Q2 2021 Shake Shack Inc Earnings Call

[music].

Greetings and welcome to the Shake Shack second quarter 2021 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad at a reminder, this conference is being recorded.

And it is now my pleasure to introduce your host senior Vice President of Finance and Investor Relations Rick Paul. Thank you Rick you may begin.

Thank you Paul and good evening, everybody joining me for Shake Shack and conference call at Gulf CEO, Randy Gucci and CFO Casey Fogarty.

During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance.

And then that shake shack offers and.

This month, we made a commitment to invest and additional $10 million and our shack teams over the next year for wage increases sign on our retention bonuses and of funding of programs to promote leadership development and diversity equity inclusion at all levels of the shack family.

Our national average hourly wage is already about $15 per hour and most importantly, or providing an opportunity to grow well beyond those rates into training and manager roles and what we call the stepping up model.

In addition, we've of particular focus on our shack and general managers, adding sign on equity grants and creating opportunities for our jams to make over $100000 a year.

We're not immune to the challenges at this moment is presented for staffing across our industry, but we're committed to building teams that will drive growth for the long term.

We'll keep working to attract and retain the best restaurant and talent recognizing the importance of our team the heartbeat of shake shack by ensuring current and future employees feel cared for and have opportunities for sustainable career growth.

Now on of our business performance.

The first half of the year, our financial performance continues on and upward trend total revenue and the second quarter was 187.5 million up 104% versus last year, which represents our highest revenue quarter ever.

Same shack sales and Q2 were up more than 52% and now down just 9% when comparing fiscal July 21 to July 2019.

Driven by continued suburban strength and ongoing improving results on our urban markets.

We're we're encouraged by the double digit year on year growth of our digital sales, even as our in shack sales improved over 300% year on year and the second quarter.

While in shack sales of started to come back or digital retention stayed strong at approximately 80% and fiscal June versus fiscal January 21, when digital had hit its peak.

And that's over the next 18 months. Additionally, we're committing extra investment instead of learning of our drive thru and drive up models with drive thru expect it to be a large portion of the class of 22, we're anticipating historical build out cost increase about 10% to 15% on average for the class.

It's and exciting and critical investment as we build out new format, which we believe can deliver strong sales and returns over the long term.

And we've got a lot tiller and we're committed to investing and new ways to experience shake shack.

Turning of our license business, which saw of strong uptick and sales during the second quarter arcs.

Our expansion has been filled with dynamic openings, including our first shack, and Shenzhen and China, a third and Beijing, and our first and he assembled at airport.

We've opened and 15, new license shack, so far this year and do the better than expected development conditions and Asia, we're increasing our full year expected license openings guns to be between 20, and 25, new license shack and maintaining between 20 and 25 and 2022.

We continue to be encouraged by the global recovery and we saw of improvement and license weekly sales performance throughout the second quarter of increasing from 6.6 million and fiscal April $2.8.6 million and fiscal June and $8.7 million of fiscal July. The recent increases have been driven by both are international and domestic license checks, especially and domestic.

Airport locations, which are experiencing increases and passenger volume.

Wells reopen stadium shacks at the end and regions, where COVID-19 restrictions have at east.

As we looked at the future of our international business, we have a strong focus on the Asia Pacific region 5.

And successful openings and Shenzhen, Macau, Beijing, Shanghai, and Hong Kong are part of the region plants and continue the momentum and China with and expanded partnership to open more shacks across the country over the next 10 years with new development agreements now signed across central and South China, including the cities of Chengdu, and Guangzhou and and.

All we remain very cautious on both sales and development expectations and the near term given the ever changing and volatile COVID-19 situation across the globe. We are excited about the long term future of this important part of our business.

And all the while we're moving forward was calling on innovation.

This summer, we've been leading with our hot Honey chicken sandwich as well as hot Honey chicken bites and fries with a side of Habanero Mayo dipping sauce.

Are hot on the sandwiches had of 10% of attach rate since launching and we saw a strong response for the promotion at all channels, particularly in digital fall and the response of our avocado Bacon sandwich off or anything which was on 1 and 5 of every transactions. We've temporarily extended the availability of freshly slice of avocado is and add on to our core.

And you sandwiches.

Our summer menu wouldn't be complete without beverage, we launched 2 shakes of this summer the triple chocolate chip.

And our unique spin on of Cherry pop shake complete with pop and candy.

We continue to innovate and cold beverage with a trio of cocktail inspired summer AIDS.

This non alcoholic lineup features of lime agave Margarita some opinion of punch and a watermelon mid mojito.

We've seen a steady uptick and average in shack checks this year and cold beverage purchases with of leading contributor to the lift and the second quarter versus the first.

And we moved to the next section of the call I'm thrilled of welcome Katie Fogarty to our first earnings call as Chief Financial Officer here at Shake Shack Qaeda brings more than 15 years of finance and investment experience, including equity research financial modeling and forecasting and a deep understanding and focus on the restaurant industry Katie's of natural fit and our shake Shack culture and.

And I'll look forward of partnering with her she continues the great work of our team and lays the groundwork for the extraordinary growth, we haven't had with that and like the hand, and the call to Katie and walk you through the financials great. Thank you. So much Randy good afternoon, everyone and thank you to the team for a touch of warm welcome to shake Shack I am so excited to be here and can share the it to that important gross stage by the company.

I have long admired shake shack deep culinary route and willingness to push the limit and elevate flavors, but I am most impressed by the company of commitment to investing and training team members and focusing on standing for something good. We're at his comment earlier on at 10 million dollar and VACMAN and team members of it's just a small part of the narrative here I spent my first week working and the shack spin.

<unk> shake flipping burgers and learning from the team members I have so much appreciation for the team and our shack and and a home office supporting our <unk>. Our teams are at the core of all of that we do and I am humbled to have the opportunity to work with everyone to continue to pave the way forward I will now highlight the details of the second quarter and share some color around how the business is performing quarter to day.

