Chipotle Mexican Grill, Inc. (CMG) Q2 2022 Earnings Call Transcript

Chipotle Mexican Grill, Inc.  (NYSE: CMG) Q2 2022 earnings call dated Jul. 26, 2022

Corporate Participants:

Cindy Olsen — Head of Investor Relations and Strategy

Brian Niccol — Chairman and Chief Executive Officer

John R. Hartung — Chief Financial Officer

Analysts:

Nicole Miller Regan — Piper Sandler — Analyst

David Tarantino — Baird — Analyst

John Glass — Morgan Stanley — Analyst

David Palmer — Evercore ISI — Analyst

Sara Senatore — Bank of America — Analyst

Jared Garber — Goldman Sachs — Analyst

Andrew Charles — Cowen — Analyst

Lauren Silberman — Credit Suisse — Analyst

Dennis Geiger — UBS — Analyst

John Ivankoe — JP Morgan — Analyst

Chris O’Cull — Stifel Financial — Analyst

Presentation:

Operator

Good day, and welcome to the Chipotle Mexican Grill Second Quarter Fiscal 2022 Earnings Conference Call. [Operator Instructions] After today’s presentation, there will an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to Cindy Olsen with Investor Relations. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our second quarter fiscal 2022 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com.

I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These statements are based on management’s current business and market expectations, and our outlook — and our actual results could differ materially from the 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.

On our discussion today, we 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 will turn the call over to Brian.

Brian Niccol — Chairman and Chief Executive Officer

Thanks, Cindy, and good afternoon, everyone. We are pleased with our second quarter performance during a period of inflation and consumer uncertainty. For the quarter, sales grew 17% to reach $2.2 billion, driven by a 10.1% comp. In-store sales grew by 36% over last year. Digital sales represented 39% of total sales. Restaurant level margin was 25.2%, an increase of 70 basis points year-over-year. Adjusted diluted EPS was $9.30, representing 25% growth over last year, and we opened 42 new restaurants, including 32 Chipotlanes.

I would like to spend a couple of minutes providing insight into current trends and our outlook. Regarding Q2, through mid-May, comparable sales were on track to reach the top end of our guidance range. Since then, the underlying trend has decelerated and we anticipate mid to high single-digit comps for Q3 with planned pricing in August. There are a couple of key things we have learned during the quarter. Our pricing power is strong and the brand is resilient; our culinary and food with integrity commitment is a key point of difference; our restaurants are staffed with terrific people despite a difficult hiring and retention environment; and our people are still getting up to speed on running a growing multi-million dollar digital business as well as a growing multi-million dollar in-restaurant business. To accelerate this learning curve, we are instituting an ops initiative focused on being brilliant at the basics. We did this in 2019, and saw a positive impact on the business right up to the pandemic in 2020. I will discuss this in more detail later.

And finally, we are focused on the right strategies. It is as important as ever that we remain focused on our five strategies that help us to win today while we create the future. Now let me provide a brief update on each of these strategies, which include number one, running successful restaurants with the people accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences. Number two, amplifying technology and innovation to drive growth and productivity at our restaurants and support centers. Number three, sustaining world-class people leadership by developing and retaining diverse talent at every level. Number four, expanding access and convenience by accelerating new restaurant openings. And number five, making the brand visible, relevant, and loved to improve overall guest engagement.

Let’s start with discussing running successful restaurants. I’m happy to say that I’ve seen lines out the door and mobile pickup shelves full in Boston, Philadelphia, Denver, Austin, Ann Arbor, Dallas, Cincinnati, London, Paris, and Los Angeles. I think everybody gets the point. Fortunately, we were staffed with terrific employees and they were working hard with smiles on their faces and great attitudes. I’m very proud to say that our restaurant teams have successfully grown average unit volumes to about $2.8 million with 39% being digital. Our general managers and teams have adapted well to our growing digital and growing in-restaurant business. However, customers were waiting on digital orders and the front line was moving, but it could have been quicker. I know we can be better.

This is why we have launched an ops initiative focused on retraining our crew members on the fundamentals of our business. These fundamentals include having great culinary prepared and ready to serve, open to close in a food-safe environment; ensuring that restaurants are staffed and appropriately deployed across both the digital makeline and front makeline; improving order accuracy in timing for the digital business; and increasing throughput and hospitality for the in-store business. Additionally, we completed the roll-out of our new labor management tool that helps put the right people in the right place at the right time. We believe the combination of being brilliant at the basics with a new labor management tool will drive meaningful productivity in our restaurants.

Along with our labor management tool, our technology road map remains robust. I think it is worth highlighting how we are investing in technology to support strong execution of the basic. We just installed new customer-facing PIN pads that offer faster and contact-free payment options. We’ve deployed a new learning management system that enables immersive ways for employees to experience training and provides digitally enhanced e-learning courses, videos, and resource materials.

We also are in the process of updating our POS hardware across the system, which should be completed by this year and we have made DML enhancements that aid accuracy and throughput. These recently completed or [Phonetic] in-flight programs will all be positive for our restaurant teams and guest experience. Additionally, we will continue to invest in possible technology for the future, like Chippy, the autonomous robot we are testing that integrates culinary traditions with artificial intelligence to help our teams make tortilla chips, bringing up their time to serve and support our guests, and we are exploring an automated real-time kitchen production system that ensures high-quality food is always available to meet the needs of our guests.

This brings me to our Cultivate Next venture fund, which is off to a great start and is giving us a front-row view of emerging food technologies. We are interested in a breadth of innovations, including sustainable farming, supply chain advancements, restaurant operating efficiencies, and ways to elevate the employee and guest experience. We have received a lot of interest with over 200 inquiries for investments and as you may have heard last week, we announced our first investments in Hyphen and Meati. Hyphen is a food service platform that automates the assembly of meals on a makeline and could help fulfill our promise to deliver on-time accurate orders for our digital guest. We look forward to sharing more investments in the future that will help us drive meaningful change at scale.

