a.  Key Points

• Challenging quarter amid challenging times.

• Market share trends are good.

• International expansion is going well.

• Working through margin and revenue headwinds.

b. Demand

• Revenue missed estimates by 3%.

• - sales growth of -0.4% missed 1.9% estimates.

• Locations roughly met estimates.

• Slightly beat $318M average unit volume (AUV) estimates.

• -2.3% Y/Y transaction growth missed 0% Y/Y growth guidance.

c. Profits & Margins

• Beat 26.0% restaurant-level margin (RLM) estimates by 20 basis points (bps; 1 basis point = 0.01%).

  • RLM is similar to gross margin for this industry.

• Beat 16.5% EBIT margin estimates by 20 bps.

• Beat $0.28 EPS estimates by a penny. EPS rose by 7.6% Y/Y.

Food, beverage and packaging (FBP) costs were 29.2% of sales vs. 30.4% Q/Q and 28.8% Y/Y. Larger portion investments offset price hikes. It sees FBP costs rising to 30% of sales due to normalizing avocado prices next quarter.

Labor costs were 25% of revenue vs. 24.4% Y/Y due to lower fixed cost leverage and wage inflation. It will lap the 20% wage hike in California next quarter and labor cost is expected to fall to 24.5% of revenue.

d. Balance Sheet

• $725M in cash & equivalents; $689M in short-term investments.

• $701M in long-term investments.

• No traditional debt. Just $4.5B in operating lease liabilities. Natural part of this business model.

• Share count fell by 1.5% Y/Y.

e. Guidance & Valuation

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