Chipotle Mexican Grill (CMG) Q3 2024 Earnings Call Transcript – CryptoMonitor.In

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

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Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

More CMG analysis

All earnings call transcripts

Chipotle Mexican Grill (CMG -0.18%)
Q3 2024 Earnings Call
Oct 29, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Chipotle Mexican Grill third quarter 2024 results conference call. All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions] Please note today’s event is being recorded.

I would now like to turn the conference over to Cindy Olsen, head of investor relations and strategy. Please go ahead.

Cindy Olsen — Head of Investor Relations and Strategy

Hello, everyone, and welcome to our third-quarter fiscal 2024 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements.

These statements are based on management’s current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the Presentation page within the Investor Relations section of our website.

We will start today’s call with prepared remarks from Scott Boatwright, interim chief executive officer; Jack Hartung, president and chief strategy officer; and Adam Rymer, 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 Scott.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, Cindy, and hello, everyone. Before I get into the details of the quarter, I know I speak on behalf of everyone at Chipotle when I say that we are grateful for Brian’s leadership and for the transformation he led. Over the past several years, we’ve built a strong team with a great culture and had developed compelling and successful strategies together. With that said, after leading our operations for the last seven years, I’m excited and honored for the opportunity to lead Chipotle as our Interim CEO.

To start, there are three things I want to make very clear today. The first is that I’m extremely passionate about our brand and purpose. We are truly a special company that cares about the culinary heritage that Chipotle was founded upon, and our purpose of cultivating a better world resonates with our teams at all levels of our organization as well as with the guests we serve in our restaurants each and every day. I’m also passionate about our people, and I strongly believe we have the best in the industry, both in our restaurants and at our support centers.

Since joining Chipotle in 2017, I’ve had the privilege and responsibility of leading our restaurant teams as we have grown from under 2,300 restaurants to over 3,600 restaurants today, employing over 125,000 people. I can tell you firsthand how hard our teams work to provide our fresh, delicious, and customizable culinary experience at accessible prices to millions of people every day. These exceptional people are the backbone of our great brand. And the third is that our strategy is not changing.

I have worked alongside our talented executive team to craft and evolve our successful strategy and we will continue to execute against it. This includes our long-term targets of expanding to 7,000 restaurants in North America, increasing our AUVs to over $4 million, and expanding our restaurant-level margins, and growing internationally. Now, before I dive into our five strategies, I want to run through our third-quarter results. We had another outstanding quarter with positive transaction growth every month.

We saw momentum build throughout the quarter as the impact from summer seasonality normalized and as we successfully launched Smoked Brisket, which is off to a fantastic start. For the quarter, sales grew 13% to reach $2.8 billion, driven by a 6% comp with over 3% transaction comp growth. In-restaurant sales grew by 18% over last year. Digital sales represented 34% of sales.

Restaurant-level margin was 25.5%, a decrease of 80 basis points year over year. Adjusted diluted EPS was $0.27, representing 17% growth over last year. And we opened 86 new restaurants, including 73 Chipotlanes. The momentum in the business has continued into the fourth quarter with accelerating transaction trends, and we are maintaining our full-year guidance of mid- to high single-digit comps.

Now, let me provide an update on our five key strategies that have helped us win today and will grow our future. These strategies include running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; amplifying technology and innovation to drive growth and productivity at our restaurants, support centers, and in our supply chain; sustaining world-class people leadership by developing and retaining diverse talent at every level; making the brand visible, relevant, and loved to acquire new guests and improve overall guest engagement; and expanding access and convenience by accelerating new restaurant openings in North America and internationally. Let’s start with running successful restaurants and our progress on throughput. We have mentioned this in the past, but it’s important to say it again, throughput is a core focus for Chipotle because it is the outcome of a strong operational engine that delivers a great experience for our guests and teams.

And execution in our restaurant is improving as we continue to build our throughput muscle. Last quarter, we began concentrating our efforts on the Expo position as it is a critical pillar of throughput. As a reminder, this is the crew member between salsa and cash, who helps expedite the order assembly and payment process. Restaurants with an expo in place are averaging five incremental entrees in their peak 15 minutes.

We are often asked why it’s so challenging to execute this key pillar of throughput. Well, the crew member responsible for the Expo position may be doing other tasks like prep, which prevents them from being properly deployed. In late August, we made a decision to have the management duty deployed to the Expo position during peaks. This has helped to improve the percentage of restaurants with an Expo in place to over 60%, compared to just over 50% last quarter.

It has also helped to drive accountability, improve communication with the guests, and ensure we are properly ringing up each order. While we are making great progress on executing the four pillars of throughput, we still have work to do. Of the restaurants that do not have the four pillars in place, we are finding that often our crew members are still prepping food during peak periods. The fact is preparing our delicious food is a lot of work and requires strong culinary skills.

Our teams are beginning prep at 6 or 7 a.m. in the morning to be able to deliver our food on time when we open. This includes slicing and dicing produce, hand-mashing avocados to make our delicious guacamole, frying our chips every day, and grilling items like the Fajita Veggies and adobo chicken on the plancha. In addition to coaching and training around throughput, we are also exploring ways to make the prep process easier on our teams while ensuring we are maintaining or improving upon our high culinary standards.

This brings me to technology and innovation. We now have several initiatives in stage gate that could help to improve the prep and cooking process and drive a better experience for our teams. Two that I’m particularly excited about are the dual-sided plancha and the produce slicer. As we mentioned last quarter, we are in the process of rolling out the dual-sided plancha to an incremental 74 restaurants, which will be complete by the end of next month.

And as part of the stage gate process, we are now evaluating implementing the dual-sided plancha into new restaurant openings, as well as retrofitting existing restaurants and we’ll have more to share on this early next year. Additionally, over the last year, we have been testing a produce slicer. In our restaurants, slicing and dicing vegetables like jalapenos and bell peppers is one of the most time-consuming and repetitive tasks. It would be an understatement to say our teams are excited about this new tool.