I do want to take a moment to discuss our people. Despite a challenging labor market, I’m proud to say our staffing levels remain above 2019 levels. Our purpose of cultivating a better world with food with integrity has created a brand that people are proud to represent and be part of. We continue to offer a world-class employee value proposition that includes industry-leading benefits, attractive wages, specialized training and development, access to education, and a transparent pathway to significant career advancement opportunities. We believe these efforts along with our growth and purpose are helping to attract and retain great employees.

And our people development program is important in order to accelerate our new restaurant openings. The real estate pipeline remains strong and supports our target of 8% to 10% new restaurants per year, with more than 80% including a Chipotlane. We now have 430 Chipotlanes and the results continue to exceed our expectations with Chipotlanes generating higher average unit volumes and higher restaurant level margins. In fact, a recent opening of a Chipotlane in a small town in California had one of the highest opening day sales in the company’s history.

In addition to the US, we are also excited about our progress in both Canada and Europe. Canada has hit its stride with AUVs and returns that are at the same level as the US and Canadian comparable sales trends remain strong. We currently have 29 locations in Canada and longer term we see room for several — several hundred, which is included in our target of 7,000 restaurants in North America. And Europe continues to move through the stage gate process. We have made significant progress in improving the economics in Europe, driven by operational efficiencies, adding our digital systems, and opening smaller formats that resemble the US restaurants. We have opened five new restaurants in the UK over the last 18 months and results have been strong. We are gaining confidence that Europe could be another layer to our growth story in the future. This brings me to making the brand visible, relevant and loved, everywhere we operate.

Our Real Food for Real Athletes campaign focuses on helping athletes across all levels perform their best by providing proper nutrition to real food and real ingredients. As an official sponsor of the NHL, we activated this relationship through traditional media and creative promotions to highlight Chipotle, including having our logo in the ICE [Phonetic] for every game of the Stanley Cup Playoffs. Additionally, we have partnered with US Soccer to create behind-the-scenes content that showcases how Rose Lavelle and Sophia Smith overcame the challenges of competing at the highest level of Women’s Soccer. And later this year, we will follow the US Men’s National team via our sponsorship and with advertising during the World Cup.

We also continue to appear in non-traditional channels to drive difference, culture, and ultimately, a purchase. We recently launched Burrito Builder on Roblox on National Burrito Day. The first 100,000 players to successfully roll a virtual burrito at a virtual Chipotle earned a free entree on our app. This led to one of our best digital sales days and marks the first time a brand-enabled Roblox player to earn and exchange virtual Roblox currency for real world items.

Okay. Moving on to the menu. Our pipeline remains robust. Building upon the brand’s recent success with menu innovations, including Smoked Brisket and Pollo Asado, we have tested and successfully validated Garlic Guajillo Steak, and this steak [Phonetic] is ready for roll-out in the future.

Shifting to our digital experience, we now have a digital business tracking towards $3.5 billion in sales, and we currently have over 29 million Rewards members. We are mining the data every day for insights while leveraging the information to influence behavior and drive greater frequency. We are also working aggressively on greater personalization across the customer journey and have gained valuable insights on which incentives provide the greatest ROI.

Additionally, we’re excited about the recent launch of the rewards program in Canada, which will provide another way for Canadian guests to engage with the brand and provide Chipotle with the ability to further delight its Canadian rewards members. Finally, our digital ecosystem is rolling out in the UK and France will follow shortly thereafter.

To conclude, there is much uncertain we are all dealing with. But what I am certain about is Chipotle and its people will remain committed to leading growing. I’m certain that over time, we have the ability to grow our average unit volumes and achieve at least 7,000 restaurants across the US and Canada. I’m certain that we will move our purpose of cultivating a better world forward in a meaningful way. I’m certain that Chipotle provides one of the best value propositions in industry. I’m certain that we have the right teams with the right focus to navigate whatever comes our way, and that our culture will continue to offer our crews terrific career opportunities. Finally, I am certain that we are well positioned for long-term growth.

Lastly, and very importantly, I want to thank our restaurant teams for their hard work and contributions to making Chipotle one of the best restaurant brands in the world.

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

John R. Hartung — Chief Financial Officer

Thanks, Brian. Sales in the second quarter grew 17% year-over-year to reach $2.2 billion as comp sales grew 10.1%. Restaurant level margin of 25.2% increased about 70 basis points compared to last year, and earnings per share adjusted for unusual items was $9.30, representing nearly 25% year-over-year growth. Second quarter had unusual expenses related to certain legal proceedings, our previously disclosed 2018 performance share modification, transformation costs, as well as restaurant asset impairment and closure costs, mostly offset by an unrealized gain on investments which negatively impacts our earnings per share by $0.05 leading to GAAP earnings per share of $9.25.

Regarding our sales trends, as Brian mentioned, we were on track for comparable sales to reach the upper end of our guidance range for the first half of the quarter. Since then, we’ve experienced a step down due to a combination of macro pressures, our ability to handle the growth with relatively new workforce, and return to normal summer seasonality for college-based restaurants. For perspective, about 15% of our restaurants are in college towns and we’ve not seen normal seasonality in three years. Looking ahead to Q3. With pricing from last year rolling off, our current trends in July are running in the mid-single-digit range. Assuming current sales trends continue, we expect our comp to be in the mid- to high single-digit range, which includes our planned August pricing increase of about 4% to help offset incremental inflation pressures, especially in dairy, tortillas and packaging as well as pockets of wage pressure throughout the country.

