Chipotle Mexican Grill Inc (CMG) Q4 2022 Earnings Call Transcript

Chipotle Mexican Grill Inc (NYSE:CMG) Q4 2022 Earnings Call dated Feb. 07, 2023.

Corporate Participants:

Brian Niccol — Chairman & Chief Executive Officer

Jack Hartung — Chipotle Mexican Grill, Inc

Analysts:

David Tarantino — Baird — Analyst

Sara Senatore — Bank of America — Analyst

David Palmer — Evercore ISI — Analyst

Andrew Charles — Cowen — Analyst

Brian Bittner — Oppenheimer and Company — Analyst

Jon Tower — Citigroup — Analyst

Sharon Zackfia — William Blair — Analyst

John Ivankoe — JP Morgan — Analyst

Dennis Geiger — UBS — Analyst

Jeffrey Bernstein — Barclays — Analyst

Danilo Gargiulo — Bernstein — Analyst

Brian Harbour — Morgan Stanley — Analyst

Presentation:

Operator

Good day and welcome to the Chipotle Mexican Grill Fourth Quarter 2022 Results Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead. Hello, everyone, and welcome to our fourth 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 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-Q for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website. We will start today’s call with prepared remarks from Brian Niccol, Chairman and Chief Executive Officer; and Jack Hartung, Chief Financial and Administrative Officer, after which, we will take your questions. Our entire executive leadership team is available during the Q&A session. And with that, I will turn the call over to Brian

Brian Niccol — hairman & Chief Executive Officer

Thanks, Cindy, and good afternoon, everyone. We delivered another year of strong results in 1,022, expanding AUVs and restaurant-level margin despite facing one of the highest inflationary periods on record and an uncertain macro-environment. These results demonstrate Chipotle’s resiliency driven by our talented teams, delicious food made fresh daily, convenience customization and of course, our tremendous value.

For the year, sales grew 14% to reach $8.6 billion, driven by an 8% comp. Digital sales represented 39% of sales. Restaurant-level margin was 23.9%, an increase of 130 basis points year-over-year. Adjusted diluted EPS was $32.78, representing 29% growth over last year and we opened 236 new restaurants including 202 Chipotlanes.

Turning to the fourth-quarter, while we are pleased with our overall growth our results were impacted by a few factors that were unique to the quarter, including a lower-than-expected benefit from Garlic Guajillo Steak and a headwind from loyalty accounting. For the quarter, sales grew 11% to $2.2 billion, driven by a 5.6% comp. In-store sales grew by 18% over last year. Digital sales continue to represent 37% of sales. Restaurant-level margin was 24%, an increase of 380 basis points year-over-year. Adjusted diluted EPS was $8.29, representing 49% growth over last year. And we opened 100 new restaurants including 90 Chipotlanes.

Our transaction trends improved throughout the quarter as we lapped Bbrisket and I’m pleased to report that our underlying trends have further improved entering 2023 with transaction trends turning positive. For the first-quarter, we anticipate comps in the high-single-digit range. Our focus on getting back to the basics and running great restaurants is beginning to pay-off and we plan to further emphasize this in 2023. Additionally, we will continue to build upon our five key strategies that will help us to win today while we create the future.

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

Beginning with our restaurants, as we discussed on the last call, chipotle is a restaurant business with high standards and it is critical that we treasure the guests and delivering an exceptional experience, including great culinary and in-restaurant execution. During the pandemic, there were unforeseen challenges such as supply outages, staffing challenges, and exclusions from COVID that resulted in a need to create work arounds. We have been eliminating the work arounds and reestablishing operational standards with Project Square One, while continuing to build a culture of excellence in every aspect of our business. This means ensuring all ingredients are in stock, that our teams are fully staffed and properly deployed during peak periods to drive throughput, that our delicious food is prompting hooked on-time, that we are improving throughput on the frontline, and improving on-time and accuracy on the digital make line and of course, that we are delivering exceptional customer hospitality.

Project Square One has helped to lay the foundations including training in each of these areas. We are also bringing back more shoulder-to-shoulder training. One thing that I believe everyone has learned from the pandemic is that virtual training is not the only tool needed. So we are reducing the amount of virtual training and bringing new crew members into our restaurants sooner for on-the-job training. This helps to accelerate onboarding and gives more confidence to our new crew members as they are learning by doing. Shoulder-to-shoulder training by experienced managers is an essential process.

I’m also happy to see an improvement in turnover with December being one of our best months in the past two years for both hourly and salary turnover rates. And our staffing levels continue to improve with 90% of our restaurants fully staffed. This combined with better stability leads to more experienced teams. When you combine this with Project Square One training for the past two quarters, positive signs are emerging across the operation. We are focused on operational excellence and have intensity and collaboration to achieve it. Great people and great culinary drives performance.

And speaking of great people, I am proud to share that in 2022, we promoted over 22,000 people, surpassing 2021 and 90% of all restaurant management roles were internal promotions and we have tremendous growth ahead. In 2023 to open our new restaurants, there will be opportunity to promote over 1800 hourly manager roles, over 255 GMS, and over 40 field leadership positions. And these numbers will continue to grow as we expand our restaurants by our targeted range of 8% to 10% per year.

As we’ve said in the past, our goal is to be the employer of choice. In addition to career advancement opportunities, industry-leading benefits and competitive wages, we will continue to look for ways to improve the overall experience for our team. We know one way is to continue to invest in technology and innovation. There are a couple of new stage gating initiatives that I’m excited to share, along with an update on improvements to our app functionality.

First, we are currently testing a new grill to improve the overall cooking process for chicken and steak. The grill is much faster and has consistent execution, which lowers the learning curve significantly. Importantly, we believe it maintains our high culinary standards and can cook the chicken and steak to perfection. We look-forward to further validating it through our stage gate process.

