Chipotle CFO: we don’t plan on taking anymore price increases

Yahoo Finance’s Myles Udland, Brian Sozzi, and Julie Hyman speak with Chipotle CFO, Jack Hartung, about the company’s earnings beat.

Video transcript

JACK HARTUNG: Yeah, listen, we're about to compare, to your point, to some historic low comps in the industry, and certainly for Chipotle as well. We're really pleased with how we performed in the first quarter. Our comps were up 17.2%. But importantly, and I think this is the way we're going to have to look at restaurant comps this year. On a two-year basis, we're up 21%. So we just started to compare it to the softer numbers of last March. But if you go back to 2019, we're up 21% from that. And so that's a two-year double digit comp, effectively. We're really pleased with that.

Our margins hit the highest margins they've been at for a number of years. We opened up 40 restaurants, which is right on pace for us open the 200 that we said we're going to open up during the year. And about 2/3 of those were Chipotle. So everything that we would hope to happen in the quarter happened. And it gives us a lot of optimism for where we go from here.

BRIAN SOZZI: Jack, you heard us just talking about airlines. And business travel has not come back yet. But it sounded like on your earnings call, your C-suite is back out traveling a little bit, visiting the restaurants. What are you seeing? And then secondarily, do you anticipate, as a management team, being back on the road more aggressively in the months ahead?

JACK HARTUNG: Yeah. You know, there's certain travel that you really have to do when you can do it. And that's what's happening. For example, you can't do a Zoom call to see what's going on in a restaurant. You can't walk into a restaurant and check the operations and make sure that, for example, quesadillas are being made properly and that the Chipotlane is working the way it needs to. That has to be done face-to-face. You need to visit suppliers. You need to visit farms. There are things like that that when we felt like it was safe-- and it's happening, as the vaccine is rolling out, it's safer for some of our folks to travel-- that's what's happening.

What's not returning is basically meetings. You know, we're not flying across the country to get into a conference room, either in an office or a hotel, to have meetings. Those still can be done through Zoom. Those are the ones that are still being done through Zoom. And I think really, even when things open up, it's not the most efficient thing to do is to jump on a plane, fly across the country for a two-hour meeting. So I think actually when things really totally open up, I think we'll be more efficient and, I think, more mindful of which travel we take. Going to restaurants, going to suppliers, those have to be done in person. I think other meetings we could do a lot more efficiently through Zoom or other calls.

JULIE HYMAN: Hey, Jack. It's Julie here. When you fly out to visit those suppliers, what are they telling you about how persistent cost increases are going to be for things like avocados, for example, but other stuff that you guys source as well? And then as a result, how persistent are your price increases going to be? Are they going to be sticky, or once they go up, do they tend to ever come back down?

JACK HARTUNG: Yeah. Yeah, so in our case, with our basket of goods, the one item we are seeing some pressure in the next quarter or two is with avocados. But I wouldn't say it's got anything to do with the pandemic or the reopening. It's more about seasonally. We have to shift-- avocados shift from, this time of year, from South America to mostly California and then into Mexico. And this also is a time when the demand for avocados and guacamole increases. So there's always pressure about this time of year every single year. So that's kind of normal.

The rest of our basket looks like it's going to be pretty benign over the next couple of quarters. The thing nobody can predict, though, our suppliers can't, we can't, is what is the reopening going to look like? What's going to happen to grocery? What's going to happen to full service restaurants? So there might be some kind of a supply demand imbalance for some period of time. But right now, it looks like, from our basket of goods, it looks like everything looks pretty good.

We don't plan on taking any more price increases, Julie. We took a small couple percent price increase at the end of last year. That's to cover normal kind of commodity inflation, labor inflation. The only thing we have been doing is we've been increasing prices a little bit at a time with our delivery. Delivery's a very expensive channel. And so we've been bearing most of those costs, and we've been passing some of those on to our customers. And I'll tell you, the customers that want that delivery experience, that premium convenience, they will pay for that delivery when they don't want to leave their office or home.

MYLES UDLAND: You know, Jack, staying on costs, you had some really interesting commentary on the call in response to a question about labor costs and where you guys are at with your average hourly earning and how an increase in that could impact things going forward, but I think ultimately would likely hit margins maybe less than you otherwise, some folks might model out.

JACK HARTUNG: Yeah, I think that's right. You know, we already pay an average of $12 to $13. So when people talk about wages in the restaurant industry or across all hourly folks being in that mid teens, we're not that far away from that. And if wages move up, either because of a national minimum wage or just because of market pressures, we think we'll be in a better position than others.

We also have an economic model such that our margins are already very attractive. And if we do need to pass these along to our customers, we can do that. We can do it, I think, in a very modest way. For example, a 10% increase in labor rates would result in maybe a 2% increase in menu prices. So you're talking about at $8 burrito might now cost you $8.16. So we're not really that worried about it. It is something that if it hits everybody in the industry, really everyone's going to have to raise prices to a certain extent. And we think we're in a good position to do that.

BRIAN SOZZI: Jack, the new quesadilla launch seems to have gone well, but you're also now about to start market testing some new items. Anything you can share?

JACK HARTUNG: You know, we did test brisket. And nothing definitive right now, but that went really well. Customers love it. Operationally, it went really well also. So we don't have any specific plans for when brisket might be rolled out or offered on a national basis. But that's something that's in the pipeline.

We've got other things that our culinary team is working on. Nothing in particular to report right now. But in the summer and then into the fall, we'll be doing some additional tests. And so more to report at that time.

JULIE HYMAN: Mm, brisket. Jack, I wanted to ask you about the digital sales. I wanted to ask you about the digital sales. And basically, half of your customers now, or half of the orders now coming in are coming through digital channels. Is that the long-term number? And if so, what does that do to your costs? Because I know you talked on the call as well about the effect of pick-up, delivery, et cetera on the cost structure.

JACK HARTUNG: Yeah. I think digital for sure is here to stay. Whether it stays at 50 and maybe it softens a little bit before moving forward, but it certainly is not going to drop back down to 20%, which is where it was pre-pandemic. I don't think it even probably drops below like 45%. Because what we've seen, even as our dining rooms are reopening, digital is staying at this 50% or even slightly ahead of 50%.

What is happening, though, within the 50% of digital, we are seeing customers that are moving from delivery and then into order ahead. Our customers are finding that the order ahead experience is not only convenient and not only fast, but it's also very, very high value as well, because you're not paying those delivery prices. So I do think within digital, there will be that continued shift. But I think digital, our customers, when they have the occasion where they want the convenience and speed of a digital experience, they're going to go to that.

Now what's going to happen, which is going to be additive to our business, is the other occasion where they do want to sit down and they want to have lunch with family or they want to have a business lunch with folks and they want to go to Chipotle. We're going to see that dining room business come back as well. And that's why we're optimistic that our business really grows from here. We don't think it's going to be a shifting between channels. We think it's going to be additive.

MYLES UDLAND: All right. Jack Hartung is the CFO at Chipotle, a company out, big quarter last night. Jack, always good to get your thoughts. Thanks so much for hopping on this morning.