Chipotle CFO on the Challenging Labor Environment

should order it online. This is a conundrum that I've started having post pandemic, because so many businesses have migrated to digital so well, and delivery is so fast and efficient now and uh, one of the biggest success stories, at least on the stock market has been Chipotle, Chipotle, Mexican Grill, Tickard, cmg UM absolutely soaring since releasing second quarter earnings on Tuesday. Stock now at what an all time high? At least if these two weekends all time high? Alright,

let's bring in the see the CFO. Jack Hartongue joins us UM right now, chief financial officer forced to put Chipotle, Jack, what do you think should I order in or should I just walk down Third Avenue and pick it up. You know, it is a conundrum. Uh, you know, I had that choice yesterday and I actually was doing the same thing you did during the pandemic, ordering a lot of digital a lot of delivery. I dec had to go into the restaurant interact with the team, eat my

ball right there in the restaurant. It was absolutely delicious, So um, I would encourage you to go into the restaurant. All right, Jack, we know you know sales have been very strong and we're just looking at your most recently released results there. I want to talk about the cost side and margins because I know you guys in the restaurant businesses are dealing with two challenges right now. One is rising food cost prices and number two is labor.

Shortage of labor. Talk to us about those two issues and how they're impacting your margins. Yeah, you know, late labor in the US is a real challenge right now, and it's it's one of, if not the most challenging labor environments I've seen, where everybody at the same time needs to hire people. The economy is opening up, you know, we're opening up our dining rooms. People want to dine

in Um. You know now that the pandemic is, you know, in the late stages, and so everyone's trying to hire at the same time, and at the same time employees are they've been cooped up for either working from home or for other reasons cooped up at home. They're really thoughtful and discerning about where they want to work and where they don't want to work. And so we had to take a big move a couple of months ago.

We announced in May, and then we actually enacted in June a significant increase in wages where we went up about from somewhere around thirteen dollars plus to average rate of fifteen dollars. And it's worked really really well since then. Our application flow is increased dramatically, uh you know, the turnover are losing of people to other folks who were paying one or two dollars more has slowed down quite a bit, and so it's worked out really related well

for us. Now, we did have to raise prices a bit um, you know, to fund that fifteen percent increase. We did raise prices about we're going to but we feel like that was a very fair trade. The customers who have commented so far have said they'll gladly pay an extra thirty cents for exactly to make sure that people can, you know, earn a living wage. And so we think that went really well. By the way, the people when they make more money, they spend more money,

and we think that's good for the economy. So and well, there there's an old Henry Ford a lesson for you. My my thing is, and to be fair, you know, we're relatively wealthy. We have good jobs here, so um, you know there are some people in the country that aren't, that aren't able to But I'm happy to pay a couple of dollars more for a meal if I know that the employees are getting paid better. And usually I find the customer experience is much better if the employees

are getting paid more. Do you I mean, I know you've got to keep your eye on costs, but do you find that you know, your workers are happier to serve food to customers if they if they're getting these raises. Listen, I think you can look at the business and look at the labor line as an expense, or you can look at labor as um. Those are your people, that's the lifeblood of your restaurant. In our case, we run all of our restaurants. We don't franchise any We have

over ninety employees. And when we were able to attract great employees who really love to work in the kitchen, they love to serve customers, they love to be part of a team atmosphere, they are better employees. They make the team better and they make the customer experience better. So, you know, the investing in the higher wages along with other things we've done, like we've invested in offering debt

free degrees to our folks. And you know, we have benefits in terms of physical health benefits and mental health benefits. And we're about to launch something to to help from a financial standpoint, to make sure that our our our teams, our individual employees are able to understand what it means to be financially healthy and make good financial decisions. These are all things that we make. Those investments in our folks,

they make investments back. They want to stay with us, and they want to advance their career with us as well. And because we're a growth company, you know, we've got three thousand restaurants, but we know we can have at least six thousand in the US, and that doesn't doesn't even count outside the US. We need lots of future leaders, and we hire great people who are really bought into what we're trying to do today. They will be our

