, labor challenges, and component and raw material shortages. While we expect these challenges to persist into 2023, our pipeline remains strong, and we expect to move toward the high end of the 8% to 10% openings range once these headwinds subside. To conclude, we're off to a strong start in 2023 with early signs of progress from our focus on getting back to the basics of running great restaurants and treasuring our guests. While we cannot predict how the macroeconomic environment will play out over the next 12 months, we will continue to strengthen our operations and work hard to earn each and every customer visit. I want to thank our restaurant teams and our restaurant support teams for all their hard work this year and for their commitment to Chipotle.

Thank you. We will now begin the question-and-answer session. And the first question will be from David Tarantino from Baird. Please go ahead.

Hi. Hi, good afternoon. I have a couple of questions about your commentary on traffic trends. I think Brian, you mentioned that underlying traffic trends have turned positive if I heard that correctly. So I'm wondering what you meant by the word underlying if you're making some adjustments to that.

Yes. So, first of all, underlying just means transactions. There wasn't anything there. So, thanks for asking for the clarity. And basically, what we saw is as we exited the quarter, our transactions turned positive, and then we saw that continue to build in January. You are right, there was some Omicron and then there were some good weather. But what we've also seen is our staffing is at the best it's been. Our turnover is at the best it's been in two years. I think the combination of focusing on the basics, meaning no menu deactivations, keeping the lines open both our frontline and digital make-line from open to close, teams deployed correctly, is also a key driver in why we're seeing the traffic progress in January throughout that whole month. So we're feeling good about where we are operationally. We believe we can still get even better as we get closer and closer to our infamous burrito season. But it's a great position of strength that we're walking forward from.

Great. And if I could just ask one follow-up on the operations, I'm wondering if you could maybe elaborate on what metrics other than transactions that you're focused on and how those are progressing? And what you think maybe the ultimate target for those should be as you progress through the year or maybe work towards your goals there.

Yes. Sure. So I'd like to put a little color on this, menu deactivations in our digital business. Obviously, during the course of the last couple of years, we've had a lot of supply chain challenges, and one of the workarounds we created was allowing teams to deactivate certain items, right, so whether it's clock or chips or anything on those lines. And we've kind of just reestablished with both our suppliers, our distribution partners, and our teams that that's not a fallback position anymore. The expectation is you should be in stock, and then you should be prepared from open to close with those items. So there were points and times during that quarter where we had hundreds of menu deactivations, and now we're back into the single digits on how that's going. So that's a key metric. Another key metric would be our digital on-time percentage. That's improved by nearly ten points. And so I think that's a function again of being deployed correctly, staffed correctly, and then obviously having the ingredients you need in order to build the order correctly. And then we've seen some progress on throughput as well on the frontline. And I anticipate really where we'll see big movement on throughput is more towards the second quarter when we get into kind of more of our peak performance, and that's why you saw us focus on hiring so many additional people. So there are a lot of good indicators beyond just the traffic trends that we've seen. I always like to start with, hey, if you've got more stability, your teams are deployed correctly, they are trained correctly, and then we keep it very focused on the basics of running the restaurant, we know we get good outcomes.

Great. Thank you very much.

And the next question is from Sara Senatore from Bank of America. Please go ahead.

Hi, thank you. I have a follow-up on labor and staffing and then a quick one on the new units. So just on the labor piece, I guess, could you help me reconcile? I think you’ve been saying mid-single-digit wage inflation, and I think you had something like 15% price on the menu. So were those hours coming from what you were talking about like the sort of shoulder-to-shoulder drop training? Or is that 90% staff – 90% fully staffed, is that a lot higher than it was? I just trying to think about as we look forward to the year if the late there should be more labor hour investments.

Yes. Well, I think what we’ve been referring to more often than not is just the absolute wage that we’re paying and then what that inflation subsequent with that has been. The stores, fortunately, are – we keep track of an at-model metric. And that’s what we’re referring to, where we’re closing on 90% of our restaurants being at-model. In regard to the shoulder-to-shoulder training, that’s just part of our process. And I think there was an element at some point where we’re maybe getting too reliant on virtual training versus the shoulder-to-shoulder training, meaning our field leaders, our team directors also need to be in the restaurants doing shoulder-to-shoulder training with our general managers and our new crews. So that should not result in any additional labor cost with having more shoulder-to-shoulder training. But Jack, I don’t know if there’s anything you want to add to that.