In fact, at our All Manager conference in March, nearly 5,000 managers and above restaurant leaders gave it a standing ovation. The new produce slicer drives improved efficiency, which will allow our teams to complete the prep process on time in every restaurant, resulting in better deployment at peak and better throughput. And it also improves our culinary by delivering consistent cut sizes. I’m excited to share that we are beginning to roll out the new produce slicer in all restaurants, which should be complete by next summer.

Beyond these two initiatives, our augmented makeline by Hyphen and Autocado, which cuts cores and scoops avocados were installed into their first restaurants for pilot testing during the quarter. These are both highly customized technologies that could provide big unlock for us in the future. We have already received a lot of learnings on both innovations from our crew and our guests that will be used for future iterations. As you can see, we have a number of initiatives underway, and I envision significant back-of-the-house changes in the near future that will drive efficiencies and improve the consistency of our culinary and our restaurants.

This will enable our teams to focus on and execute the four pillars of throughput better than we ever have and deliver an exceptional experience for our guests in-restaurant every day. Let’s shift to world-class people leadership. In addition to innovation that helps to better enable the preparation of our delicious food, we are also rolling out a new technology platform across all restaurants that will make the hiring process simpler, faster, and more automated. The new AI hiring platform automates the communication and scheduling between applicants and our general managers, reducing the amount of time it takes to hire an employee for an in-restaurant position by as much as 75%.

The automation of this administrative task will allow our GMs to spend more time coaching and developing their teams and providing excellent hospitality for our guests. And it also gives us a competitive advantage against the other restaurant chains in the high-volume hiring market because we can hire talent faster. As I mentioned earlier, I’m passionate about our people and building a strong culture that recruits, retains, and grows the very best. And I’m thrilled to share that Chipotle was ranked first among 400 of the largest publicly traded companies in the American Opportunity Index of Best Places for High School Graduates to Start a Career.

The rankings were based on how well the company hires entry-level employees, promotes from within, and prepares them for opportunities when they leave. The very best benefits we offer our teams is our career advancement opportunity. We have so many stories of crew members who have started at Chipotle and grown within the organization, resulting in life-changing careers, including several to the position of regional vice president, overseeing hundreds of restaurants and $1 billion-plus business. In fact, a team director out of the Chicago region has one of these inspiring journeys.

She came to the U.S. at the age of seven with her parents and brother as refugees and at the age of 18. She started working at Chipotle as a crew member for her first job out of high school. She has advanced within Chipotle to become a top-performing team director and now is responsible for 61 restaurants or almost $200 million in sales each year.

She clearly demonstrates and understands that developing and growing future leaders is what makes Chipotle a special company. My favorite part about her journey is that through her financial success at Chipotle, she was able to help her mom retire, which she views as her biggest accomplishment. I could not be prouder to be part of an organization that prioritizes our people and their growth. And the exciting part is that as we look to grow to 7,000 restaurants in North America and expand internationally, we will be adding hundreds of new restaurant leadership roles each year.

And we will continue to pursue our goal of promoting over 90% from within. The future is very bright at Chipotle. Now, turning to marketing. I have to take a moment to acknowledge our marketing team for their outstanding work over the years in making Chipotle more visible, more relevant, and more loved.

Our brand continues to lead and gain momentum in many categories like quality of ingredients, quality of food for the money, and healthy and nutritious. This is a result of a strong marketing strategy and brand campaigns like Behind the Foil, which showcases our Chipotle teams preparing our fresh delicious food. The campaign is certainly resonating well, and we will continue to evolve it and find new ways to put a spotlight on what differentiates Chipotle, which is our food, our people, our purpose, and our values. Turning to menu innovation.

Our limited-time offers continue to surpass our expectations. Our guests have been craving the return of Smoked Brisket for three years, and it’s off to a very strong start, driving incremental transactions and spend. As we have mentioned in the past, given the limited supply of responsibly raised beef, it was a huge cross-functional effort to bring back this fan favorite, and we anticipate it will last through the fourth quarter. We also have been testing Chipotle Honey Chicken, which is our adobo chicken season with savory Mexican spices and finished with a touch of pure honey.

Similar to Chicken al Pastor, it is simple to execute in our restaurants and absolutely delicious. This has been one of our most successful tests to date, both in early sensory testing as well as in the broader two market tests we are currently running in Nashville and Sacramento. I’m delighted to share that Chipotle Honey Chicken has made its way through the stage gate process and is ready to be rolled out in the future. Finally, coming up this week will be our annual Boorito promotion.

This year, our marketing team found another creative way to lead culture as we collaborated with Spirit Halloween and launched a new collection of Chipotle costumes, inspired by popular memes on our social channels, which has generated some of our highest social engagement this year. Now, moving on to our final strategy, which is to expand access and convenience both in North America and internationally. In North America, our development team made great progress smoothing the cadence of openings with 185 new restaurant openings year to date, which compares to 149 at this same time last year. We remain on track to open between 285 and 315 new restaurants this year, which will mark another record for us.

As we look at 2025, we anticipate opening between 315 and 345 new restaurants, with at least 80% including a Chipotlane. In Canada, our new restaurant openings continue to be outstanding. And in the third quarter, we entered another new market with our first restaurant in Edmonton, which broke an opening day record for North America. We will surpass 50 restaurants in Canada next month, which is a huge milestone.

Our unit-level economics and returns remain on par with the U.S., and we will continue to accelerate growth in Canada in 2025. Turning to Europe. Under the new leadership team, we are beginning to see promising results. We have better aligned our culinary and menu to the North American standards, and we are in the process of fully unlocking the functionalities of our operational tools to better manage labor and food costs.

