Chipotle Mexican Grill, Inc. (CMG) Q1 2021 Earnings Call Transcript

Chipotle Mexican Grill, Inc. (NYSE: CMG) Q1 2021 earnings call dated Apr. 21, 2021

Corporate Participants:

Ashish Kohli — Investor Relations

Brian Niccol — Chairman and Chief Executive Officer

John R. Hartung — Chief Financial Officer

Analysts:

David Tarantino — Robert W. Baird — Analyst

Jon Tower — Jon Tower — Analyst

Sara Senatore — Bernstein Research — Analyst

Lauren Silberman — Credit Suisse — Analyst

Peter Saleh — BTIG — Analyst

David Palmer — Evercore ISI — Analyst

Andrew Charles — Cowen and Company — Analyst

Nicole Miller — Piper Sandler & Co. — Analyst

Jared Garber — Goldman Sachs & Co. LLC — Analyst

Andrew Barish — Jefferies — Analyst

Brian Vaccaro — Raymond James & Associates, Inc. — Analyst

Chris O’Cull — Stifel, Nicolaus & Co., Inc. — Analyst

Presentation:

Operator

Good afternoon and welcome to the Chipotle First Quarter 2021 Earnings Conference Call. [Operator instructions] Please note this event is being recorded.

I would now like to turn the conference over to Ashish Kohli, Head of Investor Relations. Please go ahead.

Ashish Kohli — Investor Relations

Hello, everyone, and welcome to our first quarter fiscal 2021 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 management — are based on management’s current business and market expectations and our actual results could differ materially from those projected in the forward-looking statements.

Please see the risk factors contained in our annual report on Form 10-K and in our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website. We will start today’s call with prepared remarks from Brian Niccol, Chairman and Chief Executive Officer; and Jack Hartung, Chief Financial Officer, after which we will take your questions. Our entire executive leadership team is available during the Q&A session.

And with that, I’d like to turn the call over to Brian.

Brian Niccol — Chairman and Chief Executive Officer

Thank, Ashish, and good afternoon, everyone. Chipotle is off to a promising start in 2021, which gives me optimism for the rest of the year. There is still uncertainty related to COVID but as more people become vaccinated, including many Chipotle employees, I’m hopeful we’re getting closer to brighter days ahead. In fact, all but about 20 of our restaurants are now open, with 92% of them offering in-restaurant dining with capacity limitations. For the quarter we reported sales of $1.7 billion representing 23.4% year-over-year growth which was fueled by 17.2% comparable restaurant sales growth including about a 1.5% headwind from winter weather in February.

Restaurant level margins of 22.3% which is 470 basis points higher than last year, earnings per share adjusted for unusual items of $5.36 representing an increase of 74% year-over-year, digital sales growth of 133.9% year-over-year, representing 50.1% of sales and opened 40 new restaurants including 26 with the Chipotlane. Not surprisingly comparable restaurant sales were the highest during the month of March as we lapped easier comparisons, and I’m pleased to report that April is off to a good start. These results highlight that our key strategies continue to resonate with guests and position us to win today while we create the future.

Let me now provide a brief update on each of these strategies which I believe will help fulfill our long-term vision of more than 6,000 restaurants, AUV’s above $2.5 million and restaurant level margins above 25%. These are one, making the brand visible, relevant and loved. Two, utilizing a disciplined approach to creativity and innovation. Three, leveraging digital capabilities to drive productivity and expand access, convenience and engagement. Four, engaging with customers through our loyalty program. And five, running successful restaurants with a strong culture that provides delicious food with integrity, while delivering exceptional in-restaurant and digital experiences. Let me start with our marketing efforts where the team is doing a great job being agile and remaining relevant to a consumer mindset that continues to evolve.

Internally we encourage curiosity and experimentation, which takes advantage of our digital and social capabilities in conjunction with TV advertising to consistently reinforce our messaging. For example, we leveraged the return of sports to showcase our brand and purpose. Our first-ever Super Bowl commercial titled Can a Burrito Change the World was very successful at highlighting Chipotle’s dedication to cultivating a better world through real food, sustainable sourcing and a commitment to the farming industry. We also connected and engaged with our guests during March Madness with the mouth-watering commercial showcasing real ingredients, real cooking and real people, in order to support the launch of our hand-crafted quesadillas.

Not to be outdone, our digital communication strategy involved supercharging the super fans, who are our true advocates. Content on social platforms is a key way we interact with our guests. The end goal for all of our creative initiatives is to drive culture, drive a difference and ultimately, drive a purchase. Helping these marketing efforts were a handful of new menu innovations which provide wonderful examples of the stage-gate process and our team’s ability to execute new food experiences. Cauliflower rice, which we launched in early January and will continue through mid-May, is continuing to bring in new guests. In addition, we launched quesadillas across the U.S. and Canada as a digital exclusive offering on March 11.

This is our first new customizable entree in 17 years and was the most-requested item by guests not on our existing menu. We made sure we took the proper time to develop an excellent product that consumers love and also works well operationally. The end result is a quesadilla that is perfectly crispy on the outside with delicious, melted cheese on the inside. My personal favorite is the barbacoa quesadilla. The benefits of a digital-only offering are that it leverages our digital scale while removing operational friction by utilizing our digital kitchen. Although it’s only been out for about a month, we’re encouraged by its performance thus far with an incidence mix of approximately 10% and expect it to remain a guest favorite moving forward.

Last but certainly not least, we also had carne asada for the majority of the quarter, and we’re pleased to say that it had an incidence mix similar to what we saw last year. And our talented culinary team is not done innovating. We have several market tests of new items scheduled later this year that have shown promise in early-stage consumer testing. We are gaining valuable feedback and will update you on their progress as they move through our stage-gate process. Also, it’s likely that we will put another marketing push behind some 2020 initiatives like Tractor Beverages later this year to optimize their performance once COVID normalizes. Let me now talk about the next strategic driver, our digital platform.