I’ll now go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter were 30.4%, about flat to last year. The benefit of menu price increases offset elevated costs across the board, most notably in avocados, packaging, dairy, beef and chicken. In Q3, we expect our cost of sales to be about 30% of sales, as the benefit from the menu price increase will be partially offset by the higher cost of dairy, tortillas and packaging. Labor costs for the quarter were 24.8%, an increase of about 30 basis points from last year. This increase was driven by our decision to take a meaningful step up in wages last May, which is partially offset by menu price increases. In Q3, we expect our labor costs to be about 25% due to leverage from our menu price increases offsetting pockets of wage pressures across the country.

As Brian also mentioned, we have now completed the roll-out of our labor management tool. While our teams are still learning how to use the tool, we believe it has the potential to lead to better deployment to both make lines during peaks, which we think will eventually lead to better throughput on our front serve line and better on-time results for the DML. Other operating costs for the quarter were 14.3%, a decrease of about 90 basis points from last year. This decrease was driven by menu price increases, as well as a decline in delivery expenses, partially offset by higher costs across several expenses, most notably utilities, including natural gas. Marketing and promo costs for the quarter were 2.5%, 10 basis points above last year. In Q3, we expect marketing costs to remain in the mid-2% range with the full year to average right around 3%. In Q3, other operating costs are expected to be in the mid-14% range.

G&A for the quarter was $141 million on a GAAP basis or $130 million on a non-GAAP basis, excluding $7 million due to the settlement of certain legal matters, $3 million related to the previously disclosed modification to our 2018 performance shares and $1 million related to transformation expenses. G&A also includes $106 million in underlying G&A, $25 million related to non-cash stock comp and a $1 million benefit related to lower performance-based bonus accruals, partially offset by payroll taxes and equity vesting and exercises. We expect our underlying G&A to be around $111 million in Q3 and continue to grow slightly thereafter as we make investments in technology and people to support ongoing growth. We anticipate stock comp will be around $25 million in Q3, although this amount could move up or down based on our performance, bringing our anticipated total G&A in Q3 to around $136 million. Depreciation was $70 million, and we expect it to remain at this level for the rest of the year.

Our effective tax rate for Q2 was 25.3% for GAAP and 25.1% for non-GAAP. For fiscal 2022, we estimate our underlying effective tax rate to be in the 25% to 27% range, though it may vary based on discrete items. Our balance sheet remains healthy as we ended the quarter with $1.2 billion in cash, restricted cash and investments with no debt along with a $500 million untapped revolver. During the second quarter, we repurchased $261 million of our stock at an average price of $1,350. We increased our level of stock repurchases during the quarter when our share price fell with the market overall, and we’ll continue to opportunistically repurchase our stock.

During the quarter, the Board authorized an additional $300 million to our share authorization program. And at the end of the quarter, we had $320 million remaining. We opened 42 new restaurants in the quarter, of which 32 had a Chipotlane. The performance of our Chipotlanes continues to be strong, maintaining record-high new store productivity. In terms of development, we continue to navigate various challenges, including construction and permitting delays and material shortages. However, our team has done an outstanding job of anticipating these challenges and mitigating delays where possible, and we still anticipate opening between 235 and 250 new restaurants in 2022, with at least 80% including a Chipotlane. As I mentioned last quarter, once we move beyond these development challenges, we expect to be able to accelerate openings and get closer to the high end of the 8% to 10% opening range.

In closing, I’ve experienced Chipotle’s resiliency over the past 20 years through both great times and challenging times, and I share Brian’s confidence in our ability to navigate the current environment. Looking forward, I’m excited about the growth opportunity ahead of us with a runway to more than double our restaurant base and grow AUVs beyond $3 million with a 40% flow-through. I want to thank our 100,000 employees in our restaurants and in support roles for their continued effort and commitment to Chipotle.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session [Operator Instructions] And the first question will be from Nicole Miller with Piper Sandler. Please go ahead.

Nicole Miller Regan — Piper Sandler — Analyst

Thank you. Good afternoon. Hoping you could talk a little bit more about labor in terms of staffing. In the context of AUVs being up versus 2019, well more than 20%, just because you had mentioned that in regards staffing levels in regards to 2019 today, are you suggesting that it needs to be more efficient in terms of labor or that you need more bodies in terms of staffing? Like, how does it compare to the context of the AUV increase, if that’s applicable?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Hi, Nicole. The way to think about it is, obviously, our labor model reflects our increase in transactions and sales. So we look at it as, is the restaurant staffed at model given the volume and transactions that the restaurant has. And what we’re referring to is, the percentage of restaurants that are staffed correctly is better than what we — where we were in 2019. So that’s what we’re referring to. And then what we’re talking about is, obviously, a lot of the people that have joined our company over the last two years, they really haven’t experienced the front line and what it means to grow that in-restaurant business, while also growing the digital business. And that’s why Scott and the operators are focused on ensuring that everybody is brilliant at the basics to execute our growing two lines business.

Nicole Miller Regan — Piper Sandler — Analyst

Okay. And then, just can you briefly discuss in terms of last year’s 15% comp, how things tracked in July, August and September? So we can understand a little bit about what to think about compares from the prior year period.

John R. Hartung — Chief Financial Officer

Yeah. Nicole, this is Jack. You’ll remember that in the second quarter of last year, we did have a staffing challenge, and that’s when we took the significant increase. So we did compare during part of the quarter to a little bit of a softer comparison. But since we announced in May, I think it was like around mid-May that we were increasing wages, and right at that moment, we started paying the higher rates as new people are coming in. And the announcement that we made at that time was also a signal to our existing teams that you’re going to get a raise in early June. So we saw staffing stabilize, and then we saw our sales recover. So we did have a several week period during the quarter where we did have a little bit softer comparison.

