Good afternoon, and welcome to the Chipotle Second Quarter Fiscal 2024 Earnings 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 second-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These statements are based on management's current business and market expectations and our actual results could differ materially from those 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 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. Before I begin discussing our results, I need to recognize and congratulate Jack Hartung on his nearly 25 years with Chipotle and roughly 80 earnings calls with all of you. I want to thank him for being a great friend, a terrific leader and a champion for our purpose and brand. I'll say a few more words about Jack and Adam before I hand it over to him. Now, turning to our results. The second quarter was outstanding as successful brand marketing, including the return of Chicken Al Pastor as a limited-time offer drove strong demand to our restaurants. Additionally, our focus and training around throughput paid off as we were able to meet the stronger demand trends with terrific service and speed, driving over an 8% transaction comp in the quarter. For the quarter, sales grew 18% to reach nearly $3 billion, driven by an 11.1% comp. In-store sales grew by 24% over last year. Digital sales represented 35% of sales. Restaurant-level margin was 28.9%, an increase of 140 basis points year-over-year. Adjusted diluted EPS was $0.34, representing 36% growth over last year, and we opened 53 new restaurants, including 46 Chipotlanes. Before I give an update on our five key strategies, I want to take a minute to address the portion concerns that have been brought up in social media. First, there was never a directive to provide less to our customers. Generous portions are a core brand equity of Chipotle. It always has been, and it always will be. Getting the feedback caused us to relook at our execution across our entire system with the intention to always serve our guests delicious, fresh, custom burritos and bowls with generous portions. To be more consistent across all 3,500 restaurants, we are focusing on those with outlier portion scores based on consumer surveys, and we are reemphasizing training and coaching to ensure we are consistently making bowls and burritos correctly. We have also leaned in and reemphasized generous portions across all of our restaurants as it is a core brand equity of Chipotle. Our guests expect this now more than ever, and we are committed to making this investment to reinforce that Chipotle stands for generous amounts of delicious, fresh food at fair prices for every customer visit. The good news is that we are already beginning to see our actions positively reflected in our consumer scores and our value proposition remains strong. We believe our focus on operations, including throughput, as well as terrific marketing and menu innovation, have strengthened the brand and our value proposition. We will continue to listen to and treasure our guests to earn every transaction. Now, I will turn to our five key strategies that help us win today while we grow our future. These strategies include running successful restaurants with a people accountable culture that provides great food with integrity, sustaining world-class people leadership by developing and retaining diverse talent at every level, making the brand visible, relevant, and loved to improve overall guest engagement, amplifying technology and innovation to drive growth productivity at our restaurants, support centers, and in our supply chain, and expanding access and convenience by accelerating new restaurant openings in North America and internationally. First, I will start with running successful restaurants. As I mentioned, the improvements we have seen in throughput positions us well to meet the strong demand we experienced in the second quarter, driven by what we call burrito season or our peak seasonality as well as the success of Chicken Al Pastor. We often are asked why throughput is such an important operational KPI for Chipotle, so I thought I would begin by expanding on this. It is the outcome of a strong operational engine that delivers a great experience for our teams and our guests. To deliver exceptional throughput, restaurants need to be fully staffed and properly deployed. Our crew needs to complete all food prep on time, and they need to be well trained to execute the four pillars. This results in a better overall experience for our crew, which leads to more stability and therefore, more experienced teams that execute better every day. For our guests, faster lines with hotter, fresher food. This type of guest experience strengthens our value proposition and drives incremental transactions. Over the last year, we have improved our tools and training to deliver exceptional throughput. This included rightsizing the cadence of digital orders during peak periods and enabling our restaurants to see in real time at the point of sale, the number of entrees in each 15-minute interval. This has received tremendous feedback from our restaurant teams. It has helped to accelerate momentum as it creates excitement and allows our teams to celebrate in a moment when they achieve their goal. And our GMs can coach in the moment when they fall short. In fact, one of our field leaders in New York had five of his eight restaurants achieve their throughput goal in the second quarter, which compares to just one of his restaurants a year ago. While we are seeing progress, we still have a lot of opportunities to increase the percentage of restaurants executing the four pillars. Expo is a great example as it is the most impactful pillar. As a reminder, Expo is the crew member between Salsa and Cash, who helps expedite the bagging and payment process. Restaurants with Expo in place are averaging five incremental entrees in their peak 15 minutes, yet we only see a little over half of our restaurants with Expo during peak periods. This is certainly better than where it was a couple of quarters ago, but it should be a lot higher. The good news is that I strongly believe we have the right leaders in training in place to keep the momentum going as we continue to gather data on the execution of the four pillars and provide feedback and coaching on a weekly basis. I am confident throughput can go much higher. This brings me to world-class people leadership. As we mentioned last quarter, crew and GM turnover is at some of the best levels I've seen since I joined the company. Stability is allowing us to develop and grow our people pipeline to achieve our goal of promoting over 90% from within. We have many inspiring stories at Chipotle of crew members who have grown within the company to become some of our top leaders. In fact, our recently promoted regional Vice President started as a crew member 25 years ago. She moved to the United States at 14 years old without knowing English. At 19, she started working at Chipotle and has worked her way up, including spending time in a language development role, supporting other employees at Chipotle to learn English as a second language. Her people-first mentality has made her successful at hiring, developing, and retaining many of our best leaders. She has two sisters who have each been with Chipotle for over 15 years and are top-performing field leaders. With the addition of her role, we now have three of our ten regional vice presidents who started as crew members