And second, you may remember that in the second-quarter, we announced Hyphen as one of our first investments in our cultivate next fund. Hyphen is a foodservice platform that automates the assembly of meals in the digital make line that could help fulfill our promise to deliver ontime accurate orders for our digital guests. This will allow our restaurant teams to focus more on our in-restaurant guests on the frontline, further improving throughput. I’m thrilled to share that together with Hyphen, we are developing our first automated digital make line prototype, which we will test and learn on and we expect to have it in out cultivate center in the first half of this year.

Speaking of our digital businesses, it is over $3 billion in revenue and represents 39% of our sales and we’re constantly looking for ways to improve the experience for our guests. Last quarter, we started testing advanced location-based technology to enhance our app functionality. For guests who opt in, the program can engage with Chipotle app users upon arrival to our restaurants and utilize real-time data to enhance their experience with order readiness messaging from pickup location detection, reminders to scan the Chipotle Rewards QR code at checkout and more. The results from the stage gate process were very encouraging, including an improvement in delivery speed, a reduction in customers going to the wrong location and an improvement in the experience for [Indecipherable] guests, allowing them to quickly scan for their rewards points without impacting throughput. As a result, we rolled it out nationwide last month.

Moving on to making our brand more visible, more relevant and more loved, our Real Food for Real Athletes platform has been a success, as we partner with athletes of all levels who are fans of Chipotle. We focus on helping them perform their best by providing proper nutrition, the real food and real ingredients.

During the fourth-quarter, we teamed up with U.S, men’s national soccer team stars Christian Pulisic and Western McKinney to showcase their journey to soccer’s biggest international tournament while featuring the athletes go to orders in our app. We also continue to leverage social media to remain relevant with our consumers, especially Gen Z.

This year we surpassed 2 million TikTok followers, which to put into context, right, some of the largest brands in the world and we are the first brand to launch in the new social media platform BeReal. Shifting to menu innovation, as we mentioned last quarter, 2023 will consist of one to two LTOs. I am delighted to share that Chicken Al Pastor has been validated and ready to be rolled out in the near future. This new menu item is operationally simple to execute, while still providing a new exciting flavor that drives transactions and sales. We also recently launched a new lineup of Lifestyle Bowls that cater to contemporary wellness habits of Gen Z and Millennials. The lineup spans a wide range of healthy habits such as our Balanced Macros Bowl, our High Protein Bowl, and Grain Freedom Bowl. Lifestyle Bowls are a great way to show our customers that they can create balanced meals made with our existing ingredients that taste great and that they feel great eating.

Turning to our rewards program. In 2022, we increased our rewards members by 20% to $31.6 million. Our program continues to get more sophisticated as we better understand who our members are and serve them with relevant content, targeted offers and gamified badging to help drive transactions In 2022, 60% of our rewards program promotions were personalized and we plan to increase this going forward. To drive engagement and enroll new members, we recently introduced Freepotle, which offers each rewards member 10 personalized rewards throughout the year.

Our fifth strategic pillar is to expand access and our development team has done an outstanding job of navigating headwinds such as material shortages and permitting and inspection delays while successfully opening 236 new restaurants in 2022, including 202 Chipotlanes. In fact, we opened 100 new restaurants in the fourth-quarter, which was a record for the company. We also opened 500 Chipotlanes during the quarter as we expanded access and convenience through our unique digital drive-through format and the performance of Chipotlanes continues to be strong. In fact, since we began opening Chipotlanes in 2018, our new restaurant productivity has improved by about 1,000 basis-points. We plan to open 255 to 285 new restaurants in 2023 with over 80% including Chipotlanes.

Within our 2023 expansion plans, we will accelerate new restaurant growth in Canada and continue to open restaurants at a measured pace in Europe. In Canada, we have built out a strong local field leadership team that works closely with our U.S. team to ensure best practices and a consistent culture, while adapting to local needs. We are now ready for accelerated growth and plan to add around 10 new restaurants in 2023, which will be the fastest development growth rate since we entered the Canadian market. We also remain encouraged by the performance in Europe despite a challenging macroeconomic backdrop.

In 2023, we plan to add a few additional locations in the UK and we’re also rolling out our digital capabilities to further expand access. We remain optimistic about the growth opportunity and will continue to update on Europe’s progress with this stage gate process along the way.

In closing. I want to thank our restaurant and support center teams for another terrific year. Our focus on getting back to the basics is starting to pay-off. Our teams are energized and I am excited to see further progress over the coming quarters. We have a long growth runway ahead with the ability to more than double our restaurant count, grow AUVs beyond $3 million and expand margins. I believe we have the right team and strategy in place and we will remain focused on meeting the standards of excellence to make Chipotle Chipotle.

And with that. I will turn it over to Jack.

Jack Hartung — Chipotle Mexican Grill, Inc

Thanks, Brian, and good afternoon, everyone. Sales in the fourth quarter grew 11% year-over-year to reach $2.2 billion as comp sales grew 5.6%. We included about an 80 basis point headwind related to our loyalty program. In Q4 of each year, we reevaluate the estimated loyalty breakage for points that will expire. In this year, we decreased our estimate due to higher member engagement. Restaurant-level margin of 24% increased about 380 basis points compared to last year. In addition to loyalty program headwind, restaurant-level margin was impacted by a higher-level of sick pay and medical claims in the quarter compared to our expectations.

Earnings per share adjusted for unusual items was $8.29, representing 49% year-over-year growth. The fourth-quarter had unusual expenses related to legal expenses, our previously disclosed 2018 performance share modification and corporate restructuring.

Turning to our sales outlook for 2023, as Brian mentioned, we’ve seen transaction trends turn positive as we remain focused on delivering a great guest experience. January comps were in the low-double-digits. And for Q1 factoring in momentum we’ve seen quarter-to-date, as well as tougher comparisons as we move through the remainder of the quarter, we anticipate comp sales to be in the high single-digit range. While it’s difficult to forecast comp for the rest of the year considering economic uncertainty, including the possibility of recession, we expect comps to moderate as we lap menu price increases in early Q2 and the middle of Q3.