Additionally, similar to our successful strategy in Canada, we are rolling out local and digital marketing initiatives, which are building brand awareness and bringing more guests into our restaurants. The recent performance gives us confidence that we can begin to build our restaurant pipeline for the future, and I’m optimistic that Europe will be a sizable growth opportunity for Chipotle over the coming years. Finally, I’m excited to share that our first restaurant in Dubai opened earlier this month. The restaurant is absolutely beautiful and located along the beachside boulevard of Jumeirah Beach.

This is the third restaurant we have opened this year with our partner, Alshaya Group. All three restaurants are exceeding our expectations, and Chipotle is one of the top-performing brands and Alshaya’s portfolio. This is further strengthening our confidence that Chipotle’s responsibly sourced, classically cooked, real ingredients resonates across geographies. We are targeting to open a second restaurant in Dubai early next year and plan to accelerate growth with Alshaya Group in 2025.

In closing, I want to thank our restaurant and support center teams for another great quarter driven by strong transaction growth. I always say that at Chipotle we are either directly serving our guests or serving someone who is serving our guests. And it’s important that as a team we continue to focus on exceptional food, exceptional people, and exceptional throughput. This will drive great execution in our restaurants that will enable us to continue down our very long run rate for growth as we expand to 7,000 restaurants in North America and grow internationally.

And as we make our way down this path, I strongly believe Chipotle will become a purpose-driven global lifestyle brand. With that, I’ll turn it over to Jack.

Jack Hartung — Chief Administrative Officer

Thank you, Scott, and good afternoon, everyone. Before I hand it over to Adam to go through the third-quarter financial results, I want to make a few comments about the management transition. While Brian’s departure was not expected, our focus on succession planning at all levels of the organization allowed for this to be a seamless transition with Scott assuming the role as our Interim CEO. We’re all very supportive of Scott as his leadership at the company is unparalleled having led our restaurant teams over the last seven years.

And Adam and Jamie were already well prepared to take on their new roles earlier than anticipated so that I could step into my new role as president and chief strategy officer. Also, I want to emphasize that the culture and morale at Chipotle has never been stronger. We have so many passionate leaders running our restaurants and at our sports centers that are all connected by our purpose of cultivating a better world. There’s positive energy and a real sense of responsibility to keep the momentum going and to continue to execute against our very successful strategy.

I am committed to my new role and plan to stay on indefinitely to ensure a smooth transition. As you can imagine, having spent 22 years at Chipotle, I love this company, I’m passionate about our purpose, and I strongly believe we have a very long growth runway ahead of us as we expand Chipotle in North America and around the world. With that, I’ll now turn it over to Adam, our new chief financial officer, to go through the results. Adam, congratulations, and over to you.

Adam Rymer — Chief Financial Officer

Thank you, Jack. I’m excited to take on the role of chief financial officer for this great company, and I’m happy to be with all of you on my first conference call. With that said, I will turn to our quarterly results. Sales in the third quarter grew 13% year over year to reach about $2.8 billion, as comp sales grew 6% driven by over 3% transaction growth.

Restaurant-level margin of 25.5% decreased about 80 basis points compared to last year. Earnings per share adjusted for unusual items was $0.27, representing 17% year-over-year growth. The third quarter benefited from equity awards forfeited by our former CEO and a gain on an investment. These were partially offset by the impairment of a corporate asset and equity awards granted for retention of key executives.

Collectively, these positively impacted our earnings per share by $0.01, leading to GAAP earnings per share of $0.28. As Scott mentioned, comps accelerated throughout the quarter with transaction trends strongest in September as the impact from summer seasonality normalized and we rolled out Smoked Brisket. Looking to Q4 and taking into consideration that the strong transaction trends have continued so far in October, as well as the tougher comparison against carne asada, we anticipate our transaction comps to modestly accelerate from Q3. As a reminder, we roll off about three points of pricing in mid-October as the impact of pricing in the fourth quarter will be just over 1% due to the price increase we took in our California restaurants in April.

For the full year, we continue to expect our overall comp to be in the mid- to high single-digit range. I will now go through the key P&L line items beginning with cost of sales. Cost of sales in the quarter were 30.6%, an increase of about 90 basis points from last year. The benefit of last year’s menu price increase was more than offset by inflation across several items, most notably avocados and dairy, as well as higher usage as we focused on ensuring consistent and generous portions, and the mix impact from our premium smoked brisket LTO.

For Q4, we anticipate our cost of sales to be just above 31% as we have a full quarter of our Smoked Brisket LTO. As we mentioned last quarter, we believe we can offset the 60-basis-point portion investment through efficiencies and innovation over the next several quarters. This includes efficiencies we have identified within our supply chain as well as several in-restaurant initiatives, including the produce slicers that Scott mentioned earlier. While we anticipate some of the benefits to begin in Q4, we don’t anticipate a full offset until the second half of 2025.

Labor costs for the quarter were 24.9%, about flat to last year as the benefit from sales leverage offset wage inflation. For Q4, we expect our labor cost to be in the low 25% range due to seasonally lower sales, with wage inflation to remain in the mid-single-digit range. As a reminder, about half of the wage inflation is due to the nearly 20% step-up in wages in California from the increase in minimum wage for restaurant companies like ours that took effect in April. Other operating costs for the quarter were 13.8%, a decrease of about 20 basis points from last year.

The decrease was primarily driven by sales leverage and a lower delivery mix, partially offset by higher marketing and promo costs. Marketing and promo costs were 2.1% of sales in Q3. And in Q4, we expect marketing cost to step up to the low 3% range. In Q4, other operating costs are expected to be in the low 14% range as we anticipate higher marketing costs to be partially offset by lower seasonal expenses like utilities and maintenance and repair.

