Chipotle Mexican Grill CFO Jack Hartung joins Yahoo Finance Live to discuss quarterly earnings and pricing power as labor and ingredient costs rise.

Video Transcript

JULIE HYMAN: Chipotle shares are on the rise by nearly 9% here, and that's after the company came out with numbers that beat estimates. You can see there earnings per share, revenue, same store sales, and the company also talking about increasing the number of restaurants it plans to open. The chief financial officer of Chipotle is with us right now. That is Jack Hartung.

Jack, it's always great to see you. Thanks so much for being here. A lot has been made of the idea that you guys have been raising prices, that you're continuing to plan to raise prices this year because of rising input costs. And that leads me to ask, how much-- what's the sort of peak price, according to your research, that people are willing to pay for a Chipotle burrito?

JACK HARTUNG: Yeah, Julie, listen, thanks for having me. It's a great question, and we don't really know the answer. But we still feel like we have a lot of room. And what I mean by that is we hope to never find out. We've never had resistance when we raise prices, and we hope to never find out that we went a little too far.

But just as a perspective, you can still, in most of the country, get a chicken burrito, and that's what more than half of our customers get, for less than $8. It's really hard to go find a meal of this caliber in terms of the ingredients, real cooking. There's full customization, the convenience of digital, to get all of that for, really, less than $10. So we feel like we've got a lot of room.

And we do have the ability to raise prices. And in this inflationary environment, we're thankful we have the ability. But we'd like to have that as more of our last resort. We'd like to find efficiencies. We'd like to find leverage in our margins as we grow sales. But if we need to, if we need to pass on some of those costs of inflation as they come through, we have the ability to do so.

BRIAN SOZZI: Jack, you know, you've been around this industry for a while. You think some of your other competitors right now are just charging too much for what they sell. And I know you don't sell breakfast, but I paid about $6 for a McDonald's biscuit recently, and it blew me away. I'm like, you have to be kidding with me.

JACK HARTUNG: Yeah, listen, Brian, you're right. I've been in this industry a very long time, and I'm pretty amazed when I go to other restaurants, whether it's fast food, fast casual, sit down. It's very expensive to dine out anymore. And, you know, it's one thing I'm thankful for, that over the years, we have not rushed to the menu board every time higher costs [INAUDIBLE] through. And so this is over the last not just one, two, three years, I'm talking about the last decade. So we've built up this pricing power, and frankly, a lot of other restaurant companies, they are not in that same position.

Now the consumer is willing to pay right now because they're sick of eating indoors. They can't wait to get back outside. But at some point, everyone's got to manage a budget. And so yeah, the higher cost of eating, I think, is going to be harder for some other restaurant companies to deal with.

JULIE HYMAN: Well, it might be harder to continue to raise prices, but the input costs, I-- we need to know when those are going to slow down as well. I mean, it doesn't seem-- it seems like for you guys in particular, you're pushing wages higher because you're prioritizing that. So where are you going to get relief and when on the cost front?

JACK HARTUNG: Yeah, you know, I don't think it's going to happen in the near term. Like, I would say at least for the next two, three, maybe even four quarters, I don't see prices retreating. I don't think labor is going down in the near term. And I don't see in terms of all the ingredients that we buy, our beef, our chicken, we don't see those ingredients really retreating until, at the earliest, the end of 2022, maybe even into 2023.

So, in the meantime, we've got to do everything we can to find efficiencies in our business. We've got to make sure that when the weather picks up and omicron is behind us, that we're ready to bring more customers in. We get a lot of leverage in our margins, so our margins go up when our sales go up. So we've got to make sure we're ready for that higher volume.

And we've just gotta-- it's a difficult environment, but we just have to navigate through. And if we need to-- we talked about it on the call yesterday-- if inflation continues, and it looks like it's permanent inflation, we can raise prices. It's just not the first thing we want to do.

JULIE HYMAN: OK, I want to seize on the last thing that you said almost there. Permanent-- does it look like it's permanent inflation? What does permanent inflation mean? And what is the kind of rate that you're looking at?

JACK HARTUNG: Yeah, I would say like wages I see as permanent. I don't think wages are going down anytime soon. We do have higher freight costs. And, you know, freight costs, especially for some of our packaging that comes in outside the country, that's probably going to normalize. We don't think it's going to normalize this year or not certainly until late in the year. But it seems like right now, there is a severe supply-demand out of balance. And we think that will work its way out at some point.