Nicole Miller Regan — Piper Sandler — Analyst

Okay. And how about July, August and September of last year? The comp was 15% last year, right, in the third quarter? Is there anything [Speech Overlap] how does that look?

John R. Hartung — Chief Financial Officer

Those were — I would call those normal comparisons. By then, our staffing has stabilized. And so, those are other tougher comparisons.

Nicole Miller Regan — Piper Sandler — Analyst

Okay. So each month was kind of 15%? There was no notable difference between the months?

John R. Hartung — Chief Financial Officer

Yeah. Listen, they vary very month-to-month, but there was nothing during the quarter that I would tell you makes that comparison. I would say, if anything, Nicole, just compared to Q2, it’s just a little tougher of a comparison overall.

Brian Niccol — Chairman and Chief Executive Officer

But each month was fairly —

John R. Hartung — Chief Financial Officer

They didn’t bounce all over the place.

Brian Niccol — Chairman and Chief Executive Officer

They didn’t bounce all over the place.

John R. Hartung — Chief Financial Officer

Yeah.

Nicole Miller Regan — Piper Sandler — Analyst

Okay. Thank you.

Operator

And the next question is from David Tarantino from Baird. Please, go ahead.

David Tarantino — Baird — Analyst

Hi. Good afternoon. I wanted to ask you a couple of questions about the comp trend. I guess, I first wanted to understand how you’re thinking about the slowdown you saw towards the end of the quarter. And I know you rolled over some pricing, so maybe had some less pricing contribution. But you seem to be also pointing out some operational challenges that may have caused that. And I guess, how do you determine whether it’s that versus maybe just a general slowdown in consumer spending, if you will?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Hey, David, obviously, it’s hard to tease out some of the macro pressures versus what we’re seeing as far as people peeling off the line for potentially not being happy with the digital order time. But what we’ve definitely seen, as I’ve been out visiting, Scott has been out visiting restaurants, and when we talk to our leaders in the field is we’ve got a lot of new people that are still getting trained up on, frankly, the basics of great throughput. And I feel like this is rinse and repeat, but that’s what our business is a little bit, which is we got to have our aces in places, as you know, you got to have the expeditor. You got to have the linebacker. You can’t work around those things to try and service the business. And we just have a lot of new people that don’t understand how important some of those roles are as well as general managers, too. A lot of these managers have gotten promoted over the last 18 months to 24 months.

So, we know there is upside in taking the combination of this new labor tool, deploying people correctly and then ensuring that those people are trained and actually experience what great throughput looks like. That’s the other biggest thing. These — a lot of these folks haven’t experienced what — how fast the line can move. So I think in some cases, folks think they’re moving pretty quick when in fact we could be moving a lot faster.

David Tarantino — Baird — Analyst

Got it. And Jack, could you help us understand what your transaction levels or growth was in the second quarter and what your third quarter guidance implies on that metric?

John R. Hartung — Chief Financial Officer

Yeah. David, the transactions were up in the quarter between 3.5% and 4%. We also had a mix shift. We didn’t talk about that for a number of quarters now as our business has moved more towards in-restaurant. The average group size — well, the mix shift was about a negative 6%. The average group size dropped by about 4.5% and that drop is mostly a drop from the business moving from digital into in-restaurant. So, as we move to Q3, we do expect that — because of the downturn that we saw the macro effects in the second quarter, we do think that transaction comp will ease a bit, but we also think that the negative mix shift should ease a bit as well.

David Tarantino — Baird — Analyst

And Jack, one clarification. When you say ease, do you think it will stay positive, I guess? Was this [Phonetic] your guidance to assume it’s positive, or are you thinking —

John R. Hartung — Chief Financial Officer

David, it’s going to be right around slightly positive or right around flattish, right around in that range.

David Tarantino — Baird — Analyst

Okay. Thank you very much.

John R. Hartung — Chief Financial Officer

Thanks, David.

Operator

The next question comes from John Glass from Morgan Stanley. Please go ahead.

John Glass — Morgan Stanley — Analyst

Thanks very much. My first question is just maybe clarify a little bit more why seek more pricing now. It seems like your margins are where you thought they should be you’re sort of balancing the inflationary impact versus pricing. And you’re also now confronting a weaker consumer. So, why now versus maybe letting some pricing lapse and maybe waiting longer and just out of the abundance of caution? Maybe your thoughts on that, please.

Brian Niccol — Chairman and Chief Executive Officer

Yeah. What we’ve seen is — unfortunately, a lot of things have stuck versus gone away as far as inflation. And then we’ve got some key items that have frankly continued to be inflationary. And I think Jack highlighted it right. We’ve got avocados, we’ve got dairy, tortillas, some packaging. So, unfortunately, we were hoping we’d see some of the stuff pull back. We haven’t seen that. But there are other parts of the business that we have seen plateau, which gives us optimism that, hopefully, we won’t have to continue to pull the pricing lever. And I think you’ve seen this with us. We really do try to wait until we truly understand what feels like is something that’s an ongoing cost that we need to handle with pricing versus, hey, we’re going to wait this one out and see if it pulls back. So we figured best to share where our heads are on this one now.

John Glass — Morgan Stanley — Analyst

I appreciate that. On — thinking about your softness that you experienced post May, was there any particular part of the business that it showed up in first? I’m thinking did the delivery channel, for example, exhibit weakness? What piece of the business decelerated more than others? And was there any signal in that in terms of the behavioral change of the consumer?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. I think what we saw was probably not all that different from what people have been saying. The low income consumer definitely has pulled back their purchase frequency. Fortunately, for Chipotle, that is not the majority of our customers. The majority of our customers are a higher household income consumer. And we’ve actually seen their frequency increase and potentially not experience, I’m guessing, some trade-down from other areas where they were choosing to get their leading occasion. So probably the first indicator was in our, I’ll call it, our rewards data, where we saw some of these low income consumers starting to slow down on purchase frequency.