I’ll now go through the key P&L line items beginning with cost-of-sales. Cost-of-sales in the quarter were 29.3%, a decrease of about 230 basis-points from last year. The benefit of menu price increases and lower avocado prices offset elevated costs across-the-board, most notably in dairy, tortillas, Beans Rice and Salsa. In Q1, we expect our cost-of-sales to be in the high 29% range due to higher prices across several items including queso, salsa, spices and oil.

Labor costs for the quarter were 25.6%, a decrease of about 80 basis points from last year. The benefit of sales leverage was somewhat offset by wage inflation in addition to higher-than-expected sick pay and medical claims. For Q1, we expect our labor cost to improve slightly, but remain in the mid 25% range due to seasonally higher employee taxes as employee taxes start the year at an elevated level due to resetting of wage caps. Other operating costs for the quarter were 15.7%, a decrease of about 60 basis points from last year. This decrease was driven by a decline in delivery expenses due to lower delivery sales, as well as sales leverage, partially offset by higher-cost across several expenses including natural gas and maintenance and repairs.

Marketing and promo costs for the quarter were 3.4%, 20 basis-points below last year. In Q1, we expect marketing costs to be in the mid 3% range, with the full-year to come in around 3%. In Q1, other operating costs are expected to be in the low 15% range. G&A for the quarter was $135 million on a GAAP basis or $129 million on a non-GAAP basis, excluding $4 million in legal expenses, $1 million related to the previously-disclosed modification to our 2018 performance shares and $1 million related to transformation expenses. G&A also includes a $119 million in underlying G&A, $18 million related to non-cash stock-compensation, which includes a reduction in the estimated payout levels of our performance-based stock awards. And it was offset by $8 million reduction of performance-based bonus accruals. We expect our underlying G&A to be around $121 million in Q1 and continue to grow slightly thereafter as we make investments in technology and people to support ongoing growth. We anticipate stock comp would be around $25 million in Q1, although this amount could move up or down based on our performance and is subject to the 2023 grants, which are issued in Q1.

We also expect to recognize around $7 million related to employer taxes associated with shares that vest during the quarter and $2 million for costs associated with our field data conference in February, bringing our anticipated total G&A in Q1 to around $155 million. Appreciation for the quarter was $74 million or 0.4% of sales. And for the full-year 2023, we expect it to inch up slightly each quarter as we open more restaurants. Our effective tax rate for Q4 was 26.3% for GAAP and 25.1% for non-GAAP. And for 2023, 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.

Our balance sheet remains strong as we ended the quarter with $1.3 billion in cash, restricted cash and investments with no debt along with a $500 million untapped revolver. During the fourth-quarter, we repurchased $199 million of our stock at an average price of $1,487 and we repurchased a total of $827 million in 2022, which was the largest amount ever repurchased in a single year. 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, our Board authorized an additional $200 million to our share authorization program. And at the end-of-the quarter, we had $414 million remaining. We opened a record 100 new restaurants in the fourth-quarter, of which 90 had a Chipotlane. And we remain on track to open 255 to 285 new restaurants in 2023 with at least 80% including a Chipotlane. Development delays remain a headwind including utility installation, permitting and inspection delays, construction labor challenges and component of raw-material shortages. While we expect these challenges to persist into 2023, our pipeline remains strong and we expect to move towards the high end of the 8% to 10% openings range once these headwinds subside.

To conclude, we are off to a strong start in 2023 with early signs of progress from our focus on getting back to the basics of running great restaurants and try to bring our guests. While we cannot predict how the macroeconomic environment will play out over the next 12 months, we will continue to strengthen our operations and work hard to earn each and every customer visit. I want to thank our restaurant teams and our restaurant support teams for all their hard work this year and for their commitment to Chipotle.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions]. Yeah, the first question will be from David Tarantino from Baird. Please go-ahead.

David Tarantino — Baird — Analyst

Hi, good afternoon. I have a couple of questions about your commentary on traffic trends. I think Brian you mentioned that underlying traffic trends have turned positive if I heard that correctly. So I’m wondering what you meant by the word underlying if you’re making some adjustments to that. And I know January had a lot of puts and takes with respect to the comparison against the Omicron last year and then perhaps you had some favorable weather this year. So, I’m wondering, it seems like you’re linking some of their traffic progress towards some of your internal initiatives. And I’m wondering how you’re adjusting for some of the factors that maybe were outside of your control?

Brian Niccol — hairman & Chief Executive Officer

First of all, underlying just means transactions. There wasn’t anything there. So thanks for asking for the clarity. And based on what we saw as we exited the quarter, our transactions turned positive and then we saw that continue to build in January. You’re right, there is some Omicron and then there was some good weather. But what we’ve also seen is our staffing is at the best it’s been. Our turnover is at the best it’s been in two years. And I think the combination of focusing on the basics, meaning no menu deactivations, keeping the lines open both our front-line and digital make line from open to close, teams deployed correctly is also a key driver in why we’re seeing the the traffic progress in January — throughout that whole month.

So we’re feeling good about where we are operationally. We believe we can still get even better as we get closer and closer to our infamous burrito season, but it’s a great position of strength that we’re walking forward from. And we like how we exited December and we like how January shaped up.

David Tarantino — Baird — Analyst

Great. And if I could just ask one follow-up on the operations. I’m wondering if you could maybe elaborate on what metrics other than transactions that you’re focused on and how those are progressing and what do you think maybe the ultimate target for those should be as you progress through the year or maybe work towards your goals there.

