Q3 2021 Shake Shack Inc Earnings Call
Good afternoon, ladies and gentlemen, and thank you for standing by and welcome to the Shake Shack third quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Should you require operator assistance at any time during the conference. Please press star one on your telephone keypad.
As a reminder, this conference is being recorded I will now turn the conference over to your host handily leg senior manager of Investor Relations and F. PMA for Shake Shack. Thank you you may begin.
Thank you and good evening, everyone. Joining me for Shake Shacks Conference call is our CEO, Randy <unk> and CFO Katie Fogarty during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance.
With GAAP.
Reconciliations to comparable GAAP measures are available in our earnings release, and the financial details section of our supplemental materials.
Today's statements may be forward looking and actual results may differ materially due to a number of risks and uncertainties, including those discussed in our annual report on Form 10-K filed on February 26, 2021, any forward looking statements represent our views only as of today and we assume no obligation to update any forward looking statements if our views change.
As a reminder, and as we have discussed and disclosed for several quarters. Now 2020 included a 50 <unk> week and to normalize for a consistent like for like comparison, our comparable periods for both 2020 and 2019 have been shifted forward one week from the fiscal calendar. We've included an example calendar on page 19 of the supplemental materials.
At urban shacks are leading the way building every day as the energy of office is events commuters and eventually tourists slowly return for.
Shake Shack long term, we believe the balance of urban renewal and the strength and focus of our suburban models will build a solid foundation for the future.
None of US knows what's ahead in this environment, but we are hopeful this momentum continues.
Yet as sales keep climbing back we acknowledged profitability challenges remain and there's a fair amount of uncertainty for the world in the coming quarters. As many industries are shared we too are experiencing a swift and broad acceleration in the cost of goods and labor pressures facing our business.
In the third quarter. This coincided with a high number of shack closure days related to Covid and other weather events, which impacted our sales gavial dive more into the detailed numbers in a moment, but I want to name a few highlights.
As seen in nearly every industry and especially in hospitality staffing our shacks remains challenging.
But it will always be our top priority as we strive to deliver in light hospitality at every one of our touch points.
In July we made significant investments in higher wages retention bonuses and leadership development initiatives still at times and in some shacks, we remain below optimal staffing levels.
Working harder than ever to attract and retain the strongest teams.
You can count on us to invest in wages bonuses and incentives that take care of our teams and offer the kind of career opportunities our teams need.
All of this will come at a cost and you've seen this in our Q3 numbers and you should expect this impact to remain a pressure near term as we work to elevate our people.
In addition, we're seeing inflation throughout the supply chain most.
Most of the premium ingredients, we buy such as a no hormones no antibiotic proteins that separate us from traditional fast food.
<unk> seen significant increases in a very short period of time.
As just one example beef.
The largest part of our basket was up approximately 30% in the third quarter compared to the same period last year.
And up high single digits from just the second quarter with.
With supply chain inflation and disruptions being felt across the globe, we're expecting our cost of goods to remain elevated over our historical levels for the foreseeable future to.
It is a digital guest acquisition engagement in sales.
[laughter], we're investing in data infrastructure to better know and connect with our guests more personally whether to our digital channels email and potential offers of rewards.
In every way, we're working to make the digital hospitality of our company and even better guests experience that we've ever had.
Count on us to continue to make material investments in our digital transformation in the coming years.
As a physical September we entertained nearly 80% of our digital channel sales compared to fiscal January 21, even as in shacks sales return. So it's clear these investments are paying off.
Third we are working hard to build a better shacks.
Heard us talk a lot about our excitement for our first ever drive through opening this year and our commitment for up to 10 through next year.
Construction is coming together for our first few drive through is located across suburban locations in Kansas City, Minneapolis Orlando in Detroit.
These are drive through heavy markets, where we can optimize our learnings adapt pivot and add to the dialogue of this evolving new format for us.
We're also working to optimize our other korczak formats learning and adding to our drive up window shacks. Most recently opening our newest in Oakland in the Chicago area.
And all the while focusing our long term work on smarter designs.
<unk> allocation and four wall metrics that will drive the rapid growth we have a head.
As a physical October and we've opened twenty-five company operated shacks this year with five of those in the third quarter and the fourth quarter will be a busy one as we look to open between 10 to 13 more restaurants.
