Chipotle Mexican Grill, Inc. (CMG) Q2 2023 Earnings Call
Chipotle Mexican Grill, Inc. (NYSE:CMG) Q2 2023 Earnings Conference Call July 26, 2023 4:30 PM ET
Company Participants
Cindy Olsen - Head of Investor Relations and Strategy
Brian Niccol - Chairman and Chief Executive Officer
Jack Hartung - Chief Financial officer and Chief Administrative Officer
Conference Call Participants
Andrew Charles - TD Cowan
David Tarantino - Baird
Sara Senatore - Bank of America
Danilo Gargiulo - Bernstein
David Palmer - Evercore ISI
John Ivankoe - JPMorgan
Brian Mullan - Piper Sandler
Chris O'Cull - Stifel
Jon Tower - Citi
Dennis Geiger - UBS
Brian Harbour - Morgan Stanley
Operator
Good afternoon, and welcome to the Chipotle Mexican Grill Second Quarter 2023 Results Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.
I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead.
Cindy Olsen
Hello, everyone, and welcome to our second quarter fiscal 2023 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com.
I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projections in the forward-looking statements. Please see the risk factors contained in our Annual Report on Form 10-K and in our Form 10-Q for a discussion of risks that may cause our actual results to vary from these forward-looking statements.
Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website.
We will start today's call with prepared remarks from Brian Niccol, Chairman and Chief Executive Officer; and Jack Hartung, Chief Financial and Administrative Officer, after which we will take your questions. Our entire Executive leadership team is available during the Q&A session.
And with that, I'll turn the call over to Brian.
Brian Niccol
Thanks, Cindy, and good afternoon, everyone. The strength in our business continued into the second quarter, driven by our focus on exceptional food and exceptional people, as well as the success of Chicken al Pastor.
For the quarter, sales grew 14% to reach $2.5 billion, driven by a 7.4% comp. In restaurant sales increased 16%, digital sales represented 38% of sales. Restaurant level margin was 27.5%, an increase of 230 basis points year-over-year. Adjusted diluted EPS was $12.65, representing 36% growth over last year, and we opened 47 new restaurants, including 40 Chipotlanes.
For the third quarter, we anticipate comps in the low to mid-single-digit range, driven by transaction growth, as we are rolling off of pricing. For the full year, we continue to anticipate mid to high-single-digit comps. Before reviewing our strategic priorities, I want to share a few organizational updates.
As a way of maintaining a healthy growth mindset, we proactively conducted an in-depth review of our business needs and organizational structure to ensure we can deliver on our aggressive growth goals for future growth. This resulted in investments in areas like development, digital marketing, and international expansion. At the same time, we also identified areas where we could better optimize our organizational structure, such as putting our end-to-end digital experience, including product design, analytics, and the customer journey under Kurt Garner, our Chief Customer and Technology Officer.
Additionally, we streamlined our strategic project management process to focus on key projects and to enable faster and more efficient decision-making. These changes will further support our five key strategies that will position us to win today while we grow our future, 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, making the brand visible, relevant, and loved to improve overall guest engagement. Number four, amplifying technology and innovation to drive growth and productivity at our restaurants and support centers. And number five, expanding access and convenience by accelerating new restaurant openings and laying the foundation for international expansion.
Starting with our restaurants. While Project Square One is wrapping up, we have made the decision to permanently embed the program within our training DNA. On a quarterly basis, our crew members will be retrained on key components, ensuring we are always focused on being brilliant at the basics and that we never lose sight of training and developing exceptional people and preparing and serving exceptional food.
Next quarter, we will reemphasize throughput and elevate our focus on proper deployment standards during peak periods, where we often only have three crew members on the front make line versus our minimum deployment of four. The fourth person, which is often the expediter, may leave the front line to help the digital make line. Our focus will be on coaching the expediter to stay on the front line and to bring together the items and in order and communicate them to the cashier as alleviating this bottleneck is critical for delivering great throughput.
Additionally, we believe we have an opportunity to better optimize our smarter pickup times and deployment of labor on the digital make line during peak periods. As you may remember, we began testing changes to the cadence of orders on the digital make line in several markets to see if we could improve throughput by eliminating the need to pull a crew member from front line to help the digital make line. The good news is that in these restaurants, we are seeing an improvement in throughput on the front line and an improvement in on time on the digital make line.
We will continue to test adjusting the cadence of orders on the digital make line at certain restaurants and roll out where we see the opportunity to improve the overall experience. We remain confident that balancing the deployment between the front and digital make lines along with continuous training and reps will further drive improvements in throughput. In fact, we have seen evidence this in certain restaurants.
I was recently in New York at Chipotle on 50th and Park and it was a great experience with delicious food and fast throughput on the front line compared to my experience at the same restaurant exactly a year ago. The improvement in throughput was certainly noticeable as the employment of labor between the front make line and the digital make line was more balanced.
Over the last year, the field leader responsible for this patch of restaurants in New York City worked with the GMs and crew members shoulder to shoulder on throughput fundamentals. During his regular restaurant visits, he also followed up with consistent feedback like reminding his restaurants to have an expo in position during peak periods. By having the proper deployment with an expo in place and the right balance between the front make line and the digital make line, throughput in his patch of restaurants improved by nearly five entrees in the peak 15 minutes as compared to the prior year.
His restaurants are also outcomping his region and the company average demonstrating throughput drives performance. This is the type of leader we want to develop; one that builds a strong team, runs world-class restaurants, ensures we serve exceptional food every day and inspires our teams to achieve great results. And this brings me to our world-class people leadership.
As part of our focus on developing our teams, we’ve relaunched Cultivate University for our newly promoted field leaders which is a three-day training program on the skills they need to truly excel in managing their patch of restaurants. This includes developing future leaders, the foundations of exceptional throughput and culinary, why it's critical to protect our economic model and a culture of accountability.
