Chipotle CFO: We’ll never reduce portion sizes to save money

Yahoo Finance’s Julie Hyman, Brian Cheung, and Brian Sozzi speak with Chipotle CFO Jack Hartung about the company’s latest quarter, supply chain woes, raising prices, outlook, and other trends in the fast casual restaurant industry.

Video Transcript

BRIAN SOZZI: Chipotle's third quarter earnings blew away analyst estimates as diners like our very own Brian Cheung devoured new quesadillas and smoked brisket. Count yours truly as dabbling in Chipotle's cauliflower rice during the quarter. But Chipotle shares are getting dinged a little bit today as analysts were flagging concerns about slowing sales growth in the fourth quarter and some labor challenges.

Jack Hartung is Chipotle's CFO and joins us now, and, I should note, of course, a brisket fan of his own. Jack, always good to see you here. Let's start on the guidance because I think maybe we could swab the deck of that because I think that's what's hitting the stock here. Is your outlook for sales for the fourth quarter, is that conservative?

JACK HARTUNG: You know, I don't know if it's conservative or not, Brian, but, you know, we did lower or we did give guidance that's a little bit under what analysts were expecting. But it's mainly because we have some pricing rolling off. We took some delivery related pricing about a year ago and that rolls off. Our trends in October are holding up really, really strong. So we're not seeing any inflection point on a downward trend.

And we're really pleased with the idea that we have a 15% comp in the quarter and the third quarter on a two-year basis compared to 2019. It's up 24%. So we couldn't be happier about the results in the quarter. And then we look further because we're always looking at our business way beyond just the next quarter or two.

We're looking out over the next few years, in the next five years, et cetera. We're very optimistic about getting from 3,000 restaurants to 6,000. We're optimistic our average unit volumes are going to go up and along with the volumes, are going to-- the margins are going to go up as well. So when we look at this over long-term, we're very bullish about where we go from here.

JULIE HYMAN: Hey, Jack. It's Julie here. Let's talk about an input cost for a moment. And as we were chatting through your earnings earlier, I was wondering if Chipotle's history makes you a little bit better prepared for this current moment we're in. In other words, you guys have historically encountered shortages of various products in your supply chain. Do you feel like because of that, you learned to sort of manage through these types of periods? And how exactly are you managing through some of the shortages and increased costs?

JACK HARTUNG: Yeah, listen, Julie, it's a great point. I never thought of that before, but we've had to navigate these challenges because we have a unique supply chain. And we've always been on the verge of outgrowing our supply chain because our protocols are so discerning. And so the idea that we've had-- worked very closely hand in hand on more of a partnership basis with our suppliers, I think does allow us to do the same thing during this pandemic, where we have constant communication.

And when we have a tightness of supply or challenges on the pricing, we partner with our suppliers and we look at what is the underlying cost. And then we will strategically work together with them to figure out how do we get through it, how do we navigate this, how do we make sure we're going to have enough supply for the next quarter, the next year, or the next two years. And how are we going to navigate, find efficiencies, so that the inflation costs that we're seeing come through. We can together make sure that our system is going to be strong. So I think that partnership that we've forged over the years has definitely helped us during challenges like this.

BRIAN CHEUNG: Hey, it's Brian Cheung here. Want to talk about price elasticity here. You raised your prices. Now I guess I'm just wondering, what is the approach from a managerial standpoint over whether or not that was your one magic bullet, right? Because obviously, when it comes to business operating in your field, you're not trying to raise prices. You don't want to raise prices on a quarterly basis.

So if you maybe do raise prices, do you try to measure that if you're saying, well, if this is going to be the one time we're going to raise prices, here's the margin that we're going to give ourselves that we can absorb other possible risks in the future. How much room do you have in, say, the next 12 to 18 months if some of these price pressures don't abate to be able to maybe be flexible on the menu again in the future?