Our new shacks this year continue to outperform the overall company average strengthening our brand across the country.
2022 class will be 45 to 50 shacks, our largest class ever.
About 25% of the class will have shaq track drive up or walk up windows, and we expect up to 10 drive through formats.
As is often the case and maybe even more so next year due to supply chain disruptions. We expect a class of 22 to be heavily back waited until the latter part of the year.
It's also important to spend some time talking about the incredible growth in our license business. We've open 21, new license shacks. So far this year, who fiscal October and remain on track to open up to 25 total this year.
And its going to teach us a lot about our opportunities to offer even more premium items down the road.
On the beverage front, we remain focused on growing our beverage attach rate in.
In the quarter. We saw continued strong performance from our cold beverage innovation of cocktail inspired summer AIDS followed by our October launch of our new winter it featuring seasonal flavors of <unk> citrus punch pomegranate, Yuzu, lemonade and Apple cider right.
In the quarter. We also teamed up with our friend Kristina <unk> of milk bar for a limited time offering birthday cake and Cornflake chocolate drizzle shakes, which we featured in special promotions through our digital channels.
Menu innovation continues to be an important part of our strategy to drive traffic to our own digital channels and increase engagement when guest trade up to our exciting <unk> offerings and menu add ons.
On the brand side of Shake Shack, we're doing more fun work than ever recently as one example, as part of AD week here in New York, We teamed up with Snapchat and turned our Hudson yard shack into the Snapchat with a full takeover, where the snap team launched their new augmented reality products inside the shack itself.
Download special filters experienced virtual world of characters partying in the shack upon arrival and snag exclusive merch through your snap app.
These are the focuses where we need to be spending our time and investing our capital right now.
People digital new shack growth and the guest experience.
<unk> team is excited for what's ahead.
I'll hand, it off to cater to share more about the details of the quarter and expectations moving forward.
Thank you Randy and good evening, everyone I wanted to begin with a big Thank you to our team and expanding my appreciation for all that they do even though this environment has its challenges. It is our people and our immense dedication to creating uplifting guest experiences that it's truly laying the building blocks of what is to come it is our team that makes.
Shake shacks, such an incredible place for all of us to work.
And the third quarter, we reported total revenue of $193 9 million, marking the highest revenue in the company's history with year over year growth of 49%. We landed at the bottom end of our guided total revenue range of $194 million to $200 million that we provided you in August and I want to provide some more context and discuss.
The puts and takes of our shack sales this quarter so.
So the negative impacts of Covid related and extreme weather across our business in the quarter resulted in about 100 days of temporary closures, which totaled approximately $850000 in lost sales. Despite this our third quarter average weekly sales and that's the figure that normalizes for closures was 72000.
That exceeded our historical seasonality expectations by coming in flat quarter over quarter.
While October average weekly sales have historically declined month by month, we were pleased to have generated $70000 in average weekly sales for the month, which was above September levels. We provide further detail of monthly and quarterly average weekly sales performance on page six of the supplemental materials.
If there are more reliant on mall traffic in our supplemental we show our recently opened shack in Oakmont that its freestanding and offers a shack track drive up window. We also show our shack in suburban square, Pennsylvania, which we opened earlier this year as an example of a shack in an outdoor shopping center is.
Important to note when thinking about our suburban and urban recovered we are reporting on same shack sales relative to 2019 for the shacks that we include in our comp base and we only include shacks that have been open for two years or more in our comp base. The majority of the suburban shacks that we have opened since 2019 are the suburban freestanding and outdoor.
Shopping center format, similar to Oklahoma and suburban square and looking forward to 2022, we are targeting 45 to 50, new openings with more of half of that to come in the suburban markets principally being the freestanding in shopping center locations with enhanced convenience options such as drive through and drive up that being said.
Our robust development pipeline is comprised of many formats, both urban and suburban and spans a variety of regions and we view, our broad and diverse portfolio of shacks as critical to our growth strategy going forward.
Even as our in Shack sales grew about 120% year over year in the third quarter. We were pleased to still grow our digital sales versus <unk> 2020, and retained nearly 80% of our digital business in fiscal September versus fiscal January 2021, when digital sales hit its peak.
Since just last quarter, we have grown our first time app and web purchases by 14% and this brings the total acquired to $3 2 million since mid March 2020, we remain encouraged by our digital retention and acquisition even as our in Shack sales have letter recovery, we are committed to the digital transformation of our busy.