Our investments in new digital features and innovations helped Q1 digital sales grow 134% year-over-year to $870 million and represent 50% of sales. Momentum continued to build within the quarter, with March setting a new record for digital transactions, supported by our best-ever digital order ahead month, over 800,000 app downloads and the most new digital customers since May of 2020. With the overall digital mix remaining relatively stable for the last three quarters, we’re delighted to see that our highest-margin transaction, digital pickup orders, were slightly more than half of digital sales during Q1. Within the delivery channel, about 40% were initiated through the Chipotle app or website while the remainder were through a handful of partners.

Our digital sales are a sticky, frictionless and convenient experience as evidenced by our April digital sales mix holding around 50%. Aided by the quesadilla launch, our digital sales are now slightly above the COVID peak from last year, while we’ve recovered roughly 60% of in-restaurant sales as dining rooms have reopened. We also continue to see outsized digital performance in Chipotlanes which have revolutionized the drive-thru experience towards order ahead for pickup transactions, which is our most profitable channel. As our digital ecosystem has evolved from a commerce system to a platform of engagement, we continue to look for ways to enhance convenience and access including Chipotlanes, alternate store formats, digital-only menu offerings and Chipotle Rewards.

We are regularly making enhancements to our app, website, delivery and group offerings to support the current and expected future growth within this channel. We’ll also continue to make important tech investments to create a path for the future. One such example is our recent investment in Nuro, an early-stage leader in autonomous delivery. Nuro uses robotics in their fleet of on road, occupantless and autonomous vehicles to deliver everyday consumer goods and we believe has the potential to take the delivery experience to the next level. Speaking of our loyalty program, we have more than 21 million passionate members that receive targeted and personalized messages. We are leveraging the CRM platform for purpose-driven messaging, as well as tempting fans with our latest promotions.

Communications to our customers are individually tailored so that specific customer activities prompt targeted responses. Each digital message can vary along the customer buying journey such as the latest promotional offer on a new menu item or a more targeted offer to entice a customer that has not visited our restaurant for a certain period of time. For example, customers received communication about the quesadilla launch featuring their favorite protein based on their ordering history. Our loyalty program has been very successful in driving additional transactions across our light, medium and heavy consumer segments, but we continue to increase the level of sophistication and experience in our information and targeting, which should bode well for the future of Chipotle Rewards.

We’re also investing in talent and infrastructure for Rewards and have several enhancements to the program planned for later this year that consumers have indicated would increase their engagement and purchases. Let me end by talking about the foundational ingredient of our success, and that’s our restaurant operations, where the team has done a great job staying focused on safety, reliability and excellent culinary. Running great restaurants requires great people and Chipotle is privileged to have amazing employees. Our continued investment in our team members to ensure they have the resources to develop and thrive in their career, including the recently-announced expansion of debt-free degrees in agriculture, culinary, hospitality and supply chain, is paying off.

Turnover continues to be relatively stable, and we are seeing great applicants for open positions to staff our expected growth in AUV and new restaurant openings. After visiting a number of our restaurants recently I’m encouraged to see more guests enjoying their food in our dining rooms. As a result, we’ve been reiterating the importance of executing great throughput by teaching, training and validating the five pillars of throughput every day, during every shift. After all, guests need to feel safe, and deserve a great and fast in-restaurant experience. Chipotle is a unique brand committed to fostering the culture that values and champions our diversity while leveraging the individual talents of all team members to grow our business and cultivate a better world.

To show how passionate we are about inspiring real change in people, food and the environment, we have tied 10% of officers’ annual incentive bonus to the company achieving certain ESG goals. Our updated sustainability report which was published last week showcases our desire for transparency and being a leader in sustainability. I also want to take this opportunity to welcome our two new independent Directors, Matt Carey and Mauricio Gutierrez. Both bring excellent experience to our board, and will be valuable assets for Chipotle.

Finally, I want to thank our employees for their incredible level of collaboration and tireless dedication, which were critical in helping demonstrate the brand’s resiliency. While the past year has been full of ups and downs and the volatility related to COVID may not be fully behind us, I believe Chipotle is stronger today and is well-positioned for growth. As a result, I’m excited about our future as we remain a premier, fast casual brand focusing on all stakeholders, a leader in culinary, a leader in food within integrity, and an innovator providing convenient access inside our restaurants as well as through our expanding digital ecosystem.

With that, here is Jack to walk you through the financials.

John R. Hartung — Chief Financial Officer

Thanks, Brian and good afternoon, everyone. We’re proud of our performance during the first quarter with sales growing 23.4% year-over-year to $1.7 billion as comp sales grew 17.2%. Restaurant level margin of 22.3% was 470 basis points higher than last year and earnings per share adjusted for unusual items was $5.36, representing a 74% year-over-year increase. This included benefit from lower taxes related to option exercises and share vesting, which is more than offset by higher G&A related to performance-based catch-up adjustments and taxes on equity, exercises and investment and I’ll discuss these factors in greater detail shortly.

The first quarter had unusual expenses related to our 2018 performance share modification to account for the unplanned effect of COVID, restaurant asset impairment and closure costs as well as transformation costs which negatively impact our earnings per share by $0.91 leading to a GAAP earnings per share of $4.45. Though impact from COVID appears to be lessening, we’re not quite out of the woods yet as seen by the recent spikes in key regions as well as a pause in administering certain vaccines and therefore, it’s still difficult to provide comp guidance for full year 2021. But we’re encouraged by the strong start and we’re optimistic about our full-year performance in 2021.

The geometric two-year stack for Q1 comp is about 21% due to dining rooms reopening, our cauliflower rice launch, effective marketing, continued digital performance and the introduction of quesadillas, which all helped drive the strong finish to the quarter. For Q2 we expect our comp to be in the range of the high 20s to 30% with quesadilla incidents normalizing and a lower marketing investment. Food costs were 30% in Q1, a decrease of 280 basis points from last year. This is due primarily to menu price increase, a mix shift towards higher-margin protein and lower waste, which are partially offset by costs associated with cauliflower rice, and fewer sales of high-margin beverages.

