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Chipotle CFO on raising wages: we’re not afraid of ‘investing our people’

Yahoo Finance’s Brian Sozzi, Julie Hyman, and Myles Udland speak with Chipotle CFO Jack Hartung about the company’s Q2 earnings beat, outlook, and much more.

Video Transcript

- Chipotle just served up a very spicy second quarter for investors. The company blew away analysts sales and profit forecast powered by demand for new quesadillas and a whole bunch of food ordered digitally. Chipotle signalled that the third quarter has started well. Sending the shares to a record high this morning.

Joining us now for more is Chipotle CFO, Jack Hartung. Jack, always good to see you here. Have you seen any resistance to the price increases that you took a couple of months ago?

JACK HARTUNG: Hey, good morning, Brian. Listen, so far, it's only been about a month and a half. And so far we've seen no resistance whatsoever. And keep in mind, before we took the price increase, we announced in May that we were going to make a very important move. We're going to raise the wages of all of our crew employees up to an average of $15. And we said the way we're going to fund that is with a modest 4% price increase.

And so a lot of our customers understood what we were doing. And they understood the magnitude of it. And they're very much in support of it. So far so good though, no resistance whatsoever.

- The cost of doing business, you can appreciate this, it's going up. It's labor. It's food. It's packaging. You name it. Are you looking at another price increase for the second half of this year?

JACK HARTUNG: Yeah, you know, we've not made any decisions. We know that there is some inflation coming. What we don't know is how much. And we don't know how much that is going to be permanent, meaning it's going to stick. And how much is going to be transitory. And I suspect it's going to be a combination of both.

So Brian, we're going to be patient. We're going to watch how inflation on our ingredients unfolds over the next several months and the next few quarters. We'll watch what happens with the labor force. I mean, the action we took with raising wages has had the intended impact. So we've been able to recruit a lot more people. Our application flow has been fantastic. So we feel good about that.

So we're going to be patient. And we'll watch how things unfold. The thing we don't want to do is raise prices and then find out inflation that we're trying to cover actually is transitory. So we'll want to get as much information as we can before we take any action at all.

- All right, you guys, I believe, are planning to open about 200 new Chipotles this year. I have two questions related to that. One, where are you planning to open them? Where do you expect to see opportunities? And secondly, has the cost to open stores also gone up?

JACK HARTUNG: Yeah. I'll deal with your second question first. There is some materials inflation for sure. We've all seen what's happened with lumber. And really, the entire supply chain, you know, there is pressure. And there's pressure either in terms of availability or in pricing.

So we do think there's going to be modest inflation in terms of the materials that it takes to build our restaurants. That's more likely to be transitory. And I'm saying that mostly because-- it's because of supply chain imbalances. And those things have a way of working their way out. And already, we're seeing lumber is coming down. So it's likely that that's going to ease over time.

In terms of where we're going to open up restaurants, they're are in the same markets we're already in. 90% of our restaurants are going to be in existing markets. Those are markets where the brand is well known. We've got great teams. And there's still a demand for Chipotle. And so-- and most of the restaurants are opening include a Chipotlanes.

So even if you've got a restaurant in your area that's convenient to you, when we open up a restaurant with a Chipotlanes, it just takes the convenience opportunity to a whole another level. And our customers really love it. And those restaurants with its Chipotlanes are doing fantastic.

- You know, Jack, something else you guys called out in your release is restaurant level margins, highest since third quarter of 2015. Of course, that was another, you know, separate issue away from COVID that the company worked through over a several year period.

And I'm curious how you're now thinking about restaurant level margins going forward? Is that 24 and 1/2% beginning of an improvement? Do you want to hold it there? How are you thinking about that part?

JACK HARTUNG: Yeah. Listen, Brian, it's been a long haul. And we're really delighted that our volumes are back to our peak volumes. And our margins are back to what they were six years ago. And it's really been a lot of hard work for our ops teams. Our ops teams that focus on hiring great people, developing those people to deliver a great experience, and then running the business effectively.

And this is the kind of outcome you get, where we've got rising sales and rising margins. And Brian, the margins from here, they go up. Again, we're not stopping at this $2.5 million volume, which is our peak volume. We think we can get to 3. And once we get to 3, we'll be looking beyond that as well. And when we go from the current $2 and 1/2 million volume up to, you know, 3 or beyond that, our margins go up. They don't stay stagnant at this 24%, 25%.

- Jack, you had a hiring event, I believe, last week. How many folks did you hire?

JACK HARTUNG: Well, our goal is to hire tens of thousands. We're still in the process. I tell you I'm very pleased to say that not only from that hiring event, but also, since we took the wage increase that we announced in May and took effect in early June, our appplicant flow is up multiples compared to what it was back in April in fact.

Even though this is the toughest labor market that I've seen in my whole career in the restaurant industry, where it's tough to get labor, it's tough to hold onto labor. So you've got to have a compelling proposition, which we think we do at Chipotle. Our wages now, we're averaging $15 per hour. We offer debt free degrees. We offer mental health opportunities.

We offer probably most importantly is when you join Chipotle as crew, you can realistically expect that you can, if you want to invest in yourself, we'll invest in you as well. So you can get to a manager level within a few years. You can be a restaurateurs, which is an elite manager level within a few years. And those come with six figure salaries.

And so when you join Chipotle, you have a career path up ahead of you. So, you know, labor has been very, very challenging. But in terms of not just the career that we have this past week, but the wage action that we took, our applicant flow is as good or better than it was even pre-pandemic.

- You exited the quarter, Jack, what? $1.2 billion in cash, a $500 million untapped credit facility. The raises you gave workers this year, is that just the first round? Do you envision yourself going up a couple dollars more to get more workers into the restaurants? You're opening 200 plus restaurants. Do you need more workers? And do you think you're going to raise those wages up even more?

JACK HARTUNG: Yeah. No, I don't think we'll need to do anything in terms of a significant other dollar to dollar raise right now, Brian. But listen, we're not afraid to invest in our people. And we've been investing in our people all along the way. Again, whether it's invest in their development within Chipotle, invest in their development through debt-free degrees.

And if it means that the wages need to go higher to make sure we get great people, that we keep great people, we'll do that. We're not afraid to invest in our people. We know that when we've invested in our people, we get return for many years to come.

When you're a growth company like we are opening up more than 200 restaurants per year, we need a pipeline of great people. And that investment is definitely going to pay off. You know, we have a lot of cash in the balance sheet, that's given us a lot of room to maneuver during a pandemic like this.

You might remember last year, early on in the pandemic, even though all businesses, including ours were under pressure, we made investments in our folks with discretionary bonuses. And making sure that we invested in their future. If they were, you know, in an educational program and didn't meet our requirements, you know, we waived that kind of stuff.

So, you know, we'll continue to use our financial strength, whether it's the balance sheet or our operating income to make sure that our people feel a value, that they know they have a career with us. And we'll continue to invest in them.

- All right, let's keep that cauliflower rice on the menu. I like the lime taste. Chipotle CFO, Jack Hartung, always good to see you. Stay safe. We'll talk to you soon.