And our continued efforts to bring more of our traditional in shack guests into our growing omnichannel or allow us to engage across multiple multiple touch points.
We're also going to invest more next year and building our partner in Shack digital ecosystem.
Our plans include many initiatives from drive through menu boards to pick up screens and enhancing our in shack kiosk investing in digital remains critical and we aim to continually build on this by developing an improved level of access convenience and connection with a strong priority on welcoming more guests into our own channels are.
T. S program is just one example of our digital initiatives and our shack, although not all of our shacks have kiosk today and those that do we generate more than 75% of our sales through our kiosks and our digital channels. Our digital team has developed a kiosk experience that leaves guests delighted as well as helps them navigate our simple menu and pre.
Some add ons in fact kiosk orders have higher check than those are taken at the cash Register kiosk also help our team members to be more efficient and simplify their work and over the long term allow us to expand our digital and omni channel ecosystem.
Now onto the license business that generated total revenue of $6 9 million in this quarter. Our sales benefited from many regions relaxing COVID-19 related restrictions. In addition to strong performance of our class of 2021 well.
While our license business could continue to benefit from lessening domestic and international travel restrictions, we do remain subject to global headwinds and uncertainty due to COVID-19.
Moving onto sales guidance, which we outline in more detail on page 17 of the supplemental materials.
Assuming no major new Covid related disruptions, we are guiding to total revenue in the fourth quarter of $193 five to 200 million with shack sales of $187 million to $193 million. We expect pork you same shack sales to grow mid to high teens.
While we remain confident in the investments, we are making interdigital business, new shack pipeline and new formats. We remain cautious on the continued pressures, resulting from the state of the labor market potential per slab supply chain disruption volatility in the commodity market and continued uncertainty around COVID-19 as we approach the colder months. In addition, our sales guy.
We will continue to feel the impact from our distributors and supply chain ability to steps to staff and fulfill orders.
Food and paper costs in the third quarter were 31% of total shack sales as higher commodity inflation across chicken and beef resulted in approximately 130 basis point headwind to our shack level operating margin.
We are hopeful of protein costs will continue to stabilize throughout the fourth quarter and at the same time, we do not anticipate cost returning to similar levels that we realized in 2019 and 2020. We also anticipate freight paper and packaging expenses will rise in the fourth quarter and remain elevated elevated for the foreseeable future <unk>.
Shifting to the inflationary pressures our business is likely to face into 2022.
Labor costs in the third quarter were 31, 1% of total shack sales as we made investments in wages and bonuses to both retain and welcome new team members. We expect continued pressure across our labor lines for the foreseeable future as we navigate industry wide staffing challenges, but it is important to note that we view this challenging time.
The third quarter.
Overall, we are focused on the long term margin recovery and we're working hard on every line item or a business. It's the <unk> dependent on the recovery of sales across some of our most impacted shacks, which remained below 2019 levels and as we look forward to the remainder of the year will be focusing on continued initiatives to offset some of these pressures on top of price increases that.
He rolled through the system in October tapping.
That being said, we expect our overall sales recovery and the inflationary impact from fluctuations in commodity prices. In addition to our ongoing investment in team members to persist for the foreseeable future and well into 2022, we therefore expect shaq level operating margins to be between 14 and 16% in the fourth quarter.
I like we outline this in more detail on pages 16, and 17 of our supplemental materials.
TNA expense in the third quarter was 25 million, including $2.3 million of equity based compensation and other non-cash items as we continue to invest in marketing technology and digital evolution of our business.
The Easter Dziedzic priorities are integral to the future of shake Shack, and we anticipate using our strong balance sheet to build upon these key elements of our business going forward. We remain committed to make what makes shakes shacks. So unique our people and our viewing this moment as an opportunity to build our teams and the future of the company rooted in our strong and different.
Shaded culture, as well as our robust growth trajectory and as we move into the fourth quarter and into 20 twenty-two we expect our G&A to increase in order to support our longterm growth initiatives. We also reiterate our full year guided range for physical 21 of 86 to 88 million.
Quick reopening expenses in the third quarter or 2.9 million, an increase from $2.3 million in the second quarter at this point in the year and as we execute on a development pipeline. We expect full year 2021, preopening expenses to be between 13, and 14 million consistent with last quarter's guidance.