and have made their way up to leading a region and managing over a $1 billion business. These stories inspire our entire organization, as the opportunity to develop and grow within Chipotle, along with our industry-leading benefits and pay, enables us to attract and retain exceptional people. In fact, as we look to expand to 7,000 restaurants in North America, we will be adding an RVP nearly every year along with hundreds of restaurant leadership roles. Finally, our 50-to-1 stock split, one of the largest in New York Stock Exchange history, enables our employees and others to purchase whole shares at more affordable prices and gives us more flexibility to compensate our top performers in stock, all with the goal to have more employees participate in the financial success of our company. It really is an exciting time to be part of Chipotle. Now, turning to marketing, the Chipotle brand continues to gain momentum as we focus on exceptional operations and making the brand more visible, relevant, and loved. Chicken Al Pastor is a great example as it once again surpassed our expectations, reaching over a 20% incidence rate and more importantly, driving incremental transactions and spend. Similar to Carne Asada, we proved that when we bring back a limited-time offer, we are able to make it more delicious with seamless execution. While Chicken Al Pastor will end later this summer, I am excited to share that we will be bringing back Smoked Brisket this fall for a limited time. Brisket was among the most requested items as our guests love the combination of smoked beef, charred on the grill and finished with the brisket sauce made with smoky chili peppers. It took a huge cross-functional effort across supply chain, culinary, finance, and marketing to bring back this delicious limited-time offer. Our marketing team continues to find creative ways to generate excitement and drive more engagement around our annual promotions. In the second quarter, we had a record-breaking National Burrito Day, where a gamified promotion resulted in Chipotle's best sales and digital sales day ever. It also drove an influx of new and lapsed customers and was the best enrollment day of the year for our rewards program. I'm also thrilled to share that later this week, Team Chipotle will be visible on the world stage as we leverage our real food for real athletes platform for those competing in Paris. We highlighted the inspiring journeys of Anthony Edwards, Sophia Smith, Taylor Fritz, Sara Hughes, and Jagger Eaton. Their go-to Chipotle meals have been key components of their training regimens. We will also bring back our gold foil burritos for a limited time in both North America and France to celebrate all the athletes competing. Shifting to technology and innovation, I want to provide an update on a few of our in-restaurant initiatives starting with the Dual-Sided Grill. Over the last year, the grill has been in ten restaurants, and we have received consistent feedback that our teams and guests love it. The grill can cook chicken and steak in under half the time it takes on the Plancha, with consistent execution and the same sear and char. It also maintains better moisture resulting in juicier chicken and steak with less waste. For our teams, it takes one of the most complex positions in our restaurants and significantly improves the learning curve. Finally, for high-volume restaurants, it opens up capacity and drives efficiency during morning prep, as chicken and steak can be closer to serving. We are in the process of rolling out the dual-sided grill to an additional 74 high-volume restaurants this year, and we will continue to evaluate the economics prior to rolling it out further across the organization. Additionally, our automated digital make line and Autocado are making their way through final checks ahead of being pilot tested in their first restaurant. Our food safety and operations teams have worked closely with our technology teams to assure that the design takes into account factors like cleaning, speed, and accuracy while maintaining our high culinary standards. The next step will be to get each device into a restaurant to continue to learn and iterate as part of our stage-gate process. I'm excited about each of these initiatives, and I strongly believe we will see some impactful back-of-house changes in the years to come that will help to improve consistency in our restaurants and drive a better overall experience for our teams and guests. I’m also proud Chipotle continues to be a learning organization. Using the stage-gate process is our way to drive discipline around what ultimately gets rolled out. I'm confident this process will further strengthen Chipotle as a leader in technology and innovation. Now moving to our final strategy, which is to expand access and convenience. In North America, we remain on track to open 285 to 315 new restaurants this year, and our openings remain strong across all markets. While our timelines remain consistent with last quarter, our development team continues to see groundbreaks meaningfully higher compared to last year, which should help smooth the cadence of openings as we get into the back half of the year. I also wanted to share an update on our partnership with the Alshaya Group. Our first restaurant in Kuwait has been open for several months and continues to perform well. The good news is that feedback from guests is that the culinary experience is right on par with North America, which is fantastic to hear. It also tells me that when we execute our culinary and deliver an exceptional experience for our guests, Chipotle's brand resonates across geographies. We look forward to opening our second restaurant in Kuwait, as well as expanding into Dubai with the Alshaya Group later this year. To close, our crew members, GMs, and field leadership delivered an excellent second quarter helped by our committed support centers that enable restaurants to better succeed. We are fortunate to have a clear purpose and an organization full of talented people at all levels. It is exciting to see the progress we have made so far, and I am confident there is much more growth in front of us. Finally, I want to spend a few minutes reflecting on my time with Jack and his extraordinary 25 years at Chipotle. Jack is just as passionate about our brand and our purpose as he is about protecting our economic model. I know you all agree with me that he is one of the best CFOs in the business and has played an instrumental role in growing Chipotle from under 200 restaurants to over 3,500 restaurants, investing in our premium ingredients and supply chain, protecting our exceptional value proposition, and delivering industry-leading economics and returns. As Jack always says, these three characteristics are incredibly difficult to replicate: premium ingredients, affordable prices, and attractive margins. Beyond that, he has developed an exceptional finance team, including Adam Rymer, who will become our next Chief Financial Officer. Over the last 15 years, Adam has reported directly or indirectly to Jack and has been mentored by him in preparation for this role. Importantly, he is just as passionate about our brand, our purpose, and protecting our economic model. I'm highly confident he is the right leader to become our next CFO, and that it will be a smooth transition. So again, thank you, Jack, for your friendship, leadership, and so many contributions to Chipotle. And with that, I'll turn it over to you.