John Glass — Morgan Stanley — Analyst

And not necessarily impacting the delivery channel specifically, which one might think of as being an expensive channel?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. No. No. Actually, that’s been pretty stable throughout.

John Glass — Morgan Stanley — Analyst

Okay. Thank you.

Operator

And the next question is from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Evercore ISI — Analyst

Thanks. Just a question — a follow-up question on the topic of mix and the — that the impact of essentially the number of people per order. One casual dining company out there said that family seemed to be getting back to pre-COVID summer behaviors. So perhaps that family orders that happened last summer are going away as they get back to doing some of those other activities. Do you think — is it, I don’t know, possible for you to see that in the numbers or in any of your insights data that perhaps there’s almost a seasonal headwind that’s going to be particularly bad here over the summer and it coincided with that, not just economics?

John R. Hartung — Chief Financial Officer

I mean, David, there is the other thing that we saw was even a group size in-restaurant did decline a little bit. It didn’t decline as much. Overall decline was in that 4.5% range, and it was bigger — the bigger piece of that is a shift from digital to in-restaurant. But even within the in-restaurant customers, the group size did shrink a little bit. So I don’t know if I would connect those dots. But if you’re seeing other evidence that families are returning to the way that they would dine three years ago where they’re not all getting together and dining together, that could be at play.

We also, for the first time in three years, saw kind of normal college seasonality, meaning the college restaurants really performed exceptionally well during the school year because they were all in-person. And then we saw normal kind of seasonality that we haven’t seen in three years, where the college students go back home and they tend to eat less. I don’t know if that’s more mom’s home cooking. But they — when we tracked the individual customers, they tend to visit Chipotle to a lesser degree when they’re away from college than at college. So we are definitely seeing some normalization under the overall trends.

David Palmer — Evercore ISI — Analyst

And in the past, you’ve talked about an incremental margin framework. Maybe something like 35% to 40% would be normal. Obviously, the first half has been below that, particularly in the first quarter, maybe catching up to a bit here in the second quarter. With the four points of price that you’re talking about, do you feel like you’re going to be getting back to that sort of incremental margin from here on out?

John R. Hartung — Chief Financial Officer

That’s right, David. In fact, that’s exactly why we did, what we did. We still have some additional inflation that we are going to see carry into Q3 for tortillas, dairy, packaging and some known increases related to beef that we’ve known for a while, all those roll into Q3. And really, what this allows us to do is, when we get up to this, we’ve talked about a $3 million average volume, and then our margin should be somewhere in the 27% range that gets us back to that kind of a situation. And the pass-through for every incremental sales dollar we get in should be right back to that 40%-ish flow-through that we’ve talked about in the past.

David Palmer — Evercore ISI — Analyst

Thank you.

Operator

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

Sara Senatore — Bank of America — Analyst

Thank you. I wanted to ask about throughput and I know a lot has changed as we think about transaction baskets. But historically, you’ve given some estimates about peak-hour throughput. And I just wanted to see if you could give some context around where you are now, especially now that you have a second makeline, whereas previous peak would have been mostly the front makeline. And is there a way to kind of quantify what improving throughput could do for transactions to your point about not losing people off the end of the line? Is there sort of a framework we can think about that says, one transaction per hour is equal to a point of comp or something like that? I’m just trying to understand as we think going forward, the guidance for transaction contemplates any improvement in throughput?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. I mean — so here’s one of the things that we have done because you point out that we’ve now got this multibillion-dollar digital business, multibillion-dollar in-restaurant business. We’ve separated out the metrics for the frontline and the digital makeline. And we’ve got very specific. On the digital makeline, it’s about being on time and accurate. And on the frontline, it’s about throughput. And we believe on that frontline, we can get back to where we were. Let’s check, like 2014, ’13, where we were in the high 20s, low 30s.

John R. Hartung — Chief Financial Officer

On a 15-minute basis.

Brian Niccol — Chairman and Chief Executive Officer

On a 15-minute basis, that’s what we’re going back after. And that’s why it’s so important. We really kind of did this exercise back in 2019 and we’re starting to see it pay dividends in kind of early 2020. And then, unfortunately, COVID hit. And so we’re confident that if we can get our team members to understand what it means to be, call it, rush-ready in their places and ready to go, there’s no reason why we can’t get back to those high 20s, low 30s on a per 15-minute basis. I don’t know if we’ve talked about exactly how the transactions translate into sales.

John R. Hartung — Chief Financial Officer

[Speech Overlap] Well, here’s what I would say about that, Sara. It’s hard to tease through and find out when you increase. Let’s say you move from like 22 to 27, okay? That’s a 35 [Phonetic] entree increase. As a perspective, each five — every time you add five transactions, that’s a percent of comp, okay, for that day. We’re measuring the fastest 15-minute period. So what we believe is that when you go faster in one 15-minute period, you’re going to go faster in multiple 15-minute periods. So the opportunity to add quite a bit of comp is there. But to Brian’s point, we just need to get more reps. We have a lot of folks that really haven’t been on the frontline. They haven’t even managed a restaurant when we had the in-store business coming back the way it is today. So — but we believe that there’s definitely the opportunity to add some meaningful comp here.

Sara Senatore — Bank of America — Analyst

That’s super helpful. Thank you. Sorry, just one follow-up on mix. Was there any sort of lower attachment or anything like that, or it’s strictly the sort of lapping the order aggregation?