With so many persistent pressures hitting all at once.
But history tells us that there are seasons to these challenges.
And great teams and great brands endure.
None of us knows exactly what's coming next and what we do know is that our team is working harder than ever to take care of each other bring hospitality to our neighborhoods transform our shack formats invest in critical digital infrastructure and uplift everyone in our shack community along the way.
We look forward to sharing a shack Burger with you soon and as always hope you and your families stay safe and healthy.
With that operator go ahead and open up the call for questions.
Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
And any time you wish to remove your question from the queue. Please press star two for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question is from Jim Sanderson with Northcoast research.
Hey, Thanks for the question and congratulations on an improving quarter.
I wanted to dig into your commentary about some temporary operational delays in the third quarter and how that impacted average weekly sales are you experiencing any reduction in average weekly sales in the current quarter related to staffing challenges.
From time to time, Jim. Thanks, Yeah, we named a couple of things in the third quarter right about 100 days of full closures right now the average weekly sales adjust for that okay. So that is not included in those but what we saw in the third quarter. Obviously, we had hurricanes in the south we had some pretty.
I said just months over the next several quarters in addition to what you've already.
Proposed.
Yeah, we're gonna look at it really close it like we have a history of 17 years of basically taking 1% to 2% a year.
We have been at or below you know C. P. I increases forever, we don't love taken more price, we want to be a brand that sustains the test of time, even now with these pressures we may be taking less price. Then we could however, we are going to be patient about it. So we've taken roughly 3% to 3.5% we've done.
Some of that in our digital channels, where we've increased we've talked about this last quarter on our third party delivery, we have a 10% upcharge in there. So we're doing it more surgically should we continue to see rapid inflationary costs on any part of the P&L. We may consider taking more price earlier next year that we plan today.
We don't have a plan that we got our <unk> towards the end of October we got our three to three and a half price flowing through the system feel good about that that's hitting now and again it it's not going to offset all the pressures we see at the moment, but but you know for shake Shack, we take a long view on these things and we'll keep an eye on her closely.
Alright, nothing on that plane and thinking about you know how early we are on our growth potential I think that's something that's really important to keep in mind. You know, we still have many more shacks <unk> and to open many new markets to enter and many new format into you know echoing on Randy's point here you know being.
Yeah being mindful of that as we think about price will be absolutely essential.
Alright, Thank you very much will pass alone.
Our next question is from Jared Karber with Goldman Sachs.
Recovery and and all of those markets.
Yep, that's that's great and if I can just quickly follow up on just a quick question on the beef prices. I know you noted that beef was up 30% year over year in the third quarter I I I'm not sure if I missed it but did you give us an update on what the fourth quarter was looking like so far have you seen that that that measure accelerate decelerated kind of hold in that 30% any color. It would be really helpful. Thank you.
Yeah sure. So yeah. The prices again as he talked to that really kind of spiked up and the second or in the third quarter, we've seen them come down a little bit but they are.
At elevated levels and we're we're we're seeing them hold a little bit come down from the the high highs, but we're definitely still in an inflationary environment.
Great. Thank you.
Focus on the guest experience specifically to your question because we think about your question a lot and I'll.
Noted I've been working in restaurants, my whole life like I can remember the days when we switched our reservation systems at Union Square Cafe from a pencil and paper to open table right and these things that you said Gee. This could this could kind of hurt hospitality.
If we do it right and we will technology should enable hospitality digital hospitality should exist in a way that our products work in the way that they should be on your side make the experience easier I can tell you as a consumer I don't ever want to wait in line I haven't ordered with a human being myself at shake shack in years right.
The experience I want is the digital hospitality for the stuff that is more annoying that is ordering and paying however, when I get to my shack I still want to talk to a nice person I want it to be well prepared I want my food Hot and cold, where it belongs and I want that to be seamless, whether I'm staying or leaving.
At the register transaction.
Great contacts thank you so much.
Our next question is from Michael It's Hammas was Oppenheimer and company.
Thanks, Good afternoon, everyone.
You know you've always talk about how important menu innovation is your business. So is the current environment with commodity supply chain and staffing limiting your ability in any way to sort of test this menu innovation and roll it out with the pace and with the items you'd like to meaning that as he environment improves does that actually give you an opportunity to sort of drivers sales in a way you may not be able.