In Q2 we expect food costs to be in the mid-to-high 30% range as the benefit from our delivery menu price increase will be more than offset by seasonally higher avocado prices. Labor costs for the quarter were 24.9%, a decrease of 300 basis points from last year. This decrease was driven primarily by sales leverage and efficiencies related to digital orders, partially offset by labor inflation. We expect labor costs to be in the low 24% range during Q2 due to the benefit of our delivery menu price increase as well as seasonally higher sales. Other operating costs for the quarter were 16.9%, an increase of 200 basis points from last year, due to higher delivery fees which are partially offset by sales leverage and one-time insurance credit.

Delivery expenses remain elevated year-over-year given the significant growth in delivery, and as you may have seen we increased our delivery menu prices by 4% earlier this month to help cover the higher cost of this premium access point and will continue to evaluate and fine-tune our delivery strategy in this dynamic market. Marketing promo costs for the quarter were 3.5%, a decrease of 20 basis points from last year given the significantly lower level of delivery promotions this year. While we invested more marketing dollars in order to support quesadilla and cauliflower rice, as also our first-ever Super Bowl ad.

We expect marketing expenses to be in the mid 2% range in Q2 as the time period tends to be less responsive to the mass advertising channel. Similar to the past two years, full year 2021 marketing expense is expected to be around 3% of sales. Due to lower marketing spend in Q2, other operating costs are expected to be around 16% for the quarter. And Q1 restaurant level margin was 22.3%, while our trailing 12-month average unit volumes excluding the delivery menu price increase were roughly $2.27 million. Normalizing for the higher marketing spend, our underlying restaurant level margin was essentially in-line with the theoretical margin of 22.7% expected at the sales volume.

We’re pleased with this progress and we remain confident that we have taken and will continue to take the necessary actions to ensure the margin stays on the algorithm as our AUV’s rise throughout the year. In fact, we expect our trailing 12-month average unit volumes to pass $2.4 million in Q2 and we expect our margin algorithm to keep pace. G&A for the quarter was $155 million on a GAAP basis or $129 million on a non-GAAP basis excluding $24.4 million for the previously-mentioned modification to our 2018 performance shares and about $1.6 million related to transformation expenses. G&A also includes $89 million in underlying G&A, $30 million related to noncash stock compensation, which includes $7.7 million increase related to our strong performance in Q1, and $10 million related to higher bonus accrual and payroll taxes and equity vesting and stock option exercises.

Looking to Q2, we expect our underlying G&A to be around $94 million as we continue to make investments including in technology to support our future growth. We anticipate stock comp will likely be around $25 million in each of the remaining quarters in 2021 to reflect the new run rate, although this amount could move up or down based on our actual performance. We also expect to recognize around $5 million in each quarter related to performance-based bonus expenses and employer taxes associated with shares divested during each quarter, as well as $1 million related to our upcoming virtual Field Leadership Conference in Q2. Our effective tax rate for Q1 was 20.2% on a GAAP basis and 18.5% on a non-GAAP basis.

Our effective tax rate benefited from option exercises and share vesting at elevated stock prices, and as I’m sure you know, we receive a tax deduction for the value our employees receive upon option exercise or share vesting, and when that value exceeds the accounting charge of those shares, we benefit from a higher tax deduction. For fiscal 2021, we continue to estimate our underlying effective tax rate will be in the 25% to 27% range, though it may vary based on discrete items such as the occupancy impact I just mentioned. Turning now to the balance sheet, we ended Q1 with $1.2 billion in cash, restricted cash and investments with no debt, along with a recently refinanced $500 million untapped revolver with a five-year term and more favorable terms than our previous facility.

We also restarted our buyback program in late February when our stock price softened, and we repurchased $61 million of our stock at an average price of $1,425 during the quarter. We had nearly $154 million remaining on our share authorization as of March 31 and we expect to continue to opportunistically use excess free cash flow to repurchase our stock. That being said, the best use for our cash remains investing in more Chipotles which continue to deliver outstanding returns. We opened 40 new restaurants in the first quarter, more than double the number open in Q1 last year, with 26 of these including a Chipotlane. While only 65% of the new units had a Chipotlane in Q1 for the full year, we still anticipate opening around 200 new restaurants with more than 70% including a Chipotlane.

As of March 31 we had a total of 196 Chipotlanes including five conversions. Customers love the Chipotlane experience as it is the access channel that excels at providing convenience, speed and great value, all at the same time. Performance continues to be stellar. The trailing 12-months Chipotlane restaurants continue to drive 17% higher overall digital sales compared to non-Chipotlane. And order ahead, our highest margin transaction, is nearly 80% higher in non-Chipotlanes, but delivery, our lowest margin transaction, is about 30% lower in our non-Chipotlane restaurants. New Chipotlanes are opening with about 15% higher sales, and the comp restaurant at the six — or the comp at the 69 Chipotlane restaurants that have been open more than a year continues to outperform the non-Chipotlane restaurants from the same open period.

Beyond the significant growth opportunity in the U.S. we’re excited to accelerate new restaurant openings in Canada, which are additionally validated by our stage-gate process. We’re building a healthy new restaurant pipeline and expect to open a handful of restaurants over the next 12-months including our first Chipotlane in late summer. We’ll continue to experiment with different location formats and restaurant designs throughout the country to gauge consumer preferences. Ultimately we believe we can open at least a few hundred restaurants in Canada, especially with their unit economics now approaching those of the U.S.

The recent Surrey, British Columbia opening, which is our first new Canadian location in three years, opened very strong and gives us even greater confidence about our growth strategy. Let me close by thanking all of our team members who’ve proven their agility to operate through uncertainty while also staying focused on our long-term purpose. Their commitment to constant improvement of the customer dining experience while strengthening our branded business is what helps drive our strategic growth initiatives. The combination of investing in our people, delivering relevant and compelling marketing, leveraging our digital system to enhance convenient access and great execution in our restaurants is leading to a better guest experience, which ultimately allows us to further strengthen our powerful economic model.

With that, we’re happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions] And the first question comes from David Tarantino of Baird. Please go ahead.