Alright, those and the second quarter at showed a steady and continued improvement of our business with total revenue of $187.5 million representing of year over year growth rate of 104.2% Shack sales for 181.5 million a year over year of growth of 102.7 and per cent.

Second quarter average weekly sales were $72000 exiting the quarter and physical June at $74000, marking the highest level since the pandemic started and upfront $64000 and at first quarter. We share. This monthly progression on page 7 at the supplemental material at.

Average weekly sales were flat and month on month at $74000 and technical July that's outperformed are typical seasonality expectation and.

And the gross here is really 2 fold first of our guests began to come back to eat and our shack that we're at the hardest hit by the pandemic.

Golf ball recovery at certain checked will take some time, especially with new uncertainty of rising Covid cases, we view. These current dynamics at encouraging and second importantly, even at their and check dining <unk> sales showed early signs of recovery, we were able to retain at substantial portion of our digital business I'll go into more detail around digital and a moment and you can see.

Page 10 of the settlement mental and materials for more details.

Same shack sales rose, 52.7% year on year, and the second quarter, there at 38% and and technical July compared to up 5.7% and the first quarter second quarter traffic grew 61.5% year on year after at by a negative $8 and 8% price mix notes at 2020 at at 53rd week and to normalize.

At that are comparable period for both 2020, and 2019 had and shifted forward 1 week from the physical calendar. This is a show of more of like for like comparison, we've included and <unk> and example calendar on page 19 of the temperamental material.

Now on to price mix. Just a reminder, here that is driven by average check that is and historically hiring digital channels and and check so last year search and our digital sales drove a double digit rise in price mixed now with our in shack traffic showing signs of a strong recovery and our digital day business Stabilising, We expect average shack and consequently are price next to.

<unk> returned to of more than normal level, the author adhere to ticket pressure arising from channel shift at higher traffic, notably, though and it's Randy just mentioned the and check average check has also increased and recent period with continued strength across all of our channels. This year. Thanks in part to contributions for menu innovation cold beverage and particular and well.

On our sales continue to recover we're cognizant at the near term Covid environment remains uncertain using prepandemic, 20th 19 sales at 1 recovery sales level of benchmark or same sex sales were about 12% below 219 level. While we started a quarter with April failed, 15% below 2019 levels, we built on a broad based.

Recovery each month at at the corner and continued to make headway and and physical June with sales just 11% below 2019 levels and we are encouraged that'd be close physical July down 9% from 2019 levels.

Recovery and or urban shack still present of greatest opportunity of recapture sales as we show on page 8 of the supplemental materials are urban markets and particular, where it boosted by foot traffic and then the beginning of some office workers, returning and and gradual re emergence of domestic toward them, while limited international tourism renamed and overhang. We are please.

He's too and now that we've recently reopened to shack that had been closed since last year, So that Union station and Washington D C and Grand Central Terminal and New York. These 2 shack depend on urban transit and we expect that they're gonna take some time to recover they'll probably way on results and the interim but it was important to get them reopened and operating as we head into the fall.

Oh and winter.

And addition, I think it's important to note Tim regions at our poor performing exceptionally well across many format and channels as it should help you to understand the evolving geographic concentration of shake shack and how that impacts of recovery original details can be found on page 9 of the supplemental materials and the southeast region and in particular texts at San Shack sales on.

And now above 2019 level, we fear of momentum here as an example of our potential when they build density and awareness and newer markets and provides us with at more balance geographic footprint. These markets represent growth opportunities for shake shack across a variety of format.

The other key highlight of the quarter has there been our digital sales retention, even as and check dining showed signs of recovery.

<unk> sales made at 47% of our shack sales and the second quarter and it's Randy mentioned, we are pleased to have retained approximately 80% of our digital channel sales and pickled June compared to physical January 2021, when our digital sales peaked when we study our digital guest we find they continue to show higher and loyalty and frequency as well as of greater average of <unk>.

And then a traditional and check at.

Therefore, we are focused on acquiring more first time gas and and our digital ecosystem.

And the quarter, we grew our first time digital gas space by $16 and 7% to 2.8 million acquired since mid March 2020, and we look forward to building on a strong foundation by focusing on innovative ways to elevate the digital cast experience.

At least versus the first quarter, our second quarter margin with largely driven by sharper than expected recovery over and check traffic as well as strong shack shack App and web digital retention as a reminder, our average checks are highest and this channel.

Food and paper cost and a second quarter, where 33% of shack sales and increase of 70 basis points from the first quarter driven primarily by beef inflation, we expect to realize the impact of chicken inflation and the second half of the year as we roll up of beneficial locked and pricing achieved and the first half. These costs are expected to remain somewhat elevated from the <unk>.

Levels, we achieved at the outset of the year. The net effect here is that we expect <unk> to be remain at of similarly of elevated range that we saw on queue too.

Labor costs and the second quarter were 29% of shack sales at decrease of 180 basis points versus at first quarter due to sales leverage however, given industrywide staffing challenges and are significant growth cold, we're making meaningful investments and our teams and we expect wage inflation and the second half of 2021 to be and the high.

Single digit range in line with our prior guidance, we still expect wage inflation for the full year to be in the mid single digit range. As we mentioned these investments are critical to maintaining the strong culture and developing the future leaders need as he lay the groundwork for all of the shack better to come.

To counter some of the inflationary pressures I've just mentioned during the fourth quarter, we are planning on raising our menu prices by between 3 and 3.5% through a combination of various price tears and digital pricing initiatives. This is higher than the approximately 2% menu price. We have historically taken at the end of most calendar years, and we will be evaluating the need for further price and.

Creases that might go into effect and 2022, depending on how the cost of landscape of all through the rest of the year.

Other operating expenses were 13.4% of shack sales and the second quarter of 200 basis point decrease from the first quarter due to leverage across fixed expenses and decrease delivery commissions and overall delivery as a percentage of sales moderated. However, we expect in shack sales you continue to recover and we will bring back certain related expenses.

That were cut and the last year. Therefore, we expect other operating expenses to slightly increase sequentially and the third quarter.

