Chipotle (CMG) easily beat fourth-quarter estimates as comparable sales jumped 8.4% year-over-year, with total revenue increasing 15.4% to $2.5 billion year-over-year. One thing on the horizon for Chipotle, and many large restaurant chains, is California's impending minimum wage hike to $20 per hour.
Chipotle CFO Jack Hartung joins the Live show alongside Yahoo Finance Executive Editor Brian Sozzi to discuss Chipotle's earnings, what California's minimum wage hike for fast-food workers will mean for the company, and the fast-food industry at large, going forward .
Hartung comments on the impact the wage hike will have: "Here's the thing that's unfortunate. This act was aimed towards, large restaurant chains, and large restaurant chains, like Chipotle, can afford to do this. We have scale. We can find efficiencies. We have menu pricing power. It doesn't technically apply to individual business owners. It doesn't apply to businesses outside the restaurants, but they're all going to be affected... The restaurant industry in California is the largest employer, in the state. So when that many people are going to get a significant raise, it is going to have a ripple effect. It is going to make things more expensive, I do think its going to have an inflationary impact and make it a little tougher to go to the grocery store or stay at a hotel, and of course, eat at a restaurant whether it's independent restaurant or a chain restaurant."
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Editor's note: This article was written by Nicholas Jacobino
SEANA SMITH: Chipotle shares up about 4% after easily beating fourth-quarter earnings estimates. Comp sales rising more than 8% from a year ago, and transactions bucking the industry's downward trend rising 7%. We want to bring in Jack Hartung. He's Chipotle's CFO joining us now along with our very own executive editor Brian Sozzi. Great to have both of you here.
Jack, let's talk about this quarter, which was very strong year for the company. You posted transaction growth of 7%. You're doing this at a time when consumers are facing-- still facing very sticky inflation. What do you attribute this to?
JACK HARTUNG: Yeah, there's a couple of things that we saw in the quarter one. We had carne asada. We brought it back for the third time, and it was better than the first two times. So I think carne asada is it's well understood by our customers, our teams did a fantastic job of executing it. And so when the news came out that carne asada was coming, our customers lined up to come have it again as one of their favorite meals.
The second thing, though, is our teams are running great operations. We've seen some of the highest throughput numbers we've seen in five years since before the pandemic. So this idea of creating demand where we pull people in or invite people in to try carne asada, but then make sure they have a great experience with great throughput in the restaurant is a great one to punch. And those are really the two key drivers for the quarter.
BRAD SMITH: So it's a gift and a curse because now you've got to keep innovating, Jack. What's that next menu What is the next carne asada moment for Chipotle?
JACK HARTUNG: Yeah, we're going to do one or two LTOs this year. We haven't announced which ones, but what we've learned is we don't have to come up with something new every time. Our chefs are doing a great job. They're constantly innovating. I mean, some of the stuff they come up with is amazing.
But we also know we have a favorite that we want to bring back from time to time. We certainly can do that as well. So we have lots of options. And our customers really respond, and most importantly, our crews are responding in a big way. It takes a Herculean effort to bring in a new item like this in all 3,400 of our restaurants. And our teams executed at a super high level. And you don't get these kind of results without our crews and our managers just hitting it out of the park.
BRIAN SOZZI: Jack, perhaps you could break this down for folks that don't have your sophisticated numbers background. So if wages are going up-- the minimum wage in California is going up 25%. 15% of your restaurants are in California. Now, as the CFO of Chipotle, do you have to raise your prices 26% so you make profits? And then if you do, what happens to the volumes in those restaurants?
JACK HARTUNG: No, we don't have to raise it that much. We haven't made a decision on what we're going to do in California. We're definitely going to have to take action. Really every restaurant company is going to have to. Our wages Brian are a little bit-- they're going to go up a little less than that. We're probably more in the 20% range because we're already paying about $17 or a little more than that in California.
But it's still a significant jump to go from $17 on the average to $20 is the minimum. So you've really got to average more than $20. To just break even from a profit standpoint, we would have to take a mid to high single digit, say, call it a 5%, 6% 7% increase, something like that.
For us to maintain our margins, so we don't dilute margins, it would be something like a high single digit number. So maybe in that 8%, 9% range. Significant increase but-- and again, we haven't decided what we're going to do, but it's probably going to be somewhere within that range.
BRIAN SOZZI: Jack you've been a-- I mean, you're basically like day one in Chipotle, but you've spent your whole career pretty much in the restaurant space. I mean, what do you think about this policy in California? Because it's not just going to be Chipotle having to raise prices, all of your competitors are going to have to raise prices, and it could really hurt a lot of consumers.