future leaders tomorrow. That's kind of where I went to go Jack, Given some of those challenges that uh, you know we're seeing across this economy in terms of labor, What has that done to your store opening strategy here maybe you know, in the next six twelve months. Yeah,

it really hasn't changed it a bit. You know, we've had a few interruptions here and there where we've had to delay in opening by maybe a week or ten days something like that, and that was just so we can make sure that we have the full complement of crew and their world trained. The thing you don't want to do. You don't want to rush and opening, and you know, if you target a July one day and you don't have the team up and ready to go and fully train, it's the right decision to wait until

a week or ten days later. You only get a chance to make a first impression one time with new customers in a new trade area. And so we've had minor delays like that. But we actually just announced yesterday that that we're going to exceed the early year guidance. We give guidance of two restaurants that we would open this year. We now expect that we will not only hit that number, we will exceed that number. And so our development team they're doing a great job getting the

sites up and running and constructed. And then are HR and our os folks are doing a great job and making sure that people trained to open those restaurants. All right, Jack, thanks so much for joining us. CAP is fifty billion dollars right now, this round number. It's it's a pleasure talking to you. And u uh. The story has been amazing.

I've been following it, you know, for years, because we used to have a Chipotle here north and now we have them down south, and so I've been eating the food and that makes me want to follow a story all the more, Jack Carton, there is a chief financial officer of Chipotle. After um fantastic earnings, the street bids the stock up sighties six to an all time high. This is Bloomberg. Let's get over to David Kudla right now. We've been telling you um that he's that he's coming

on with us, and now he's finally here. So we're happy all as always to talk to um David. He has a you know, as I was saying earlier, a big following in terms of, uh, the listeners just right into us whenever you come on, David. So UM, we're always grateful to get your insight. Mainstay Capital Management UM out on out in Michigan. There three not billion dollars of assets under management. The question I've been asking for weeks and I haven't gotten a sufficient answer to is

what's going on with rates? Why are we at one on the tenure? Why is the real yield negative one per cent? What does it mean to you? Uh, it doesn't mean the same thing to me. Uh, good morning, Matt And and I hope the I hope the listeners are writing in good things about me, of course, but yeah, but it doesn't mean the same thing to me that it means to some people. I think that you know, Uh, there's still people that are that that are looking for

signals from the bond market. Uh, like the old days. And when I say the old days, I mean before there was so much manipulation of rates by the federal reserve, and we could count on the bond market to send us signals about the economy and to send us signals and and you know, normal reaction functions that that could help us in our our investments and where we should

be going in the markets. But especially in the past fifteen months, but even before that, UM, I think it says more about the amount of liquidity, the amount of asset purchases, but not just by our FED, but by the ECB and other central banks. They're just pushing yields down and it is just distorted. Um the pictures so much.

If you think about back in the nineteen eighties when we were at five and a half percent inflation, where we're bond yields then compared to today, we're sitting here UH at UH one point to seven seven basis points on a ten year on a thirty year with inflation. Last read we had at five point four p UM. So it's it's not it's it's not about a reraction of the economy, iraction inflation. It's about the FED. We

are just a wash with liquidity. The asset purchases mostly by the FED, bombs and NBS is mostly being purchased by the FED and just driving rates down. Hey, David, you know, the pandemic unfortunately is still with us. We a lot of folks feel like we're on the other side of it, but there's still that delta variant. How are you guys thinking about it from a stock selection perspective or sector perspective as it relates to Hey, this

thing might be with us maybe a little bit longer. Well, you know, it was, it was it was an easy I'll just say it was an easy trade last year

and not saying that in hindsight. Uh. You know, we went with the stay at home I T e. Commerce, uh, those trades last year, and I think a lot of investors, a lot of professionals did very well in that environment, and a lot of investors and professionals are frustrated this year with this, uh, this constant rotation back and forth between value and growth, whether it's a month to month, week to week, or like this week day to day,

just the difference between Monday and Tuesday. And uh, you know, one of the things that we're looking at that that uh, we think makes sense for investors in their portfolios for two reasons. Uh, is you know, there's the this this constant argument where the leadership will be between growth and value is to look at defensives. And you know, defensives, we haven't had five per cent correction in the market or fire I should say pullback, uh since last October.