No. No, I think that’s right, Sara. And we don’t think we need to have incremental investment in labor for the training because the best training is, you put your teams in position. You have somebody that’s chosen what to do and you have somebody that’s watching them to kind of self-correct along the way. So it shouldn’t be extra labor per se. Now when we hire 15,000 people, there’s going to be some additional training. But I don’t think it’s going to be anything that you’ll see will blow up the labor line on the P&L going forward at all.

Okay. So, just as we’re thinking about kind of the labor, there’s still room, I think, what you’re saying for improvement on just the restaurant-level margin line is the new comp?

Yes. Definitely.

Okay. And then just quickly on the new store productivity. Could you clarify that sort of there, it’s 1,000 basis points better? Is that because the Chipotlanes open at higher volumes than non-Chipotlanes, and so it’s just sort of comparing the different models? Or is there something else going on where across the board, new store productivity is better? Thank you.

Yes. Sara, I’ll take this. I think it’s really more based on the Chipotlanes. Because if you look over the last four years or so, you got to look over a longer period of time to look at all the opening, we’ve moved up our productivity. So for example, today, our restaurants open up on average around 85% of what our existing comp stores are doing. If you look back three years or four years ago, we were in kind of the high 70% range or so. So there’s been a step change. The biggest thing that’s happened from the three years, three and a half years ago to today is we’ve moved from having just a handful of Chipotlanes to having the majority of our portfolio as Chipotlane. And we still – when we look at what our Chipotlanes are doing, the 85% compared to 15% without a Chipotle, they continue to outperform that non-Chipotlane cohort. So, we think the main driver is the Chipotlane and the convenience that our customers find with that digital drive-through.

Thank you so much.

The next question will be from David Palmer from Evercore ISI. Please go ahead.

Thanks. I wanted to ask a question about digital orders. I’ve been somewhat surprised by the level of decline there. I think back in the third quarter, we estimated that digital traffic per store decline in the mid-teens. That’s including both delivery and pickup. Maybe you can comment on where you think that was correct, but also how much you think digital traffic per store declined in the fourth quarter. And just relatedly, what are your thoughts about that channel? I know it’s important to you. What’s your outlook for it? And are there things you can do to stabilize that line? Thanks.

Go ahead, Jack.

Yes. I’ll get started, David. Listen, there’s a couple of things that are driving it. One is, we’re having a surge in return to in-restaurant. And so that part of our business is growing very, very healthily throughout the last year and a half or two years since we’ve been moving away from the pandemic. But secondly, delivery has been declining as well. Delivery transactions in the fourth quarter declined 15%, and that’s I think just again a normal kind of move away from people getting out and about. I think there’s probably some people who are deciding that while that channel adds a lot of convenience, there is a higher price that comes with that. So those are the two main drivers. We figured that digital would kind of settle in this high 30% range. And so we’re at 37% range now. So it’s within the range that we thought we would be in. Early on in the pandemic, we saw our two markets that were the least affected, that’d be the Southeast and the Southwest. When they were starting to normalize, they were normalizing towards that high 30% range. So it feels like about the right range for us.

So is your view that you’re going to start to kind of lap the second quarter, things really step down? Or do you think you’re going to enjoy that comparisons when it comes to digital orders and start to stabilize on that channel, and then perhaps enjoy some of the benefits you’re talking about with throughput on the front make-line? Is that – is your belief that you’re going to get a dual benefit there?

Yes. That’s right, David. I mean the way we think about it is, we feel like we’ve reset the delivery business to be now where it makes sense economically. And as such, our order-ahead business, I think, has started to show the right trajectory. And then obviously, our in-store business has shown tremendous acceleration. So, I think you said it well.