Brian Niccol — hairman & Chief Executive Officer

Yeah, sure. So I’d like to put a little color on this. Menu deactivations in our digital business, obviously, during the course of the last couple of years, we’ve had a lot of supply-chain challenges and one of the work arounds we created was allowing teams to deactivate certain items, right. So whether it’s block or chips or anything on those lines and we’re kind of just reestablished with both our suppliers, our distribution partners and our teams. That’s not a fallback position anymore. The expectation is, can you hear me David? I can. Thank you. The expectation is, you should be in stock and then you should be prepared from open to close with those items. So there are points in time during that quarter we had hundreds of menu deactivations and now we’re back into the single digits on how that’s going. So that’s a key metric. Another key metric would be our digital on time percentage. That’s improved by nearly 10 points. And so I think that’s a function again of being deployed correctly, staff correctly and then obviously having the ingredients you need in order to build the order correctly and then we’ve seen some progress on throughput as well on the front line. And I anticipate — really when we’ll see big movement on throughput is more towards the second-quarter when we get into kind of more of our peak performance and that’s why you saw us focused on hiring so many additional people. So there’s a lot of good indicators beyond just the traffic trends that we’ve seen. I always like to start with, hi, if you’ve got more stability, your teams are deployed correctly. They’re trained correctly. And then, we keep it very focused on the basics of running the restaurant. We know we get good outcomes.

David Tarantino — Baird — Analyst

Great, thank you very much.

Operator

And the next question is from Sara Senatore from Bank of America. Please go-ahead.

Sara Senatore — Bank of America — Analyst

Hi, thank you. I have a follow-up on labor and staffing and then a quick one on the new units. So just on the labor piece, I guess, could you help me reconcile — I think you’ve been saying mid-single-digit wage inflation and I think you had something like 15% price on the menu. So were those hours coming from what you were talking about like this sort of shoulder-to-shoulder drop chaining or is that 90% staff — 90% fully staffed, is that a lot higher than it was. Just trying to think about as we look-forward to the year if the — there should be more labor hour investments.

Brian Niccol — hairman & Chief Executive Officer

Yeah, well, I think what we’ve been referring to more often than not, it’s just the absolute wage that we’re paying and then what that inflation subsequent with that has been. The stores fortunately are — we keep track of ad model metric and that’s what we’re referring to where we’re closing in on 90% of our restaurants being at model.

In regard to the shoulder-to-shoulder training, that’s just part of our process. And I think there was an element at some point where we maybe getting to reliant on virtual training versus the shoulder-to-shoulder training, meaning our field leaders, our team directors also need to be in the restaurants, doing shoulder-to-shoulder training with our general managers and our new crew. So, that should not result in any additional labor cost with having more shoulder-to-shoulder training. But, Jack, I do not know if there’s anything you want to add to that.

Jack Hartung — Chipotle Mexican Grill, Inc

No, I think that’s right. We don’t think we need to add incremental investments and labor for the training because the best training is you put your teams in position. You have somebody that has chosen what do. You have somebody that’s watching them to kind of self-correct along the way. So it shouldn’t be extra labor per se. Now when we hired 15,000 people, there is going to be some additional training, but I don’t think it’s going to be anything that you’ll see will blow up the labor line on the P&L going forward at all.

Sara Senatore — Bank of America — Analyst

Okay, so just as we’re thinking about kind of the labor, there is still room I think what you’re saying for improvement on just the restaurant level margin line.

Brian Niccol — hairman & Chief Executive Officer

Yeah, definitely.

Sara Senatore — Bank of America — Analyst

Okay and then just quickly on the new-store productivity, could you clarify is it sort of — it’s 1,000 basis points better. Is that because Chipotlanes open at higher volumes than non-Chipotlanes and so it’s just sort of comparing the different models or is there something else going on where across-the-board, new-store productivity is better. Thank you.

Jack Hartung — Chipotle Mexican Grill, Inc

Yes. I’ll take that. I think it’s really more based on the Chipotlaness, because if you look over the last four years, we’re certainly got a little bit of longer period of time to look at all the openings. We’ve moved up our productivity. So for example, today our restaurants open up on average around 85% of what our existing comp stores are doing. If you look-back three or four years ago, we were in kind of the high 70% range or so. So there has been a step change and the biggest thing that’s happened from the 3, 3.5 years ago to today is we’ve moved from having just a handful of Chipotlanes to having the majority of our core portfolio is Chipotlanes.

And we still — when we look at what our Chipotlanes are doing, the 85% compared to 15% without a Chipotlanes, they continue to outperform that non-Chipotlanes cohort. So we think the main driveris the Chipotlanes and the convenience that our customers find with that digital drive through.

Sara Senatore — Bank of America — Analyst

Thank you so much.

Operator

The next question will be from David Palmer from Evercore ISI. Please go ahead.

David Palmer — Evercore ISI — Analyst

Thanks. I wanted to ask a question about digital orders. I have been somewhat surprised by the level of decline there. I think back in the third quarter, we estimated that digital traffic per store decline in the mid teens. That’s including both delivery and pickup and maybe you can comment, do you think that was correct, but also how much you think digital traffic per store declined in the fourth quarter and just relatedly, what are your thoughts about that channel. I know it’s important to you. What’s your outlook for it and other things you can do to stabilize that line. Thanks.

Jack Hartung — Chipotle Mexican Grill, Inc

Yeah.

Brian Niccol — hairman & Chief Executive Officer

Go ahead Jack.

Jack Hartung — Chipotle Mexican Grill, Inc

Yeah, I’ll just start David. Listen, there’s a couple of things that are driving it. One is, we’re having a surge and return to in-restaurant and so that part of our business is growing very, very healthily throughout the last year-and-a-half or two years since we’ve been moving away from the pandemic. But secondly, delivery has been declining as well. Delivery transactions in the fourth quarter declined 15% and that’s, I think, been just again a normal kind of move away from people getting out and about. And I think there’s probably some people who are deciding that while that channel adds a lot of convenience, there is higher price that comes with that.