We usually get or the averages at least three of those in a year, at least one crushing in a year, and so there's concerned about that. That's where defensive position in a portfolio can help. Also, um so one area's healthcare to look at is a good one for that.

And with these renewed concerns about COVID with the delta variant, one area we like in particular is um is medical devices, medical technology and devices because as we saw and you've been reporting on the show, we are seven day average in cases in this country had gotten down at the end of June to about eleven thousand, and you know, we we've ramped back up to over forty with the

delta variant. You I want. I was wondering because you're in um in Michigan near Detroit, right just north of Royal Oak there, and you have about three and a billion in assets under management, but you're one of the top one independent financial advisors for years and years um at Barons uh Forbes rates you one of the top one hundred wealth advisors. You want to Stanford and did all of everything that the super smart um Wall Street guys need to do. But you're not on Wall Street.

What what's business like there? Is any different? Are your clients calling in from here or do you have a local base? So we have, I mean, we really consider ourselves a national advisor. We have we have clients and forty seven states and twelve other countries because of people, you know, businesses global these days. We have investors that that move around the country or from around the country and move around the world. Certainly we have a lot here in Michigan, a lot of clients that that are

in the auto industry. Um, so we do I mean, but certainly represent you know, entire country. Yeah, in global business. All right, David, thank you so much for joining us. We always appreciate getting your insight. We appreciate your time. David Cood left, founder, CEO and chief investment strategist for Mainstake. We should ring there, you know, we should should go there at because there's obviously a lot of people for us to interview and then you could get David and

do a round table. End we are going to talk stocks right now. We have got the senior US equity strategist from UBS Global Wealth Management, Nadia level with us and uh, what a market? I mean, where do we begin? Nadia? Um, It's been such an incredible run. I was reading about a really successful hedge fund manager this morning that was up seven percent year to date, and I thought, well, I would rather just be in the SNP five double that return. Does this continue? Do we continue to hit

new highs? Yes, we think that you would continue to hit new highs from here. Our expectation is that the SNP five hundred will reach five hundred by year end. And what's really going to drive that is strong economic growth driven by the consumer and earning's upside. We're ready seeing that this week during earning season that earnings beaten too the upside. We look for that to continue. That's

kind of where I wanted to go now here. Get just kind of getting into the meat of the earning season here, And I guess it's all important really about the guidance here, because a lot of folks have some valuation worries and and feel like you know a lot of these stocks, a lot of this market needs to earn its way into the multiple kind of big picture, what are you looking for earnings and growth and that

type of thing. Absolutely, so, as you know so far, about of the SMP companies have reported and for a quarter, we are actually looking for earnings to grow about eighty percent year over year, and that's higher than where consensus is. Consensus coming into this season without about six uh this season, unlike last season, we are seeing companies awards for those feats. And so when we look out for the full year for twenty one, we expect earnest to grow over percent.

That's the bove where consensus is, and we expect some of that momentum to continue into twenty two. Obviously they'll grow three role moderated twenty two because we're just coming off of a higher base, but we still look for healthy earliest growth in two of about ten percent. So what do you think when when people start talking about growth fears, A lot of people were attributing low rates that we're seeing two concerns that, um, we're not going

to get a lot of growth. I think some JP Morgan analysts said, even though they expect three and a half percent growth over the next twelve months. The bond market is indicating zero point five percent. Yes, there's a disconnecting the bond, but some of that is technical in nature. All of you is the last month that you've seen this pullback in in yield and the flat and of the yield coat has to do with some technical factors.