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

Great. Thanks. Jack, I have two margin questions for you. There’s obviously a lot of noise in 4Q. Labor cost was 1Q guidance for labor. And I’m curious what the impact of higher expected sick claims have in 4Q. And then I missed the term, but there’s some external factors that you’re betting within the mid-25% labor margins. Can you just help tease us out in terms of what that impact is from that external factor? And then my real question is that if we zoom out and fast forward to when you get the $3 million sales volumes, what’s your level of confidence in achieving 27% restaurant-level margins relative to what you might have said a quarter ago if the sales structure has obviously been up and to the right and you’re rapidly getting towards that target?

Yes. So let me start with the fourth quarter. Our expectations were that our margin would be more in the 25% range rather than the 24% range. When you look at the pieces of how we got down to 24%, part of it was the loyalty breakage. Frankly, there was an 80 basis point change year-over-year in the comp related to just that journal entry that we had to book for the breakage. If you look at just the – there was 30 basis points of additional or reduced breakage that we had to reflect this year, that cost us 20 basis points on the margin. It was 60 basis points on – we saw higher-than-expected medical claims and sick pay during the quarter as well. We typically do see those things pick up a little bit in the fourth quarter and especially in December. But the surge was more than we expected. That’s not something that we would expect to recur. And then sales softened during December as well. I think that went hand-in-hand with softer retail sales. We know there was some weather and a seasonal shift in the holidays and things like that. And that was 20 basis points, 30 basis points or so. So, we look at that margin in the fourth quarter. And we think if those things normalize, there is as much as 100 basis points or so that we can get back. We don’t get it back all at one time, but we definitely think we have the potential to do that. So with that in mind, if you’re looking at more of that high 24% and that 25% range on a normalized basis, then we are confident that as we move from the current volumes on a menu price-adjusted basis just over $2.7 million up towards that $3 million, the flow-through that we know our model provides will still get us to that 27%.

And can you just clarify – I’m sorry, you said sales were a bit softer than you guys expected in December. But I think earlier in the script, you guys talked about how there was improvement through the quarter. So was that just a reflection that December didn’t perform to the level that you guys were really expecting?

Yes. I mean, listen, the way I would describe the quarter, we started out soft and we talked about that in October that we were doing a mid-single-digit comp, that GGS, while there was an attachment rate that was as expected, it wasn’t driving transactions. So we started out soft in the quarter. We picked up as we stopped comparing against brisket. That was in the middle of November. So we had, call it, high single-digit comps for a while. And then we lapped the menu pricing increase from December of 2021. And then just as we got around the holiday, we just didn’t see that pop, that momentum that we normally see in – so December. So the way I would describe it is, frankly, we started the quarter soft and we ended the quarter soft. Now what we’re happy about is, as the holidays – we got through the holidays and we got into January, that’s where our transaction, not just from a comparison standpoint but just on a trend month-over-month, really did improve. And so we feel good about where we go from here. But yes, listen, the fourth quarter was a tough quarter for us.

Thanks for the color Jack.

Next question will be from Brian Bittner from Oppenheimer & Co. Please go ahead.

Thank you. Thanks for the question. As you move throughout 2023 and you lap some of these large menu price increases as the year progresses, would you think about replacing them with some type of increases, albeit probably a lot more normalized, more lower price increases? Or do you plan to let these fully roll off? And Jack, as you sit here today, what do you anticipate the total pricing factor to be for the full year 2023 for the same-store sales model?

Yes. So, I mean, I’ll start with that and then we can talk about expectations. We’re running right now in that kind of 9% to 10% range. And as I mentioned, it rolls off early in Q3. And then in – I’m sorry, early in Q2 and mid-Q3. There were a couple of delivery adjustments, target adjustments in there as well. We’ll end up being somewhere in that kind of mid-single-digit because by the time you get to the end of the year, we’re running basically zero pricing. Overall for the year, it will be somewhere in that kind of mid-single-digit. In terms of pricing action, we're not going to take a price increase just to cover a lap over last year. The main thing we're going to do is we're going to want inflation, and we're going to hope that inflation is tame. Right now, we know that there is some pressure on a few of our ingredients. Beef is the one that we keep hearing about. We haven't seen it yet, but everyone is predicting that there's going to be greater supply versus demand. But we'll watch that carefully and see what inflation does. But it's going to be more about inflation and wages, inflation and ingredients and do we need to take pricing action to cover some of that, but I – we wouldn't take a price increase just to cover a comp lap.

