Earnings Labs

Chipotle Mexican Grill, Inc. (CMG)

Q3 2024 Earnings Call· Tue, Oct 29, 2024

$32.86

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Transcript

Operator

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]. 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

Analyst

Hello, everyone, and welcome to our third quarter fiscal 2023 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 projections in the forward-looking statements. Please see the risk factors contained in our Annual Report on Form 10-K and in our Form 10-Q 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; and 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'll turn the call over to Scott.

Scott Boatwright

Analyst

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 built a strong team with a great culture and have 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…

Jack Hartung

Analyst

Thank you, Scott. 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. Finally, I'm 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

Analyst

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 at 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…

Operator

Operator

[Operator Instructions] Today's first question comes from Andrew Charles of TD Cowan.

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 this strengthened traffic in recent months, along with missing widget labor cost pressures, to help solidify your decision on this.

Scott Boatwright

Analyst

Yes, 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 and 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 a pricing action at some point in the future.

Adam Rymer

Analyst

Yes, 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's going to be the investment that we made in portions, 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 prices 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

Okay, 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

Analyst

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 2025. 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.

Operator

Operator

And our next question comes from David Tarantino with Baird.

David Tarantino

Analyst · Baird.

Hi, good afternoon. My question's 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

Analyst · Baird.

Yes, I'll start, and it's got 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

Analyst · Baird.

Yes, and the year two ROI is still holding pretty steadily. And we feel really good about the performance of this class of restaurants.

David Tarantino

Analyst · Baird.

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 volume. 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

Analyst · Baird.

David, I'll start 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

Analyst · Baird.

No, I would just say that within the margin algorithm, that 40% flow through on incremental transactions 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 50 basis points or so. And then there's an add 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.

Operator

Operator

Our next question today comes from Sara Senatore with Bank of America.

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 be a flow 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

Analyst

Yes, Sarah, we are seeing acceleration in the business and that's even in the light of what we believe to have been a very successful Carne asada promotion, which we're rolling over at present. As well as, if you recall, we have 3% 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, Sarah, 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. I think all of those things together are driving the performance that we're seeing in the business today.

Adam Rymer

Analyst

Yes, 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 our 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 of equipment you're rolling out? I mean I know you talked about efficiencies and it seems like it's that'll 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

Analyst

I do, Sara, absolutely. One of the challenges that we have in our restaurants is in the mornings 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 call out or a new team member joining the team that is less talented with a 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 of the business.

Operator

Operator

And our next question today comes from David Palmer with Evercore ISI.

David Palmer

Analyst

Thanks. Good evening. Scott, I actually heard you on CNBC just now, just a half hour ago or so, and you were 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 per 15 minutes, and we saw that you had driven, 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, 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

Analyst

Yes, thanks David. On to the CRM and CDP, I'm sorry, CDP loyalty and personalization I spoke of earlier. And that way, Curt Garner and his team and talked 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's 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 a 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. So we think it's a really cool play on how do we continue to drive incremental value within that platform.

Adam Rymer

Analyst

Yes, 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

Yes, no, and we can, I'll ask about it more offline, but thank you.

Scott Boatwright

Analyst

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 it's the same amount of labor in the building, but someone's taking care of pot companions at the district and someone else is wrapping up prep on onions or peppers or bell peppers or jalapenos and not being deployed. So if we can get all that work done, 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.

Operator

Operator

And our next question comes from Christine Zhao with Goldman Sachs.

Christine Zhao

Analyst · Goldman Sachs.

Thank you. Congrats, Scott, Jack, and Adam. 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 the second half, but how you see the returns on the investment so far. Thank you.

Scott Boatwright

Analyst · Goldman Sachs.

Yes, it's really hard to quantify. Here's what I will tell you is, if you think about one of the core equities of this rolling brand for the last 30 years, it's all been grounded and this idea of high quality, fresh ingredients prepared for classic culinary techniques in variety and abundance and a speed in which you can't get anywhere else, at an extraordinary price point. And so we know that portioning is a core equity of hours 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 and people about, it's a reverse of what we saw earlier in the year. Around people posting big burritos, big bowls, and really excited about portioning their getting a 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 internal consumer metrics that we measured through our digital channel and then restaurant experience show portioning positive scores are 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

Operator

And our next question is from Brian Harbour with Morgan Stanley.