David Tarantino — Robert W. Baird — Analyst

Hi. Good afternoon, everyone. My question’s really about the reopening of the dining rooms to a more full extent and the resumption of consumer activity we’re starting to see as the vaccines roll out. And I guess, Brian or Jack, can you elaborate on what you’re seeing as that activity returns in terms of sales and mix? And then secondly, based on what you’re seeing as the dining room traffic might be coming back, how are you thinking about the overall unit volume opportunity in the U.S., assuming that some of these digital transactions might stick? Thanks.

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Hey, thanks, David. You know, look. What we’re definitely seeing is people want to be back in our dining rooms. I’ve had the luxury of traveling recently and Scott and I have been at numerous restaurants and it’s great to see the lines again in our dining rooms. And we’re seeing a nice rebound, obviously, in those dining room sales, because there weren’t any a year-ago, and at the same time, what we’re seeing is our digital business is really continuing to thrive. In the quarter, I don’t know if you guys picked up on this, but we had record sales for our digital business, despite the fact that our dining rooms are opening, so I think it just demonstrates the power of both access modes, meaning the in-restaurant dining access mode and the digital access mode.

And then not surprising you’re seeing the occasions come back based on whether you’re coming into the dining room or whether you’re ordering off-premise. And that’s more tied to how open the region is, is how I would kind of describe it. So we’re feeling great about where we are. Consumer sentiment is definitely one where they want to get back out to socialize and get back into the dining rooms and have that in-dining experience. And at the same token for those occasions that they’ve built the behaviors around digitally, those are remaining in the business. And I think that’s why you’re seeing our results in Q1 and frankly, why I’m really proud of our teams that we’re managing these two businesses out of one kitchen, with really added excellence.

David Tarantino — Robert W. Baird — Analyst

Great. And then my other question is on the quesadilla, and I guess from a consumer behavior uptake, it sounds like you’re getting a high incidence for that product. Do you have information that would tell you whether that’s kind of new customers or incremental customers or existing customers trying the product? I guess what do you think the incrementality of that might look like?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. So you’re exactly right, David. The incidence is high, we’re in that 10% range, I think is what we just covered, and the thing is really exciting is it’s comprised of a lot of new users, so we’re seeing two things happen. A lot of new users coming to the business through the quesadilla proposition and then our existing customers, we’re also seeing them utilize that quesadilla platform as part of a new eating occasion. So it was actually our highest penetration of new customers in the month of March, which I think just a testament to one, people coming back to the dining rooms and two, I think a really meaningful innovation around quesadilla.

David Tarantino — Robert W. Baird — Analyst

Great. Thanks so much.

Brian Niccol — Chairman and Chief Executive Officer

Yep.

Operator

The next question comes from Jon Tower of Wells Fargo. Please go ahead.

Jon Tower — Jon Tower — Analyst

Great. Thanks. Hopefully you can hear me okay. Just curious on the delivery side of the equation. It sounds like, Jack, you had mentioned the company has taken another 4% or so pricing in the delivery channel during the quarter. Where does that set the delivery occasion now relative to an in-store transaction? And do you feel like there’s even more potential to take pricing in that channel, if necessary, down the line? And when I ask, the percentage piece on a margin basis [Indecipherable].

Brian Niccol — Chairman and Chief Executive Officer

Jon, you cut out at the very end.

Jon Tower — Jon Tower — Analyst

Okay. I was just asking gross profit dollar versus the margin percentage when it comes to the delivery transactions, how those have changed with the incremental pricing versus the in-store transaction?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Jack, do you want to take that or you want me to start or?

John R. Hartung — Chief Financial Officer

Yeah. I’ll go ahead and start, Brian.

Brian Niccol — Chairman and Chief Executive Officer

Okay.

John R. Hartung — Chief Financial Officer

Listen, the last price increase that we took, it doesn’t get us all the way to where a delivery transaction delivers the same margin as an in-store transaction, certainly not as much as our highest transaction, the order ahead, it gets it very, very close. From a dollar standpoint they’re pretty close but as you know, when you are charging higher prices you’re grossing up the sales and so it makes it a little harder to fully capture that margin. But I would say we’re within striking distance. We’re maybe a few percentage points away if we want it to completely equalize, the margin on an in-store transaction for a delivery. So we made a lot of progress over the last year and we’ve taken these increases along the way, we’ve seen either acceptable resistance and we’ve also seen what looks like people are shifting channels because it does look like our order ahead moves up when we do see customers maybe resist the higher pricing in the delivery channels a bit.

Jon Tower — Jon Tower — Analyst

Great. And if I may, on the loyalty side of the equation, I believe, Brian, you mentioned earlier, there’s some effort internally to improve engagement per customer feedback that you’ve received, so what have you heard from customers in the loyalty program [Indecipherable] done today?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. So you kind of cut out near the end, but I think I got the gist of the question which is how are we seeing more customers become more engaged within our rewards program? And the simple answer on that is I think we’ve gotten a lot smarter with the analytics, so that I mentioned this in my prepared remarks. We’re really trying to figure out how we move just from a commerce experience to an engagement experience and so what you’re seeing is the power of that playing out by people shopping more often with Chipotle, experimenting with other things on the menu and obviously there’s going to be further enhancement to our rewards program going forward, because we want to respond to our customers to keep them engaged in this rewards program.

Jon Tower — Jon Tower — Analyst

Great. Thank you very much. I appreciate it.

Operator

The next question comes from Sara Senatore of Bernstein. Please go ahead.

Sara Senatore — Bernstein Research — Analyst

Oh, thank you. I wanted to ask a little bit about the loyalty members and also your comment about the 40%, I think you said of delivery order coming through proprietary apps. So first, just the loyalty members. I guess do you have a sense of what percentage of your total customers that might represent if you have a certain 80 million, 100 million unique customers, something like that? I guess I’m trying to sort of reconcile the loyalty membership with your delivery orders or the digital orders that are coming through your native apps, because it seems like the share of orders that are coming through your own ordering platform has gone up and I’m trying to figure out, are you shifting people away from third-party by virtue of incentivizing them through loyalty or that kind of thing? Or is it just that the people who are ordering directly are very high-spending customers and they’re the sort of the minority that will ultimately download your apps versus preferring the convenience of an aggregate or platform? I know there’s a lot in there but I’m trying to understand sort of the power of the Chipotle brand versus like kind of call it the convenience of the aggregators and who owns the customer there.