To do so today.
Yeah, a little bit of balance on that yes, there's definitely disruptions we have from time to time sort of things like already things. We have planned just getting caught up in supply chain challenges. There's there's also things that.
Can seem small, but basic paper goods that we may not be able to get and you are seeing this across every industry every retailer where different things are popping up that's happening to us too so sometimes that is happening but.
But it isn't really a material distraction for us we simplified the menu a bit during COVID-19 right, we removed Chicago style, Hotdogs, which had a high number of items we removed.
Concretes.
Which had a high number right some of those things we may test, bringing back again.
But now is not the environment. When you have both supply chain and labor disruptions challenges, we really wanted to just focus as possible and when we do L. T. OS like we're doing now we want them to be run for a significant period of time. So we can work through some of that disruption and to be impactful. That's that's so far what we're seeing with black truffle and we'll have a fun.
Slate of L. T O is that we hope can be impactful next year.
Oh and then on your 22 development are all those sites sort of signed and locked and ready to go and and maybe it's just sort of construction and equipment you're waiting on and then just maybe on the equipment side of things when you buy stuff today that you may not need for a little while but just so it's ready to go see you minimize or interruption. Thanks, yeah as much as.
<unk> not every one of those 45 to 50 is sign but there's certainly identified right and we have we have we have more than that that we identify this far out in a class where we're looking at what that class could be.
With the goal and target of 45 to 50, but we named this and it's really important to name it you're seeing more disruption than ever in the development side right, whether it is a landlord who can't get materials, and therefore cannot deliver the space to us permitting supply chain challenges local governments I mean, it it's just a series of.
Of cascading items that you hear about every day you listen to the news now we we still believe we can deliver on the 45 to 50, we think it would be more back waited as often happens, but certainly going to happen next year. We know this and where we can either pre by or pre prepare will do that.
And certain things you know certain things you may have American made items that are waiting for a part that couldn't that needs to go somewhere you may have things as basic as.
Some of our some of our kitchen equipment some of our Wifi equipment from time to time, you're just having funky disruptions and we expect that stuff's gonna be choppy for a bit and I I don't think we're alone in that.
Thank you.
Our next question is from Lauren Silberman with credit Suisse.
[noise]. Thanks for the question of the culture, that's quite how you operate the company and the date the Kern County can you talk about what you're saying with turnover as well said overall sentiment him on your team to monitor and are there any market their region, where you've seen outside pocket labor talented.
Yeah, well OK a couple a couple of ways to answer that yes, I would say turnovers generally elevated this year than in years past, we we expect that you're saying that everywhere [laughter]. That's true of our industry right now and I expect that'll that'll continue for awhile and we're hopeful that people continue to come back to work.
Force and that they make the choice to work with shake Shack, we're doing more than ever in a recruiting and our investments.
There and then I'm, sorry remind me the second part of your question.
Yeah.
Yeah, Yeah, well one this is over I'll set a minimum your yeah <unk> and then I guess, the second part with any market their reasons layer thing out that Oh, yeah, sorry, Yeah, sorry, Yeah, you know it it it I've said this before.
Where it was hard before Covid, it's hard [laughter] and where it was easier it's easier and that's just kind of exist I think you see that in certain.
Markets around the country that have always been hard.
Especially in some of our further out some of our suburban markets, where you have younger work force generally working and you may not have as many of them, whose parents don't want them to work during the time of Covid right or small examples like that that get bigger over time, but Luckily. This is this is going to be an ongoing journey.
It's hard it's been hard it's gonna be hard and we're going to we're going to continue to focus to take care of our team.
And see if I can have a quick one on commodity costs, though how are you thinking of that.
Alrighty are elevated commodity cost and I understand for them near term dynamics, Hi, Natalie prefer today do you think that labour coffin creeping across the supply chain.
Yeah, Yeah, I understand how you're thinking about that in the context of willing to pay a price if more of the same structural.
Structural in nature.
Yeah, and so on that point, you know, we'd expect it to be and it's inflationary environment for the Forseeable future and you know well we might be seeing moderation at elevated levels and beef, we're starting to see and we've called this out at paper packaging and frame are moving up. So we're just in a very you know <unk> I'm pretty and.