John R. Hartung — Chief Financial Officer

No. I mean the only thing I would clarify on that, Sara, is there is a higher attachment rate to digital. And so when you see people move from digital to an in-restaurant visit, then you also see a return to less attachment. We’re also — by the way, we are seeing higher drinks. The fact that we’ve got more people coming into the restaurant, we are seeing more drinks. And just to give you a perspective, about 40% of our transactions in restaurant included a drink, only about 20% or slightly less than that of a digital transaction. So as we’ve seen this shift, there’s been a positive shift as well but not enough to offset the lower group size.

Sara Senatore — Bank of America — Analyst

Thank you so much.

Operator

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

Jared Garber — Goldman Sachs — Analyst

Thanks for — thanks for the question. I wanted to just ask about menu innovation. Brian, I know you mentioned that the Guajillo Steak is sort of past its stage-gate process and ready for launch, whenever that may be. But wanted to also get a sense if you could update us on the other item that’s in test, which is the Mexican cauliflower rice. And how you think about maybe more permanent menu item as a plant-based base for consumers over time.

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Obviously, we’re very interested in that new way of eating. And I think we mentioned this in our earlier comments. We’ve invested in a plant-based company called Meati. And the idea is how can we continue to find plant-based items that are consistent with our food ethos, that also are delicious from a culinary standpoint. So we’ve obviously done the cauliflower rices. We have the sofritas that’s on our menu all the time. I’m optimistic that hopefully, we can find another center of plate or call it center of bowl solution that’s plant-based, which we haven’t done to date, right? It’s really been a plant-based read. So the qualifier of these things have been more perceived as, I would say, a piece of your bowl versus the centerpiece of your bowl. And so that’s what we’re working towards. And I’m excited to see what we learn as we partner up with Meati. And obviously, our culinary team continues to work aggressively in this space.

Jared Garber — Goldman Sachs — Analyst

Thanks. That’s helpful. And then just one follow-up on the throughput, which seems to be a little bit of the topic of the day. Is there anything similar across maybe either geographies or store bases that you’re seeing throughput as more of a challenge? Maybe that’s an urban thing or a suburban thing. Just curious what you guys are seeing in terms of any read across or tie-ins across the geography. Thanks.

Brian Niccol — Chairman and Chief Executive Officer

Yeah. No, really, you’re not seeing that. I’d say probably the experience is where we see the biggest difference. We have restaurants that are doing $6 million, $7 million. That team has been together for years. And when — as soon as kind of all the COVID restrictions went away, they went right back to running Chipotles really successfully. And that’s why we’re so confident in so much opportunity in just getting people, the reps, getting them trained up on the basics and then, frankly, just for them to experience the success that they have by following these basics.

So ultimately, what we’re really after is the better throughput actually results in a better employee experience as well. And we probably should talk about that a little bit more because our employees that are more successful. And then obviously, they give a great experience to our guests. But yeah, I’d say the biggest thing, and fortunately, we have experienced managers all over the country. So we don’t see any variability from like region or suburban, urban. It’s more along the lines. We just got to get more people trained up.

Jared Garber — Goldman Sachs — Analyst

Great. Thanks for the color.

Operator

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

Andrew Charles — Cowen — Analyst

Great. Thanks. Brian, can you talk a little bit more about how Chipotle plans to flex value in the menu in the current consumer backdrop as you run double-digit pricing while lapping what looks like about 10% price in the back half of 2021? I know earlier in your career, snacking and looking at the shoulder period between 2 PM and 5 PM was an opportunity. Is that something that you think applies to Chipotle just given the background for lower income consumers?

Brian Niccol — Chairman and Chief Executive Officer

I really believe the value proposition what we sell today is our strongest proposition. We looked really hard at this. When you look at a chicken burrito, steak burrito and you compare that to your alternatives, the value is there. And so if — I think we execute great accuracy and being on time and we execute great throughput. That’s our winning formula. That is the value proposition that wins. And that’s why we’re very much focused on executing our basics. The basics drive our value. So great culinary, customized, and then with Food with Integrity is a winning value proposition for all income levels.

Andrew Charles — Cowen — Analyst

And my follow-up question is just on another one on culinary. Just talking a little bit more just around Pollo Asado and the ability to keep that on the menu. I know it’s a higher margin, obviously, tested very well and it’s done very well for you guys. Is the plan to keep that permanently? It’s gone a little bit longer than a typical limited-time offer would run?

Brian Niccol — Chairman and Chief Executive Officer

No. The plan is not to keep it permanently. I think we’ve talked about this. Ideally, we like having menus two times to three times a year. And if we get some that can carry longer, we stay with them longer. But that will eventually be coming out here in the next couple of months. And hopefully, we’ll have some other menu news that gets people equally as excited.

Andrew Charles — Cowen — Analyst

Looking forward to it. Thank you.

Operator

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

Lauren Silberman — Credit Suisse — Analyst

Thank you for the question. On unit growth, so on track to accelerate unit growth to 8% to 10%. Can you talk about what you expect with respect to cannibalization and just the trade-off between unit growth and comp?

John R. Hartung — Chief Financial Officer

Yeah, Lauren. We measure the impact, and we don’t see — we’ve never seen impact go above a 1% comp impact. We’ve seen it go up to 0.7%, 0.8%, something like that. So it’s still very, very manageable. And so every time we do a deal, we go through a routine where we have an algorithm where we measure what we think the impact is going to be. Our team does a really good job of measuring that. It’s still an estimated part art, part science, but we look to do deals that are going to give us a superior after impact return.

So we’re not looking to put restaurants right on top of each other and cause excessive impact, but there’s just a lot of white space out there still. We — with this idea of getting from 3,000 restaurants to 7,000 restaurants, we’ve modeled that after our three or four or five most dense [Phonetic] markets, and those are markets that we already have the density that represents what we would be on a national basis at 7,000 restaurants. And those restaurants are very high-volume and very high-return restaurants.