G&A for the quarter was $127 million on a GAAP basis or $149 million on a non-GAAP basis, excluding a net $22 million benefit from equity awards forfeited by our former CEO, partially offset by the expense for awards granted for retention of key executives. G&A also includes $126 million in underlying G&A, $25 million related to noncash stock compensation, and a $2 million benefit from a bonus adjustment. Noncash stock compensation and bonus expense benefited in the quarter from our CEO’s departure as well as performance-based adjustments. We expect our underlying G&A to step up to around $130 million in Q4 as we invest in people to support our growth.

We anticipate stock comp will be around $28 million in Q4, although this amount could move up or down based on our actual performance. We also expect to recognize around $4 million related to higher bonus accruals and employer taxes associated with shares that vest during the quarter, and $1 million for costs associated with our field leadership conference in early 2025, bringing our anticipated total G&A in Q4 to around $163 million. Depreciation for the quarter was $84 million or 3% of sales. In Q4, we expect depreciation to step up slightly as we open more restaurants.

Our effective tax rate for Q3 was 22.9% for GAAP and 23.8% for non-GAAP. Our effective tax rate benefited from a reduction in nondeductible expenses related to our CEO’s departure. For fiscal 2024, we estimate our underlying tax rate will now be in the 24% to 26% range, although it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $2.3 billion in cash, restricted cash, and investments, with no debt.

During the quarter, we repurchased $488 million of our stock at an average price of $54.55. In the third quarter, our board of directors approved an incremental $900 million in share repurchase authorization. And at the end of the quarter, we had nearly $1.1 billion remaining. To close, I am grateful for Jack’s mentorship over the last 15 years and honored to be a part of our leadership team, serving our 125,000 employees in our restaurants and support centers.

We will continue to protect the special brand and our unique economic model that allows us to spend more on our real ingredients yet remain one of the best values in the industry, while also maintaining industry-leading margins. This is a huge competitive advantage and will continue to require a relentless focus on driving an exceptional experience for our restaurant teams and our guests each and every day. And with that, let’s open it up for questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today’s first question comes from Andrew Charles of TD Cowen. Please go ahead.

Andrew Charles — Analyst

Great. Thank you. First off, Adam, Jack, as well as Scott, congrats on your new roles. Last call, you guys were contemplating a price increase in 4Q.

I was curious if the strengthening traffic in recent months along with mid-single-digit labor cost pressures has helped solidify your decision on this.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. This is Scott. I’ll jump in here. Thanks for the question.

We’re keeping a really close eye on the consumer, as you can imagine, also a close eye on this very competitive market that we’re in today given the macros and what’s going on with value wars in QSR and fast-casual. But also, note that we are seeing some modest inflation, I’ll let Adam speak to that, in the business today. So, nothing planned today, but that’s not to say we wouldn’t look at our pricing action at some point in the future.

Adam Rymer — Chief Financial Officer

Yeah. And to go a little bit further into inflation, so yes, like you said, Andrew, we’re kind of seeing low single-digit inflation on cost of sales. That’s after you peel back a few layers. So, one of that is going to be the investment that we made in portion.

So, roughly that 60 basis points that we mentioned on the call. We believe we can offset that through efficiencies within our supply chain as well as within the back of house of our restaurants. Probably a full offset by the end of next year, so that’s not included. Neither is the impact of brisket, kind of that premium item, and what that’s doing to cost of sales right now as well as the avocado comparison.

So, if you remember about a year ago, avocados were abnormally low. And so, once you peel back those layers, you’re seeing about a low single-digit inflation on cost of sales and then a similar amount on labor. We mentioned mid-single digit on labor, but that includes the FAST Act. We’ve already taken price, as you know, back in April of this year to offset that roughly 20% increase in wages in California.

And so, the remaining underlying inflation on labor is kind of in that low single-digit range.

Andrew Charles — Analyst

OK. Very helpful. And then Jack or Adam, you guys previously talked about aspirations to ramp to 10% net restaurant growth in 2025. While the guidance for 315 to 345 openings is a strong number, it was a bit light of the aspirations you guys previously laid out.

So, I was wondering if you could talk through what is factored into the development guidance for ’25.

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, this is Scott. I’ll jump in here again. I’ll let Adam come in behind. I’ll tell you, we will see year-over-year incremental new restaurant growth in ’25, the percentage will move closer to 10% than we’ve been in years past.

We feel really comfortable about the number today to successfully open that many restaurants with high-quality leaders that we know we can execute and deliver with excellence. We feel really comfortable in the 8% to 10% range. Can we move closer to 10%? Perhaps. Timelines remain pretty consistent at 21 months, and we have a really robust pipeline.

We have a lot of confidence in our development team and operations team to deliver great results in the years to come.

Andrew Charles — Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from David Tarantino with Baird. Please go ahead.

David Tarantino — Analyst

Hi. Good afternoon. My question is on new unit performance. At least the way we calculate it this quarter, it looked a little lower than it has been in past quarters.

So, I was wondering if you could explain what you’re seeing there and whether there’s something unusual in the numbers affecting the calculations of that?

Adam Rymer — Chief Financial Officer

Yeah. I’ll start, and then, Scott, definitely jump in. So, nothing unusual in this quarter to really call out. We’re still seeing productivity kind of in that low 80% range.

And so, we’re still really excited about how our new units are performing.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. And the Year 2 ROI is still holding pretty steadily, and we feel really good about the performance of this class of restaurants.

David Tarantino — Analyst

Great. Thank you. And then I guess my other question was about the path to get back to the high 20s restaurant margin. I think you’ve talked about that being something that you would have at this level of average unit volumes.

So, I guess I know you mentioned some efficiency gains or productivity gains you’re expecting. But I guess, as you think forward, is there anything you can share with respect to the path to get there in the next few years?

Scott Boatwright — Chief Operating & Restaurant Officer

David, I’ll start and again flip it over to Adam. But I think in general, we have a lot of confidence in our ability to get back to high 20s. We think the algorithm still holds at $4 million and 30%. There are several initiatives that are in the pipeline today, whether it’s supply chain initiatives or efficiencies, and/or technologies like equipment technologies will help us be more efficient at the restaurant level.