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Look, I think where you just ended your question is the answer, which is we have a very powerful brand, and as a result, when people join our rewards program, download the app and start ordering through our app and they realize that they have the access of order ahead and pickup whether it’s at a Chipotlane, order ahead and pickup meaning grab off the shelf and go. Or I can get delivery through our app. In all those occasions, you are able to accrue points and get recognized for being an engaged customer.

And we’re providing lots of access, lots of convenience with a very powerful brand position behind us, and that’s why I think you’re seeing our order ahead business continue to grow, our white label or delivery business in our app continuing to grow as a percentage of the delivery occasion and I think it’s just a function of the brand continues to resonate. Our first strategy’s all about building the brand, trust and love, and I think while we do that and provide a great experience both digitally and for whatever occasion you want associated with that digital experience, and then you give them rewards, it’s a really powerful system that keeps people engaged.

Sara Senatore — Bernstein Research — Analyst

Great. That makes a lot of sense. And then just do you have any sense of like kind of what share of Chipotle customers are on your loyalty program versus ultimately what you might get to?

Brian Niccol — Chairman and Chief Executive Officer

Well, look. We’ve got 21 million customers in the rewards program, 60% of those are active, ongoing and then we’ve got programs with those that we see lapsing. But you know, we don’t see a whole lot of crossover still between the dining room experience and the digital experience. There’s only 10%, 15% that are doing both occasions. So there’s still a lot of upside in getting our dining rooms reopen for that customer experience, customer occasion and that’s why I think the earlier question I got, I’m still optimistic about our dining rooms reopening because it’s not cannibalizing from our digital business. These are really two distinct occasions that people want to have access to great food with integrity. So, there’s what, 100 million Chipotle customers coming through these doors, and the good news is, we know when we get that dining room open, there’s a lot of people that are going to come back that we haven’t seen in a while.

Sara Senatore — Bernstein Research — Analyst

Great. Thank you so much.

Operator

The next question comes from Lauren Silberman of Credit Suisse. Please go ahead.

Lauren Silberman — Credit Suisse — Analyst

Thanks a lot. So, on quesadillas as you move through the stage-gate process, you talk a lot about your focus on operations, with quesadillas now available across the system are you seeing any impact on throughput or operations relative to what you expected?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. You know look, I’m really happy to say the stage-gate process worked because two things. One, we’ve got the right kitchen equipment to create a great product at great speed. And then two, we’ve got the right operational process in place. So if in the event somebody does order still on the frontline, obviously, our guys will figure out how to accommodate it, but it is a much faster experience with a much better product. So we’ve improved our employees experience when that happens, and then for our customers, they’re learning, the quesadilla was made to be an off-premise solution with Chipotle’s food. And I think it’s a testament to our teams. Our Operators that validate it, our marketers that have explained to customers how to use it and then the marriage of our technology to actually get the transaction in place. So I think it’s a great example of using the stage-gate process in the most effective way possible.

Lauren Silberman — Credit Suisse — Analyst

Okay. And I think you talked about expectations for quesadilla incidents to normalize in Q2 but so just to clarify, do you expect the mix to settle below the 10%? And then how does the attachment rate go up in size compared to what you see with burritos and bowls?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. So look, we’re just saying we’re only, what, a couple weeks into this, and the good news is, we haven’t seen a backwards yet. So, and the feedback from our customers are they love it. The attachment rate looks really good. It’s frankly a little bit better than our burritos and bowls, so I think that’s the power of showing our food going really well with Guac or queso and again, its Chipotle’s food is really good. And guess what? It’s really good when it’s in a quesadilla.

Lauren Silberman — Credit Suisse — Analyst

Great. Thanks very much.

Operator

The next question comes from Brian Bittner of Oppenheimer. Please go ahead. Brian your line is open. The next question comes from Peter Saleh of BTIG. Please go ahead.

Peter Saleh — BTIG — Analyst

Great. Thanks for taking the question. I wanted to come back to the conversation around delivery menu price increases. I think you guys mentioned a 4% increase in most recently, but I think the test that you guys were running was substantially higher than that on the delivery price increase, so can you talk a little bit about did you see pushback on the test? And why did you decide on a 4%, why was that the right amount of a price increase to take?

Brian Niccol — Chairman and Chief Executive Officer

Yeah, so just to clarify. Go ahead, Jack.

John R. Hartung — Chief Financial Officer

Brian, you’re probably going to say the same thing I was. Peter, just to clarify. We are running 13 in most of our restaurants across the country. We had a few that were at different levels so we could see the differences. We took the entire country up another 4% so we’re now charging a plus 17 and the reason we did that was we were comfortable that the resistance that we saw was acceptable resistance so we did see people move into other convenience and other value-driven channels. So I think that’s a testament to we had the 13% price increase running for several months and we were very comfortable that we could go another 4%, so the 4% we just took earlier this month was in addition.

Peter Saleh — BTIG — Analyst

Great. Understood. All right. And then just on the Chipotlane conversions, I know you have around 400 freestanding stores and maybe 1,500 to 1,600 end caps. Have you guys thought a little bit more about how many conversions you can actually do? I know I think the quarter or two ago you said potential for several hundred. Has that number increased at all?

John R. Hartung — Chief Financial Officer

It’s not — it hasn’t changed per se. Our desire to have more Chipotlanes and to push the percentage of new restaurants that open with a Chipotlane, we want to continue to push the envelope there. And then with conversions, we want to opportunistically look at relocations and rebuilds that, you know, remodels where we can add a Chipotlane. We still think that we can have hundreds of conversion. It’s hard to pin that down though, because in essence what you do is we have to, as we approach the end of a lease term, like let’s say you’ve got a 10-year primary term with options, when you get to year seven or eight, that’s the time you have the conversation with landlords.

If you try to have the conversation with landlords to try to get permission to modify the space in year two or three, when you’ve got seven years left, landlord doesn’t really want to have that conversation. So we have those conversations and we have many of them throughout the year. If you look back to 10 years ago, we will have 100 or more, maybe in the 100 to 150 range, where we’re having conversations with landlords. Those conversations are going well, but it’s too early to tell exactly how many hundreds of these conversions we can get but we’re definitely pushing the envelope.