One of the most challenging transitions is from general manager managing one restaurant to field leader and managing around eight restaurants. Cultivate University is a program that will be offered each year to support our new field leaders as they make this transition to managing a $20 million business.
We remain committed to hiring and developing the best people to work at Chipotle, through our competitive wages, industry-leading benefits, and tremendous growth opportunity. In fact, we are on track to surpass our 22,000 promotions from last year and create over 7,000 new jobs with our restaurants anticipated to open in 2023.
We are also relaunching our successful and long-running behind-the-foil ad campaign. This campaign provides unfiltered and emotional testimonials from our team members about the impact Chipotle has had on their lives, as well as it glimpses into our daily preparation using our real ingredients and classic culinary techniques, a key differentiator for Chipotle. What better way to make the brand more visible, more relevant, and more loved than to feature our talented restaurant team members preparing exceptional food?
And speaking of exceptional food, our menu innovation has been outstanding this year. Chicken al Pastor has proven to be a popular LTO with one in five transactions, including the new protein. It is boosting transactions with a strong repeat and is attracting new customers to Chipotle. It also delivered the highest positive social sentiment of any new menu introduction, and importantly, was simple for our teams to execute, which resulted in a win all around. As Chicken al Pastor wraps up in late August, we have a planned new menu item for later in the quarter.
Our rewards program is another way we aim to drive frequency within our existing customer base, as our reward members come more often and spend more than non-rewards members. We’ve launched Freepotle earlier this year, which was designed to deliver a strong value proposition and attract new members with 10 free rewards dropped into our members' accounts throughout the year.
Freepotle has been successful in driving enrollments in the first half of the year as we surpassed 35 million reward members. With each strategic Freepotle drop, we are learning more about our customers' behaviors and utilizing those learnings to personalize future offers. We will continue to look for creative ways to drive enrollment and improve engagement in our rewards program.
In traditional media, we remain top of mind at sporting events as we leverage the basketball playoffs as a high-profile opportunity to spotlight the Chipotle brand, and through our NHL partnership, our Chipotle logo was featured on the ice during the Stanley Cup playoffs. Additionally, the return of the popular Chipotle Hockey Jersey Bogo Day had the highest participation in the history of the program.
Chipotle's ingredients continue to power many of the top male and female athletes on and off the field. Through our Real Food for Real Athletes campaign, we have showcased the inspiring journeys of athletes across all levels of sports and how Chipotle can help them perform their best by providing proper nutrition. Partnering with athletes and teams along with traditional media around big sporting events has been an authentic and successful way to connect the brand to some of our biggest fans.
Shifting to technology and innovation in our restaurants. First, I wanted to provide an update on the benefits we have seen from the dual-sided grill, which we discussed last quarter. The new grill can cook the chicken in under four minutes versus 12 minutes on the plancha and can cook the steak in under one minute versus four minutes on the plancha. This allows for a faster recovery of freshly grilled chicken and steak, resulting in more opportunity to remain in stock during peak periods, as well as the ability to cook smaller batches, ensuring superior culinary.
Additionally, the grill allows for more consistent execution with the same sear and char and maintains better moisture, resulting in juicier chicken and steak with less waste.
Finally, it takes one of the most complex positions in our restaurants and significantly improves the learning curve, making it a more desirable role for our teams. The feedback from our guests and our teams continues to be very positive, and we recently completed the rollout of the dual-sided grill into 10 high volume locations as the next step in the stage gate process.
We also began to do a broader rollout of our new third pan rice cookers, which eliminates our large rice pots and cooks the rice in our third pans that you see on the line. This streamlines the rice cooking process while delivering fresh, high-quality rice that's cooked perfectly to our standards. It can also make single batches, allowing for a faster recovery time, less waste during non-peak periods, and the ability to make white and brown rice at the same time. We have rolled this out to our new restaurants with plans to add it to another 200 existing restaurants this year.
And as part of our Cultivate Next fund, we recently invested in [Veedu], and together we are exploring collaborative robotics that will drive efficiencies and [easy paying] points for our employees. One device that we are in the process of developing cuts, cores, and peels an avocado. It's called the autocado. This co-botic prototype saves time and eliminates a less favorable task, but still allows our teams to hand mash our signature guac. As you can see, all of these initiatives have a common goal, which is to improve the in-restaurant experience for our teams and our guests while maintaining or improving upon our high culinary standards.
I'm really proud of the work the teams are doing to leverage automation, technology, and artificial intelligence, and it was nice to be recognized as one of Time magazine's most innovative companies last month.
Our final key strategy is to expand access and convenience. I'm thrilled to share the addition of Stephen Piacentini as our new Chief Development Officer. Stephen has extensive experience as some of the largest restaurant brands, and will lead our very talented and tenured development team as we look to reach 7,000 restaurants over time in North America. This year, we continue to target 255 to 285 new restaurants with over 80% including a Chipotle, and in fact, this quarter, we opened our 600th Chipotle.
In Canada, performance remains strong with 34 locations, and we are on track to add about 10 new restaurants this year. We had our highest opening day ever in Canada this past quarter, which is a testament to the increasing excitement around the brand and our growth opportunity in the country. We also believe there's even more opportunity on the 7,000 restaurants we were targeting longer term in North America, and we were laying the foundation for further international growth.
For our recent reorganization, we added resources to our European operations, including bringing over one of our top U.S. operators to Europe to drive productivity and better align our operations with the U.S. We look forward to continued progress in Europe over the coming quarters as we aim to set up the region for long-term growth.
And finally, we’ve recently announced our first ever development agreement with the Alshaya Group to open restaurants in the Middle East, which will further accelerate our international efforts. The Alshaya Group has successfully expanded many of the largest global brands into the Middle East, North Africa, and Europe, and they plan to open our first restaurants in Kuwait and United Arab Emirates in 2024.