Thank you, Brian, for those kind words. I'm extremely fortunate to have had the privilege and honor to serve Chipotle, our employees, and our shareholders for all these years. While retiring was one of the hardest decisions, it was also one of the easiest I've ever had to make. It was hard because Chipotle is a special brand, a special company, and it’s full of special people. But it was also easy because I know Chipotle is in great hands with a family of smart, talented people who are committed to our purpose of cultivating a better world. It's also easy because I have a large and growing extended family, and I treasure the time I get to spend with every one of them. Now I'll have the chance to enjoy even more special experiences with them. I'm delighted that Adam Rymer will be our next CFO, and as Brian mentioned, Adam has worked with me for 15 years, and I can tell you he's a very talented leader who knows our brand and our business well. I'm confident in his ability to help lead Chipotle to the next level. In addition, Jamie McConnell will be elevated to our Chief Accounting and Administrative Officer. Since joining Chipotle six years ago, Jamie has provided great leadership, built strong teams and is well prepared to serve in her new role. With that said, I'll turn now to our quarterly results. Sales in the second quarter grew 18.2% year-over-year to reach about $3 billion as comp sales grew 11.1%, driven by 8.7% transaction growth. Restaurant-level margin of 28.9% increased about 140 basis points compared to last year. Earnings per share adjusted for unusual items was $0.34, representing 36% year-over-year growth. The second quarter had unusual expenses related to unrealized loss on investment and an increase in legal reserves, which negatively impacted our earnings per share by $0.01, leading to GAAP per share of $0.33. Sales comps were highest in April, driven by the Easter shift, a strong reaction to the return of Chicken Al Pastor and several successful activations, including National Burrito Day. Comps settled back to around 6% in June and continue to be driven by positive transactions. July has been more difficult to read so far due to the fourth holiday, weather disruptions in Texas, and the impact from a recent technology outage, but we believe the underlying trend remains similar to June. We are maintaining our full-year comp guidance of mid- to high single-digit. As a reminder, we will roll off about 3 points of pricing in early Q4 as we lap our menu price increase from last year. Before I go through the individual P&L line items, I want to give an overview of what to anticipate. We expect our margins will be under pressure for the next couple of quarters. Most, if not all of this pressure is seasonal, temporary, or an investment that we can offset through efficiencies, and we believe our industry-leading margin structure is still intact. I'll now go through each of the key P&L line items, beginning with the cost of sales. Cost of sales in the quarter were 29.4%, in line with last year. Benefit of last year's menu price increase was offset by inflation in avocados, increased oil usage, and higher incidence of beef as a result of the continued success of the Braised Beef Barbacoa marketing initiative. For Q3, we expect our cost of sales to be just below 31%. About one-third of the step-up is due to the higher protein costs as we roll out Chicken Al Pastor and then launch Smoked Brisket later in the quarter. About one-third is due to an uptick in dairy and avocado prices and the final one-third is about 40 to 60 basis points as an investment we are making to focus on outlier restaurants to ensure correct and generous portions. We expect this investment will ease from these levels somewhat. We also believe that we can offset the remaining investment with efficiencies and innovation over time. While avocado prices are higher than the very favorable levels we have seen over the past several quarters, this is in line with our expectations from earlier this year. Additionally, we are less impacted by the recent volatility in the Mexican avocado market, as our supply chain team has done a fantastic job of diversifying our exposure, and in the third quarter, the majority of our avocados come from Peru. Outside of avocados and the protein mix shift, we anticipate underlying cost of sales inflation will be in the low single digits range for the remainder of the year. Labor costs for the quarter were 24.1%, a decrease of about 20 basis points from last year, as the benefit from sales leverage more than offset wage inflation. For Q3, we expect our labor costs to be in the low 25% range due to seasonally lower sales, with wage inflation to remain at about 6%. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California as a result of the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 12.9%, a decrease of about 100 basis points from last year. The decrease was primarily driven by sales leverage. Marketing and promotional costs were 2.1% of sales in Q2. In Q3, we expect marketing costs to remain in the low 2% range with the full-year being in the high 2% range. In Q3, other operating costs are expected to be in the high 13% range due to seasonally lower sales and higher seasonal expenses like utilities and maintenance and repair. Based on these expectations, we anticipate restaurant-level margin to be around 25% in Q3. As I mentioned earlier, some of the pressure is seasonal, like the shift from Chicken Al Pastor to Brisket. Some is temporary like the higher prices in avocados and dairy, which if they persist, we can address with menu prices over time. Finally, we're confident that the investment we're making to ensure we are delivering correct and generous portions can be offset by efficiencies and innovation over time. G&A for the quarter was $175 million on a GAAP basis or about $171 million on a non-GAAP basis, excluding a $4 million increase in legal reserves. G&A also includes $122 million in underlying G&A, $43 million related to non-cash stock compensation, and $6 million related to higher bonus accruals and payroll taxes and equity vesting and exercises. We expect our underlying G&A to be around $128 million in Q3 and step up each quarter as we make investments in people to support ongoing growth. Anticipated stock comp will be around $40 million in Q3, although this amount could move up or down based on our actual results. We also expect to recognize around $6 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, bringing our anticipated total G&A in Q3 to around $175 million. Depreciation for the quarter was $84 million, or 2.8% of sales, and we expect depreciation to step up slightly each quarter as we continue to open more restaurants. Our effective tax rate for Q2 was 25% for GAAP as well as for non-GAAP. Our effective tax rate benefited from option exercises and equity vesting above the grant values. For fiscal 2024, we estimate our underlying effective tax rate will be in the 25% to 27% range, though it may vary based on discrete items. On June 26, we successfully completed our 50-to-1 stock split: one of the largest in New York Stock Exchange history. We believe this will make our stock more accessible to our employees as well as a broader range of investors. Our balance sheet remains strong as we ended the quarter with $2.5 billion in cash, restricted cash, and investments with no debt. During the quarter, we repurchased $151 million of our stock at an average price of $63.52. At the end of the quarter, we had nearly $650 million remaining under our share authorization program. We opened 53 new restaurants in the second quarter, of which 46 had Chipotlanes. We continue to anticipate opening between 285 to 315 new restaurants in 2024, with over 80% having Chipotlanes, and we remain on track to move toward the high end of the 8% to 10% range by 2025, assuming timeline conditions do not worsen. To close, I also want to thank our employees for all their hard work in driving our strong results and for continuing to build and grow Chipotle. I also want to reflect on our historic 50-for-1 stock split. When Chipotle went public at $22 per share, I was very optimistic that we have a special brand with tremendous growth opportunity. I'm not sure I could have ever imagined then that we would split the shares at just over $3,200 per share, but I did envision that we would reach over 3,000 restaurants, as we have today in the U.S. And today, I know we have a special brand with industry-leading economics and returns. I'm just as optimistic about our growth opportunity to reach 7,000 restaurants in North America and to expand internationally. As we further our purpose of cultivating a better world, we'll continue to drive extraordinary value for our guests, employees, and shareholders. It is truly an exciting time to be part of this purpose-driven company with seemingly limitless opportunity. And with that, I’ll open the lines for your questions.