I'll keep it at the cost and the second quarter of at 8.2% of Shack fail, a 100 point decrease from the first quarter due to sales leverage we expect occupancy costs and the third quarter to be and a similar range as of second quarter levels Big.

Bigger picture on margin recovery is dependent on several things, including the level of commodity and wage pressures as well as of sales recovery and our highest volume shack as we looked at the rest of the year. We expect of recent investment and our teams to weigh on the very strong flow through that we realised and the second quarter that being said we believe these investments are strategic and placed the company on.

And a stronger path forward and sales fully recovered with shack sales of $188 million to $193 million and the third quarter. We expect shack level of operating margin should be between 15, and 17% we outline this and more detail on pages 16, and 17 of our supplemental material.

DNA expense and the second quarter, with 20.4 million, including $2 million of equity based compensation and other non-cash items.

We firmly believe that we must continue to invest and people technology and marketing to support of recovery and open a robust pipeline of new shack as such we are slightly raising our 2021 G&A guidance to be between 86, and 88 million as we continue to invest and the infrastructure and needed to accelerate our long term growth.

With N G N a R equity based compensation is expected to be about 8 million.

[noise] Preopening expense and the second quarter was $2.3 million, a decrease from $3.6 million and the first quarter at this point and the year, we and and as we execute on a development pipeline plan and we expect full year 2021, preopening expense to be between 13 and $14 million. This is below prior guidance.

On and adjusted pro forma basis reported we reported of net gain of $2.4 million or 5 cents per per fully exchange and diluted share. Excluding the tax impact of stock based compensation are adjusted pro form of tax rate. During the second quarter was 27% of full reconciliation of our tax rates can be found and the appendix of our supplemental.

On material.

Similar to previous quarters, and we will not issue specific 2021 tax guidance at this time given the continued uncertainty for the rest of the year and timing of recovery, However, and normal operating environment are adjusted pro forma tax rate, excluding the impact of stock based compensation is expected to be between 26, and 28% and line with Twenty-twenty levels.

The balance sheet remains and a very strong position to support the growth opportunity ahead of us and we ended the quarter with $420.2 million in cash and marketable securities at.

As we continue to grow we may remain cautious and aware of of the challenges ahead, both globally and domestically, but despite that we are confident that are continued investment and people and innovation and cross our business model of places and of stronger position at the business recovered and with that I'll turn it back to Randy.

And maybe we were a lot of the situation with the global pandemic is not yet and all of <unk>.

Given all unique position premier real estate throughout the country are recovery will still take on and what we learn from the best years of situations can change unexpectedly. However, we remain confident that we can achieve our future gross initiatives are could you do that for you and people will ensure that we're receiving of developing the best talent and that is available across orange tree and offering on <unk>.

<unk> multiple avenues to wish to grow with the company and.

Research and development of new formats such.

Such as shack truck and drive through.

And sure review the needs of and ever change and consumer while we double down on creating a shotgun experience at is better than ever on.

<unk> at her for what the future holds for US you should check has always we hope that you and your family stay safe and and help me with that operator go ahead and open up the Gulf of questions.

Thank you will now be conducting a question and answer session. If you'd like to ask you. A question. Please press store 1 on your telephone keep on the confirmation of <unk>.

And your lawn is and the question to me for a store to if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before person was sparky 1 moment, please while I pull for questions.

Thank you. Our first question comes from Michael Thomas with Oppenheimer and company. Please proceed with your question.

Alright, thanks, very much and security congratulations on the new rule you know the.

Of questions really on the new shocks that are outperforming your base of about 20 per cent and just wonder how important is it to you to maintain a positive job and now that you've got on there obviously in years past and you guys were open and units of sales volumes. So low your footprint, but that was kind of unique because of of of your footprint. So.

Expanded and and gotten further along are these new store designs that are accretive and and you'll have this job is that something that you actually targeting of internal at the internet.

Well it says my of it's it's a mix right, we've all fit and the history of the shake Shack outperformed and and we saw at we've long talk for many years about some of the honeymoon period at some big Shaq's often have well, we really like about this class has been a mix of suburban and urban.

The mix of formats and the geographic mix so within those that outperformance of about 20% up and over 81000 dollar average weekly sales. We've got some really fun new markets, we open to outside of Portland, Oregon, and the suburbs of Portland, We open in Indianapolis and the suburbs of the tremendous start and a shack track drive.

Up a scenario, we also expanded and our hometown and we're doing fantastically well at shacks in Hoboken, New Jersey, and and the Bronx, and New York City. Those are really good songs and then you know within that of the roughly 20 shack set of open we've got we've got them across the country. So so at guys really.

Look forward our strategy use this we've learned a lot during COVID-19 and that will work its way through the shattered on digital ecosystem and some of the physical formats at you will see that as drive thru and <unk> windows and it's just really interesting new types of real estate and we can go after because of this across.

And the country, we will do predominantly suburban shacks and the coming year, but we also we're going to continue to die of deep on our urban footprint. You know, we while while we know that's been of lag and a recovery compared to some others that are much bigger than us we believe in the urban urban areas and then we think they're gonna come back and we've got some great room.

Estate on tap and kind of continue to learn as we go really pleased with the new shack of performance.

And on a near term basis and or if you. How you think about it and maybe some of these construction costs a elevated overtime do we expect to be able to of maybe offset some of that with some of these new tools and shack tracks and digital or is it just going to be 1 of those things that when we look back and added and a couple of years will say Oh, Yeah do you remember all of the inflation and the building costs then.

And he sort of commentary there in terms of how you and the team think about setting these up knowing it's for the longterm would be helpful.

Yeah, well, so we build shack for decades to come and not for the next quarter and we are looking for amazing real estate and that will stay on the test of time, and we're gonna build and do things at others are unwilling or unable to do if you look at the supplemental of a set we that we noted there there's some really great renderings of the expectation of what our drive through.