We're excited to offer guests in the Middle East our responsibly sourced, classically cooked real food and look forward to furthering our purpose to cultivate a better world in this new territory.
In closing, I want to thank our 114,000 employees for all their hard work to reestablish Chipotle standards of excellence in culture of accountability. Earlier this month, Chipotle celebrated its 30th anniversary of the opening of the first Chipotle restaurant in Denver, Colorado. What makes Chipotle special and has driven our success over the last 30 years is our people, our purpose of cultivating a better world, and our focus on delivering exceptional food. Our culinary, using the highest quality ingredients and classic cooking techniques, makes our food delicious.
Our customization, convenience and speed are differentiators and our value is simply tremendous. This has resulted in an industry-leading brand with industry-leading economics and we still have a long runway for growth. We are well positioned to win today while we grow our future over the next 30 years.
And with that, I will turn it over to Jack.
Jack Hartung
Thanks, Brian, and good afternoon, everyone. Sales in the second quarter grew 14% year-over-year to reach $2.5 billion as comp sales grew 7.4% with over 4% transaction growth. For the third quarter, we anticipate comps in a low to mid-single-digit range driven by transaction growth as we roll off nearly 500 basis points of pricing in early August. We continue to forecast full-year comps in the mid to high single-digit range. Restaurant level margin of 27.5% increased about 230 basis points compared to last year and earnings per share adjusted for unusual items was $12.65, representing 36% year-over-year growth.
The second quarter had unusual expenses related to corporate restructuring and corporate and restaurant asset impairments, including the closure of Pizzeria Locale. I'll now go through the key P&L line items beginning with cost of sales.
Cost of sales in the quarter were 29.4%, a decrease of about 100 basis points from last year. The benefit from last year's menu price increases and lower avocado prices were partially offset by elevated costs across the board, most notably in beef, tortillas, dairy, salsa beans, and rice.
For Q3, we expect our cost of sales to be around 30% due to higher beef and avocado prices. Our supply chain team has done a fantastic job at diversifying our avocado exposure, and in the third quarter, the majority of our avocados will come from Peru. While prices are higher than the very favorable levels in the second quarter, we are less impacted from the volatility in the Mexican avocado market.
Labor costs for the quarter were 24.3%, a decrease of about 50 basis points from last year. The benefit from sales leveraged is partially offset by wage inflation, and for Q3, we expect our labor costs to be around 25% reflecting continued labor inflation and seasonally lower sales.
Other operating costs for the quarter were 13.9%, a decrease of about 40 basis points from last year. This decrease was driven by sales leverage. Marketing and promo costs for the quarter were 2.4%, and in Q3, we expect marketing costs to step down to the low 2% range before stepping up in Q4 with a full year to come in right around 3%.
In Q3, other operating costs are expected to be in the mid 14% range. G&A for the quarter was $157 million on a gap basis, or $153 million on a non-gap basis, excluding $3.5 million related to corporate restructuring expenses. As Brian mentioned, we recently went through a review of our organization needs to assure we're well positioned to meet our long-term growth goals. G&A also includes $119 million in underlying G&A, $29 million related to non-cash stock compensation, and $5 million related to higher bonus accruals and payroll taxes on equity, investing, and exercises.
For Q3, we expect our underlying G&A to be around $125 million, and to grow slightly their efforts would make investments in technology and people to support ongoing growth. We anticipate stock comp will be around $31 million in Q3, although this amount could move up or down based on our performance.
We also expect to recognize about $4 million related to performance-based bonus accruals and payroll taxes on equity, investing, and exercises, bringing our anticipated total G&A and Q3 to around $160 million.
Appreciation for the quarter was $79 million at 3.1% of sales, and we expect depreciation to increase slightly each quarter as we continue to open more restaurants. Asset retirement stepped up to $16.2 million, which includes $8.5 million related to corporate and restaurant asset impairments, including the closure of Pizzeria Locale.
In the near term, we expect asset retirement to be around $8 million per quarter as we continue to prioritize the guest experience and focus on great ops. Our effective tax rate for Q2 was 23.8% due to an increase in tax benefits related to option exercises and equity investing. We continue to estimate our underlying effective tax rate will be in a 25% to 27% range, though it may vary each quarter based on discrete items. Our balance sheet remains strong as we enter the quarter with over $1.8 billion in cash, restricted cash, and investments with no debt.
During the second quarter, we repurchased $88 million of our stock at an average price of $1,937. At the end of the quarter, we had $295 million remaining under our share authorization program. We opened 47 new restaurants in the second quarter of which 40 had a chipotle and we remain on track to open between 255 and 285 new restaurants this year with at least 80% including Chipotle. Our development timeline remains extended, but our pipeline remains strong, and we expect to move toward the high end of the 8% to 10% openings range once these timeline challenges subside.
In closing, when I joined Chipotle, we were approaching our 10th anniversary with just over 200 restaurants. We were determined to change the way people think about and eat fast food by preparing delicious, fresh food using classic cooking techniques, sustainably raised, wholesome ingredients, and serving it quickly.
Brian mentioned Chipotle celebrated its 30th anniversary earlier this month, and those fundamental values that made Chipotle successful are still deeply ingrained in our brand. Along the way, we've invested in food with integrity, expanded access and convenience through our digital channel, Chipotle's an international expansion, and continue to innovate within our restaurants to improve the overall experience. We still have a long growth runway ahead, and a talented team excited to continue to build, expand, and evolve our brand and our purpose of cultivating a better world over the next 30 years.
With that, we're happy to take your questions.
Question-and-Answer Session
Operator
We will now begin the question and answer session. [Operator Instructions] Our first question comes from Andrew Charles from TD Cowan. Please go ahead.