We will now begin the question-and-answer session. The first question comes from David Tarantino with Baird. Please go ahead.

Hi. Good afternoon. First, Jack, congratulations on an amazing career at Chipotle. You're going to be missed, and we look forward to working with Adam going forward.

Thanks, David.

My question is about the sales trends you mentioned; I believe you said the comparisons adjusted to around 6% in June, and you think that underlying trend has continued into July. While that's a strong performance compared to many brands, it is slower than your previous pace. I would like to know your thoughts on the reasons for this slowdown—whether it's due to macroeconomic factors or something within the business itself that might have caused it.

Why don't I start, and then Jack can fill in. Look, first of all, David, I would tell you the quarter was really spectacular. When we look at brand metrics, they've never been stronger. So, value, food scores, all the key metrics to make sure that the brand is in a good spot really continue to improve throughout the quarter. From an operating standpoint, I don't know if you've been to our restaurants recently, but I think the teams are doing a terrific job of continuing to deliver quick culinary-grade throughput. Obviously, we mentioned in our earlier comments, we've doubled down on making sure we're also providing great portions, which I think is a key equity for this business as well. One of the things we've seen, which is consistent with what we saw last year, is this kind of seasonal move with the summer change of behaviors. We’re trying to understand what that looks like because it appears to be new trends since coming out of COVID. That's one piece of the puzzle. Additionally, we're trying to understand if there are any macro things going on as well. The one thing we know for sure is the feedback on the business from our customers has been great value, great culinary, and improving speed. Those are things we can control, and those are the things we're going to move forward with. Jack, I don't know if you want to add anything.

No, I mean, just to add some more context to the seasonal things like July 4 used to be a weekend and now it looks like it's two weekends. So it seems like, with a combination of a holiday and work-from-home being more accepted now, it appears like the holidays that used to be three or four days are stretching out a little bit. We even saw for the first time ever on Juneteenth, we saw a little softness there as well. So, we wonder if that's also kind of a work-from-home environment too. The last couple of summers have been hard to predict. We think that's definitely a big part of what we're seeing.

Great. Thank you very much.

The next question comes from Sara Senatore with Bank of America. Please go ahead.

Thank you. First of all, congratulations to both Jack and Adam. I've enjoyed working with both of you, but the question I have first is just a quick follow-up. If you could just maybe talk a little bit about the composition of the price mix and how you're thinking about that going forward, given some of the reinvestments that you are making? Then also wanted to get a sense of store growth and how that is progressing. Just I know there have been endemic problems across the industry, but the goal was to get the growth rate higher and perhaps into that 10% range next year. So, any updates there? Thanks.

Yes, I'll start with the components of the comps, Sara. Transactions were up 8.7% during the quarter. We also had a menu price increase that was effectively 3.3%. That was 3% that we took last year, and then we had the 1% effect from the FAST Act as well. We did have a negative mix, and the negative mix was based on group size. The negative mix was 1%. Group size was down about 2%, but that was offset by we did have some add-ons, mostly in chips, queso, and extra meat as well. What we're seeing as we moved into June, we're still seeing transactions be the main driver. Transactions were in the 3%, 3.5% range during the month of June. Regarding openings, we’re still on track, Sara. We're not seeing the timelines really change at all. We’ve seen some modest improvements so far this year, but the pipeline is very robust, and we feel good about the openings for this year. If that continues, based on the inventory building alone, if timelines don't worsen, we think we can get close to if not all the way to that 10% next year.

Got it. Thank you. And just pricing for the rest of the year?

We have the 3% from last year that runs out in the middle of October. We'll continue to have California. Right now, we have no plans for further pricing. I mean, we'll look at how the rest of the next few months unfold. We'd love to get through the rest of the year based on what's going on, and again, we don't know how much is seasonality, whether there's something bigger going on. But it’d be great to not have to take any price for the rest of this year.

The next question comes from Dennis Geiger with UBS. Please go ahead.

Great. Thanks very much, and Jack and Adam, congratulations to you both. Just wanted to ask Jack a little bit more on the margin commentary you made, specifically as it relates to some of that pressure over the coming quarters. If you could dive in a little more to some of the moving pieces there, and maybe some of the efficiency offsets that you spoke to? Thank you.