JACK HARTUNG: Yeah, you know, here's the thing that is unfortunate. Here it is, this act was aimed towards large restaurant chains. And, you know, large restaurant chains like Chipotle can afford to do this. We have scale. We can find efficiencies. We have menu pricing power. It doesn't technically apply to individual business owners. It doesn't apply to businesses outside the restaurants, but they're all going to be affected.
So when restaurant waiters-- and the restaurant industry in California is the largest employer in the state. And so when that many people are going to get a significant raise, it's going to have a ripple effect. It is going to make things more expensive.
I do think it's going to have an inflationary impact and make it a little tougher to go to the grocery store, or stay at a hotel, and, of course, eat at restaurant, whether it's an independent restaurant or a chain restaurant. We'll see how it plays out. I think we're really well positioned Brian to handle this, but it's going to have an impact for sure.
SEANA SMITH: And Jack, raising prices is just one of these methods that you could use here in order to cope with the higher costs. There's also been talk, at least from some of your competitors, about restructuring their employee headcount, what exactly that could look like, whether or not they're going to implement hiring freezes. Is that something that you're considering?
JACK HARTUNG: We're not considering that at all. I mean, our restaurant starts very early in the morning, 7:00 or 8:00 in the morning with prep work. Our restaurants don't open up till 10:30 or 11:00, but we have whole onions and peppers and we're mashing guacamole and we're marinating meats. There's a lot of kitchen work that needs to be done. We need each and every one of those always early in the morning.
And then, of course, we want to continue to drive great throughput. You can't drive great throughput unless you have a full complement of well-trained, talented crew on the line. So we're not looking at cutting our crew in the restaurants at all.
BRAD SMITH: Jack, as you were talking about the number of locations that you operate, I couldn't help but think back to what you were talking about on the call with regard to this economic environment, specifically as it relates to Fed policy and rates and how that also influences construction for new locations that you're looking to move into. How much does rate policy directly flow through to the growth ambitions for Chipotle?
JACK HARTUNG: Yeah, it hasn't affected our growth too much. We have enough capital. So we're not in a borrowing position, so the higher rates don't affect us directly. What it does do, though, is our developers a lot of them are pausing. They tend to leverage the developments that they're going into. And we rent the vast majority of our sites.
So our developers are pausing a little bit. The returns that they need, the costs that it takes them to go into a development so that we can rent one of their spaces has gone up. So it has slowed down the pipeline a bit. It has added to costs. There's been inflationary impact on the materials that go into construction. There's been inflationary impact on the labor.
And then there's higher cost of interest is inflationary as well. So it has put a bit of a challenge into our economic model. But our economic model is so strong to begin with. We can withstand this, and so we're not slowing down. It has extended our timeline, but we expect next year to increase our openings. We're going to open 285 and 315 restaurants. That will be an all-time record for us. So we continue to grow.
BRIAN SOZZI: Jack, I've always viewed the secret ingredient for Chipotle is the employees. Your ability to continue to promote from within. People that started cooking food are now running a large amount of restaurants. Perhaps you could talk to investors here and explain to them some recent initiatives that you've put into place to retain your talent because I really think that's helping to drive your results, and it continues to drive your stock price.
JACK HARTUNG: Brian, you're 100% right. Not only does it allow us to grow, it allows us to own our own restaurants. And when you own your own restaurants, you can do things like navigate through a pandemic, handle inflationary pressure like what we're dealing with in California.
90% of our restaurant leadership came from crew. Last year, we promoted 24,000 people. So no question about it, our crew is our lifeblood. It's our future. It's where our future leaders are coming from. And we've done things over the years like we have debt free degrees. So we'll invest in the development of our folks. That tends to lead to them tending to stay longer at Chipotle, so they will stay a lot longer. It tends to lead to them moving into management ranks as well.
So when we invest in our people, they will invest in their selves, and they will grow their careers with us. Most recently, we added some benefits around mental health. Mental health is a big concern of our crew. We tend to have a very young crew. We also just added a new benefit, which really allows our folks to pay off student debt.
And the idea here is as our employees pay off student debt, we will have a matching contribution to the retirement fund. So a lot of folks, young folks, are thinking, do I pay off my debt, or do I save for retirement? But they can't do both. In this case, they really can. They can pay off the debt, and then we'll have a matching contribution towards their retirement. And we think that's a great added benefit that we just rolled out this year.
BRAD SMITH: Well, we are also especially thankful for those employees when they also give us just a little bit more chicken too and our malleable to that request here, Jack. Certainly do appreciate the time as always. Jack Hartung, who is the Chipotle CFO, alongside Yahoo Finance's Executive Editor Brian Sozzi. Thank you.
JACK HARTUNG: Thank you guys.