That makes sense. And just a clarification on the same-store sales guidance for the first quarter. I know you've talked a lot about traffic flipping positive here in January. But if we just hypothetically land in that high single-digit range for the first quarter, what do you think mix and traffic would separately be in that build if it kind of played out how you thought?

Yes. I mean, right now, we're running, call it mid-single-digit positive traffic. We expect for the quarter, that guidance range assumes that we're also going to be positive transactions more in the low-single-digit as we move away from Omicron. Pricing will be that 9% to 10% range that I mentioned. Then there's going to be a mix component. We think it's kind of probably be in that low maybe 2-ish, 3-ish percent something like that. Mix is a little harder to predict, but those are the main components.

Great. Thank you.

Thank you. And the next question will be from Jon Tower from Citigroup. Please go ahead.

Great. Thanks for taking the question. Quick clarification on the question. On the new store productivity, I know we talked on this a little bit earlier. During the quarter, was there anything about timing where – based on the way that we can calculate it looks like the productivity of the stores might have been a little bit lower than the normal. I don't know if that's related to timing or something else. That's kind of the clarification. The question is then on thinking about the Garlic Guajillo Steak, it didn't live up to your expectations. Curious if you could dissect that and give us a reason as to what you might have missed. I know it hasn't been that long, but curious to know how it didn't perform versus your expectations and why you think that happened?

I'll let Jack answer the first one on the store productivity, and then I can chime in on the Garlic Guajillo Steak.

Yes. You hit the nail on the head. We opened a record 100 restaurants during the quarter, but it was very, very back-loaded. Our teams did a great job of just scratching, clawing, and doing everything that they could to get the restaurants open. I think we probably had a record opening in the month of December as well. We had more than half of the openings or in the last month of the year. So yes, you're not – you didn't see a typical sales flow-through, considering we opened 100 restaurants.

And then on your question about Garlic Guajillo Steak. Look, I think it's one of those things where we tested it in a very different environment than when we rolled it out. As a result, we got the check benefit, but we didn't get the transactions. It also had the challenge of rolling over brisket, which was arguably one of our best-performing menu items that we've done to date. But we'll continue to analyze that we make sure we learn from it going forward and that's why we use the stage-gate process so that we are always learning.

Thank you. And our next question will be from Sharon Zackfia from William Blair. Please go ahead.

Hi. Good afternoon. I wanted to ask a question about staffing and the lower turnover that you're seeing. Is there a way to kind of compare and contrast tenure on the frontline now versus 2019? And if we think about throughput opportunity as we enter high season, I mean, how much is the frontline because it is less experienced kind of lagging where you were in 2019 or dimensionalize kind of how – how much throughput opportunity is really on the table here as you have more productive frontline staff?

Yes. Look, thanks for the question on this because I think this is an important one, which is what we know is when we have our teams at model and deployed correctly with leadership present for shoulder-to-shoulder training, our restaurants perform and that's what we saw in 2019, and that's what we anticipate occurring going forward. We know there's upside in how much throughput our teams are capable of doing. Obviously, we're targeting to get those throughput numbers back to where they were in, call it, the 2019-time-period. The one thing that's nice is our turnover levels have dropped. So we're getting more stability in the teams, which means they're getting more reps. So that as we walk into these higher-level or higher-volume months, they've got more reps and being deployed correctly, working together correctly to ensure that we get more throughput. That's what we're focused on is the people that we have today, how do we get them trained, how do we get them deployed and then how do we make sure those teams stay together.