Lauren Silberman — Credit Suisse — Analyst

Great. Thank you for that. And then just on potential AUVs, the AUVs are now running at 2.8 million, high end of restaurant peers. You’ve talked about the opportunity for increased throughput. 40% of sales going through the secondary digital makeline. How are you thinking about peak AUV levels and where that can go? Is there a level where it makes more sense to open another restaurant?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Look, I think one of the things that truly special about Chipotle is we are not capacity-constrained with our front line or our digital makeline. So I mentioned, right, there’s restaurants doing $5 million, $6 million, $7 million. And obviously, it presents an opportunity for us to build a lot more restaurants without having really any meaningful impact. But I think it also just demonstrates the four walls that we’re already running Chipotle has tremendous upside as well. So I’m feeling really confident we’re going to get past $3 million, and I’m sure we’ll probably be talking about how we get to $4 million at some point. But I first like to get past the milestone of $3 million. We can celebrate that milestone. And the good news is I don’t see any capacity constraints that would prevent us from saying $4 million is next up.

Lauren Silberman — Credit Suisse — Analyst

Great. Thank you so much.

Operator

And the next question is from Dennis Geiger from UBS. Please go ahead.

Dennis Geiger — UBS — Analyst

Thank you. Brian, a quick follow-up on throughput question again. Is there anything else to stare on sort of that opportunity to get back by 2030 throughput for 15 minutes? Can you do that [Technical Issues] current staffing environment? And is it really more about training the ops initiative that you mentioned as well as the experience, I think, of the teams work there? Just trying to get a sense for how generally quickly gains can happen across the large system as we think about [Technical Issues] kind of frame that up for us.

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Look, I think the good news is we have lots of opportunity to execute what we know are the basics of great throughput, right? Like — unfortunately, I’ve gone into a lot of restaurants, and we don’t have our expeditor in place. That is a key piece of the puzzle. And the good news is our operation leadership is very much focused on explaining to people how important that expeditor role is. Because if you’re new, you could see why you would think of, maybe I can flex that person when, in fact, that’s the last person you want to be flexing if you want to really achieve great throughput.

So look, the good news is staffing is not a barrier. Frankly, the barrier we have to get — we have to overcome is getting people to experience what it’s like to run a restaurant with everybody in the right place, doing the right role through a peak. And obviously, it will take a little bit of time, but that’s something that we can train, people can experience. And like I mentioned, we saw a lot of progress on this when we did this back in 2019. So I’m confident, we can get focused and get the reps and then get the execution that then results in the comp growth.

Dennis Geiger — UBS — Analyst

That’s great. And then you spoke to this some, but I just wanted to ask a little bit more on resiliency, sort of your expectations for resiliency, increasingly difficult macro environment. The brand meaningfully outperformed in 2008, 2009. Obviously, you’ve been extremely resilient and brand strength over the last several years. But anything you could kind of highlight, maybe differences or similarities [Technical Issues] prior tough economic periods where the brand has outperformed? And just broadly, anything additional that you could add on sort of resilience for the brand from here? Thank you.

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Sure. Well, look, I think probably the thing that’s common when you look back to what we’re seeing right now is the strength of our higher-income consumer. That’s a common factor. So even though the lower income consumer is slowing down, we’ve not seen that happen with our higher income consumer. And fortunately, for Chipotle, we over index with higher income consumers.

And then I think the other piece of the puzzle, too, is now we’ve got a database of, call it, 29 million, 30 million people, where we can hopefully be on the front-end of what is happening out there, so that we can hopefully pivot and communicate correctly with our customers. And what we’ve heard over and over again is our value proposition is probably our greatest strength, meaning terrific food or terrific culinary, unbelievable customization, if you want it digitally, it’s on time, right, and it’s accurate. And if you come into our restaurant, you love the customization and the speed of which you can get it.

So good news is it’s a lot of similarities of what we’ve seen in the past. The one thing I know for sure is something will be different. So that’s why I think it’s important to talk about just how resilient the organization is to also handle whatever unexpected headwind we’ll deal with.

Dennis Geiger — UBS — Analyst

Thank you very much.

Operator

The next question is from John Ivankoe from JPMorgan. Please go ahead.

John Ivankoe — JP Morgan — Analyst

Hi, thank you. Hopefully, a slightly different take on the throughput question. Is your throughput — is it constrained, the 12:00 to 1:00 and 6:00 to 7:00, kind of the classic times that you used to be busy, or are there kind of pockets throughout the day, I guess, is kind of the first main question? And secondly, if there are just certain hours where your throughput constrained because of staffing, I guess, what does the store manager? What does the system do? I mean people obviously don’t want to come in and work for an hour shift or even a two-hour shift. Does the brand have the flexibility? Does the model have flexibility to bring people in for four hours to eight hours to maybe cover a couple of busy hours? So just kind of walk us through, I guess, the practicalities of actually staffing that store, that front makeline or the second makeline, during those 15-minute windows of those hour [Phonetic], windows, as it where, where you really are capacity-constrained?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Well, first, so we’re not capacity constrained at 12:00 to 1:00 or 6:00 to 7:00 or 1:00 to 1:30. The good news is we’ve got capacity in every 15-minute increment. Now your question about how do you best deploy so that you have the right amount of people in place ready to go, that’s really the reason why we’ve implemented this new labor tool. It’s going to do just that, right? So, it’s going to go ahead and take a look at like this restaurant is slammed from 11:00 to 11:45. This restaurant is slammed from 12:00 to 12:30. This restaurant has a really big dinner business. So it takes into that account so that we deploy the right amount of people against those peaks. We’re not capacity constrained. So if we can get the people at the right time in the right position, our throughput is going to go up.