Peter Saleh — BTIG — Analyst

Thank you very much. Very helpful.

Operator

The next question comes from David Palmer of Evercore ISI. Please go ahead.

David Palmer — Evercore ISI — Analyst

Thanks. I just wanted to get a few clues from you about how the sales layers might shake out after the full reopen, after we get passed all the vaccinations and things get up and running at least reasonably so I’m sure work commute will be, there will be some areas that will be lagging there. But what are you seeing from some of your early and most reopened markets in terms of that on-premise business sales layer? It looks like overall on-premise might be only 70% of pre-COVID levels right now as a system, but where is that getting to in some of your most reopened markets? And when it does get to that level, how much is your off-premise business, the digital side, really hanging in there? And I have a quick follow-up.

Brian Niccol — Chairman and Chief Executive Officer

Yeah. So, David, the way to think about it is like in our regions that are the most open, obviously, you’re not that far off on your average of the return in our dining business. The places where we’re more open, we’re above the average. And the thing that I love to see is regardless, our digital business is maintaining that 80% to 85% run rate. The thing that’s also exciting though is, as I mentioned, in the quarter we still had record levels of digital business, and that’s because we’re going to continue to use our system, call it rewards, quesadillas, to drive people further and further commitment on our digital platform for those occasions where it makes sense. So in the places where we’re more open we got our dining room business back and our digital business is hanging in there, I’d say it’s actually our digital business is operating from position of strength. And then the places where it’s slower for the dining rooms to come back, thank heavens we’ve got such a strong digital business.

David Palmer — Evercore ISI — Analyst

And I guess this might be one for Jack. In terms of how you think about sales and margins over time, in the past you’ve had a rule of thumb of your AUVs tracking with margins. The way the world is working feels like sales will be higher on average for the average company out there, but margins may be more challenged for the average company out there. You might have some better defense mechanisms than others in terms of your digital business and whatnot, but how are you thinking about that relationship? Is that changing even as you see some of the recent measures you’ve been taking? And I’ll pass it on.

John R. Hartung — Chief Financial Officer

Yeah, David. Listen. We still feel very confident that our margin algorithm is alive and well. We made some important steps over the last several months so that we’re within striking distance of that algorithm, and we see from here on out as our volumes grow our AUV was 2,000,270 and as we grow to 2.4, 2.5, etc, etc, we think that our margin will move to a 24 then a 25. Now that’s not going to happen every single quarter. It’s not going to be perfect, but in terms of seeing our margins move up with our volumes, we still expect that to happen.

Now there is a slight degradation as you move from $2.5 million to $3 million for example. You might not get to, all the way to 30% in terms of the margin for a $3 million restaurant but you certainly should get in the 28% to 29% range. So we still fully expect that we’ll be able to expand margins. And one of the things that’s enabling that is with the growth, the significant growth in the delivery business, that has been, still is our lowest margin transaction, but we closed the gaps considerably and our customers are still choosing that channel, or they’re choosing another channel, so giving the customers’ choice and let them pay for the more extreme convenience channel of delivery, let them pay the going rate, seems to be a workable strategy for us.

David Palmer — Evercore ISI — Analyst

Thank you.

Operator

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

Andrew Charles — Cowen and Company — Analyst

Great. Thank you. Brian, based on the experience of the quesadillas, how open minded are you around future digital-only menu innovation that can’t be done on the front make-line such as the potential for nachos and enchiladas? And perhaps from an ops perspective, are you confined to only one to two possible digital-only innovations in new opens? Or could there be several more items launched before you would become capacity constrained on those digital makelines?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Look, the good news is we’re far from capacity constrained on those digital makelines. And we’re continuing to make enhancements to our digital makelines so that our employees become even more accurate, more efficient. The equipment that we’ve chosen gives us a lot of flexibility, whether it’s additional entrees or desserts and whatever it may be. The good news is we’ve got a lot of great ideas in our culinary team. Obviously we’ll vet them through the stage-gate process, but look the goal is to be balanced. At the end of the day, we want to have a great experience in the restaurant and a great experience if you choose to go digital.

And I don’t think you’re going to see us ever get out of equilibrium where we’re providing a great experience for whatever channel it could be. You know if, I don’t want to come across with this P&L all of a sudden means you’re doing something every month. That’s not who we are. Who we are, are great ingredients done in very simple ways so that you can customize. And the good news is we’ve got lots of capacity on that line, and now we’ve got more flexibility because of the additional equipment that we have. So not surprising I think there’s a lot of growth still to be had on our digital business, and there’s still tremendous growth to be had in our dining room business.

Andrew Charles — Cowen and Company — Analyst

That’s helpful. And, Jack, I just had a follow-up question on development. This might be a little technical but looking at the proxy, it looks like there were 324 site assessment requests over the next 12 to 18 months. That’s about 50% higher versus the 227 that was in the proxy from a year ago. And so when I look at the guidance for 200 store openings this year, it’s not quite 50% above the 161 you did last year, so in terms of the guidance for 200 openings, besides conservatism just on the availability of construction crews, is there anything else in there that might be presenting pressure on 2021 development?

John R. Hartung — Chief Financial Officer

No, I would say it’s more of a timeline challenge. We’ve seen that the timelines have elongated over the last year or two or so, and so this year, for example, we target 200. First quarter was exactly on pace to do 200. I think you can expect us to see, to open up similar numbers in Q2 and Q3. Now what might happen, Andrew, we might overperform a bit in the fourth quarter. It’s too early to say that right now. We certainly have a very healthy pipeline. That pipeline is chalk full of Chipotlane, so we think the numbers go up from here, not down. But right now the responsible number of 200 I think still applies, but let’s see how the — you know how things shape up in quarter two and three, what the fourth quarter looks like.

Andrew Charles — Cowen and Company — Analyst

Very helpful. Thank you.

Operator

The next question comes from Nicole Miller of Piper Sandler. Please go ahead.