Andrew Charles
Great, thanks. I wanted to talk about pricing plans in the second half, just given inflation of the beef and avocado categories. What I'm looking to better understand is that is a price increase on the table for December when you historically took price in 2018 through ‘21, or does the resumption of student payments on September 1 that could weigh on restaurant industry spending, leads you to want to bear potentially weight on that and see how that plays out?
Brian Niccol
Yes Andrew, this is Brian. Our approach on pricing has been obviously, it's a lever that we will pull as kind of the last thing we like to pull, but I think we've proven time and time again that the brand is very strong, the value proposition is very strong, and we have that pricing power to use. Obviously, I think you heard Jack's comments. We're seeing some inflationary pressure both on the labor line and in some of the food areas when you pull on avocados. It's something that we're looking hard at, and as we get closer to that fourth quarter, we'll make a decision on exactly what we want to do on the pricing front. I don't know if you want to add anything there, Jack.
Jack Hartung
No, I think Brian summarized it well, but we've had underlying inflation in the last two quarters, but we've had benefits from lower cost avocados, that's offset that, and then also we've got a benefit because Chicken al Pastor has really shifted some of our customers from the more expensive beef into the less expensive chicken, that's been a benefit as well. As those benefits subside, that's when the inflation will flow through, and that's where we'll have a clear view of the inflation impact. We will, as you suggested, look at our customer demand transaction patterns as well before we make any final decisions on price.
Andrew Charles
Okay, that's helpful. Then just on the 3Q guidance, I know that you guys call it out that you're seeing about five-year base points of price that rolls off in August. Can you just comment as well about the lower income consumer? I know last quarter you guys were talking about sequentially. They were seeing some strength in that consumer. I just wanted to know what you guys have seen in recent months to relate to that consumer.
Brian Niccol
Yes, I mean, this is one of the elements of, I guess, the consumer demonstrating how resilient they are. Both the lower income consumer and kind of our higher income consumer are showing really good strength. I think that's why we had such a strong traffic performance in the quarter, and we continue to exit that quarter with really healthy traffic or transaction trends. So we're not seeing any weakness in the lower income consumer. If anything, they've continued to improve, and we're feeling really good about the value proposition. We're providing all income levels.
Andrew Charles
Very helpful. Thanks, guys.
Operator
The next question comes from David Tarantino from Baird. Please go ahead.
David Tarantino
Hi. Good afternoon. First question, I just want to clarify how you're thinking about the third quarter from a comps’ perspective. And maybe, Jack, if you can just talk about the underlying traffic trend you're assuming in the third quarter relative to what you saw in the second quarter and whether that would imply any slowdown versus what you've been running?
Jack Hartung
Yes, David, the components of our guidance just give kind of general ranges, and the menu price increase remaining after the August from last year rolls off will be called in that 2.5%, 2.6% range. We're still expecting positive transactions throughout the quarter. In fact, we expect the transactions will probably be in the plus 3% to plus 3.5% range, somewhere in that range. We're still seeing a little bit of a mixed impact. Our group size continues to normalize as people are returning to work, and so there's less of a channel shift between digital and in restaurant ordering, but we are seeing that the group size is lowering. So this is the hardest part to predict, but we're assuming that somewhere in that two-ish range, we'll see a negative mix because the group size, somewhere in that 2% range. So those are the general components we're thinking about.
David Tarantino
And Jack, when you seasonally adjust the trends, would it imply a slowdown or is this more of the same of what you delivered in the second quarter? I just want to make sure I understand whether you're seeing a slowdown in traffic.
Jack Hartung
Yes, so there is a subtle seasonality shift that we're seeing, David. We saw in early June as schools were letting out and as people started traveling more, we saw a little bit of an inflection point in transactions. We also, when we stratified our restaurants, we did see that restaurants in more touristy areas were benefiting, restaurants in non-touristy areas were a little bit softer. And just recently, within the last week, week and a half or so, we're starting to see some normalization of that.
So we're still reading through that. We assume there's not going to be a full bounce back in the fourth quarter, but we did assume the normalization, or the rest of the third quarter, but we did assume that the normalization that we're seeing last week or so, that some of that will continue. So we're still trying to do a read-through, but it looks like there was maybe a little early vacation taking this year that didn't necessarily happen last year.
David Tarantino
Great. Thank you.
Operator
The next question comes from Sara Senatore from Bank of America. Please go ahead.
Sara Senatore
Great. Thank you. I just wanted to talk about throughput in the context of that sounds like the traffic's fairly stable. You talked about new equipment. I understand that cooktimes are down pretty dramatically. Could you translate that into, some sort of throughput measure and kind of what you're seeing both presently and then what the opportunity is, I guess, as we think about throughput, the capacity is one side, but then making sure that, you have enough demand there to move the customers through and I'm trying to sort of understand the dynamics there. So anything you can tell us about throughput now and what you're seeing with the new equipment? And then I'll just have a quick follow-up.
Brian Niccol
Yes, sure. So we've made some really good progress on the throughput side, but we're not all the way to where we want to be. I think I mentioned this earlier, where the good news is we now consistently probably have three people on the front line, but really what that needs to be is four people in order for us to achieve kind of our pillars of great throughput. And that's probably why we're retrenching again on throughput, kind of going forward here. But as I mentioned in my comments earlier, in the places where we've seen restaurants or patches adopts I'll call great throughput execution and you're definitely seeing a move on to the two three to five transactions in their best 15 minutes. So, we know it's out there, we just seem to do it as an entire enterprise and we're focused on that piece going forward.
As it relates to equipment and other tools to help us become even I say more efficient and faster, the double-sided grills are now in 10 restaurants and so not obviously across the system by any means but rather just move into our stage gate process that just enabled cooking times to dramatically decrease. So, checking goes from 12 minutes to three to four minutes, stage goes from three or four minutes to a minute. It makes the position a lot easier, it makes the culinary much more consistent and then obviously it gives us much more capacity on the plancha. So, that's where we are with that.