Brian Harbour

Analyst

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

Adam Rymer

Analyst

Yes, from what we see at this point, we believe that that will continue. Labor has been kind of in that level outside of the FAST Act for quite some time now. So we have no reason to believe that'll change. And then our first initial looks at cost of sales in the next year are still going to be more of the same. But we'll update you guys if that changes in upcoming calls.

Brian Harbour

Analyst

Okay, 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

Analyst

Yes, Brian, I'll tell you, we have a number of initiatives in our stage gate process today. Some short range, some mid-range, 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 it, have already talked about that. We also have, we're testing a new dual backfire that will be more efficient as we cook chips daily in 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 a 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 were 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 know, go into restaurants, we'll test and learn, bring it out of the restaurant, refine the piece of equipment, put it back in. But we feel really good about what the value they can bring long term for the organization. Hopefully that answers your question, Brian.

Operator

Operator

And our next question comes from John Ivankoe with JPMorgan.

John Ivankoe

Analyst · JPMorgan.

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 in 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

Analyst · JPMorgan.

That was an investment we made from our Chipotle Next fund, and we felt really good about it. So we were, we've been looking around the industry for concepts, emerging concepts that are 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 on 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 the distraction of 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 · JPMorgan.

Okay. 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 staffed at 6 or 7 in the morning. I've asked a 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

Analyst · JPMorgan.

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 the opportunity 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 central location out to, call it, a spoken hub. It’s 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.

Operator

Operator

And our next question comes from Lauren Silberman at Deutsche Bank.

Lauren Silberman

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 income consumer, any differences that you're seeing across regions at all?

Scott Boatwright

Analyst

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. You can 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 lead into that as we move forward. Again, all income cohorts, even low income, are showing positive signs of strength.

Adam Rymer

Analyst

Yes. 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 on 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 sell 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

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 a level set? Are you thinking 4.5% to 5% in terms of the comp guide for the quarter? Thank you.

Adam Rymer

Analyst

Yes, and so like I said earlier, September was kind of a mid-7% comp of which trans were 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 mixed 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-5% range.

Operator

Operator

And our next question today comes from Chris O’Cull with Stifel. Chris O’Cull: 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 and issues that are planned for the next six to nine months or so.

Scott Boatwright

Analyst

Yes, I think 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 are 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 upsides. Chris O’Cull: Okay, 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

Analyst

Yes, so I'll start, and then, Scott, you can jump in. And so Brisket is performing really well, especially compared to Carne asada. 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, 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 beauty, the beauty of all of these LTOs is they come in, they try Brisket, and then we see on the second or third businesses, sometimes they go back to Brisket, sometimes they go to chicken, steak, or other items. So really seeing some great trends there.

Scott Boatwright

Analyst

Yes, it's not often that you find an LTO that you can put in 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.

Operator

Operator

And our next question today comes from Brian Bittner in Oppenheimer.

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 bridge 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 us all 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

Analyst

Yes. So like I talked about earlier, so within cost of sales, that portion 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 a 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.

Operator

Operator

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

Sharon Zackfia

Analyst

Hi, good afternoon. It sounds like things are on a really good path to 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 UK?

Scott Boatwright

Analyst

Yes, thank you. 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 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, I am 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 there's 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

Analyst

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 60% of our entrees are either bowls or salads. And so the table is taking care of all of that lifting, heavy lifting, if you will. And then the operator at 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.

Operator

Operator

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

Danilo Gargiulo

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 was 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

Analyst

Yes, terrific question. It is my endeavor to keep our organization, this leadership team, and all the 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, but we feel very confident those five key strategies will continue to drive extraordinary performance for this organization. It'll 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 that's an important note, right. I mean, 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 towards 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

Analyst

Okay, great. And if I may, just double-clicking on the international expansion, given your continued successes in Europe, if you were to borrow from your experience in Canada, how many quarters of the way 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 Europe? Thank you.

Scott Boatwright

Analyst

Yes, so if you look back at what happened historically when we worked on the turnaround in Canada, it started about six years ago, and of course appointing a new leader in Canada and 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 US, comparable to US margins and we're growing at 25 to 35% in country today. The reason we put Anat in Western Europe is to probably, not probably, to look for a similar outcome and she's already making incredible progress aligning the co-native US standards, 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'm telling 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 leave you with.

Operator

Operator

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

Scott Boatwright

Analyst

Thank you. And I just want to say thank you to everyone for joining the call today. And I want to ensure I really believe that I'm incredibly proud of this entire Chipotle family for driving another, what I believe to be, 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

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines. And have a wonderful day.