We have inflation in our materials as well to open up new restaurants. And we think a lot of that also is a severe supply-demand out of balance. Some of that is because some of the materials come from outside the country. So I do expect that those types of things, where it's just an out of balance-- it's not a permanent increase like wages are-- they will normalize. It's just not going to be in the next two, three, four quarters is the way we're thinking about it.

BRIAN SOZZI: One way to beat inflation, Jack, or just try to overcome it is open more restaurants. It was interesting to hear you guys talk last night on the call about pushing into smaller towns in the country. Is that a profitable venture, spacing out restaurants miles apart?

JACK HARTUNG: Yeah, it's actually very profitable for us. The best way to do it is when we have a lot of restaurants in one city, the great way to do it is maybe 30, 40, 50 miles away. The brand is well known. And so when we come to a small town-- and by small town, we're typically talking 20,000, 30,000, 40,000 people. So it's not-- it's hard to make a go of it in a town as small as maybe 5,000 people, though. But we have the ability to oversee that restaurant because it's nearby, so our field staff can make sure they get out and they can develop our teams out there.

But when the brand is well known, our restaurants open up at about the same volume, maybe slightly less, as they do in the major metropolitans. But the rent is usually lower. The cost to build is lower. And so typically, our margins of returns are actually higher in these small towns. That's what gives us the confidence to move from our previous guidance ultimate potential of 6,000 up to 7,000 restaurants.

JULIE HYMAN: Jack, there was something we were wondering at the top of the show, as we were talking through your numbers. Do you guys do dynamic pricing at all? In other words, when you're opening in these smaller towns where the cost of living is lower, does stuff cost less at that Chipotle--

JACK HARTUNG: Definitely.

JULIE HYMAN: --than at a Chipotle in an urban area?

JACK HARTUNG: Definitely, and I wouldn't say, Julie, that it's restaurant by restaurant. But we certainly will take a trade area. In a trade area, for example, like in Manhattan or downtown Chicago, rents are higher. Costs of doing business are higher. So certainly you'll pay higher for a burrito in the major cities like that versus in the remote areas, where the rent is lower. If the labor is lower cost of doing this is lower. And that's why most of the country-- like, most people we talked to will be in the major cities. And they'll talk about what their burrito costs.

What I have to remind them is, though, most of our customers are in the suburbs. They're in these more remote areas. And that's why, in most cases, you can buy a chicken burrito for less than $8. And that does reflect the fact that the rents are lower and the cost of doing business is lower in most of the areas that we deal with.

BRIAN SOZZI: Jack, I was listening to the call last night, and I came away thinking, you have a lot more on your plate compared to when we used to talk to you pre-pandemic. How has your role of being a CFO of a company like Chipotle changed?

JACK HARTUNG: Well, god, it's changed a lot, you know, Brian, over the years. I mean, we've become a much bigger company. We have a very talented team today. And so we have a lot more innovation. We've got terrific tech innovation, with Curt Garner heading our tech area. We've got Chris Brandt, you know, heading up our marketing and our menu innovation. And so we've got such great ideas.

The main thing for us-- and this is what we really, really grab onto as a management team-- is, we want to make sure we don't overwhelm our restaurant teams. And we don't want to make it too complicated for our restaurants. We know that if we bring too much innovation too quickly and if our teams can't handle it, our customers aren't going to have a great experience. And it's all going to go for naught.

So that's why you see us doing things like limited time offers. We will bring in brisket, or we will bring in, like, the plant-based chorizo, which we're running right now. We'll bring that in for a period of time because our teams do a great job of handling a new menu item for a given time, but then we take that off the menu. We give the teams a break, and then we bring in another menu item.

And it's more similar to what a real sit-down restaurant would do, where you will have your normal menu, but the chefs will have some specials from time to time. I mean, that's kind of the way we think about Chipotle, is having these special things for a limited time to delight our customers. But we have to make sure that we do allow our team-- we still do a ton of cooking. We do a lot of handwork. We still make our, as you know, our guacamole everyday, hand-mashed with real, whole avocados. So we've got to make sure that we still allow our teams to do a great job and still provide a great customer experience.

JULIE HYMAN: And of course, one of the upcoming limited items is the pollo asada, which Sozz and I are excited about. But we'll have to talk to you about that next time. We're going to leave it there. Thanks so much for being here, Jack. It's always a great pleasure to talk to you. Jack Hartung, Chipotle Mexican Grill CFO.