Yes. So, there are three main buckets. We've got inflation. Inflation generally has been relatively benign. We have two items we called out, avocado and dairy. Both of those ingredients we do expect either near the end of the year or into early next year. We think those will normalize. Avocados, as you guys know, have been a benefit. We've had great avocado prices for the last several quarters. Even the current avocado prices we're seeing right now are more in the normal range, but we think that those will ease through the end of the year or into next year. We also do have pricing power, so we'll watch that very closely, and at some point in the future we can hopefully offset that. The other item that we talked about, Brian mentioned, we decided that this brand equity called Generous Portions is something we don't want to take for granted. We don't want to take something that's been a positive for all these years and then have it turn out to be a negative because of some of the social media comments. We've made this investment, and we’ll continue to make the investment. We already have a number of initiatives underway. Some of them are operational, some of those are supply chain efficiencies. We won't go into details of those, but we do think over the next couple of quarters that we'll be able to see some efficiencies in terms of where our margins are and what we think.

Just to move from Chicken Al Pastor.

Yes. I mean, that's clearly temporary.

Yes.

The mix shift will clearly be in LTO, and once we move from brisket into the next LTO, especially if it's chicken. Not only will that reverse but it'll turn into a positive for us.

Makes sense. Thanks and congratulations.

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

Great. Thanks. I did want to ask about labor, if I could. I think, Brian, you mentioned a little over half of the units with an expeditor during peak hours. What's the holdup in terms of expanding the expeditor to more units? It feels like that's a key driver of throughput? Is labor just really tight? Is there a lot of turnover? Just any thoughts around that would be helpful. Thank you.

Yes, sure. So, look, the good news is we've made progress to get to 50%. The other piece of good news is we’ve had experience in the past getting that number closer to 70%-plus. I'm confident with our operational leadership going on in the field right now, and here's a key piece of us that gives us the ability to improve from where we are. We have really great staffing levels right now with turnover at some of the best levels it's been to date. The fact that we're getting these teams cohesive and focused on the culture of great throughput combined with great culinary gives me confidence that these teams will continue to improve. The other thing, too, you guys might have seen is we talked about this; giving our teams the visibility through reporting has really enabled them to enhance their performance. I think just repetition using the tools that we have combined with maintaining focus from the organization is crucial.

The next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Thank you very much. Congratulations to Jack and Adam on an excellent quarter. I wanted to get your thoughts on the industry's approach to gaining market share through discounts and promotions. You mentioned that the value proposition remains strong, but can you highlight any shifts you've noticed among consumers? This question is specifically for Brian. During the last period of significant price competition, you found yourself in quite a different position. What key lessons have you learned from that experience, and how will they influence your strategies in navigating the current environment? Thank you.

Yes. There's a lot to unpack here, but I'll start by saying that it's crucial for us to focus on delivering exceptional culinary experiences, great burritos and bowls, and valuing every single guest, whether they're dining in or ordering online. When we excel in these areas, we see an increase in our value scores and our brand affinity. I'm closely monitoring our market share, and it's encouraging to observe that we're gaining ground each month. By concentrating on executing Chipotle's core business, we not only see positive results in our comparable sales and transactions but also in our market share growth. Chipotle was not established on the premise of competing with promotional pricing. Instead, we're grounded in the principle of providing outstanding food tailored to individual preferences, and doing so quickly. Our guiding principle has always been simple: great food delivered fast. By continuing to execute this straightforward concept, I believe we'll keep capturing market share and improving our value scores.

The next question comes from Sharon Zackfia with William Blair. Please go ahead.

Hi. Good afternoon. Thanks for taking my question. I guess just following up on that. I think in the prior few quarters, you had talked about outperforming amongst lower-income consumers. Are you still seeing that strength across income cohorts? And on the Brisket, is that something we should expect, Jack, to impact the fourth quarter as well? Thanks.

The good news is we are seeing transaction growth from every income cohort, which speaks to the strength of our brand and value proposition. Our goal is to continue to give people the bowls and burritos they want at a speed that delights them. Hopefully, that continues to resonate with every income cohort. To-date, it has. From what we see in our consumer research, it will continue to delight every income cohort. On your Brisket question, I'll let Jack jump in on that.

Yes, Sharon, I can share that there will be an impact, but there are other factors to consider. We expect our food costs to remain similar in Q4 as they were in Q3, so we do not anticipate another increase.

Thank you.

The next question comes from John Ivankoe with JPMorgan. Please go ahead.

Hi. Thank you. The question was on the automated digital make line. Just in terms of what you've seen in your Cultivate Center and your culinary center, how scalable is this machine? If you do decide to roll it out nationally, how fast could this potentially happen? Does your equipment supplier have the capacity to get up and running for the entire system? And secondly, related to that, if we are talking about consistency and speed as two things that you want to do really well, would that be considered as part of an early stage gate process as well once you establish it on the back make line? Thank you.