And then things like avocado and raisin very much still into pilot phase meaning like prototype phase but we're pretty optimistic about what both of those can do for us but we're not in any restaurants yet with either one of those items.
Sara Senatore
And then just to sort of clarify as to follow-up is even through or again throughput and we've seen some really nice improvement in the last couple of quarters and transaction and traffic growth here it sounds like that anticipation as that'll be fairly stable. I understand the comparisons I entered that like would you expect a kind of another step change in traffic as some of what you're talking about best practices sort of disseminate across the system again just to understand how to translate throughput.
Brian Niccol
Yes. No, absolutely. I mean I think there is a real opportunity for and not only the continued strength in traffic but a step up in traffic. As we get better at executing the tortilla is a throughput in, now that's why I wanted to get that example of the one restaurant in New York. That restaurant's outperforming a region, that's doing a really nice job. And the reason is because they are executing every element of our throughput tilla's with excellence. And so, as that happens more consistently across more patches or more restaurants. We anticipate we're going to see increases both in traffic and total comp.
So, obviously that comes with time, we're dealing with a 110,000 employees that need to learn what great throughput is and what it looks like. But the teams making great progress, we're focused on it and I'm confident we're going to need a culture of throughput building this organization.
Sara Senatore
Great. Thank you, very much.
Operator
The next question comes from Danilo Gargiulo of Bernstein. Please go ahead.
Danilo Gargiulo
Thank you. So, with the low-to-mid single-digit expected comp since 3Q, what is giving you the confidence to meaningfully accelerate a trajectory in 4Q to meet the full-year guidance, especially as we think about the 4Q compatible sales potentially becoming more from traffic versus from versus from pricing action. What actions are you contemplating to sustain the momentum?
Brian Niccol
Yes. I mean, obviously we're going to stay first and foremost on enhancing our operational performance as it relates to throughput. So, that will be a piece of the puzzle. We've got a new menu item that we'll be bringing out after we finish the run on Chicken Al Pastor and then obviously role will evaluate what component and pricing it has in the fourth quarter as well given some of the inflationary pressures we're seeing. So, you line those things up plus the strength of the trend that we already have and we feel really good about our full-year guidance.
Danilo Gargiulo
Thank you. And maybe beyond this year or thinking a bit more multi-year on a multi-year basis, historically you have it secured it a more constant international roll out across Canada and Europe. So, what drove you to on the statement sizing and specifically why are you starting with the Middle East. So, can we expect a combination of co-op and concise mixing international market or is this more in a monetary step to fine tune your international expansion plans going forward?
Jack Hartung
Yes. So, you can probably anticipate more of a mix. We still believe company ownership in Western Europe makes a lot of sense. We just had the opportunity to visit with the team there and in the last week or so, and we're making great progress in London, Frankfurt, and obviously Paris. I mean, as we mentioned in the call too, Canada continues to really perform. So, we're going to fill 10 new restaurants on a base of 34. So, you can see how we're stepping up the development there and the team they face to a great job.
As it relates to the Middle East and the partnership with Alshaya. As we looked around the world, we see there are certain regions where it's like hey this makes a lot of sense for us to partner as opposed to try and go at it on our own. The Middle East is that region, Chipotle as a concept based on the work we've done, we believe it will resonate and perform really well. And then, when we have the opportunity to partner with Alshaya which we believe is one of the best operators in the region, we thought this is a great opportunity for us to experience what it's like to work with a great operator in more of a franchise environment.
So, we're optimistic, we're excited about getting those restaurants opened in Dubai, and Kuwait, and we look forward to a really successful partnership with them. But we're really excited about where international can go both from a standpoint of partnerships and then company ownership.
Operator
The next question comes from David Palmer from Evercore ISI. Please go ahead.
David Palmer
Thanks. First I wanted to follow-up on the double sided growth question and then touch on the personalized marketing. On the double sided growth, you mentioned you're in 10 stores now and that it's maybe a third of the cook times. What is the pace that you anticipate on rolling that out and in as far as the metrics that we would focus on, what do you think ultimately would be the benefit to sales and profit from those growth?
Brian Niccol
So, look we're obviously really excited about what we're already seeing just in the 10 restaurants both from a standpoint of yield, quality of culinary and then the team's ability to execute over and over again. So, the excitement around the new cooking equipment is terrific you see because that means we're going to get the execution that we want. To rule this out this product a year plus project, and the good news is the manufacturers have the capability to scale to what we need once we give them the green line. So, we're pretty excited about this because obviously the bigger the volumes get with the amount of transactions that we're doing, the fact that we now have even more capacity on the plancha, is a terrific outcome.
And then it turns one of the harder jobs to train into one of the easiest jobs to train. And when the culinary is consistent, people get great chicken or steak, we know they love to pull in they come back. So, and we're still dialing through all the components of the puts and calls on this but it looks very promising based on where we are in the first 10 stores.
David Palmer
Thanks for that. And my first one is marketing. I think you recently launched that this seems to be something that would have a long runway to it where you could have different iteration and ultimately having AI be a component to it. Are we already seeing anything different from personalized marketing, where do you see this going and maybe give us a sense of how this could be impacting your business going forward? Thanks.
Brian Niccol
Yes, sure. I mean, look, probably the most visible spot is just in the app with the suggestive sale. You'll see already some personalization on what we're offering and as far as recommendations go to add the order based on your history with the brand, and then obviously this goes all the way into the cohorts and the journeys that then we create. And we believe you do this across our 35 million rewards customers and now has meaningful scale where the customization results in loyalty that results in obviously additional sale. So, the most visible space, probably you'll see it in the app at the web, and then it's probably more new launched in how we communicate awesomely communicate with you and what exactly we say to you.
But all the experiments we're running, we're continuing to see nice positive outcomes with every iteration that we do. The next big step for us is to roll this out in a way where it covers a lot more people at much more meaningful scale so that you feel it on the entire enterprise.