Yes. And Sharon, just to add, when we look at the timing position back to 2019, there are two factors here. One is turnover. The other one is promotion rates as well, but when your turnover slows down, people are going to be in their position longer. In for example on the kitchen manager, we're very close to where we were in 2019. The average tenure in the kitchen manager role was like 0.69, meaning it was about eight months or so. Today, it's like 0.64. So it's like maybe seven, 7.5 months or something like that. In apprentice, we're not quite back to 2019, but we're ahead of where we were a year ago, and we're in striking distance again. Those are areas that we were seeing that our average tenure was going down during the high-turnover period of the last year – year-and-a-half or so. But those numbers appear to just like with the turnover be stabilizing and moving back up.

Thank you. And the next question will be from John Ivankoe with JP Morgan. Please go ahead.

Hi. Thank you. I know you've been working on a number of different automation or technology practices in the store that could potentially reduce the demand for labor and also make you efficient and perhaps more consistent in some ways. So I was just hoping you could take a few minutes or a few seconds and just kind of talk about some of the different packages that you have. How far along they are and when you – we actually might be able to start to see some benefit, even if it's on a limited basis at a market level? Thank you.

Yes. Sure. So probably the one that's closest in is the new grill work that we've got going on, which I mentioned in my earlier remarks. It just gives our teams a tool that allows them to cook the chicken, frankly just perfect every time and a lot faster, significantly faster. The same thing goes for steak. We're actually moving that from a one-store test now to a multi-store test as we speak. So we're excited about that one. Obviously, we're working on an automated digital make-line, which is in partnership with Hyphen. We'll get the first one of those into a real live prototype in our Cultivate center probably end of this quarter, early in the next quarter. So that one's a little bit further out. And then we just got rolling with a live pilot on the, what we call Chippy, which is our automated arm or robotic arm to fry chips. So I have much more information on that as that goes live in the one restaurant. I'd say the one that's probably close in is the grill, and the ones probably furthest out probably is our digital make-line – automated digital make-line. But all these are really promising because when you can significantly reduce cook times and then make the practice of grilling chicken and steak easier, good things happen with our culinary, and that's what we've seen in the one restaurant. People are giving us feedback that the steak and chicken taste great. Our team members are giving us feedback that they love using the new grills, and we’re more consistent with great culinary, everybody wins.

The next question will be from Dennis Geiger from UBS. Please go ahead.

Thank you. Just first wondering if it would be possible to give the traffic mix price for the 4Q? And then the question is really about pricing – another one on pricing. Just curious if you believe you've seen any customer resistance to pricing levels, how that's kind of shaped how you thought about the pricing that you talked about for the year. And related to that, any kind of update on value scores, the low-income customer that you spoke to last quarter, anything as it relates to shaping your view on how the business performs into a potentially tougher macro? Thanks guys.

Yes. Sure. So look, we really have not seen any meaningful resistance to our pricing, especially as it relates to our in-store experience. Obviously, the delivery channel was down, but I think that's a function of a couple of things. One, you do have to pay a premium for that occasion, combined with that the in-store experience is back and people are back out and about. So potentially, they see the convenience, the customization of coming in the restaurant and getting it on kind of their control terms. We continue to see the higher-income consumer, the individual that earns over $100,000, coming more often. Frankly, I think the same thing would have happened with the low-income consumer regardless of what the pricing was that we acted on. We made the decision not to go chasing people with discounts. That's not what our brand is, and that's not what we're going to do. We're better off winning the value gain through great culinary, great speed/convenience, terrific customization, and we know that continues to resonate. Our value scores continue to be really strong. If you look at people that I would say are comparable that are in the fast-casual category, we're still at a 10% to 30% discount. So look, I think we've made a lot of really good moves to kind of move with the challenges that we've had to deal with. As a result, I think we're seeing stronger operations, stronger teams. We’re seeing, I think that work come out to bear in January and where we are here in February. So Jack, I don’t know if there’s anything to add to that.

No. I think you said that perfectly, Brian. And just – I think you were looking for the components in the quarter. The components of our pricing were about 13.5%. Transactions were down about 4%, mix was down about 3%. So that gets you to an underlying comp about 6.5%. Then we had the journal entry that deals with breakage, and that was 80 basis points. So that gets you to the 5.6% comp.

Great. Thank you guys.

And our next question is from Jeffrey Bernstein with Barclays. Please go ahead.