And might look like it's really important that we invest right now and this learning the unlock the potential that could open up for shake shack as we commit to this investment and drive through and other models is really exciting and that's where we're focused so we want to spend and do that right. We are not going to cut back and we are not gonna optimize.

And spend when we are trying to optimize learning.

Average you'd of volume and a big white space opportunity, we will balance at overtime with obviously getting smarter and our construction you know, we're obviously living and Ah elevated price time, we'll see where that goes hopefully that can come down over time, but we're all set of balance it with some of the formats right. We've got some fantastic food court little simpler b.

Old out we've got some core shack that we've really gotten good at building.

And will balance at overtime, but again at this is why we fortress our balance sheet. This is why we have set ourselves up with of cash opportunity to build a head confidently and that's how we're gonna spend the money with investments and our formats that we believe of open up opportunities down the road.

Both of <unk> very much appreciate the contact there and then leading into that your people pipeline and your people culture has been a huge part and will continue to be a huge part of the story you touched on on a little bit on the call, but just curious if you could provide him some contact and how that pipeline is building, obviously labors tight around the industry right now, but you have a.

No culture and I imagine you can very easily continue your track record of being an employer of choice, but just curious if you could talk about the people pipeline and kind of have that set up for yeah. The next several you of quarters years, and and maybe if you can also touch on how your license partners are kind of of addressing this as well.

Yeah, Uhm look at our people from day, 1 or where how we lead we take care of of each other with San for something good we have to invest and that we're obviously living and a particularly challenging time for many reasons and at the end of the day, what we need to do is build a bench of.

Strong leaders and that our leaders training future leaders and have you look at some of the development. We're doing we've of program today called shift up where we are training our shift managers and financial literacy and business acumen and the development that they need to become leaders and our company down the road those investments are gonna pay off.

With diversity and equity inclusion goals and and you know exciting programs for to educate our teams. We've got all of that and play. In addition to just paying people more and you know that's what we Gotta do that's why we're gonna invest that's why you know you'll see it it's part of our guidance and this and your term uhm margin and back which is gonna.

B the expectation that we're gonna be training up a lot of them and we're gonna be opening more shacks next year and we've ever open and.

Uhm, that's really exciting on the license front you know, it's such at it it's kind of hard to distill it down and each market as it has its own challenge at some very different and others. You know there are many markets, where you know it is challenging to find and develop people and others were gosh, we're building and the most incredible pipeline and look at our partners and China. So many of our age.

And team members throughout those markets that have just built incredible pipelines for growth that are training and capturing and you're saying that you're seeing that and to come back you know if you look at our our.

License sales and there was incredible coming back this quarter and not just quarter over quarter and year over year, but just every day. So that's exciting and we hope that COVID-19 cooperates and and in the meantime will be developed and people and taken him along the way that's what we do and on that plane. You know I would just add here that we've already and the last quarter and with that very strong and <unk> and our urban thousand.

<unk>, maybe might come down 25% first at 2019 levels can add down 18% from 2019 at all so there is still at of room to recover here and and having you know strong and and well staffed restaurant is definitely key to that and we expect to see you know the flow through as at the restaurant and continue to recover it and you know even of testing for and everything and back then.

Great. Thanks for the time to reach you.

Thank you. Our next question comes from Michael Raw skin with Goldman Sachs. Please proceed with your question.

Hi, This is Michael on for Jarrod at and congratulations Katie Good luck and the new role had a quick question about sure suburban shack recovery in the quarter. So it seems versus 2019 you guys have have you know kind of alternated from down 1% on same store sales to plus 1 and kind of back and forth could you go into a little bit about what maybe why you haven't seen that accelerate as you you may want to and.

And I had a quick follow up and thank you.

Well you Gotta look at where it's been a and basically around that that at flat level for 4 months, I Wanna say and and the and that that as urban has continued to recover. So we feel really good about that right. You look at the suburban holding and again I think of I think sometimes because somebody of the companies that.

People on the call my follow it might be tempting to compare us to them you have to realize we have just 200.

Domestic company operating Jackson, just 200 and everyone you might compares to when you talk about suburbs at.

Is a totally different geographical footprint and probably more weighted towards those regions that we showed and a regional that have that are up that are coming back pretty strong. So actually feel really good because it makes sense and and even in the suburbs, we have traffic generating event based.

You know special place locations that COVID-19 ways on and a different way and that's been the shake Shack brand and and you see it and the urban recovery and you see at you know how we expect to come back but look we still got a long way to go Covid is still a real thing and and it has impacted us, but if you look at the basically straight line continued momentum that we've had.

Since you know 15 months ago, that's the encouraging thing that we keep we keep we keep pushing for you know and and on that plane, Yeah, Alright suburban sales went from down and 4% birthdays at 20, and 19 levels and at first quarter to know we exited at pick on July to up 1 perfect first day of 2019 level of.

And I think that that is you know of pretty amazing number to <unk> and think about when you look at the various channel recovery of that with and our urban market that went from down 25% or at the 2019 levels and price quite of 21, now and get down 18%, Yeah still a lot of recovery there to come and but the fact that suburban that's able to.

Hold on while we thought of a pretty good teeth and recovery and her uhm urban does it is encouraging.

Great. Thanks, a lot of shake the color.

Yeah sure just a quick follow up you guys I know, there's a little bit granular, but are you seeing any sort of a difference in the recovery within say you know Manhattan or you know first of at the Bronx, or maybe more residential urban environments versus I I know you're kind of of mentioned that tourists towards him so ways, but what does that trade off maybe between more of the business.

[noise] districts and tourism versus residential urban. Thank you. It is a great question and we haven't broken it out but at <unk>, We're happy to say that there's absolutely differences right. If you were and look at and this is why we broken out and not just and we'd broken out of Manhattan, and you've seen the upward trend on all of them, but there's no question.

Are hardest hit checks of.

Or midtown or downtown Chicago are some of the places not just New York at is those places that are driven by office event tourism Broadway some of our busiest shacks in the world continue to be down significant numbers and and so.