JACK HARTUNG: Yeah, Brian, great question. And listen, the situation we're in, which we like this position, is where we've got pricing power, meaning our customers really feel great about the value we bring to Chipotle. When we do price shopping on a market by market, store by store basis, we find that our prices are very, very attractive. When you combine that with the fact that we have higher quality ingredients, we have sustainably raised ingredients, and we do all this cooking in the restaurant, our customers look at that as a great value.

And so we love that position of having the ability to raise prices, but then we also like the idea that we're going to be patient and not be in a hurry to raise prices. We're going to first look at things like efficiencies. What can we do to drive margins through, being efficient either through our own operations or working with our suppliers? We also know that our margins go up when our volumes go up. And we know that we've got a lot of room to move our volumes up. And when we need to, when we've exhausted those opportunities and when inflation is coming through across our ingredients and across the restaurant industry, we know we have that pricing power to tap into it.

The other thing we have, Brian, that's an advantage is, we're all company-owned. So we don't have things like franchisee debt payments to make next month and the month after and the month after. And so, we can be a little bit more patient and see how the inflation situation unfolds. We can see how other restaurant companies are raising prices so we can be very patient and make a very informed decision.

BRIAN SOZZI: Jack, I'm hearing a lot of folks. They're telling us that they are looking for efficiencies of their own. Where are you finding them? Because when I hear that, I hear a lot of companies-- I'm not saying Chipotle. They look to cut corners. And historically, in the restaurant space, that has meant they've taken certain things off the menu, they've reduced portion sizes. I don't want to see my portion sizes cut at Chipotle. I like that they spill over the bowl. I don't mind paying $15 for the bowl. Just don't mess my portion sizes.

JACK HARTUNG: Brian, you and I are in the exact same page. You know, through my whole career with Chipotle, which goes back to when they were a very, very small company, we have never looked to reduce the portions or reduce the quality of our ingredients in order to save money. In fact, if anything, what we've done, we found efficiencies outside of the food line in our labor, working with suppliers so that we can remove costs along the chain.

Like, for example, there are sometimes middlemen that are in the process of our food chain between the farmers and our restaurants. And sometimes they're not adding the value. And so we will do things so we can restructure, so we can pull those costs out. Our objective, over the years, has always been to invest more in the quality of our food. And that involves finding efficiencies elsewhere. There's also when you run 3,000 restaurants, there's always opportunities, just in terms of how you schedule labor and how you maintain your equipment.

And, you know, it comes down to negotiating rents as well. I mean, there's all of these line items other than food that you can find efficiencies. Food is where we want to invest, and we want to really just be efficient all the other line items. And by the way, Brian, we're also not going to charge you $15 for your burrito, but I appreciate your ability or your desire for that.

BRIAN SOZZI: OK, good. Good. Big bowls, big burritos, that's what I like to hear. Lastly, Jack, I had a source send me an email this morning. They want to know about what you're doing in Western Europe because there are some folks now starting to talk about an international growth story coming its way to Chipotle.

JACK HARTUNG: Yeah, listen, we're excited about-- it's early days still, but we're excited about the progress we're making in Western Europe, in particular, in the UK. Listen, all of Europe got hit a lot harder than the US did with the pandemic. Our restaurants there were completely closed. It was mandated that they had to close for a number of weeks or even a number of months. But things are opening up now. There are sales have come back and are looking really, really strong.

And what we've done is a couple of things. One, we're bringing our digital system there, and it's almost all the way implemented in the UK. We're implementing it in France. And then we're opening up different formats as well, small formats, as small as 1,000 square feet. And you couldn't really do that without the digital system. With the digital system, you can operate in a small space like that.

And we're also looking at trade areas that are outside of central London where the occupancy costs are a little more reasonable. Availability and cost of labor is more reasonable as well. So, gaining great traction with a handful of openings so far. Too early to say that it's going to shift into growth mode, but if these results continue, that announcement will hopefully be sometime in the near future.

BRIAN SOZZI: All right, we'll be on the lookout. And thank you for alleviating or just alleviating my fears about portion sizes. Chipotle CFO Jack Hartung, always nice to see you. Have a great weekend.

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