Great, thank you very much. First question is just on the restaurant margin. I know for full year 2022, you ended in that 24% range, though you talked about maybe some headwinds in the fourth quarter that brought that in below expectation. Just wondering, if you can give any specific thoughts as you look to full year 2023. I know you gave some color specific to the first quarter, but as you think about the environment going forward, your pricing perhaps rolling off by the end of the year and what you know today based on the key cost pressures. And just wondering your thoughts on the full year 2023, whether it’s reasonable to assume or return to 25% plus in 2023 or beyond. I know you mentioned getting to more like 27% when you hit the $3 million, but just wondering kind of on the interim what you’re thinking specifically of the 2023.

Yes, I mean, it’s so hard and the reason we gave, some color on the first quarter, but not beyond that is we don’t know what’s going to happen to the economy. We think inflation will be reasonably tame. Hopefully that will come true. And we don’t, we haven’t made any decisions on pricing action right now. Jeff, the way I would think about it is we’re going to kind of let the year play out. We’re going to do everything we can in terms of managing supply chain, managing as we recruit people we’ve got to pay the wages to, make sure that, we gear up for burrito season. We’ll watch how the inflation element plays out. We don’t have any plans right now to take pricing action. So we might be more patient this year than we were last year. The inflation kept coming at us, and then we could see more ahead and we take pricing action, we see even more ahead. It doesn’t feel like it’s at that fever pitch. So I think, you could see us being more patient this year. What I can tell you is when things do normalize, whether that’s later this year or into 2024, we absolutely have at these kind of volumes, the ability to get a margin up into that 25% range on a sustainable basis, and then it’ll grow from there. I just don’t want to make any promises on a quarter-by-quarter basis. Just because so many things has happened – have happened in the last several quarters, and it’s hard to predict what’s going to happen, but I do know that our model is intact.

Understood. I’m just following up on a couple of bigger picture topics. I think, Brian, you mentioned that international growth’s going to be at, I think you said a measured pace. I’m wondering if the headwinds, to your point about the economy in Western Europe perhaps, is the primary reason why it’s measured or maybe there are other causes for concern. Anything around that international acceleration and when the timing of that might be would be great. Thank you.

Yes, sure. So obviously Canada is full steam ahead, right? We’re opening; I think the most restaurants we’ve ever opened from a percentage standpoint and probably absolute standpoint ever in Canada which is really exciting. Those economics continue to perform really well. When you look at Europe, look, the top line is really performing. Frankly, we’ve been much more patient on pricing there because we want to make sure that people have the experiences with Chipotle. So, there’s a lot of inflation that we’re still dealing with in Europe. But look, we like what we’re seeing; the good news is feedback on the experience is really very positive. Feedback on the culinary is very positive, and the most recent restaurants that we’ve opened are performing really well. We’re just taking our time with it because unfortunately, the last three years have not been normal in any way. So we just make sure we aren’t getting any false positives or false negatives on any part of the business. The good news is we’ve got a tremendous growth runway in the United States that we can be very patient with how we approach our international expansion. But look, the early signs are people like burritos and bowls and they like our culinary and they like the convenience and they like the speed. So that’s a recipe for a lot of opportunity down the road.

Thank you. And the next question will be from Danilo Gargiulo with Bernstein. Please go ahead.

Great, thank you. So if I understand correctly, the traffic improvement you’re seeing seems to be stemming primarily from productivity and operational improvement also as you are moving along in 2023. But I’m wondering your expectations on the demand side from consumers and in particular, whether you are seeing or expecting any trends that could be possibly offsetting the productivity and operational improvements as we are moving along in 2023?

No, look, the consumer demand, especially if we use kind of our in-store experience right now looks to be there. Especially as you look at the higher income consumer, their purchase frequency has actually gone up. So, we fundamentally believe that better we operate, the better our performance will be. That’s why we’ve got, Scott and the team have a full court press, frankly on, great people, great culinary. If we do those two things against our operating standards, we believe we’ll continue to make progress on throughput and we’ll continue to see the gains that hopefully, we’ve experienced in the first part of this quarter.