Adam, is there anything else you would add to that?

Adam Rymer — Chief Financial Officer

No. I mean, I would just say that within the margin algorithm, that 40% flow-through on incremental transaction, still very much in line. And I know in Q3, it was about an 80-basis-point decline year over year, but you have to take into account a few different things. One, the portion investment, which, again, will offset that 60 basis points through efficiencies.

The avocado comparison is another like 50 basis points or so. And then there’s an ad promo timing that added another 20 basis points. So, if you take those into consideration, we would have gone from kind of a minus 80 basis points to a positive 50, which would be more in line with the transactions that we drove. So, a few unique items in the quarter.

David Tarantino — Analyst

Great. Thank you very much.

Scott Boatwright — Chief Operating & Restaurant Officer

Thanks, David.

Operator

And our next question today comes from Sara Senatore with Bank of America. Please go ahead.

Sara Senatore — Analyst

Thank you. I guess a clarification on the comps and then a question on the throughput. So, you mentioned that the comparisons — carne asada comparisons are difficult. But I thought carne asada was on the menu for all of the fourth quarter of last year.

So, just trying to understand if you’re saying that you would expect traffic trends, which accelerated nicely into October to somehow slow through the rest of the quarter, and whether or not again that any of this is seasonality, similar to what we saw in the second quarter where maybe April was very strong, but then some other kind of variability. So, I wanted to make sure I was understanding the commentary on the traffic outlook for 4Q and then just a question about throughput.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Sara, we are seeing acceleration in the business. And that’s even in light of what we believe to have been a very successful carne asada promotion which we’re rolling over at present. As well as that, if you recall, we had 20% pricing that is rolling off — rolled off a couple of weeks ago.

And so, we feel great about the trends. And I think it’s a combination of an exceptional product offering, great marketing around what makes our brand unique and special, as well as operational execution. I’ll tell you, Sara, our ops teams are delivering on a level I have not seen before in my 30-year history. I couldn’t be more proud of them.

And I think all of those things together are driving the performance that we’re seeing in the business today.

Adam Rymer — Chief Financial Officer

Yeah. And then I can expand a little bit on throughput. So, we saw great progress in the quarter. Like Scott mentioned, Expo execution went from like 50% of our restaurants to 60% of our restaurants.

So, that was a nice step up. And then we saw an increase in max 15 of about 1.2 entrees in a 15-minute period. And so, we believe that, again, the fueling of not only the positive 3.3% transaction, but also, that execution that Scott talked about, just amazing in our restaurants to help drive that result.

Sara Senatore — Analyst

Right. Thank you. That’s great color. And just on the throughput, just one quick question.

Is that how you think about the — some of the technology or equipment you’re rolling out? I mean, I know you talked about efficiencies. It seems like it’s — that will largely be reinvested into the portion sizing. But would you expect to see a step change in throughput as well? Or is that, again, more incremental?

Scott Boatwright — Chief Operating & Restaurant Officer

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the morning, our teams are so involved in cutting, slicing, dicing, chopping, and really preparing all the wonderful ingredients to be used throughout the day that oftentimes they fall behind, for a host of reasons, whether that’s a fall-out or a new team member joining the team that is less talented with the knife, those challenges are formidable. And that oftentimes causes us to not be deployed effectively at peak and not able to drive great throughput. The technologies we’re talking about will help enable our teams to deliver great culinary but also get the process done in time to be deployed effectively and really drive great throughput in the business.

Sara Senatore — Analyst

Thank you very much. Really helpful.

Operator

Thank you. And our next question today comes from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you’re talking about some of the technology, the AI-enabled customized marketing that you would imagine happening, and some of the bespoke type suggestions or whatnot. I’m trying to imagine what you could have been talking about there.

Maybe you can maybe bring that to life for us about maybe what iterations of enhanced digital experiences and what that could mean ultimately to comps. And just to follow up on that throughput question that Sara was asking about. You mentioned something like a 1.2 improvement in entrees for 15 minutes. And we saw that you had driven — it looks like your labor hours might have been roughly flat versus the traffic up 3%.

Is that the type of relationship that happens from that? I mean, you talked about five more entrees per 15 minutes being the opportunity. Does that mean that you can kind of do this for another — if you — is there a relationship there that we should think about as we model between those two things? Or maybe I’m overthinking that. Thanks.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. Thanks, David. On to the CRM and CDP — I’m sorry, CDP loyalty and personalization I spoke of earlier, in that way, Curt Garner and his team can talk through some of the early stages of what would an AI model look like to really drive greater efficiency with our loyalty members. And we’re early innings and we’re still experimenting with some really, really unique ideas.

He has an extraordinarily talented team that continues to figure out ways to iterate and drive performance in that channel. And so, it’s really early days, but we think the AI model sitting on top that’s really searching out whether you’re a lapsed user, an at-risk user, or an active user within the program, how do we serve up a bespoke experience, a truly bespoke experience, beyond some of the traditional format pitches that you typically get in a loyalty program, but something that’s really tailored for the user. Not just in checkout for ads, but also a bespoke experience when you enter the experience, you’ll see something tailored for you as an individual based on your needs, your usages over the past — or your history. And so, we think it’s really a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer — Chief Financial Officer

Yeah. And then, David, I can comment on the labor comments. I mean, outside of normal leverage as we drive additional transactions, whether that be through throughput or marketing initiatives or really all of the above. labor hours, there’s no kind of relationship, I think, other than the leverage that you’re talking about.

So, if I’m understanding that question correctly.

David Palmer — Analyst

Yeah. No, and we can — I’ll ask about it more offline. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

OK. David, I will add one of the challenges we face again is getting all the work done in the AM and being deployed correctly. So, the same amount of labor in the building, but someone’s taking care of pots and pans and the dishing, and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So, if we go and worked on, put away in the right way in every restaurant consistently every day, we can deploy all those individuals to the guest experience, which is where we’ll drive the most value.