We think most of that is behind us, and so we look for the tenure to sort of trend back up higher. Our target for urine is two percent, and so we expect that the current is steepen and that's just you positive. We don't think that we are necessarily at peak growth. We might hit peak growth into three However, we do think that the economy will make above trend

growth and that's what's important for markets. All Right, Donna, Given all that backdrop, what are some of the sectors that you guys at GBS are focusing on right now? You know, we continue to like value over growth and we have approach to capual tilt in our sect or preferences, so we favor consumer, discretionary, energy, financials, and industrials. I know that value has lacked over the last month or so due to the fall in interest rates in the

flat and of cars. But we think, as I said, some of that what we're reverse in common months and that should save our value, particularly financials, as we know is a larger segment in value. And you believe inflation is transitory. I think that's consensus on the street and

probably among the smartest economists in the world as well. However, I continue to hear from c e O S and I don't know if they're in a sense talking their book, but from Statlantis to uh Unilever input costs to Siemens, input costs are higher and they're passing those price increases onto their customers. We are in the camp that we think inflation will be transitory. However, it will take a few months for us to get past those high spices and inflation, and we think that we get there in

the fall. But I think it was important for the markets and companies is as you know, that is the ability of companies to pass on those higher costs two consumers. We're seeing that happened broad based in the smp PI found to be able to protect margins and so from a market standpoint, we're not concerned about the increase in inflation. We think it will will subside as we head into the back half of the year, and we think that

companies will continue to protect their margins. And more importantly, you want to also focus on companies that have powers that consumers. Got it, Nadia, thanks so much for joining us. Nadia level their senior US equity strategist at UBS Global Wealth Management. All right, Matt, it seems like the whole world's going to electric vehicles. We've got Mercedes benz Senor gonna spend forty seven billion dollars on their e V business over the next decade. And what happens to internal

combustion engines? Is that going to be an extinct relic at some point? It's something I spend a lot of time, you know what. I spent a lot of time thinking about that and talking about Barry Riholtz. Do we have them on today? I think we can do that. I think we haven't at d N Yeah. Yeah. Let's chat with Michael Dean. He's an expert all this stuff. He's the auto analyst covering all the European autos for Bloomberg Intelligence. He's based in London. Is one of my faves over there.

So Michael, this sounds big to me that Mercedes is saying, all right, we're putting all our chips in here on these evs. Tell us how big this is. Yes, So that doubled their target for x cvs, which which are plug in so include hybrids. By two thousand of the seals mixed they were, but now they're saying they want to go a hundred percent by two thousand and thirty. Now there was a caveat. It depends on the markets.

And I don't know about you, but I don't think the US market is going to go a hundred percent by two thousand and thirty. But it's a very encouraging sign and it shows they're fully committed to electric vehicles. It's to me, I've wondered why, Um, none of the big carmakers has already done this, And I know Volkswagen kind of did, but I mean five years ago. You know, when I drove a Tesla for the first time in two thousand and ten with Jason Harper from Road and Track,

I was like, damn, this is awesome. Um, and I think there's no there's no roar of the engine, so what do you can do with your Lamborghini, your or your Lambo when you get back here. I mean, if I have a Lamborghini, um, I would probably have another car too. So but Michael, why didn't any big car maker get this idea before the pandemic? What? They certainly didn't take Tesla seriously for many years. It wasn't until two thousands and seventeen. And part of that is because

electric vehicles don't make any money. You can see from Tesla the majority of their profits come from selling regulatory credits and that's still the case. But because they're scaling up and because they see battery costs going to below a hundred dollars the killer what tow by two thousand twenty five, they can see those profits on the horizon. And so Daynler now saying that theirselves will be electric. They're still sticking to their double digits margin targets. So

that is encouraging. So, Michael, just give us a sense of kind of the driving public in Europe. What's the embrace of evs. Because here in the U S it's it's it's coming. But until again you put a four D F one fifty fully EV you know, electrified, I'm not sure this market is gonna move that much. What's it like in Europe? Yeah, it's still modest, So it's about fift market share for plug ins, So that's literally