Why are we not worried about that I'll <unk> I'll tell you why because those checks are gonna come back like <unk> I don't I don't worry for 1 second whether those shacks will eventually come back and to have the recovery. We've had with that as an overhang is is really the story that we've been trying to tell and I think it's been well understood.

So yeah. If you go to the theatre district, 44th and eighth 1 of the visit of Shake shacks and the world prior to the pandemic and it is not 1 of our busiest as of right now, but you you bet, it's gonna come back and we're hopeful for Broadway to open and other things like it will impact that and and by the way. The other thing we don't talk a lot of about is there a certain shacks.

Uhm, yeah, and it's not that many but because of our small comp base at does have impact that are that are obviously tourist related and specifically international tourism right. We don't break that out but there is virtually no international tourism right and we have a lot of shacks and places where international and domestic just hang out and that's and overhang. So.

And that's part of what why are why are numbers on where they are.

Thanks appreciate it.

Thank you. Our next question comes from Lauren's Doberman with Credit Suisse. Please proceed with your question.

Thanks for the question and Katie and back again on the role.

Randy follow up on the commentary on the new unit classes Prepandemic, you've talked about you and and opening at a honeymoon and then and the second year coming down and that as you look at the knee and class that was all day and 2019 and the last 3 pandemic of class at starting to enter the coffees had and they're covering rate of those units compared of older classes.

And then any commentary that you can provide on how your 2020 class.

Farming.

Yeah sure we haven't broken those out yet it's a really good question, Lord I and I'll say that I think it's just too hard to answer just yet because of the impacts of Covid. It's not a number I think that is reliable so at it going back to history for everyone listening. We generally have said that because shacks off and on open.

And so hot we have a on average roughly 5% decline and a sophomore year. Some of them are down much more because they're big flagship openings and some are up quite a bit and you're too right and it balances out to about negative 5 that's been part of our our story and and what part of why we have of 24 month comp base. We certainly have some shack set of <unk>.

And this year and and 2020 that or a really big starts.

But when you think about 2020 openings, we only had 20.

And.

They were all impacted by Covid and some way right. So we are hopeful that as day turned a year on month 13 turn into their sophomore year and and as they get into their multiple years that there's growth and will I'm sure, we'll see that and all categories right I'm sure. We'll see some that you know.

<unk>, what we call Covid winters, right and locations that did better and what we call the opposite which was and struggled so <unk> we of 130 shacks and our comp base. Just 130, I think over time as we've said that'll that'll balance out it'll be more or less flagship it'll be more balance of there'll be more mature, but it's a funky number for awhile.

And there's no question about it.

Yeah.

Okay, and I I can just do a quick clarification on the price 3 and a half.

Happy and taken 4 of <unk>.

That all in shack price or is there any contribution digital channel price.

Yeah at that Hey, how are Ya and so I've got 3 to 3 and 5% and at the next of a couple of things. So first of all at his pricing and that we're taking strategically and across the various tiers of shack and and then on top of it at is the you know 10% price that we are passing through with <unk> at third party digit of part.

And.

Thank you.

Yep.

Thank you. Our next question comes from David Tarantino with Milwaukee. Please proceed with your question.

Good afternoon, and it's actually with bird, but my question is.

On the long term margin framework I think of historically talked about 18% to 22% for restaurant margin or shack level contribution margin historically and and there's been a lot of change over the last year and you know at.

All of the investments are making so just wondering if if that's a range that you still think is viable longer term and if so and and what are the main building box to get there from here is at just a matter of recovering of sales or something else is needed.

Thanks, David Yeah, I look we haven't changed that long term guidance and when you look at us being able to put up 19 over 19% and <unk> with a massive part of our company is still significantly down you see the opportunity to build back to where we where we think we can be but what are the inputs sales sales sales and sales.

Will be the things I'll tell you is gonna get there. This is part of our format strategy. When you look at and they've been next year that roughly a quarter of our shacks are gonna be drive through that's a big new model. We're gonna of a lot to learn of a lot to drive and we are hopeful that that will continue to drive strong sales profits overtime. So we believe and our business.

Model, we know we have recovery still yet to be had but we also have evidence at those shack that continue to come back continue and sales continue to come back and they're all profits and did this new parts of the business right. There's significant investments and team. There's there's digital cost that didn't exist before but there's also off sets we feel good about the <unk>.

Rice were taking we feel good about the sales we can recapture and we still got a long road to go but we believe we can rebuild margins overtime.

[noise], Great and then 1.1 follow up on the pricing Randy and I think given all of the cost pressures and industry thing and and you're saying and the investment you're making.

And I'm wondering why.

You arrived at 3% to 3.5% is the right level and something higher you know I guess, yeah, <unk> <unk>, yeah I get at a there's you know we could easily and trust me, we we sit around a lot and think about pricing and optimizing that and if you know this company since 16.

Years of selling burgers, and and a park and New York, we have roughly taken 2% of year, we have been right around CPI for the entire history of this company we <unk>.

We are very conservative and we are very long term thinkers I've seen every burger ever made at this restaurant company and all of these years and we do not go too far too fast we take our time, we do the right thing.

We do not know yet whether inflationary pressures will be transitory, how how long they were last and there's just no reason to to.

Take too much at a time when there's a lot of uncertainty and the world and that's why we got there. So we feel really good about the 3 and a half is Katie said that is that is based and some digital moves and some straight and shack pricing and.

Hour and shack and App channels will continue to be the best price best value and we feel great about that and that leaves us the opportunity David to do more next year and the future of yours, if we want and we'll keep and on that but we we feel good at towards that.

Somewhere around the middle of the fourth quarter will take the 3 and a half and it's the right move for right now and David at gets to add on there and you know pricing is 1 way that you can address margin concerned really where our focus is is providing that gassed with the experienced at delightful experienced that day that they crave and getting you know giving them compelling.

At T O. So that they want to pay up for that our margin of creative and so Randy did a lot of talking about at the L. T O R summer menu at the hot Honey check and of bites and the fries and also called beverage and all of these shy of of higher ticket at the consumer wanting to add on the avocado and wanting to add on the Bacon those are a waste of more organically crowd of <unk>.