David Palmer — Analyst

Thanks again.

Operator

Thank you. And our next question comes from Christine Cho with Goldman Sachs. Please go ahead.

Christine Cho — Analyst

Thank you. Congrats, Scott, Jack, and Adam with your new roles. I was wondering if you can share any internal metrics or measures on the impact and returns of these portion-size investments. So, do you think these investments have been sufficient in protecting the core brand equity? And what do you need to see to kind of move on gradually? I know you mentioned that you won’t expect to fully cycle until second half, but how you see the returns on the investments so far? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s really hard to quantify. Here’s what I will tell you, is if you think about the core equities of the Chipotle brand for the last 30 years, it’s all been grounded in this idea of high-quality, fresh ingredients, prepared to classic culinary techniques in variety and abundance at a speed which you can’t get anywhere else at an extraordinary price point. And so, we know that portioning is a core equity of ours in the organization, and we are committed to ensuring that we give the right portion to every guest that walks into the building.

We’ve seen strong improvement even through our social channels of people now it’s a reverse of what we saw earlier in the year, around people posting big burritos, big bowls and really excited about portioning they’re getting in the Chipotle brand. We also see that show up in our brand tracker and other third-party sources where value for the money, food for the money, and quality for the money exceed most of our peers in the category. So, also in total consumer metrics that we measure through our digital channel and in-restaurant experience, showed portioning, positive scores were up 500 points over the spring. So, we know we’re making great progress.

We know we’re delivering value for the consumer, especially in this really tight environment, and we’ll continue to lean into that.

Operator

Thank you. And our next question comes from Brian Harbour with Morgan Stanley. Please go ahead.

Brian Harbour — Morgan Stanley — Analyst

Yeah, thanks. Good afternoon, guys. Maybe just first one, Adam, do you have any kind of thoughts on inflation next year so far? Do you think low single digit for food and wages can kind of continue?

Adam Rymer — Chief Financial Officer

Yeah. For what we see at this point, we believe that that will continue. Labor has been kind of in that levels outside the FAST Act for quite some time now. So, we have no reason to believe that will change.

And then our first initial looks at cost of sales into next year are still going to be more of the same, but we’ll update you guys if that changes in the coming calls.

Brian Harbour — Morgan Stanley — Analyst

OK. Thanks. Scott, maybe just on some of the new equipment and automation, how fast do you think some of that can be deployed? And I guess, just kind of like philosophically, is this something where — it’s really — it’s mainly about kind of creating a better experience for employees? Is it something that you think kind of drives better margins over time? Or on the other hand, do you sort of — if it creates efficiencies, do you share that with the customer in the form of kind of lower pricing versus some of your competition over time? How do you kind of manage that over the longer term?

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, Brian. I’ll tell you we have a number of initiatives in our stage-gate process today. Some short range, some midrange, some long range. A couple of pieces that are in the short range at the stage gate that have moved their way through, the dual-sided plancha, which will drive great efficiency and unlock increased capacity, I should say, in the kitchen, and also drive efficiencies as it relates to the labor model.

The produce slicer, we feel really good about, have already talked about that. We also have — we’re testing a new dual-basket fryer that is going to be more efficient as we cook chips daily and season chips in our restaurants. So, all of these things will be items that will help the team member experience, drive efficiency, remove some of the mundane repetitive tasks in the restaurant, which will always ladder to a better guest experience. And some of them will have margin improvement baked into the program.

So, we feel really good about the long-range items around avocado and Hyphen. Recall, these are companies that we’ve invested in, that we’re building, co-building really bespoke pieces of technology that we know will help us down the road somewhere, but we continue to refine and iterate on how those show up in the restaurant. And so, you’ll see those items. I think it’s important to note, go into enter into restaurants, we’ll test and learn, bring it out of the restaurant.

We’ll find the piece of equipment, put it back in. But we feel really good about what value they can bring long term for the organization. Hopefully, that answers your question, Brian.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Thank you. And our next question comes from John Ivankoe with JPMorgan. Please go ahead.

John Ivankoe — Analyst

Hi. Thank you. Two, if I may. The first question is on your investment in Brassica in the Mediterranean and the Columbus area.

Should we read anything into Chipotle maybe extending itself a little bit more in terms of being a platform company? I mean, was that a one-off type of transaction, or could we expect a series of interesting businesses like that that could eventually fit within the Food with Integrity broader theme?

Scott Boatwright — Chief Operating & Restaurant Officer

You know, that was an investment we made from our Chipotle Next Fund, and we felt really good about it. We were — we’ve been looking around the industry for concepts, emerging concepts that aligned with our food ethos and how we think food should be eaten, that were aligned to our business model and practices that we could co-invest with. Now, keep in mind, this is a passive investment and a minority investment and will not be a distraction of the Chipotle organization. And so, we see them as they think about growth down the road.

We’ll give them some guidance and counsel on development and how they grow. But it won’t be a distraction for this organization. And it could be a growth platform somewhere 10, 15 years down the road that adds a layer of growth for the business.

John Ivankoe — Analyst

OK. Sounds good. Thank you. And secondly, we spent a good amount of time today talking about prep, prep labor complexity, and to some extent, the repetitiveness around it, stores that need to be stopped at 6 or 7 in the morning.

I’ve asked the question before, and sometimes I don’t think I’ve asked it correctly, is there an opportunity over time to maybe have certain prep stores that are densely clustered within a market that can maybe take care of some prep work for stores that are in their immediate surroundings? I’m not asking for a central kitchen per se as we would normally define those terms on an industry basis, but maybe one store that takes care of prep for five or 10 stores around it, that could make it easier to run all stores within a specific trade area. Is that something that you’re considering over time?