So those are the two main drivers and we think here that digital would kind of sell in the high 30% range. And so we’re at 37% range now. So it’s within the range that we thought we would be and early on in the pandemic, we saw our two markets that were least affected would be the southeast and the southwest. When they were starting to normalize. they were normalized towards that high 30% range. So it feels like about the right range for us.

David Palmer — Evercore ISI — Analyst

So, it is your view that you’re going to start to kind of lap the second quarter things really step down or do you think you’re going to enjoy that comparisons when it comes to digital orders and start to stabilize on that channel and then perhaps enjoy some of the benefits you’re talking about with throughput on the front make line, is that [Speech Overlap] dual benefit there.

Brian Niccol — hairman & Chief Executive Officer

Yeah, that’s right, David. I mean, the way we think about it is, we feel like we’ve reset the delivery business to be now where it makes sense economically and as such you know our order ahead business, I think, has started to show you know the right trajectory and then obviously our in-store business has shown tremendous acceleration. So, I think you said it well.

David Palmer — Evercore ISI — Analyst

Thank you.

Operator

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

Andrew Charles — Cowen — Analyst

Great, thanks. Jack, I have two margin questions for you. There’s obviously a lot of noise in 4Q, labor cost was –1Q guidance for labor. And I’m curious of the impact of higher expected sick claims have in 4Q. And then I missed the term, but there’s some external factors that you’re betting within the mid 25% labor margins. Can you just help tease this out in terms of what that impact is from that external factor? And then my other question is, if we zoom out and fast-forward to when you get to the $3 million sales volumes, what’s your level of confidence in achieving 27% restaurant-level margins relative to what you might have said a quarter ago, you know, if the sales structure has obviously been up and to the right and you’re exactly getting towards that target?

Jack Hartung — Chipotle Mexican Grill, Inc

Yeah, so let me start with the fourth quarter. Our expectations were that our margin would be more than 25% range rather than the 20% range. And when you look at the pieces of how we got down to 24 part of it was loyalty breakage. Frankly, there was an 80 basis-point change year-over-year and the comp related to just that journal entry that we had to book for the breakage. If you look at just the — there was 30 basis points of additional — reduced breakage that we had to reflect this year. That cost us 20 basis-points on the margin. It was 60 basis points on– we saw higher than expected medical claims and sick pay during during the quarter as well. We typically do see those things pick up a little bit in the fourth quarter, especially in December. But, the surge was more than we expected. That’s not something that we would expect to recur. And then sales softened during December as well. I think that went hand-in-hand with softer retail sales. We know there were some weather and a seasonal shift and holidays and things like that. And that was — that was 20, 30 basis-points or so. So we look at that margin in the fourth-quarter. And we think as those things normalize, there is as much as a 100 basis point or so that we can get back. We won’t get it back all at one time. But we definitely think we have the potential to do that. So with that in mind, if you’re looking at more that high 24% and that 25% range on a normalized basis, then we are confident that as we move from the current volumes on the menu price adjusted basis just over $20 — $2.7 million up towards that $3 million. The flow-through that we know our model provide will still get us to that 27%. And can you clarify — I’m sorry, you said, sales were a bit softer than you guys expected in December. I think earlier in the script, you guys talked about how there was improvement through the quarter. So is that just a reflection that December didn’t perform to the level you guys are really expecting. Yeah, listen the way I would describe the quarter, we started out soft and we talked about that in October that we are doing a mid-single-digit comp, that GGS, while there was an attachment rate that was as expected, it wasn’t driving transaction. So, we started out soft in the quarter. We picked up as we start comparing against Brisket. That was in the middle of November. So we had call it high-single digit comps for a while and then we lapped the menu price increase from December of 2021. And then just as we got around the holidays, we just didn’t see that pop, that momentum that we normally see in December. So, the way I would describe it is frankly we started the quarter soft and we ended the quarter soft. Now what we’re happy about is as the holidays — we got through the holidays and we got into January, that’s where our our transactions, not just from a comparison standpoint but just on a trend month-over-month really did improve. And so we feel good about where we go from here. But yeah, the fourth quarter was a tough quarter for us.

Andrew Charles — Cowen — Analyst

Thanks for the color Jack.

Operator

The next question will be from Brian Bittner from Oppenheimer and Company. Please go-ahead.

Brian Bittner — Oppenheimer and Company — Analyst

Thank you. Thanks for the question. As you move throughout 2023 and you lap some of these large menu price increases as the year progresses, would you — think about replacing them with some type of increases, albeit, probably a lot more normalize, more lower-price increases or do you plan to let these fully roll-off. And Jack, as you sit here today, what do you anticipate the total pricing factor to be for the full-year ’23 for the same-store sales model?

Jack Hartung — Chipotle Mexican Grill, Inc

Yeah. I mean, I’ll start with that and then we can talk about expectations. We’re running right now in that kind of 9% to 10% range. And as I mentioned, it rolls off early in Q3. And then in — I’m sorry early in Q2 and mid Q3. And then there are couple of delivery adjustments, target adjustments in there as well. We’ll end up being somewhere in that kind of mid-single-digit because by the time you get to the end-of-the year, we’re running basically zero pricing. So overall for the year, it will be somewhere in that kind of mid single digit. In terms of pricing action, we’re not going to take a price increase just to cover a lap over last year. The main thing we’re going to is we’re going to watch inflation and we’re going to hope that inflation is tamed.

Right now, we know that there is some pressure on a few of our ingredients. Beef is the one that we keep hearing about. We haven’t seen it yet, but everyone is predicting that there’s going to be greater supply versus demand. But we’ll watch that carefully and see what inflation does, but it’s going to be more about inflation and wages inflation and ingredients. And do we need to take pricing action to cover some of that? But we wouldn’t take a price increase just to cover a comp lap.

Brian Bittner — Oppenheimer and Company — Analyst

That makes sense and just a clarification on the same-store sales guidance for the first-quarter. I know you’ve talked a lot about traffic flipping positive here in January. But if we just hypothetically land in that high-single-digit range for the first-quarter, what do you think mix and traffic would separately be in that build if it kind of played out how you thought?