Rather than just you know.

Arbitrarily throw and 5 or 6 per cent price of across the board.

Makes total sense. Thank you very much.

Thank you. Our next question comes from John Glass with Morgan Stanley. Please proceed with your question.

Thank thank you very much can you talk a little bit about how digital mix between the channels of shifting as we reopen or are we seeing more of your in out of White label your own outgrowth first and say third party and I think you said 17 per cent of an increase of new purchasers. So do you know who those people are those first time shack users or the.

Or they just folks at first on digital users what what do you know about them and maybe how they behave maybe differently than your legacy digital users.

John Thanks, a couple of things, we haven't broken that out I think of it is just.

High level of say the trends are similar to how they've been obviously as you've seen the comments today about in shack returning that obviously has an impact on the total digital which includes delivery I think we'll see more delivery when cold weather comes back right, you'll see that shift, but we're really pleased with how our <unk>.

Animals are continuing to lead the way, but but when you say well who's that guess I think what we're most encouraged by is <unk>.

The new learning we can we can finally start to see here in terms of how many people are omnichannel users of shake shack right. We are seeing more and more guests who use all channels and and by the way we don't even know alright, we don't have the data on third party of delivery. So it's it's even more than we know right, but we are seeing.

And a lot of guests who are using our at and web channels.

And <unk> and coming and a shack don't forget and we don't talk about this enough with.

With curbside and I was all part of the Shack track digital and other ways to pick up on digital that just gets more and more fulfilling overtime. So more digital guess, both acquisition and retention and frequency. That's what we're driving for that's what we're learning and we really think it's gonna be accretive overtime, but but again you know we've got a <unk>.

Keep investing and these digital tools, we are a young digital ecosystem, we've got a lot to do and we're really proud of the team and their work and where we're at today and we know we've got a long way to go.

And thanks for that.

On development, so you're tightened arrange a little bit and and Ah. These yeah. Thank you <unk> I think it was 40, whatever the higher end, but.

Is that slippage just pipeline and that happens or is it is there somebody was changing and the real estate market and can you talk a little bit about I think you said he's costing place and that's your part of it has to do with the drive through but are you <unk> what is the underlying like inflation and development running for you and your business right now.

Yeah. So.

On on the slippage you know we look for so and the range. We thought we would be and there's a couple of those that are going to kind of peek out what you're seeing is just some longer lead times on often landlord delivery of spaces, often permitting and licensing they're still cities and and municipalities are just taking longer.

Of issue permits and get things done so what we feel great about getting that class of real strong class open and we don't think that's really of material change that we're gonna see and and the ability of real estate and now look of Covid changes things that can often slowdown projects. We don't expect that at the moment, but we're keeping a close eye.

On that and.

Oh, sorry, the second part of of course of inflation at all and Justice should actually yeah, yeah, yeah. So.

Most of it is a little bit of both we and we said about 10% to 15% for the next class a lot of that will be format, driven with bigger investments and some of our large drive throughs, you've seen that and those beautiful pictures that we've shared but some of its and materials you've seen of whipsaw, obviously of materials and the last quarter of lumber steel certain things are still.

Hard to get so of long lead times and labor and contractors are up and you see this cross country doesn't matter what market. So it's a mixture of <unk>. It's a mix of both of those things. So hopefully some of that it'll be transitory and not super longterm and some of it is gonna be on investment and and this learning and this is this is as I said earlier why we why we.

Built the balance sheet, we did because these these.

These investments are critical to the learning the future and the transformation of our company.

And you think about <expletive> checks and never had a drive through ever.

We're really excited to see what that means.

Alright, thank you.

Thank you. Our next question comes from Brian moment with Deutsche Bank. Please proceed with your question.

Okay. Thank you just question around the theme of digital and and acquiring and retaining customers in the past and it sounds like a transaction based or of points space of loyalty program is not really a part of the plans at shake Shack you know, though they are in place and other successful digital concept. So I'm just wondering if your thoughts there have evolved at.

All in any way.

Yeah, we need to look we we can think about loyalty a lot of loyalty. What are you what is it ultimately be and you want people to come to your restaurant and there's lots of ways to do that we have not.

Develops and now store or decided on any kind of point space or other type of loyalty program at the moment, what we're really honing in on US is personalization is connecting with guests finding ways to reward initiate and routine get people back and different ways, we're doing that as we build at our toolbox and we.

Still got a lot of building to do there. So no no new expectation that you're going to see any kind of traditional loyalty program at shake Shack anytime soon we never say never lots of ways, we're gonna keep testing and learning and and and we'll keep you posted on to the <unk>.

Finally here on the digital side, Yeah, we are completely focused on getting consumer on our app and getting our guest on our App and we're providing and more economical way for them to get delivery of our App and 3 <unk> third party and that's basically where we are looking to build on our digital footprint at this time.

Thank you and then just as of fault you know on the drive through plans at its up to 10 and out within the next year could you just speak to how you arrive at 10 and and is it is at cause you want to test the shack drive thru and a bunch of different geographies or is it maybe up to 10 and there's actually several different types of of drive through formats, you have in mind or maybe.

And the car yeah.

Yeah, Yes, yes, there's a little bit of both we want to do a lot of geographies. We we expect the first few to be and the Midwest.

1 in Florida, and we really want a test at in what you may call kind of traditional drive through areas look we know if we do this and and and like our home market and and New York Metropolitan area like we're pretty confident it's gonna work right. We're kind of it's gonna work anywhere and I think we have a lot more to learn when we put it in markets, where we are.

Of of smaller footprint and that's part of our investment there there's great real estate the teams out there looking for it we have tremendous opportunity. We we want to make a real learning moment right. We don't want to do that with 1 or 2 and that's why we're investing and up to 10 and next year. We Wanna go really all in on this learning we will do of.