David Palmer
All right. Thank you.
Operator
The next question comes from John Ivankoe from JPMorgan. Please go ahead.
John Ivankoe
Hi, thank you. I actually want to meet with a comment about excess capacity on the planche. It's actually an interesting point. Do you think that it significantly broadens additional product opportunities that you totally can do? I mean that, double-sided grill takes care that, the chicken and the steak and presumably, maybe the planche can be used for something different than what you're already selling. How big of an opportunity is that in your mind?
Brian Niccol
I mean, look, we always want to make sure we execute the menu with excellence. And we like the cadence that we're doing as far as new menu items go right now. But yes, it definitely frees up the capacity, which then allows us to evaluate how we do new menu items and maybe how long we want to keep certain menu items on. And so that is a big unlock for us. I'd say the biggest benefit, though is and when the restaurant opens at 10.30, you don't have to start cooking chicken at eight in the morning. Because now we can be ready for that lunch business closer to the timing of lunch because it just takes a lot less time to cook all the chicken to be prepared. It also allows us to recover a lot faster.
So in the event, you have a really big, lunch push at 11, you have the ability to recover for that lunch push that might be coming at 12. And so these are the things that I think are going to be really powerful for us going forward. And then also the simplicity at which the cooking creates for the team members is a big unlock too because then the culinary is just that much better every single time.
John Ivankoe
Yes, I got it. And I agree in experience. Let me turn it to another question. You've been alluding to, including on this call, upward bias to the 7000 North American store target. I guess, are you prepared to start thinking about numbers and there's a thousands at thousands. And I want to ask it in a question some years ago. I remember, I don't remember exactly when it was, it used to be discussed that Chipotle would be a $10 billion brand. Well, here we are in '23 and all likelihood it will be a $10 billion brand. Sorry for that. If you were to just look at the overall North American opportunity today, and I guess to some extent free the economy, how big of a brand do you think Chipotle could be just based on what you know about, the North American consumer market today in terms of how big we could expand from here?
Brian Niccol
Yes, sure. I mean, look, we're not ready to change the number yet, but the good news is the economics of every new restaurant that we open continue to be just terrific economics, where hopefully we'll get closer to the higher end of that age to 10% once kind of we work through a little bit of the bottleneck that we have on development. But I believe we're going to continue to grow the four wall revenue and then obviously the economics that come with it.
So without even moving the $7,000 store count, if you all of a sudden find yourself at $3 million, $4 million average unit volumes, you're in that $20 to $28 billion range. So lots of growth in front of us. And that's without having to be really all that aggressive. That is just executing the plan we've been talking about. And I think as long as Chipotle stays focused on great culinary, great throughput, developing team members so that we're ready to go when we open new restaurants, the number will grow. I think Jack told me when the company first went public, what was the number Jack?
Jack Hartung
3000.
Brian Niccol
We said we were going to maybe do 3000 restaurants. So here we are. We're at 3000 restaurants. I'm sure as we continue to grow both the AUVs will go up and the store council will go up. But yes, it's pretty fun to think about we're closing it on $10 billion and then I'm sure we'll be talking about $20 billion and then probably from there we'll be talking about $30 billion. So I don't see a cap on this business anytime soon.
John Ivankoe
Excellent. Thank you so much.
Operator
The next question comes from Brian Mullan from Piper Sandler. Please go ahead.
Brian Mullan
Hey, thank you. Just a question on automation, robotics in general. Hypothetically, if all your combined efforts were to yield a couple hundred base points of margin over, the next many number of years, are you inclined to want to let that all fall to the bottom line? Or perhaps would you want to let some of it fall to the bottom line and then spun the consumer value proposition with the rest? Maybe it's too early to say just wondering if you're already having those questions internally, even if it's just philosophical right now.
Brian Niccol
Yes, look, I mean, obviously the good news for us is. We aren't capital constrained to invest in continuing to drive the Chipotle business, both in growth and in value as it relates to giving a great experience for a customer and a great experience for a team member. So obviously as we get closer, we'll have a better idea of how much of it falls to the bottom line. But, right now I'm hoping a lot of it falls to the bottom line. But we'll know a lot more as we get closer to when we roll it out.
Brian Mullan
Thank you.
Operator
The next question comes from Chris O'Cull from Stifel. Please go ahead.
Chris O'Cull
Hi, thanks for taking the question. Brian, it sounds like the hyphen make line is close to that testing stage. So, can you help us understand how long you expect it to be in that phase and maybe walk through what the validation stage could look like? I'm also curious if you could describe what KPI is the team's monitoring to determine the success of that make line?
Brian Niccol
Yes, sure. So we have an inter-cultivate center right now. It's fun to see it actually producing bulls and the team has done a phenomenal job of taking this from, a concept to a prototype to now a working prototype. We've learned a lot. We're getting ready to figure out what the next gen version on this is, but it looks really promising. Obviously, key components of this are how fast can it do bulls, per 10 minutes, how accurate can it do the bulls, and then obviously our ability to expedite those bulls, meaning getting it to the customer in the correct order.
So we think assuming the prototype continues to evolve and grow the way it has demonstrated its growth over time, we'll have something to be putting into restaurants here in the next 12 to 18 months. So optimistic about where this gets to, but it's one thing to run it in our cultivate center. It's another thing to run it in a restaurant. And until we run it in a restaurant, it's hard to really talk about the benefits or what the timing is of it. But conceptually, and what it looks like right now, still very promising a top priority to figure out how we get this thing into a restaurant sooner rather than later.
Chris O'Cull
Great. And then I just had a follow-up. Jack, the step up in the underlying G&A run rate was pretty considerable. Can you break down maybe what's driving that in a little more detail, and then how we should be thinking about the core run rate in the fourth quarter, and then maybe even just underlying growth for the out year?