For a second there, John, I thought you worked for Cronos. But —

John Ivankoe — JP Morgan — Analyst

And Brian — and just by capacity constraint, it’s capacity constraint for the given number of employees that you have on that given shift, not for the overall box itself. I get that.

Brian Niccol — Chairman and Chief Executive Officer

Okay, okay. Yeah, yeah. And that’s exactly what this is supposed to help us address. So that you don’t end up with you’re understaffed from 11:00 to 11:45 and you’re overstaffed from 12:45 to 1:30. The idea is we get our people in the right places at the right time. So — and that’s the tool that we just rolled out. And now we’re training against the tool to ensure people are in their place so that we execute the maximum throughput we can in each of those 15-minute increments.

John R. Hartung — Chief Financial Officer

And just to add on, Brian, the tool also recognizes like where is the business? Like how much is digital? How much is front line?

Brian Niccol — Chairman and Chief Executive Officer

Oh, yes. Good point, too.

John R. Hartung — Chief Financial Officer

Our old tool wasn’t as sophisticated. And so if one restaurant has 20% digital, another has — like in our Chipotlanes have 55% to 60% digital. The staffing model is very different for those two things. So our ability to really put exactly the right people with the right skills at the right time throughout the day to drive throughput has never been better. Now this is a brand-new tool. It’s like learning how to drive a Ferrari. When you first get in the car, there’s — it’s a very, very highly sophisticated tool. And so we’re learning how to use that. But the capabilities are much higher than what our previous tool allowed.

John Ivankoe — JP Morgan — Analyst

And — no, thank you for that. And if I can, obviously, this wouldn’t be rolled out in the system unless it obviously went through the extensive operational stage-gate system. I mean how big of a pilot did you do for the system before you decided on the system-wide roll-out? And how effective was it in that collection of pilot stores?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Yeah, so look, we’ve been piloting this for over two years. And we did really the bulk of the roll-out for the last six months across our restaurants. So it’s a new tool for our teams. The good news is it’s not a new tool for our organization to manage, train against and get people to use it to its best ability. Look, there is a change management process, though, in anything. No matter how good it is, sometimes people really like the old approach better even though the new approach is going to help them perform better. So we’re going through the change management process as any organization would but the good news is we’ve done the due diligence on the front end so that as we learn things — and we’re dealing with 100,000 people. So I’m sure we will learn some things even beyond our pilot. We have the know-how, though to pivot accordingly and maximize the tool.

John Ivankoe — JP Morgan — Analyst

Thank you.

Operator

And the next question will be from Chris O’Cull from Stifel. Please go ahead.

Chris O’Cull — Stifel Financial — Analyst

Thanks. Good afternoon, guys. I had a follow-up on the value question that was raised earlier. It seems like a potential scenario could be where commodity prices start to ease, traffic continues to soften for the industry, and that would cause some change to be more aggressive with either price-led value promotions or even maybe new value menus to kind of reset their pricing. I’m just wondering how Chipotle might respond, if discounting or menu reset like that were to start to impact that value gap it has with the competitive set?

Brian Niccol — Chairman and Chief Executive Officer

Yeah. Look, obviously, if our value proposition changes dramatically, we have to reevaluate how we’re providing our customers value. I haven’t seen it happened yet. And when you go back and look the 20-plus years of the company, the thing that drives the best value with our customers is this commitment to food with integrity, it is this commitment to culinary, and then is this commitment to getting you exactly what you want. So I’d be hard-pressed to believe we would want to abandon what makes us Chipotle. And my experience as well as what I’ve seen in the company is our value proposition is very strong. So long as that is the case, we’re going to keep doing what we know drives value with our customers.

Chris O’Cull — Stifel Financial — Analyst

Fair point. Jack, I apologize if I missed this in the presentation, but can you speak to the level of inflation you’re seeing in construction cost? And maybe describe some of the most common challenges you’re seeing with hitting project time line?

John R. Hartung — Chief Financial Officer

Yeah. The time line, it’s a myriad of challenges. Sometimes it’s permitting, sometimes it’s contractor labor. Like if somebody has call-outs or exclusions because of COVID exposures that will slow down a deal as well, and then materials as well. I mean, some of the electronics, like for some of our HVAC, walk-in coolers, things like that, have been a real challenge. So it’s been a myriad of challenges. The pipeline is really, really strong. That’s what gives me great confidence that not only will we hit between the range this year. But when these things ease, our pipeline is still there and we’ll be able to accelerate from there. In terms of the inflation, it’s at least in the several percent range, maybe even more than that. The deals have varied throughout the country, but definitely our investment cost this year are much higher than they have been in the past and higher than we expected them to be.

Chris O’Cull — Stifel Financial — Analyst

Great. Thanks guys.

Operator

Ladies and gentlemen, 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

All right. Thank you. And thanks, everybody, for joining and all the questions. Obviously, we’re very proud of our results. I think it speaks again to the resiliency of both the Chipotle brand, all of our employees out in every restaurant, their ability to execute great culinary, great throughput. And I also think it speaks to the strength of our value proposition. So I know there’s a lot of uncertainty out there. I said this in my earlier remarks. The thing we spend our time on are the things that we can control, the things that we’re certain about. And what I am certain about is Chipotle has got great people running restaurants that do food in a different way. And we continue to give people great access through digital and great throughput on the front line with good hospitality. I think we’ll continue to be rewarded with more business. And we’re proud of where we are, and we’re really excited about where we’re going. So, obviously, we’ll see what comes next, but I think we’re ready. And we’ll continue to do what we know how to do best, which is make great burritos, great bowls. And hopefully, we continue to delight our customers so that they come back over and over again. So, thank you for taking the time and we’ll talk to you all in three months.

Operator

[Operator Closing Remarks]