evenly and that's really been pushed by government incentives. So in Germany you can get nine and a half thousand euros off a plug in car. Globally, if you look at BMW and Mercedes, the market shell battery electric vehicles is only three UM, so three percent battery electric, ten percent um plug in in total, and in Europe it's a probably double the market shell that it is. Globally,

it does seem like it's picking up. It does seem like there's something more prestige for a fully battery electric vehicle. And I've not understood this either. If I have the option and the means, I'd much rather have what BMW called a range extender, right, I'd much rather have a sweet electric vehicle that also has a little triple in it. Right. Why why is that not so popular? Well? Um well, firstly, from a market's perspective, they see hybrids as a sort

of interim technology. And if you look at Tesla, it's getting the valuation because it's pure electric. If you look, what's happened to Volksbag in this year Because they've given a battery electric target out to two thousand and thirty, it's got some tech recognition. So that's why other companies want to push the battery electric angle more um than than hybrids. But from a consumer's perspective, guest, because there's range anxiety, there's there's not enough charging points, hybrid is

a much better option in the short term. So my god, that's what where I want to go is to the charging stations. It seems like there's that could be a little kink in the rollout of the electrified vehicle plant. Who does that and that what's what's the play there? Yes, so, so the companies themselves are putting money in, they need the governments to invest um that. There's collaborations with the

oil companies as well. Um So, so there're certainly investing in sort of recharging points, but you're right, there's still very few of them and it's going to take a huge investment to get to where they want to be, especially if if months um and you want to m you know, achieve their mission targets out to two thousand thirty. Where they're looking for another reduction in co two kilometer for their cars, and by that time I just can't

I can't understand why it's taking so long. And I've asked Ben burden um this and and other oil majors. Like in Germany, when you're driving the auto barn, you you see every few kilometers either a shell or in a row. Why not spend the next six months putting charging stations at each one? You know you can do it. We have the technology. I feel like they're pushing back a little bit against this. Yeah, they are expensive though, so a fast charging point is about forty dollars, so

you need quite a few of them. And it's no good going to a petrol station which has charging points where the petrot sivation might take you five minutes to refill. What if there's a queue um at a charging points and it's going to take minutes to recharge. You know, that's quite a long stage. So you can see the attractions still of the combustion engine for sure, for sure, But for the gas stations, like if I've got you for thirty minutes, I could sell you a lot of

stuff exactly. I think Tesla's it has us doing that right, that's very true. That's very true that there is a different angle there. But people want convenience as well. So you know, like the porsh you take and it's expensive, but you can recharge the vehicle to in fifteen minutes. And this technology will be rolled out to other cars, I think probably over the next three or four years. It's a hot car, but it's two under grand for

the Yeah, that's what I'm saying. All right, So Michael, talk to us, just give us an update on just production for the European companies. Are they still suffering from a lack of chips as this can continue to be an issue for the remainder of the year. It's interesting. So the first half numbers most of the companies are pre released so much better than expected. We had that from Mercedes yesterday, UM Fox, Fagan them w still to release, but the outlook from Mercedes was that they're not going

to make their sales expectations. So instead of having silicificutly higher sells, they're just gonna be at the prior level. They're blame me um semi conductor shortages and that is the issue. But also if you look at Europe, the underlying demand for autos in Europe is still quite weak. Although it's up in the first half, it's still below

that of two thousand and nineteen. So I think it's maybe a combination of uncertainty over demand, but also you know, semi conductors is an issue and it continues to be an issue in the second half. Hey, Michael just got thirty seconds here. Why did Folkswagen do the Remac deal with Bugatti? What does that what? What value does that add for herberts Well. I just think that they want to take the lead in terms of electric supercars and they can do that with Remac and Bugatti, and it

also gives Porsche the technology in the future. On the e D side, I think thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews of Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller en seventy three. On Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.