Couple of different kitchen designs for our own learning, we will be having various tech solutions for our own learning because we're looking at there's 1 thing we know for sure we won't get everything right on the first try those companies that I've taken 50.60 years to figure. This out we're gonna take our time, we're gonna learn things were gonna mess things up and.

You know I can't wait to see it I can't wait to learn from at and Yeah. We'll see at will see at the first couple of drive throughs as we're testing and learn.

And.

Thank you.

Thank you. Our next question comes from Brett <unk> with MK of and partners. Please proceed with your question.

Thanks for taking my questions and Katie congratulations.

Look forward to interacting.

I guess.

Since you have such a a longer term.

<unk> of things and you're willing to take so absorbed some near term pain. How are you thinking right now about staffing levels and and.

And the commodities and the supply chain when you're thinking about it in terms of.

Not just taking care of keeping your current staffers, but also really trying to build out and.

And maybe over index and and how you are looking at the Inn stores maybe.

Have a.

Delevering effect.

Productivity just to make sure that you have the people in case there is at builder, even if we see some slippage or some pullback on the sales from.

Well, Yeah, you gotta build teams that.

Can endure anything up and down right. We've been through of a lot of this last year, we've certainly learned how to do that and had of flax at various levels of sales no matter, where you are if you're obviously growing momentum or if you're flat or if you're declining wherever you are you want to have a strong team and that costs money.

And it certainly costs money to right now and retraining and retiring and and by the way just just think about it and we have 200 restaurants. We're about to open 45 to 50 next year right. You were talking about significant increases we've gotta build teams. We've got we've got a strengthened and we've got a bill of training teams that can go round and that.

Cost money on current P&l's, you know the run rate business. If you were to look at it for a shake Shack is is you know and interesting difference of how you might consider the numbers right, whereas we're still on the building phase we're still knew deep invest and phase we are a growth company and.

And we believe there's a lot of shacks and you had a head that's gonna take great people.

Thank you. Our next question comes from Crystal call with Stifel. Please proceed with your question.

Good evening. This is actually Alec of straw on for Chris Your urban location soft steady improvement on April of June, but kind of remained flat from June and July even though you know mobility.

Was there anything in particular and that July period that may have slowed the rate of recovery and those are the markets.

Average weekly sales seasonality and or is there something more on there.

Yeah, Hi, Yeah actually we are encouraged fired July resulting of typical seasonality and July it's a little bit of every first of all of their and we ask for for them to add normal seasonality and nothing really new to call out there just a continuation of they're very strong and trends that we thought of throughout the rest of the quarter.

Okay. Thanks, just 1 more from me.

Yeah, I think I heard you mentioned and the prepared remarks of in traffic for the quarter was at 62% and check it down and 9 your ear I'm curious how does that compare to 2019 and and more broadly have you seen that trend in recent months and does it does it vary between urban and suburban locations.

Well you you Gotta look at check through the lens of Covid for a second okay generally.

2019 was different universe, and digital which we know carries a higher average check and all channels right generally not as a rule, but often are are suburban shacks actually have at higher average check because there are more people and the party. So on average transaction and often and some of our urban shack.

<unk> of of small ivers shack, because it's more of a quick lunch 1 person in and out type of type of deal.

So all of that is wrapped up in that and that question as to how it compares to last year and how at my compares extra but but in every way or check continues to grow.

And that has been a lot of of comments, we made about some of the items for check and some of the premium is Asian that we've been able to add through cold beverage innovation and other L. T OS and and I think that's really went on and then the more remarkable things and I look across the menu next here and how check has evolved over the past couple of quarters you know the.

The amount of cash that you know, we're seeing and called the average across all channels and even as and jackets come back and digital has moderated all that all day anyway. So I've been able to retain at it it's really encouraging and I think of that speaks to the strength of of the menu to strengthen the L. T O profile and today, you know kind of endorses. This on the strategy of ever really going on.

All in uncle beverage.

Great. Thank you very much.

Thank you. Our next question comes from Jim Sanderson with Northcoast Research. Please proceed with your question.

Hey, Thanks for the question I, just wanted to dig into a little bit more detail and store margins just wondering.

Uhm, how you're looking at the Manhattan market place and whether there's some locations that are actually achieving much stronger store emergence with less of of recovery sales, maybe they're getting to 90% of pre COVID-19 and actually finding that they're a little bit more efficient maybe sales mix from digital is really helping them improve their efficiency Prof.

The ability of any learnings received from the variation of performance and Manhattan locations.

Yeah, our urban markets are Manhattan market still have a lot of room for recovery, there and and really at the margin flow through that you saw that quarter on net return of of the early return of urban and Manhattan traffic kind of shows you of that and then to leverage and the power and that model, though and then nothing really to call at on that front and there had been a lot of learning.

And and Covid I'm for sure, but you know as these types of reopen and are not reopen at guest there to come back to the dining room, and we kind of staff for that there's there's puts and takes on that side and but you know actually look of had here, there's still a lot of great recovery and available and urban market and you of you Gotta you Gotta remember sauce of some of our highest rents right <unk>.

And so that that.

And that'll just as tough when you have lower sales and some of these markets there at all.

But but again and.

Another reason why I think the and the overall average for the company. So strong given how hard hit some of those bigger of heavy hitters are.

Just a quick follow up anytime and and getting some of these urban mortgage of <unk>.

Considering relocations, maybe they are just a handful of stores that just may not work based on what might be a much lower commuter traffic potential that type of things urban Chicago, Yeah. It's a good question, we talk about it from time to time and I've yet to meet a shack I didn't like so.

That doesn't mean, we won't make a smart business decision when the time comes but generally there really isn't any shack and we look at at and say there's not a reason as as we returned at this should work and again also because we're so young right. There's so there's so few shack that have ever even re signed the lease like and the history of the <unk>.

Company. There's so few right. So you know we're still on that very early phase, where that's probably not the best and use of of money but.

You know, we'd rather open and another 1 [laughter] and that's our intention on fire alright.

Alright, thank you.

Thank you our next question and confirm that Curtis with William Blair. Please proceed with your question.