Thank you. I think you also mentioned there are some positive signs that are emerging from Project Square One. I was wondering if you can elaborate on that one and maybe like share a couple of metrics, where you’re particularly proud of.

Yes, look I mentioned this earlier obviously one of the things that we’ve seen is a lot less incidents of many deactivations. So when you go to order online, all the products are available chips, guac, chicken, steak. That is dramatically decreased. We know that’s a big deal because when you order online, if you don’t have what you want available your conversion rate goes down. So we’ve seen when we have the products in stock, our conversion rate gets back to where it should be. We’ve also seen a huge step up in our on-time percentage, on-time in a meaningful way. Then we’ve also already seen some progress on throughput, albeit small movement, but I think that has more to do with the time of year than a testament to the impact of Project Square One. What I also think is also really great news is we have more stability in our teams than we’ve had in over two years, and we’ve got more teams at model with less turnover. I think Scott’s got these teams focused on deploying correctly and getting trained shoulder-to-shoulder, so that they’re ready to go when the rush shows up.

Thank you. And our final question today will be from Brian Harbour from Morgan Stanley. Please go ahead.

Yes, thank you. Maybe first just a question on delivery, are you able to see in your data that those customers have shifted to coming into the stores or mobile order-ahead, or do you think those customers have basically fallen off as you’ve seen that business decline a little bit?

What it looks like to us is we’ve definitely seen people make a shift in restaurant and then some shift to order ahead. That’s probably been the biggest trends that we’ve seen. Obviously, the premium, especially when you operate in our white-label execution is one of those places where you can quickly compare, like what’s the difference between ordering delivery versus ordering pickup. That’s an obvious one where I think we’ve seen as a result, people they toggle between the two and then they choose order ahead. So yes, we’ve seen people stay committed to the idea of getting Chipotle. I’m sure there are those customers where if something’s free somewhere else for delivery, they might take advantage of a freebie. But look, we’re not interested in renting or borrowing customers. We want people to be a part of the Chipotle business because the value proposition is right for them, they buy into, the food that we provide, the culinary that we provide at the convenience and speed at which we provided. So that’s been a conscious choice, and I think it’s going to serve us well in the long run.

Okay. And maybe just a related question on kind of some of the new perks that you rolled out, the Freepotle that you launched in January. I mean, is it your view that, that drives kind of a step up in frequency or how else do you think it’ll affect customer behavior? Is there any margin impact of that? And then I guess, also you, it sounds like you’ve seen kind of mobile ordering stabilize, but do you want that to grow as you go into the next couple of years and do you think this can kind of be a catalyst for that?

Yes, look it’s doing two things. One, it’s hopefully keeping more people engaged in the loyalty program. We’re only what, one month in on it. Then also acquiring more people into the rewards program. It looks really promising that it’s doing exactly what we want it to do. But again, it’s only one month in. And what was your second part of your question?

Just if you think that, that’s kind of the next catalyst for driving greater, more order penetration.

Yes, look, what we definitely know is when people are engaged in our rewards program, we get more purchase frequency out of them. The most engaged people come through our digital business when it comes to our rewards program. I do think the combination of high engagement with rewards specifically around the amount of personalization that we’re doing here will result in more frequency out of customers down the road. Usually, that comes via a digital experience is where you see more of the impact from the rewards program. Okay, thanks. And thanks everybody for all the questions and being a part of the call. Obviously, 2022 was another one of these years where a lot of unexpected things occurred. But I do think once again, we’ve demonstrated the resiliency of Chipotle and the power of our food with Integrity purpose combined with the culinary and convenience that we provide. Again, we were able to expand our AUVs our margins. We had a record number of store openings in the fourth quarter. We’re optimistic about where the business is today because of the focus on great operational execution, combined with great culinary and great people. You’re going to continue to see us stay focused on executing those basics while we continue to execute against the other strategies to make the brand more visible, loved and hopefully engaged with. So off to a good start in 2023 and we’re optimistic about our growth runway going forward. So thanks everybody for being a part of the call and we’ll talk to you soon, I’m sure. Take care. Bye.

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