Jack Hartung — Chipotle Mexican Grill, Inc

Yeah. I mean, right now we’re running call it mid-single-digit positive traffic. We expect for the quarter that guidance range — assume there were also going to be positive transactions more in the low-single digit as we move away from Omicron. Pricing will be that 9% to 10% range that I mentioned. And then there’s going to be a mix component. We think it’s kind of probably be in that low maybe two-ish, three-ish percent something like that. Mix is a little harder to predict, but those are the main components.

Brian Bittner — Oppenheimer and Company — Analyst

Great, thank you.

Operator

Thank you. And the next question will be from Jon Tower from Citigroup. Please go-ahead.

Jon Tower — Citigroup — Analyst

Great, thanks for taking the questions. Quick clarification on a question, on the new-store productivity, I know, you talked on this a little bit earlier during the quarter. Was there anything about timing where based on the way that we can calculate, it looks like the productivity of the stores might have been a little bit lower than the normal. And I don’t know if that’s related to timing or something else that’s kind of the clarification. The question is then on thinking about the Garlic Guajillo Steak, it didn’t live up to your expectations. Curious if you could dissect that and give us a reason. So what you might have missed. I know it hasn’t been that long, but curious to know. How it didn’t perform versus your expectations and why you think that happened?

Brian Niccol — hairman & Chief Executive Officer

Well, I’ll let Jack answer the first one on the store productivity and then I can chime in on that.

Jack Hartung — Chipotle Mexican Grill, Inc

Yeah, you hit the nail on the head. We opened a record 100 restaurants during the quarter, but it was very-very back-loaded. Our teams did a great job up just scratching, clawing and doing everything they could to get the restaurants opened. I think we probably had a record opening in the month of December as well. We had more than half of the openings were in the last month of the year. So you’re not — you didn’t see a typical sales flow-through, considering we opened 100 restaurants.

Brian Niccol — hairman & Chief Executive Officer

And then on your question about Garlic Guajillo Steak, look. I think it’s one of those things where we tested it in a very different environment than when we rolled it out. And as a result, we got the check benefit, but we didn’t get the transactions. And it also had the challenge of rollover Brisket, which was arguably one of our best-performing menu items that we’ve done to date. But we’ll continue to analyze, that we make sure we learn from it going forward and that’s why we use the stage gate process so that we are always learning.

Operator

Thank you. And our next question will be from Sharon Zackfia from William Blair. Please go ahead.

Sharon Zackfia — William Blair — Analyst

Hi, good afternoon. I wanted to ask a question about staffing and the lower turnover that you’re seeing. Is there a way to kind of compare and contrast tenure on the frontline now versus 2019. And if we think about throughput opportunity as we enter high season, I mean how much is the frontline because it is less experienced, kind of lagging where you were in 2019 or dimensionalize kind of how much throughput opportunity is really on the table here as you have in a more productive frontline staff.

Brian Niccol — hairman & Chief Executive Officer

Yeah, look, thanks for the question on this because I think this is an important one, which is, what we know is we have our teams at model and deployed correctly with leadership presence for shoulder-to-shoulder training our restaurants perform. And that’s what we saw in 2019 and that’s what we anticipate occurring going forward. So we know there is upside in how much throughput is our teams are capable of doing. And obviously, we’re targeting to get those throughput numbers back to where they were in the 2019 time period. The one thing that’s nice is our turnover levels have dropped. So we’re getting more stability in the teams, which means they’re getting more reps. So that as we walk into these higher level or higher-volume months, they’ve got more reps and being deployed correctly, working together correctly to ensure that we get more throughput. So that’s what we’re focused on is, the people that we have today, how do we get them trained?. How do we get them deployed and then how do we make sure those teams stay together?

Jack Hartung — Chipotle Mexican Grill, Inc

Yeah, and just to add, when we look at the time and position back to 2019 and there are two factors here. One is turnover. The other one is promotion rates as well. But when your turnover slows down, people are going to be in their position longer. And for example, on the kitchen manager, we are very close to where we were in 2019. So the average tenure in the kitchen manager role was like 0.69, meaning it was about eight months or so. Today, it’s like 0.64. So it’s like maybe 7. 7.5 months something like that.

In apprentice, we’re not quite back to 2019, but we’re ahead of where we were a year ago and we were in striking distance again. So those are areas that we we’re saying that our average tenure was going down during the high turnover period of the last year-and-a-half or so. But those numbers appear to just like with the turnover be stabilizing and moving back up.

Operator

Thank you. And the next question will be from John Ivankoe with JP Morgan. Please go-ahead.

John Ivankoe — JP Morgan — Analyst

Hi, thank you. I know you’ve been working on a number of different automation technology practices in the store that could potentially reduce the demand for labor and also make you more efficient, perhaps more consistent in some ways. So, I was just hoping you could take a few minutes or a few seconds and just kind of talk about some of the different packages that you have, how far along they are and when you we actually might be able to start to see some benefit, even if it’s on a limited basis at a market level?. Thank you.

Jack Hartung — Chipotle Mexican Grill, Inc

Yeah, sure. So probably the one that’s closest in is the new grill work that we’ve got going on, which I mentioned in my earlier remarks. It just gives our teams a tool that allows them to cook the chicken, frankly just perfect every time and a lot faster, significantly faster. And the same thing goes for steak. And we’re actually moving that from a one store test now to a multi-store test as we speak. So we’re excited about that one. Obviously, we’re working on a automated digital make line, which is in partnership with Hyphen and we’ll get the first one of those into a real life prototype in our cultivate center probably end of this quarter or early in the next quarter. So that was a little bit further out.