Yes, and thanks for the question. Obviously, we're really excited about Python and the automated digital make line. We'll have that in a restaurant probably here at the end of August, early September somewhere around there. It will be exciting to see. We want to maintain consistency and speed. Those are two critical equities of the brand. The good news is we've got various initiatives in the stage-gate process. I never like to have all my eggs in one basket. I'm really delighted about the progress we're making with other tools that make us more efficient with prep, whether it's the avocado slicer, veggie slicer, dual-sided grill, modifications to our rice cooker, and fryer equipment. There are many things happening in the back of the house to make us more effective culinary-wise and prep-wise, which sets us up to be successful consistently in the front line and the digital make line. I've discussed these things where we’re also experimenting with AI and vision to ensure that our teams receive the right support. I’m really excited about all the things we have in the pipeline.

That's great. Jack, congratulations.

Thanks, John.

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

Great. Thank you. Just like everyone else, congrats to both Jack and Adam. Jack, what a ride it's been. Jack, curious just with the guidance, why keep the mid-single-digit part just given the blowout from 2Q as well as the fact that it sounds like July spotty but around that 6% trend. That mid-single-digit piece suggests a pretty wide range of outcomes for the back half of the year and implies some deceleration potentially coming. Can you just talk more about the guidance philosophy?

Yes, I mean, there are two things going on. One is, as we said, since the pandemic, the summer months have become more difficult to predict. In the first year, going back to school and then leaving school was very, very different. Last year, vacations pulled forward. This year, vacations were pulled forward again and seem to have stepped up. So, there's difficulty in predicting seasonality. The other thing to keep in mind is we have 300 basis points of pricing rolling off. What we hope to achieve is, in a couple of quarters, we might discuss how the guidance ended up being somewhat on the conservative side. For now, with everything that’s going on, whether it’s seasonality or a greater impact on the consumer, we think this is the right guidance level. Our intent is to give you more granularity regarding the monthly outlook.

That's helpful. In past years, before the inflation issue, we saw about a 2% or 2.5% price increase taken in December. What's the likelihood we see that again next year? I know you're seeing some temporary margin headwinds. What are your thoughts on pricing levels for next year?

Well, that's a long way away. I assume you’re asking about December 2025, which is a long ways away. In this environment, we love the idea of getting through this year without a price increase. We would feel better about the timing of a price increase in an environment where the economy is robust and healthy. The consumer is feeling healthy, spending, and the restaurant industry is doing well. Transactions are accelerating, not decelerating. That’s a great environment to use inflation to take a modest increase. Our previous price increases have gone well, but we would not want to take that for granted. I think it would be really data-dependent.

The next question comes from Lauren Silberman with Deutsche Bank. Please go ahead.

Thanks a lot. I wanted to ask on the LTO strategy. You have one in spring, one in fall. It seems like you generally comp the LTO comp quite consistently. What enables you to keep growing LTOs year-over-year incidence rates? Do you tend to see during the periods of LTOs that comps actually accelerate even though it's off a higher base?

Yes, so the good news is we have a nice mix with our menu news of items that we've done in the past, as well as completely new menu items. We've demonstrated that when we go back to something like Chicken Al Pastor or Carne Asada, we can talk about it in a much more exciting way than we did the original time because we have learned some things on it. We execute better. Our teams are familiar with the execution. Great operational execution amplifies all these initiatives. If we have terrific throughput and culinary deployment, it enhances the guest experience and drives in more customers and transactions. It’s a combination of stronger operations than maybe the last time we executed this program combined with better-informed marketing programs.

Great. Thanks. If I could just do a quick follow-up on the Q3 guide. I understand there's a lot of noise, but can we safely assume that the 25% restaurant-level margin guide implies about a 6% underlying comp for the quarter?

That's a fair assumption. Yes, you're in the ballpark.

The next question comes from Jon Tower with Citi. Please go ahead.

Great. Thanks for taking the questions, and congrats, Jack and Adam. I guess just a quick follow-up and then a question. First, you mentioned the generous portion efforts you're implementing. Are you doing anything to communicate that to the consumer beyond what you’ve already done on social media? Also, any change in consumer behavior in California you’re seeing at your stores or perhaps more broadly across the industry?

Part of the reason we relooked at our execution was the feedback we received on portion sizes. We always felt that the key equity of Chipotle is our generous portion sizes. We wanted to ensure we deliver uniformly across our restaurants. We've identified about 10% or more of restaurants that needed retraining and re-coaching to align with the standards we expect. We have communicated to the entire system. I’m already seeing it in social media, where people are commenting positively on the burritos and bowls they’re getting. I think this word-of-mouth marketing is powerful. For 90% of our restaurants, they're doing business as usual, so I don’t want this to overshadow the fact that this was about doubling down on 10% of the system that needed focused training.