Scott Boatwright — Chief Operating & Restaurant Officer

Hey, it’s a great question. And it’s something we have looked at in the past. Now, it comes with its own set of complexities and inherent risks. And largely, in fact, that largely the opportunity is, is how do we create that experience.

We can be consistent with regard to how we prep, but then distributing and keeping that food safe during the distribution process, from the center location out to, call it, spoke-and-hub is just challenging. And when we looked at it a few years back, it was cost-prohibitive as well. And so, right now, we feel like the working model we have is the best way to Chipotle to deliver our unique experience. But that’s not to say we couldn’t look at something different down the road.

John Ivankoe — Analyst

Perfect. Thank you.

Operator

Thank you. And our next question comes from Lauren Silberman at Deutsche Bank. Please go ahead.

Lauren Silberman — Deutsche Bank — Analyst

Great. Thanks so much. I just wanted to ask about the consumer, some of the behavior you’re seeing across different cohorts, the low/middle income, high-end consumer, any differences that you’re seeing across regions at all?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. I’ll start, and I’ll flip it over to Adam here. We’re still seeing strength across all income cohorts even in this competitive environment, which gives us the belief that we are still delivering extraordinary value for the consumer and get all the core equities that I talked about earlier, and the chicken burrito on average is still under $10, which we believe is still a 15% to 30% discount compared to our peer group. And so, we’ll continue to lean into that as we move forward.

Again, all income cohorts, even low-income, are showing positive signs of strength.

Adam Rymer — Chief Financial Officer

Yeah. And I would just add, across the board, too, in terms of our regions, I mean, really all performing very, very well. We called out California in the last call, of course, after the FAST Act price increase there. We did see some weakness overall in our sales in California after the FAST Act, but we saw that across the entire industry, so it seemed to be more of a macro-based or really just a reaction to the inflation in restaurants in California.

So, that has kind of continued on into Q3. But outside of that, it’s really been pretty broad-based on our strength.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. And then just a follow-up on the 4Q guide. You talked about traffic modestly accelerating have price rolling off.

Are you assuming traffic decelerates as we move through the quarter? And just to level set, are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer — Chief Financial Officer

Yeah. And so, like I said earlier, September was kind of a mid-7% comp, of which trans kind of in that low 4% range. That trans comp has continued into October. And at this point, our assumption is that will continue into Q4.

And then in the prepared comments, I talked about how the price impact would be just above 1%, and there’ll be a slight mix drag. So, I believe check will be somewhere around 1%. So, I think you’re thinking about it the right way if you get kind of into that mid-five range.

Lauren Silberman — Deutsche Bank — Analyst

Great. Very helpful. Thanks.

Operator

And our next question comes from Chris O’Cull with Stifel. Please go ahead.

Chris O’Cull — Analyst

Thank you. First, Scott, I wanted to clarify the level of improvement in the number of entrees per 15 minutes that you believe is ultimately possible after implementing the throughput initiatives that are planned for the next six to nine months or so.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. I think really it’s possible for us to get back to where we were in the heyday of Chipotle, in the low 30s. And today, we’re trending around the mid-20s. So, you have to include digital in that number, the digital entrees coming through the digital channel as well.

But if you think about just the true business, the in-restaurant experience that is, we think there’s still pretty significant upside.

Chris O’Cull — Analyst

OK. And then just one other question. I was hoping you could provide a bit more color on the performance of the Smoked Brisket. In particular, has the repeat usage been as high this time as it was the last time it was promoted?

Adam Rymer — Chief Financial Officer

Yes. So, I’ll start, and then Scott, you can jump in. And so, brisket is performing really well, especially compared to carne asadas. It’s kind of in that mid-teens incident in terms of a percent of entrees.

It’s driving spend. It’s driving additional transactions. It’s comping really well over carne asada. And then in terms of repeat usage, I mean, I know it’s driving amazing new customers to the brand as well as getting people in and increasing their frequency.

And then what’s — the beauty of all of these LTOs is they come in, they try brisket, and then we see on the second or third visit, sometimes they go back to brisket, sometimes they go to chicken, steak or other items. So, we’re really seeing some great trends there.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. It’s not often that you find an LTO that you can put the marketplace that’s going to drive check, transactions, and margin. This is one of them. And so, we’re super excited about the product.

We love how it’s performing.

Chris O’Cull — Analyst

Great. Thanks, guys.

Operator

And our next question today comes from Brian Bittner at Oppenheimer. Please go ahead.

Brian Bittner — Analyst

Hey, thank you, and congratulations to everybody on their new roles. As it relates to margins, specifically the COGS margin line, you saw the deleverage this quarter of about 90 basis points, and obviously, that was expected. But can you bridge that deleverage broken down between the actual portion investments that you deployed versus underlying dynamics like food cost inflation for us, so we can understand that bridge a little bit better? And I totally understand that a price action doesn’t seem necessarily on the table for 4Q, but how do you want to solve thinking about the potential base case for pricing as we go into 2025? Because I think that is going to be a debate on investors’ minds moving forward.

Adam Rymer — Chief Financial Officer

Yeah. So, like I talked about earlier, so within cost of sales, that portion of investment of about 60 basis points, that’s fully in that cost of sales number. And then the avocado comparison of being about another 50 basis points or so of just it being abnormally low in the prior year is also in there as well. And so, once you peel back those two layers and then the fact that brisket, which like Scott talked about, it drives margin overall, however, it does increase our cost of sales, I think, roughly 40 or 50 basis points in the quarter.

And so, that’s another layer that’s basically temporary hit to cost of sales. However, because of the price point of brisket, you leverage on labor and other operating and things like that. And so, once you peel back the layers, look at the underlying inflation of cost of sales, labor, and other operating expense that menu price impact that we would need to offset that and maintain our margins would be probably somewhere in that like 2% to 3% range.

Brian Bittner — Analyst

OK. Thank you.