Jack Hartung
Yes. I mean, any increase in our underlying G&A is around some of the things that Brian mentioned, and it was part of our review where we're investing in resources for Europe. We're adding resources, frankly, for some of the innovation that we're talking about in terms of probiotics and things like that. There's some items in there where our equity, we're expecting our equity based on our projections. We'll step up. These are three-year calculations that you're making.
So, but in terms of underlying G&A, it's going to be either people to support our growth or tech to support our growth. We haven't given fourth quarter guidance, but I would expect there'd be another slight, a step up from Q3. Not a huge step up, but a modest step up. As we make sure we've got our teams all stepped up for the growth that we want to support, not just for this year but for the next several years going forward.
Chris O'Cull
Great. Thanks, guys.
Operator
The next question comes from Jon Tower from Citi. Please go ahead.
Jon Tower
Great. Thanks. I just wanted to dig into development a little bit. And, Jack, I know you and your prepared remarks talked about some delays in the system, and I was hoping maybe you could drill into it a little bit, especially as you're thinking about, getting to that 8%-10% range in terms of unit growth over time. Can you really get into what's driving some of the delays in the market today? Is it, say, local market permitting, builder or developer issues, or are there problems with accessing equipment? I was hoping you could flesh that out for us.
Jack Hartung
Yes, it's not really equipment anymore. That was a challenge through the pandemic, and as we got out of the pandemic, but our teams have done a good job to pre-order, so we had bulk ordering. We've had good relations with our suppliers, so we get priority. So it's really down to things that are city, under the city control, like getting utilities to the site. Sometimes it takes us weeks to just get somebody, to come out and make sure that we have utilities in, that are coming to the site. It does involve things like permitting, and then you talk about inspections as well.
So it's really a lot of these cities, what we're hearing from our teams is that a lot of them are still working remote. And so to get somebody to show up when they need to show up and do the work has been a real challenge. Now, what we're doing, Chris is here and Chris has been sending this message to the team is, we really got to rise to the city, okay? We have to make sure we're calling, calling, calling because they're doing some work and whether they're working at home or whether they're working in the office, they're doing some work. Let's make sure that we're at the top of the list, that they're hearing those often. And if they hear us more often, it's likely they're going to move it. So that's the strategy to try to hopefully remove that bottleneck.
Jon Tower
Got it. And just pivoting to the throughput initiatives, I appreciate all the training you guys have been doing. I'm just curious, I know Brian, you mentioned that, like, even on the make lines, making sure people, four people are on the front line at peak. Do you think you need to add labor hours to stores? Is it purely just getting people back to the aces and their places kind of belief?
Brian Niccol
Yes, no, it's more to do with getting the trust in the team to have the confidence to stay aces and places. Just yesterday I was in a restaurant and staffed, the deployment was right, the culinary was right, the restaurant looked great. Unfortunately, we didn't have aces and places. You had too many people leaving the line to do other tasks that they shouldn't have been doing when they got a line to the door. And I think once they understand that they stay in those places, they'll power through that line to then go take care of the tasks accordingly.
So I think it's an element of they got to see it for themselves, they got to experience it, they got to trust it, because sometimes it's hard. I mean, it's hard to just stay in position when you, think you might need some more napkins out by the drink station. It's like, well, hang in there, get through the line, and then you can go put additional napkins in the drink station.
So I think it's a component of they need experiences with it so that they can trust it. And I know Scott and the team are laser focused on getting the pillars of great throughput back into our culture, not just as an initiative. And the good news is, we're staffed, turnover is looking really good at the general manager level. And we're now in the low 20s. So their leader is staying much more consistent. I think you have consistency in leadership, consistency in message, we'll get consistency in execution. So I'm very optimistic about where Scott and the operators are going to get us to when it comes to throughput.
Jon Tower
Got it. Thanks. And then just lastly, I know your, your lines are somewhat capacity constrained. So in terms of adding additional items to the menu, not always easy, often times at the rotate, but with,-- I think chicken al Pastor, I believe you said about 20% of your mix, transaction mix came from that during the period. So how, how, when do we think about that potentially becoming a permanent menu item?
Brian Niccol
Well, look, it's something we definitely will go back and evaluate. Obviously this was one that struck a chord with a lot of people and I can understand why it tastes great and it is great. So we'll reevaluate if and when it makes sense to bring it back, how long we bring it back for, and if it should be a permanent item. The challenge for us is I think if you, we wanted to add something permanent, we got to remove something. So, that'd be something that we have to work through to just make sure we understand the trade off.
Unidentified Analyst
Got it. Thanks for taking the questions.
Brian Niccol
Yes.
Operator
The next question comes from Dennis Geiger from UBS. Please go ahead.
Dennis Geiger
Great. Thank you. Just wondering if you could provide a breakdown of the, the traffic price and mix for the, for the two queue. I think you gave the, the traffic component, but if you could kind of loosely break out those, those others, that'd be helpful.
Jack Hartung
Yes. The traffic, I mentioned traffic in my comments, better than 4%, you know, on a positive side on traffic, the menu price increase was in the mid five, I call it 5.5, 5.6, something like that. And then we had this, this mix item that I've mentioned, we're talking about the third quarter that actually reduced the comp by about 2.5%. And that, that mix is entirely due to group size. The group sizes continue to normalize as we continue, you're watching people going back to the office. You're seeing our, our urban locations, our outcomping or suburban location. So there's still been a normalization since the pandemic and our group sizes are still continuing to normalize. They're still group size. They're still ahead of where we were in 2019 before the pandemic, but they, they continue to normalize pretty much each quarter.
Dennis Geiger
Very helpful Jack. Just one or just, I know mix is probably a tough one group size in particular to, to predict. You give us the, the three queue as we look to the end of the year. Can that still be, I think closer to flat by the end of the year, or is that a little bit of a moving target given, given group size behaviors? And maybe that's tough to predict. Thank you.