<unk> time, and certainly not immune from me the effects of the broader industry here and as Randy said you know we are we are pleased so far with uhm the price increase that we put through an October uhm, but we're gonna wait and see how that how that plays out and you know.
We could take more pride next year, but you know it's not something that we have that submitted to at this point in time.
Thank you.
Our next question is from Andrew Charles with Cowan.
Great. Thank you I had a question for both of you. So first just Randy on the October price increase.
If our car cause you guys were running 5% pricing putting on third party delivery. You mentioned you know 10% was that price increase they took in October was that exclusively on our marketplace channels or can you tell us how much was balanced screen marketplace as well as in store if that's possible.
Yeah. So it's it's a balance it's regional also netting out two three to 3.5, we think over the whole system. Okay. We moved from 5% to 10% are in July on our third party delivery services. Okay. So obviously that you can work that out it was less than that in the old.
For all regular pricing of in shock pricing.
Got it Okay. That's helpful and then Katie totally get the industry staffing commodity challenges that weight on three Q marches or guide to persistent for Q and.
Is it sounds like unfortunately, there will be around for a good portion of 2022 and I know you're not ready to formerly Guy 2022 restaurant margins, but I think investors looking for some guardrails. So is it fair to say 2022 margins will be able to to trend above 18%. The low end of the longterm guidance.
<unk>, we're not giving guidance at that point, let me try to do is just kind of highlight the pressures that the business is facing and we expect these pressures that you're seeing now to continue I think that's the punch line on.
Cogs labor in the main pressures that we have we expect to continue into 22 now again, we look at the vital signs of our business right now in a long term basis and that looks like the continued straight-line recovery of our sales that we've talked about for the last year and that's where we are really focused there's gonna be some things out of our control right. Now there are some things that we.
Can do about those elevated costs that are hurting our margins, but in general we are expecting margins to be pressured for some time.
[noise] Oh.
Our next question is from Jeffrey Bernstein with Barclays.
Great. Thank you very much.
Two questions. The first one on the pipeline for next year. The 45 to 50 U S Company operated I think you mentioned already you've already got the sites chosen you're still working on some of the paperwork, but it seems like people would be more of the the issue based on the conversations thus far I know some of your peers were talking about having a tough time recruiting and retaining managers.
And it seemed like it would be more of an issue for a brand that is actually adding 50 units above and beyond the hiring just to fill the existing posts. So I'm. Just wondering if you can give me qualitative color or some metrics to demonstrate your confidence in the people pipeline that you're opening up these stores, but they're set up for success with however, many hundreds of managers, you've got lined up and ready to run their own rest.
And then I had one follow up.
Yeah.
That is exactly what we talk about every day and making sure that we are recruiting retaining developing Katie talked about shift up our program where right now we have nearly 60 of our shift managers, who are going through a leadership development program in order to work their way up to exempt salary level.
<unk> managers. We also are strategically is important thing we're doing here not go into too many new markets next year.
That helps you when you need to.
Grow teams from within and not have to move people that helps but you're you're hitting on the right pressure, it's not gonna be easy.
And that is hard work now if you look at our percentage growth. We have strong percentage unit growth called roughly 25 plus percent next year adjusting our company operated domestic those are the kind of numbers, we've looked at year on year and that's a that's an impressive growth and we believe we can hit it and again, if we if for some reason we.
See that we need just slows down we would but that's the bench. We're building, it's the opportunity for giving US why we're gonna spend money.
If you follow the story for a long time on our leadership retreat, which will be next year in in first quarter, we expect to spend a lot of time and money developing the nearly 1100 managers that we have across all of our restaurants across the country [laughter].
[noise] understood and then the follow up interest on the the restaurant margin and I know you said you know there's no specific guardrails that you're providing for 2022 at this point other than the puts and takes I'm. Just wondering if there's a certain level over time that you'd say here's a line in the sand, where we will take incremental pricing because this business needs to home.
Old certain margin, whether or not it's an incremental cost savings that you might have or I know a lot of people are pushing on the incremental my new pricing opportunity, but is there a level where you say these pressures are just too much and therefore that would dictate a certain minimum amount of price increase just to hold that certain margin level, whether it's in 2022 or beyond.
We've never thought about it that linearly I would say we've always thought about it is what is the point where the guests is having a great experience in this restaurant is going to be here for many years to come we don't run or restaurants by percentages, we run them by guess human beings and people who need to come in and.