Nicole Miller — Piper Sandler & Co. — Analyst

Thank you. And good afternoon. Just one question for me. I’m curious about traditionally, thinking about restaurants and unit level economics, and what I’m wondering is with your 21 million loyalty relationships and the CRM platform you were talking about, can you talk now about customer lifetime value? Like what’s the economics of a customer now that you found some of them outside of the four walls of the store?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Let me — it’s a great question, Nicole, and one of the reasons why we’re so, I guess, optimistic about our rewards program is these reward members versus non-reward members, they’re coming more often, and they’re also spending more. So, that’s obviously a great outcome of putting somebody into a rewards program. And then I think the team has really become so much more sophisticated in our ability to understand what they want from Chipotle. And as a result, you’re going to see us making some further enhancements to the rewards program and the experiences that people can have so they will be even further engaged. And the whole reason why we’re doing that is because we think we can get even more frequency out of people, and potentially continue to influence that check further. So, it’s a very valuable asset, and I think it’s going to continue to become more valuable.

Nicole Miller — Piper Sandler & Co. — Analyst

Thank you for that. Appreciate it.

Operator

The next question comes from Jared Garber of Goldman Sachs. Please go ahead.

Jared Garber — Goldman Sachs & Co. LLC — Analyst

Thanks for the question. I wanted to touch base on the labor environment and what you guys are seeing from that respect. Obviously we’ve heard a lot in the news lately about the availability of labor and the challenges of staffing up, so wonder if you could talk there a little bit about what you’re seeing? And if you’re seeing those similar challenges play out? And then as it relates to that, how you guys think about potential pricing power and/or pricing in different markets? Thanks.

Brian Niccol — Chairman and Chief Executive Officer

Sure. So, obviously, one of the things that’s great is we’re seeing the economy come back in a big way with customers out and about and getting back to the business of I’d say normalcy. With that, obviously, we are quick to want to staff up our restaurants accordingly to be in sync with where our business is growing. The positive is it came back really fast in March. The negative in that is, you got to play a little bit of catch up with the staffing. But I think our employee value proposition is world-class and as people realize these opportunities are available, usually we have no problem with the applicant flow. And then we turn our attention to training and developing these individuals, because it’s a great opportunity for not just the job now, but a future career. So, it’s great to see the business come roaring back.

It’s also exciting to see our need to staff more people because that is the growth that we like to have. We like to have growth that results in more jobs and more people having upward opportunities. We had, I think, 13,000-plus promotions recently, so I mean, that’s just a testament to the growth that we have, the strength of our proposition for those that stay with us, commit themselves to being developed and trained. And then obviously, we’re going to staff accordingly as the business comes roaring back. So I’m very optimistic about the people we can attract, the culture that we create for them and then the opportunities that are available for them. And what was the second part of your question?

Jared Garber — Goldman Sachs & Co. LLC — Analyst

Just as it relates to kind of increasing wage pressures across the industry, how you guys think about mitigating that through price increases, obviously you’ve taken on delivery but more broadly across even the dine-inside of the business and how you think about that geographically as well?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. I think we’ve talked about this in the past. The good news is our value proposition is I would say top top-tier and so that gives us a lot of flexibility on how we price and when we price. We’ve taken a very conservative approach on it. We’ve been more in that 1% to 2% range on an annual basis. I think Jack’s talked about this. That usually offsets any labor inflation that we deal with, so I think we’re in a really strong situation, both from a brand value proposition and then the ability to attract and retain people with our employee value proposition.

Jared Garber — Goldman Sachs & Co. LLC — Analyst

Thanks.

Operator

The next question comes from Andy Barish of Jefferies. Please go ahead.

Andrew Barish — Jefferies — Analyst

Hey, guys. Good afternoon. Just taking that a little bit further, I know some of the traditional metrics have kind of gotten a little bit skewed by everything going on right now, but can you quantify sort of what type of wage inflation you’re seeing? And then also on the commodity front, certainly the commodity proteins have been significantly higher. Just wondering if you’re starting to see that in the non-commodity markets that you’re buying from?

Brian Niccol — Chairman and Chief Executive Officer

Why don’t you go ahead, Jack?

John R. Hartung — Chief Financial Officer

Yeah. I’ll take this. First of all, Andy, in the last year, what we seen with labor inflation has been more modest than it had been in the last five years. In the last five years we’ve seen inflation in kind of the mid-single-digit range. And with some of the dislocations going on with COVID, actually, the labor inflation dropped to the low single-digits, but we expect, I think most people expect, that’s going to tick back up. But let me just give you an example because the other thing that you might be thinking about is what if we have a national minimum wage that over time approaches $15. The way to think about this is our minimum wage, or our average wage right now, is $12 for our crew. It’s $13 for all of our hourly employees.

So we’re not that far off of like for example, a $15 number. But let’s say, for example, that there’s going to be an across-the-board 10% increase in our wages. That would have an impact on our margins of call it 150 to 200 basis points. And that would, to offset that with menu pricing, that would take us 2% to 3% price increase. So all of that is very, very manageable and we feel like if there is going to be significant increased inflation because of market-driven or because of federal minimum wage, we think everybody in the restaurant industry is going to have to pass those costs along to the customer. And we think we’re in a much, much better position to do that than other companies out there.

In terms of commodities, the one that we’re seeing for sure, and this is more of a seasonal shift that we see pretty much every year, is avocados. We are going to see an increase in avocado prices as we shift into the next season. We don’t see anything else moving up dramatically right now, Andy. I mean, I think everyone’s kind of waiting to see what happens in terms of demand and if there are any disruptions with supply chain. We’re not seeing that we’re worried about right now, but with everyone talking about with the stimulus and the reopening and the vaccine, there is going to be a surge in demand, and we think we’re well prepared from a supply chain standpoint. But that’s the only kind of wild card as the year unfolds is will there be maybe a cyclical or interim dislocation where maybe there is some commodity inflation but nothing that we’re seeing right now.

Andrew Barish — Jefferies — Analyst

Okay. Thanks very much.

Operator

The next question comes from Brian Vaccaro of Raymond James. Please go ahead.