Jack Hartung
Yes, I don't think it'll be totally flat, but it should narrow. In this current quarter, we're about 1% group size over where we were in 2019. If you look at Q3 and Q4, they were about 3% to 4% it was, it was, 4% and Q3, 3% and Q4. So we've still got a gap there. That's still to close, but it should diminish the two and a half that we saw on Q2 should diminish each quarter. I don't think it'll be totally flat by the end of the year though.
Dennis Geiger
Thanks, Jack. Appreciate it.
Operator
The next question comes from Brian Harbour from Morgan Stanley. Please go ahead.
Brian Harbour
Yes, thank you. Good afternoon. Jack, could you just elaborate on some of the food cost drivers? I mean, you mentioned kind of what's, what's really driven a year-over-year, but maybe just versus last quarter versus some of your expectations. I'm sure avocado is part of it, but anything else. And also just as we, think about the rest of the year, will this new item, affect food costs in any way that we should think about?
Jack Hartung
Yes. I mean, during, during the quarter, we had just a number of things that just had a slight increase. We had, some of our salsas or tortillas, our rice, our spices and all those, if you look at just the quarter, and if you look at the quarter consecutively, so Q2 versus Q1 that added like 40 or 50 basis points, but those were offset by a combination of favorable avocados compared to last year, as well as chicken al Pastor, as I mentioned before, it actually did ship people from steak and barbacoa, which is more, more expensive, higher food costs to our chicken, which is a lower food cost. So we've had this, just call it low grade inflation.
That's been hitting the P&L the last couple of quarters, but it's been offset by favorable avocados and then favorable mix. One reason why, as we look forward into the, into the third quarter we do think there's going to be a bump up in food costs. And that's really attributable to this same kind of low grade inflation that we expect will continue into Q3 but we're not going to have as avocado prices normalize. And as we shipped away from chicken al pastor, we won't have that kind of offset to offset some of the inflation that we're seeing.
Brian Harbour
Okay. Thanks. Could you also just elaborate on what you said about Europe? And I guess the, the broader question is just how fast might we see that grow as we start to think about the next few years?
Brian Niccol
Yes, look, I think very similar to what we did with Canada is the way to think about Europe, once we get performance consistent in Europe, like we did in Canada, we'll start building much more aggressively. The team is very much focused on ensuring that we're building a brand. And as we build the brand, we have the economics that support building a lot of restaurants and like I mentioned Jack, myself and Scott, we were just over there and the team has a terrific plan. The thing I love to see is when I was in, Frankfurt, Germany, there were a lot of Germans in a Chipotle enjoying Chipotle.
When we were in London, there were a lot of Brits enjoying Chipotle. The thing that I also saw was a lot of people walked up at the restaurant and had no idea of what Chipotle is. So we still have a real opportunity to build a brand. And while we build that brand, ensure that we've got great economics that justify, building a lot more restaurants. Canada is a perfect example.
We put a great leader in place there and not she's headed out of the park, the economics perform. She's doing a nice job of growing the brand, not surprising. We're building a lot of restaurants. So, most recently, we just sent one of our top operators over to London to be a part of that team, lead the team with that work that he's putting in place. I'm already seeing, big, big improvements in operational execution and I'm confident the economics will follow and I'm confident we'll build a terrific brand. So assuming that all happens, you can see us then quickly being able to invest into building a lot more restaurants in those countries.
So I think we've been pretty consistent on this. It's like we're in no rush to just start building restaurants for the sake of building restaurants. We want to have people that are ready to go. We want to have economics that makes sense and then we want to have a great brand that we can execute against time and time again. So that's served us well in the United States. It's serving us well in Canada. I believe it'll serve us well in Europe.
Brian Harbour
Thank you.
Operator
And the last question comes from Zach Fadem from Wells Fargo. Please go ahead.
Unidentified Analyst
Okay, good afternoon. This is John Park on for Zach. I guess on the franchising side, are there any more details you guys can provide on your new agreement with Alshaya? I guess around like the number of units in the initial development agreement, anything on the royalty rates, things like that.
Brian Niccol
Not really. We're just getting started with Alshaya. We're excited to get the first couple of restaurants open. Obviously, both of us have expectations of a lot more restaurants than just a handful. And I'm confident we're going to have great openings and this is going to turn into something that hopefully Alshaya considers a huge success and we consider a huge success. So more details to come, but we probably need to open the first one.
Unidentified Analyst
Got it. And then just kind of switching gears a little bit. On the labor side, have you guys kind of started to see any leveling out of wage inflation for new hires as you kind of move through Q2 and into Q3?
Brian Niccol
I would say it's more normal. It's in the 4%, 3% in that range. So there's still inflation. It's another consideration as we look at our model, look at our margins when we take pricing action. So it's not anything we can't handle. The great news is the applications are coming in. Our restaurants are doing a great job of staffing the restaurants. They're doing a great job of getting our restaurants to model. So this is, I would call it again, kind of a low grade normal inflation going forward. Nothing that our model can't absorb.
Unidentified Analyst
Great, thanks a lot.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Brian Niccol for any closing remarks.
Brian Niccol
All right, thank you. And thanks everybody for all the questions. I'll just wrap up with, again, I think Chipotle's demonstrated an excellent quarter. And I think it demonstrates the strength of our business. Very proud of what our teams have accomplished in the field. If I think about where we are today versus where we were a year ago, we are operating these restaurants significantly better. I believe there's still a lot of upside in our ability to drive throughput going forward. I'm confident the teams are focused on it and we're going to, see that happen.
The other thing that I'm really excited about in our business is that we're growing our business through traffic growth, and we're doing it, in my opinion, the right way, where we're continuing to drive our value proposition forward with great culinary, great people, and obviously great new restaurant opening. So very proud of our results, very optimistic about the future, and look forward to sharing our results next quarter with you all. Take care.
Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