And then we just got rolling with a live pilot on the what we call Chippy, which is our automated arm — robotic arm to fry chips and so much more information on that as that goes live in one restaurant. So I’d say the one that’s probably close in is the grill. And the one that was probably farthest out probably is our digital make line — automated digital make line, But all these are really promising because when you can significantly reduce cook times and then make the practice of grilling chicken and steak easier, good things happen with our culinary and that’s what we’ve seen in the one restaurant. People are giving us feedback that the steak and chicken tastes great. Our team members are giving us feedback that they love using the new grills and so more-and-more consistent with great culinary, everybody wins.

John Ivankoe — JP Morgan — Analyst

Thank you.

Operator

The next question will be from Dennis Geiger from UBS. Please go-ahead.

Dennis Geiger — UBS — Analyst

Thank you. Just first wondering if it would be possible to give the traffic mix price for the 4Q and then the question is really about pricing — another one on pricing. Jus curious if you believe you’ve seen any customer resistance to pricing levels? How that’s kind of shaped how you thought about the pricing that you talked about for the year. And related to that, any kind of update on value scores. The low-income customer that you spoke to you last quarter, anything as it relates to shaping your view on how the business performs into a potentially tougher macro. Thanks guys.

Brian Niccol — hairman & Chief Executive Officer

Yes, sure. So, look, we really have not seen any meaningful resistance to our pricing, especially as it relates to in-score experience. Obviously, the delivery channel was down but I think that’s a function of a couple of things. One, you do have to pay a premium for that occasion, combined with that the in-store experience is back and people are back out and about. So potentially, they see the convenience, the customization of coming into our restaurant and giving it on kind of their control terms. We continue to see the higher income consumer, the individual that earns over $100,000 coming more often. And frankly, I think the same thing would have happened with the low-income consumer regardless of what the pricing was that we acted on. We made the decision not to go chasing people with discounts. That’s not what our brand is and that’s not what we’re going to do. We’re better off winning the value gain through great culinary, great speed/convenience, terrific customization. We know that continues to resonate. Our value scores continue to be really strong.

If you look at people that I would say are comparable, you know that are in the fast casual category, we’re still a 10% to 30% discount. So, look, I think we’ve made a lot of really good moves to kind of move with the challenges that we’ve had to deal with. And as a result I think we’re seeing stronger operations, stronger teams and we’re seeing I think that work come out to bear in January and where we are here in February.

So. Jack, I do not know if there’s anything to add to that.

Jack Hartung — Chipotle Mexican Grill, Inc

No. I think you said that perfectly, Brian. And just — I think you were looking for the components in the quarter. The components of our pricing was about 13.5%. Transactions were down about 4%. Mix was down about 3%. So that gets you to an underlying comp about 6.5%. And then we had the journal entry that deals with breakage, and that was 80 basis points. So that gets you to the 5.6% comp.

Dennis Geiger — UBS — Analyst

Great, thank you guys.

Operator

And our next question is from Jeffrey Bernstein with Barclays. Please go ahead.

Jeffrey Bernstein — Barclays — Analyst

Great, thank you very much. First question is just on the restaurant margin for full year 2022. You ended in that 24% range. You talked about maybe some headwinds in the fourth quarter that brought that in below expectation. I’m just wondering if you can give any specific thoughts as you look to full-year 2023. I know you gave some color specific to the first-quarter, but as you think about the environment going-forward, your pricing perhaps rolling-off by the end-of-the year and what you know today based on kind of the key cost pressures, I’m just wondering your thoughts on the full-year 2023, whether it’s reasonable to assume a return to 25% plus in 2023 or beyond. I know you mentioned getting to more like 27% when you hit the $3 million, but just wondering kind of on the interim what you’re thinking specifically at 2023.

Jack Hartung — Chipotle Mexican Grill, Inc

Yes, I mean, it’s so hard and the reason we gave some color on the first quarter, but not beyond that is, we don’t know what’s going to happen to the economy. We think inflation will be reasonably tamed. Hopefully that will come true. And we don’t — we haven’t made any decisions on pricing action right now. So Jeff, the way I would think about it is we’re going to kind of let the year play out. We’re going to do everything we can in terms of managing supply chain, managing as we recruit people. We’ve got to pay the wages to make sure that we gear up for burrito season.

We’ll watch how the inflation element plays out. And we don’t have any plans right now to take pricing action. So we might be more patient this year than we were last year. The inflation kept coming at us, and then we could see more ahead and we take pricing action, we see even more ahead. It doesn’t feel like it’s at that fever pitch. So I think you could see us being more patient this year. What I can tell you is when things do normalize, whether that’s later this year or into 2024, we absolutely have at these kind of volumes, the ability to get a margin up into that 25% range on a sustainable basis and then it’ll grow from there.

I just don’t want to make any promises on a quarter-by-quarter basis just because so many things has happened — have happened in the last several quarters, and it’s hard to predict what’s going to happen, but I do know that our model is intac.

Jeffrey Bernstein — Barclays — Analyst

Understood. And I’m just following up on a couple of bigger picture topics. I think, Brian, you mentioned that international growth’s going to be at, I think you said a measured pace. I’m wondering if the headwinds to your point about the economy in Western Europe perhaps, is the primary reason why it’s measured or maybe there are other causes for concern. Anything around that international acceleration and when the timing of that might be would be great. Thank you.

Brian Niccol — hairman & Chief Executive Officer

Yes, sure. So obviously Canada its full steam ahead, right? We’re opening; I think the most restaurants we’ve ever opened from a percentage standpoint and probably absolute standpoint ever in Canada, which is really exciting. And those economics continue to perform really well. When you look at Europe, look, the top line is really performing. And frankly, we’ve been much more patient on pricing there because we want to make sure that people have the experiences with Chipotle. So, there’s a lot of inflation that we’re still dealing with in Europe. But look, we like what we’re seeing. The good news is feedback on the experience is really very positive. Feedback on the culinary is very positive, and the most recent restaurants that we’ve opened are performing really well.