Regarding California, what we've observed is really across the entire state. We have seen a step-down in the industry and individual data points within specific restaurants. We've noted that when individual restaurants experience a pullback in spending, it doesn’t correlate with the significant price increase. The general trend indicates a macro impact of lower spending in restaurants. Unfortunately, we raised prices by 100 basis points and observed a resistance we typically wouldn't see otherwise, meaning we saw a pullback that equaled the impact of the menu price increase.

Got it. Thanks for taking the questions.

Sure.

The next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Thanks. Yes. Good afternoon, and Jack and Adam, congratulations as well. The Barbacoa marketing initiative, could you comment on that? Was it a material driver? Did people respond as you expected? Are there other opportunities to do that sort of thing?

Yes, look, that was really effective. I think the marketing team did a great job of informing people of a great product we have on our menu all the time. As a result, we saw incidents go up. I think it’s something we'll revisit again in the future. We have another hidden gem with Carnitas that we’ll evaluate as well. If it worked really well, you will probably see us do that again.

Okay, great. As for your comments on automation and some of the initiatives you mentioned, how fast do you think some of those will materialize? When should we expect to see it reflect in terms of margin upside?

Yes. I think with any good portfolio of ideas, we have short-term, medium-term, and long-term initiatives. Some of those can happen on much faster timelines, while others take a little longer. What I love about the stage-gate process is it doesn’t slow things down; it ensures we don’t have unintended consequences. We are informed as we roll things out. Some things can happen in the near term, while others take longer to show results, but it all blends together very nicely.

The next question comes from Danilo Gargiulo with Bernstein. Please go ahead.

Thank you. Brian, last time we discussed, you were talking about throughput that was in the mid-20s. Where do you stand today? Can you help us understand the major catalysts for accelerating throughput from here?

Yes, sure. We saw our biggest improvement in throughput during the month of April, which was great. We continue to see strong execution. The key piece that will push throughput forward even further is proper deployment. If we achieve the Expo number at a higher percentage, that position is a significant driver of throughput gains. I'm optimistic we'll improve from 50% to even higher. I aim to move from the mid-20s to the high-20s in the not-too-distant future.

Great. Can you provide an update on the restaurant-level margins and demand that you’re seeing in European markets? You’re making some bold investments over there. When do you think it’ll be realistic to expect an acceleration in units in Europe?

Yes, I'm really excited about the progress our team has made in Europe in a short time. They have implemented many of the tools used in the U.S. I believe managing food, supply chain, and culinary has greatly improved. As a result, we’re seeing nice improvements in both top line and bottom line. I'm optimistic we’ll prove these markets are investable to accelerate growth down the road, similar to what we’ve seen in Canada.

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

Thanks and congratulations Jack and Adam. I just wanted to ask, Brian, do you see any signs that the increases in value promotions by the QSR chains have had any impact on the company's results?

We really haven't noticed any impact. Our data indicates that we’re gaining market share. The brand metrics have continued to strengthen. Our value proposition remains strong. When I connect all the dots—market share gains, strength in the brand, and solid operational execution—it appears these promotions are not affecting our business at this moment. In a tougher environment, we've historically seen Chipotle as one of the last impacted and one of the first to recover. We are focused on our operational model. I believe it is resonating with customers.

That's helpful. Just as a follow-up, you talked a lot about product innovation, and that’s been successful. One of the factors impacting April sales was the marketing activation event. Can you help us understand how impactful these events can be and whether the company would consider using them more frequently in a tougher consumer spending environment?

Yes, look, it's a great question. This is the power of our digital marketing and consumer database, combined with clever marketing moments like National Burrito Day and National Avocado Day. We can turn on block mode and have analytics in place to leverage unique opportunities that resonate with the Chipotle customer. You'll see us use this strategy moving forward. The strength of our loyalty program combined with an excellent marketing team provides us an advantage. All right, thank you. Thanks, everyone, for all the questions. Again, I want to recognize Mr. Jack Hartung for having the privilege to work with him, along with the tremendous gratitude from everyone involved with Chipotle. Thank you again, Jack. We’re excited for Adam to step into the CFO role, and Jamie McConnell stepping up into her Chief Accounting role. Terrific leaders under Jack's guidance who will have opportunities to contribute even more to our great brand. It was an outstanding quarter, and I couldn't be prouder of what we accomplished. Achieving 8% transaction growth in any environment is special. It’s a testament to our operations, marketing, and digital efforts. The brand metrics have never been better, and our value proposition is strong. We have ups and downs ahead, but a strong brand and organization set us up for success. I look forward to finishing the year strong.

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