Yeah, Good afternoon, and thanks for squeezing me and I just had a question on the upcoming vaccine requirement for indoor dining and New York City.

Just curious as to how you're preparing what kind of good and she might be getting from the city at this point and basically what you think of the impact might be.

Yeah. It's it's early days on and understanding that I think we are.

I'm looking for more clarity and we expect will get that and the coming days and weeks and we're going to follow mandates at our local governments give us that is what we will do we certainly probably expect that we'll see more cities take this tact. So at that happens we will listen will follow and we'll let you know.

Think it's gonna be at interesting impact and.

Not sure not sure of the answer but what we know is that we will follow what we're told to do.

Okay Fair enough and then just 1 more and Randy and May of touched on this before.

But it wasn't quite clear on it but basically where his shack right now relative to what you believe to be your desired staffing levels.

Either today or say compared to 2019 or something.

Yeah, there's some shack many of the jacks are fantastic and you know here's a theme and the way we say it right. There's always been places, where it's harder to hire and places where it's easier to hire today, where it's hard to hire it's at a higher [laughter] and where it's easy to hire it's pretty.

Pretty much easy to hire and and I know that's oversimplifying it but there really is a wide swath and and it's also we do think that's transitory too. There's just been pockets of moments, where you might have.

At a different staffing level. So I I think we still need to optimize we still need to grow you're seeing that and our investments that we're gonna make to get back to you know full staffing levels everywhere and and that will also come along and sales recover.

Okay, Oh, great. Thanks very much.

Thank you. Our next question comes from Jeff Bernstein with Barclays. Please proceed with your question.

Hi, Thanks for squeezing me and this is product on for Jeff and Katie Congrats to you on the new role.

My question was on beef with your of strict forced reading requirement, let's see outlook for the specialty beef market for the balance of 21 and and to 22.

Or at the supply chain issues and labor shortages that you're seeing at the major processors also spilling into the specialty market or on your suppliers kind of independent of that and then lastly, if you were to experience of destruction and supply are there enough of alternative sources out there that you can pursue thanks a lot.

Great. Thank you so as we're thinking about beef here and what we're seeing and last quarter, we and what types of I may may earlier remarks, and we did see elevated price and beef and it's moderating here, but it's still up on a area of basis and and ran yell at you.

Yeah look when it comes to like the the supply we feel really good about how we work with ranchers and our and our purveyors I. We don't expect any disruptions. There obviously, we've seen some of those those disruptions happened and the the real peak of Covid last year were square prices went up and.

There was a lot of outbreaks at various places that that we have not seen.

But it's not easy for them, either right, you're seeing that and chicken inflation, you're seeing it across the the protein industry. So we're watching of carefully we don't expect it to come down anytime soon.

But we feel good about our ability to supply of restaurants.

I appreciate the color.

[noise]. Thank you. Our next question comes from Rahul Crow with J P. Morgan. Please proceed with your question.

Conflict of squeezing me and guys too this <unk>.

Can you just give us a sense of what happened at the time of your on me at on the 11th competition and of our Bun on February of markets instead of boyfriend and paid off of like competition and that came off that they can talk at on on how this could impact on Mafia on me at them.

And this locations.

Rahul we lost you there for a moment I'm. So sorry, I think we just cut out for a second there can you just repeat the suggestion of all.

Clarification, and I'm, sorry, Yeah, I'm, just looking for some sense of what happened to some of your mirror and relevant competition and the urban and suburban Margaret Yeah on them.

I'll get on and yeah. Thank you yeah. It's a really good question I think and the suburbs and there's more restaurants and ever right and as you've seen from traditional fast food or casual dining as people of returned there's quite a bit of excitement and there and the supermarkets, which is why we feel really good about the 2019 compares that we bought and would do.

Yeah, I, I think and suburban I don't know I I think that the death of the restaurant has been much over exaggerated I think of you actually look right at you walk around New York City urban centers and maybe some that certainly some net struggled through the last year, but many of those restaurants made at and many new restaurants are opening.

You're seeing at you're seeing at around New York City, I can walk down the block and there's like really cool great restaurants opening up all over the place. So I don't think there's any shortage of competition is what I would say so we have to do what we do and when we do that we generally do pretty well, we've always had that mindset and don't worry so.

Much about what's happening around us we of concern ourselves with how we operate next cute and if we do that we feel pretty special about the package of shake Shack and we've put together so yeah I think.

I think it was an interesting question and I don't think it's played out to be as many.

By closures as people may have predicted and when I look at where consumer iceberg diners are prefering clean.

Clearly looking more and more towards more convenient option towards digital options and that's where I think that you know where we're meeting them, where they want to be where we have shack chat and then also we're going to be going into drive through at so those are 2 very exciting things that I think will continue to help US you know of address and pretty competitive landscape.

Oh, Thanks, a lot for the color of guys and just a small follow up on the labor side like for your existing stores like what that fully open up, especially and like the order of markets and it lets the other staffing levels back to 3 covered levels on 1 of all of our are you seeing any changes to the store and operating hot on day to day operations.

It really depends on the store it depends on how that's that shack has evolved digitally right. Some do more delivery and pick up and others. Some are very and shack related so it's a little bit of a mix of generally we we are similar to 2019 staffing levels. When we are optimized but you know of.

Again, we've learned a lot to last you through the last year, we've learned how to schedule better we've learned how to continue to drive our kitchen is better but at the same time. We're we're always about driving is much sales as we can so you know we're continuing to make sure we have the right people on the shifts to to optimize and.

Not perfect every day, it's not perfect at every shack, but and we've got work to do but we'll keep will keep plugging away and and get there.

Thanks, a lot on Friday.

And get good luck guys.

And I should thank you.

Thank you there are no further questions at this time I would like to turn the floor at back over to Randy Rudy for any clothes and common.

Thanks to everyone really appreciate the time, everyone took today and say say policies and take care of.

This concludes today's conference and May disconnect. Your lines at this time. Thank you for your participation of a wonderful day.