So, we’re just taking our time with it because unfortunately the last three years have not been normal in any way. So we want to make sure we aren’t getting any false positives or false negatives on any part of the business. So the good news is we’ve got a tremendous growth runway in the United States that we can be very patient with how we approach our international expansion. But look, the early signs are people like burritos and bowls and they like our culinary and they like the convenience and they like the speed. So that’s a recipe for a lot of opportunity down the road.

Operator

Thank you. And the next question is from Danilo Gargiulo with Bernstein. Please go ahead. Great, thank you. So if I understand correctly, the traffic improvement you’re seeing seems to be standing primarily from productivity and operational improvement also as you are moving along in 2023. But I’m wondering your expectations on the demand side from consumers and in particular, whether you are seeing or expecting any trends that could be possibly offsetting the productivity and operational improvements as we are moving along in 2023?

Brian Niccol — hairman & Chief Executive Officer

No, look, the consumer demand, especially if we use kind of our in-store experience right now looks to be there. Especially as you look at the higher income consumer, their purchase frequency has actually gone up. So, we fundamentally believe that better we operate, the better our performance will be. And that’s why we’ve got, Scott and the team have a full court press frankly on great people, great culinary. If we do those two things against our operating standards, we believe we’ll continue to make progress on throughput and we’ll continue to see the gains that hopefully we’ve experienced in the first part of this quarter.

Danilo Gargiulo — Bernstein — Analyst

Thank you. And I think you also mentioned there are some positive signs that are emerging from Project Square One. I was wondering if you can elaborate on that one and maybe like share a couple of metrics where you’re particularly proud of?

Brian Niccol — hairman & Chief Executive Officer

Yeah, look I mentioned this earlier obviously one of the things that we’ve seen is a lot less incidence of many deactivations. So when you go to order online, all the products are available chips, guac, chicken, steak. That is dramatically decreased. And we know that’s a big deal because when you order online, if you don’t have what you want available, your conversion rate goes down. And so we’ve seen when we have the products in stock, our conversion rate gets back to where it should be.

We’ve also seen a huge step up in our on time percentage, on time in a meaningful way. And then we’ve also already seen some progress on throughput, albeit small movement, but I think that has more to do with the time of year than a testament to the impact of Project Square one. What I also think is also really great news is we have more stability in our teams than we’ve had in over two years, and we’ve got more teams at model with less turnover, and I think Scott’s got these teams focused on deploying correctly and getting trained shoulder-to-shoulder so that they’re ready to go when the rush shows up.

Operator

Thank you. And our final question today will be from Brian Harbour from Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yes, thank you. Maybe first just a question on delivery. Are you able to see in your data that those customers have shifted to coming into the stores or mobile order ahead or do you think those customers have basically fallen off as you’ve seen that business decline a little bit?

Brian Niccol — hairman & Chief Executive Officer

What it looks like to us is we’ve definitely seen people make a shift in restaurant and then some shift to order ahead. That’s probably been the biggest trends that we’ve seen. Obviously the premium especially when you operate in our white label execution is one of those places where you can quickly compare, like what’s the difference between ordering delivery versus ordering pickup. And that’s an obvious one where I think we’ve seen as a result, people they toggle between the two and then they choose order ahead.

So yes, we’ve seen people stay committed to the idea of getting Chipotle. I’m sure there are those customers where if something’s, free somewhere else for delivery, they might take advantage of a freebie. But look, we’re not interested in renting or borrowing customers. We want people to be a part of the Chipotle business because the value proposition is right for them, they buy into, the food that we provide, the culinary that we provide at the convenience and speed at which we provided. So that’s been a conscious choice, and I think it’s going to serve us well in the long run.

Brian Harbour — Morgan Stanley — Analyst

Okay. And maybe just a related question on kind of some of the new perks that you rolled out, the Freepotle that you launched in January. I mean, is it your view that, that drives kind of a step up in frequency or how else do you think it’ll affect customer behavior? Is there any margin impact of that? And then I guess, also you, it sounds like you’ve seen kind of mobile ordering stabilize, but do you want that to grow as you go into the next couple of years and do you think this can kind of be a catalyst for that?

Brian Niccol — hairman & Chief Executive Officer

Yes, look it’s doing two things. One, it’s hopefully keeping more people engaged in the loyalty program. We’re only what, one month in on it. And then also acquiring more people into the rewards program. And so it looks really promising that it’s doing exactly what we’ve want it to do. But again, it’s only one month in. And what was your second part of your question?

Brian Harbour — Morgan Stanley — Analyst

Just if you think that, that;s kind of the, the next catalyst for driving greater, more order penetration.

Brian Niccol — hairman & Chief Executive Officer

Yes, look, what we definitely know is when people are engaged in our rewards program, we get more purchase frequency out of them. And the most engaged people come through our digital business when it comes to our rewards program. So I do think the combination of, high engagement with rewards specifically around the amount of personalization that we’re doing here, will result in more frequency out of customers down the road. And usually, that comes via a digital experience is where you see more of the impact from the rewards program.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

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 — hairman & Chief Executive Officer

Okay, thanks. And thanks everybody for all the questions and being a part of the call. Obviously, 2022 was another one of these years where a lot of unexpected things occurred. But I do think once again, we’ve demonstrated the resiliency of Chipotle and the power of our food with Integrity purpose combined with the culinary and convenience that we provide. Again, we were able to expand our AUVs our margins. We had a record number of store openings in the fourth quarter. And, we’re optimistic about where the business is today because of the focus on great operational execution, combined with great culinary and great people. And you’re going to continue to see us stay focused on executing those basics while we continue to execute against the other strategies to make the brand more visible, loved and hopefully engaged with. So off to a good start in 2023 and we’re optimistic about our growth runway going forward. So thanks everybody for being a part of the call and we’ll talk to you soon, I’m sure. Take care. Bye.

Operator

[Operator Closing Remarks]