Operator

And our next question today comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia — Analyst

Hi. Good afternoon. It sounds like things are on a really good path for Alshaya so far. And I’m curious just given what seems to be a good start there.

Are you thinking about other kind of shortlisted regions that you’d like to find licensees to operate Chipotle? And are you fully committed to continuing to own your locations in France, Germany, and the U.K.?

Scott Boatwright — Chief Operating & Restaurant Officer

Yes. Thanks, Sharon. Here’s what I’ll tell you, is we’re really pleased with our partnership with Alshaya. And I said on the call, we’re one of the best-performing brands in our Alshaya’s portfolio.

We plan pretty aggressive growth with Alshaya over the next few years. We will strategically look at other like partners around the globe that we could potentially partner with to expand, whether that’s Latin America or APAC or otherwise. Those opportunities will I’m sure emerge over the coming months. And we’ll look at those very closely on what the market entry would look like for us, how we think about those partnerships.

We will continue to own our presence in Western Europe as well as North America. We think that’s the greatest way to drive value for our brand and for our shareholders.

Sharon Zackfia — Analyst

Thanks for that. And then just a question on Hyphen I know it’s early days and you’ve only have it, I think, in one location. But is that helping keeping kind of the aces in their places having that tool in the restaurant?

Scott Boatwright — Chief Operating & Restaurant Officer

It is. More importantly, it will allow us to unlock demand in that channel. And so, we think — we don’t think. We know that the table with one individual, the output is far greater than one or two individuals on the table.

And so, the goal here is to — 60% of our entrees are either bowls or salads. And so, if the table is taken care of, all of that lifting, heavy lifting, if you will, and then the operator of the table can focus on burritos and tacos, we think it’s a pretty magnificent lift in overall demand, and we’re driving improved performance, whether it’s plating or accuracy for the consumer.

Sharon Zackfia — Analyst

Great. Thank you.

Operator

Thank you. And our final question today will come from Danilo Gargiulo with Bernstein.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you, and once again, congrats, everybody, for your new and expanded roles. Scott, clearly, your message has been that of continuity with the strategy at Chipotle. So, if your appointment were to become permanent, what would you like to be known for and which opportunities for acceleration of the current strategy do you see more likely for Chipotle? I mean, it sounds like you’re more open to international growth as a natural evolution, but maybe there is more areas that you are going deeper on. Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah, terrific question. It is my endeavor to keep our organization, this leadership team, and all our 125,000 folks in our field organization clearly focused on our five strategic priorities that have served our brand for the last many years. Sure, there’ll be some iteration or modification in the years to come. We feel very confident those five key strategies will continue to drive extraordinary performance for this organization.

It will also — two other things I think I’d like to point out is I’d like to continue to move our organization to a more connected organization to the consumer through our restaurant teams. And so, I think it’s an important note, I think everyone in the organization, I said this in the prepared remarks, is either serving a Chipotle guest or serving someone who is. And when you have that kind of power and focus in an organization, extraordinary things can happen. And the last thing I’d leave you with is this brand has had extraordinary success here in North America.

We have our sites clearly aligned on 7,000 restaurants. But I also want to give an eye toward how do we continue to push Chipotle to be more of an iconic global brand. And so, that’s what you’ll see probably in the coming years and coming months. And that’s probably it.

Danilo Gargiulo — AllianceBernstein — Analyst

OK. Great. And if I may, just double-clicking on this international expansion. Given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters away do you think we are from Chipotle growing units in Europe? And what is still pending before the performance in Europe can really close the full gap versus Canada or U.S.? Thank you.

Scott Boatwright — Chief Operating & Restaurant Officer

Yeah. So, if you look back what happened historically when we worked on the turnaround in Canada starting about six years ago, and of course, appointing a new leader in Canada in Anat Davidzon was critical, and really the fulcrum to leverage the business in a more full way whether it’s supply chain efficiencies, operational efficiencies or marketing — demand-driven marketing. She’s done an amazing job in that country getting margins to U.S. — comparable to the U.S.

margins, and we’re growing at 25% to 35% in country today. The reason we put Anat in Western Europe is to — not probably, to look for a similar outcome. And she’s already making incredible progress aligning the culinary U.S. standards and getting operational efficiencies and processes in place around cost of labor, cost of food.

And so, we feel really good about the progress. To put a time to it, I couldn’t really give you a timetable. Here’s what I’d tell you, is we know we could have hundreds of restaurants in the markets in which we operate today and potentially thousands in Western Europe over time. So, that’s what I’ll leave you with.

Danilo Gargiulo — AllianceBernstein — Analyst

Thank you.

Operator

Thank you. This concludes our question-and-answer session. I’d like to turn the conference back over to the company for any closing remarks.

Scott Boatwright — Chief Operating & Restaurant Officer

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I reiterate that I’m incredibly proud of this entire Chipotle family for driving another, what I believe to be an incredible quarter around transaction trends and accelerating momentum. Our culture, brand, and value proposition have never been stronger, and we have a lot of exciting initiatives in the pipeline that will continue to grow and strengthen our great company and our brand for many years to come.

We look forward to speaking to all of you in our fourth-quarter earnings call in February. Thank you so much.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Cindy Olsen — Head of Investor Relations and Strategy

Scott Boatwright — Chief Operating & Restaurant Officer

Jack Hartung — Chief Administrative Officer

Adam Rymer — Chief Financial Officer

Andrew Charles — Analyst

David Tarantino — Analyst

Sara Senatore — Analyst

David Palmer — Analyst

Christine Cho — Analyst

Brian Harbour — Morgan Stanley — Analyst

John Ivankoe — Analyst

Lauren Silberman — Deutsche Bank — Analyst

Chris O’Cull — Analyst

Brian Bittner — Analyst

Sharon Zackfia — Analyst

Danilo Gargiulo — AllianceBernstein — Analyst

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