Brian Vaccaro — Raymond James & Associates, Inc. — Analyst

Thanks. Good afternoon. I was hoping to better understand the sales cadence that you saw through the first quarter. Perhaps you could comment on the two-year stack by month and where that stood quarter-to-date in April? And then I know you mentioned more normal quesadilla incidents, but could you walk through, walk us through kind of the other puts and takes that you considered as you set the second quarter sales guidance?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Sure. So obviously, the first quarter, I think, Jack covered it in his remarks. The geometric average in was the 20% to 21% range. I would obviously tell you that January was a really good start, February kind of flattish and March was really strong, obviously, you got a much easier rollover and then we talked about all of the things we did around launching quesadillas and dining rooms start to reopen, so on and so forth. As you move into April, if you think about this two-year, I think this is probably the best way to think about our business right now, because of what you’re seeing in kind of the year-ago performance on Easter and so on and so forth. The good news is we’ve seen days and weeks where you’re in the 20s and we’ve seen days and weeks where you’re in the high-teens.

So it’s bouncing around a little bit and I think a lot of the things are driving that. You’re still seeing things flash around COVID in different parts of the country. Unfortunately, we had the pause in the vaccines. So you’ve got some consumer sentiment I think bouncing around, which obviously, plays a role. And then obviously, we’re going to, we’re going to be more in the leverage phase of our quesadilla launch versus our launch phase, which is what we’re taking into account as we think it’ll normalize as you go down into the rest of the quarter. So those are some of the puts and calls. We’re, what, a couple weeks into the second quarter. We love where we are, and we’ll see how the rest of the quarter unfolds, because I think we’ve got the right strategies. So we’re going to stay focused on what we know has been working for us.

Brian Vaccaro — Raymond James & Associates, Inc. — Analyst

All right. That’s helpful. And could you also comment on California specifically? Obviously, a big important market for you. Could you just ballpark where volumes there are versus the rest of the country? And have you seen an acceleration more recently as COVID restrictions are lifted?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Look, I mean this is not just a California phenomenon. This is a phenomenon that’s happening across the country, which is as, I think, places see a reduction in COVID cases and an increase in vaccines and people get back to maybe their old habits, as well as some of the habits they’ve created in this new environment, you see the business respond accordingly. So more people being out and about results in really good things for a restaurant concept like us, because when you’re out and about, Chipotle is a great option. Obviously, we’ve demonstrated we’re a great option when you need that off-premise occasion as well. So you know the dining rooms become more open, people are more confident to be out and about, that bodes well for us in every state. So it’s not just the California phenomenon. That’s an American phenomenon.

Brian Vaccaro — Raymond James & Associates, Inc. — Analyst

Yes. Makes perfect sense. I’m in Atlanta and I see it every day so makes perfect sense.

Brian Niccol — Chairman and Chief Executive Officer

Yeah.

Brian Vaccaro — Raymond James & Associates, Inc. — Analyst

So thank you. I’ll pass it on.

Brian Niccol — Chairman and Chief Executive Officer

Yup.

Operator

The next question comes from Chris O’Cull of Stifel. Please go ahead.

Chris O’Cull — Stifel, Nicolaus & Co., Inc. — Analyst

Thanks. Good afternoon, guys. Brian, I was curious what you believe the risk may be to sales growth from pulling the cauliflower rice I think you said in mid-May?

Brian Niccol — Chairman and Chief Executive Officer

Look, I think this is a great initiative that we did. I have mentioned in the past our goal is to keep people engaged with our menu. We’ll have some things on for a time period and then take them off and bring them back. What we’ve seen where we’ve tested this in the past is it’s not anything that results in us taking pause, and moving forward with our strategy of taking it out in May. So the good news is we’ve got a lot of strength in the business. I’m sure it’ll be something we’ll bring back down the road, but we feel really good about our strategy of having some items that come off the menu and other items like a quesadilla that will be permanently on the menu.

Chris O’Cull — Stifel, Nicolaus & Co., Inc. — Analyst

And then I was curious if you’re seeing a similar level of beverage attachment rate with dine-in usage to-date that you saw pre-pandemic?

Brian Niccol — Chairman and Chief Executive Officer

Well, look. I think Jack’s talked about this. That’s one of the things that’s been a little bit of a drag is as people stop coming into dining rooms, our beverage incidents went down. We fully anticipate as the dining rooms come back, we’ll recapture that beverage incidence, and as things really start to normalize I think we’ve got another shot at making people aware of the new Tractor Beverage offering, which the reason why we initially did that is we were hoping to drive more beverage incidents. So that’s our plan, as the dining rooms come back our plan is to figure out how we can drive more beverage incidents accordingly.

Chris O’Cull — Stifel, Nicolaus & Co., Inc. — Analyst

Great. Thanks.

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 — Chairman and Chief Executive Officer

Okay. Well, thank you, everybody and thanks for all the questions. I just want to start off with first saying how immensely proud I am of all of the Chipotle employees. I think what we’ve seen in the last quarter and frankly the last year is the power of great people, great culture, being focused on the things that needed to be handled right now. And it’s pretty powerful to see an organization of 100,000 people come together and do the right thing for each other and their communities.

So I’m very proud of this organization, very proud of our employees, and look, I think we’re off to a great start in 2021 because our employees have demonstrated the resiliency of our business. I’m confident that we will continue to do the right things so that as the dining rooms reopen, we will give people great experiences. We’ll continue to invest in our digital business, that’s not done growing, as evidenced by what we shared here. And then obviously, we talked about this too. We’re very committed to seeing the AUV margin algorithm come to life, and that’s really exciting to see that starting to emerge in a meaningful way.

And then, lastly, it’s really exciting to be building 40-plus restaurants in a quarter. We’re going to build from here, and I think we’re well on our way to getting back to the business of Chipotle growing in a meaningful way, both top-line, bottom-line, and new units. And then that results in great opportunities for all our people that have just demonstrated the power of the Chipotle culture, and the Chipotle purpose. So, thank you for joining. Thank you for listening, and I look forward to touching base in a quarter. Take care.

Operator

[Operator Closing Remarks]