Love our product if we said that we continue to have added pressures and it would it is would be accepted and well received by that community. Then we may certainly choose to take more price in those but where long term thinkers, we're not going to overreact, because we're having we're all as a world shakes.
It is not unique in this conversation.
The world is experiencing a very high inflationary pressure and let's let's be patient and let's see where that goes in the coming quarters.
[noise] understood. Thank you.
Our next question is from John Glass with Morgan Stanley.
Thanks, very much when they just wanted to come back to the development question and I guess <unk> given the pressures on labor given the pressures on costs, which you have to live with and development forever have you ever contemplated that this is a time to maybe go slower get them right.
If not why not and maybe how do you pro forma a new store now write me what margin assumption do you want to use what causes them. It would seem like that's a harder thing to do that used to be.
I just wonder if you've changed your assumptions based on that yeah yeah.
I just wonder if you've changed your assumptions based on that yeah yeah.
Lots of good questions in there I think I'm getting it right is not necessarily about the number the quantity or the speed getting it right is choosing a great site with the right format for its community now we have some major changes in that right. The evolution of this brand is gonna do.
<unk> drive throughs between now we've never done one we're doing that in the next 15 months, it's gonna be super exciting different levels of convenient format with shaq track Windows drive up and walk ups. So we are really really excited about that so.
I think John we have always believed that we're gonna grow to the extent, we can continue to develop great sites and great teams that can execute them. When do you think about the returns yeah look we we've obviously outperformed any targeted returns we've shared since the day of our IPO right and we're not changing any longterm metrics at this time, we're not real.
Iterating anything other than to say of course, when your margins are pressured and you're spending a little bit more as we are to develop larger units that have a higher investment costs are returns in the near term will likely be impacted there's no question about that right. It's simple math.
But.
The longterm return.
To the total addressable market opportunity that we can get from getting these formats right and continuing to grow is what we're after and uhm, you'll look if we need to slow down for any number of reasons, we've been through that over the last couple of years will certainly react, but we feel like that's inappropriate development scheduled for this next 15 months.
I appreciate the answer and just you did <unk> comment on new store productivity last quarter, I think <unk> or I can't remember it was a trailing 12 month class or whatever it was was up 20% I think either and they can't remember what it was versus versus something it was good what does that now is that still trending in that similar direction yeah.
Yeah, you're you're you're commenting on we talked about the new shack class for the year. This year, so far versus the total company average being at those elevated numbers those remain elevated we're not breaking out the numbers every quarter, but we did it you reiterate the comment that they remain higher than our classes a couple of things to note we only open five.
Restaurants this quarter, we're gonna open 10 to 13 next shakes shacks as you know tend to open big we had a number of new market openings, which we've commented on and how strong they were Indianapolis.
Hoboken, the Bronx, Ah Portland, Oregon, and some other really high volume ones Tampa was our first there in that area of Florida, [laughter]. So again those moderate those come down over time, and we have a new class of the next 10, plus that that will likely open in this quarter. So that's a that's a number that will go back and forth the whole point of giving that <unk>.
<unk> has to say.
Even during COVID-19, even during our sales recovery time, our new shacks were and are continuing to perform.
Great. Thank you.
Our next question is from Jake Bartlett with Jewish Securities.
Thanks for taking the question you know I just wanted to clarify on the menu pricing the three the three and a half you I believe he typically take it in December. So you is that the total pricing within the menu right now or is there more until your lap what you had taken last December just trying to.
To make sure we understand where with the effective pricing is in the first court in the fourth quarter.
Yeah, that's exactly right. So we took in total 3% to 3.5%.
And in October inclusive of the 10% delivery premiums that were charging and that's on top of the price that was taken last year. So now you've ever had kind of a mid single digit price right now and we took about 2% in December and of December last year. So that'll.
That will roll off at that time next year.
Great that that's really helpful. And then you know just looking at at G&A Uhm the guidance for the for the fourth quarter is.
Completely higher than you than you saw in the third quarter, what is the right kind of level two <unk> I don't know if there's any using abnormal in the in the fourth quarter in terms of Ah Ah ketchup or something or a crew or something I'm, just trying to really make sure we understand or I understand uhm what to grow from what what's the right kind of quarterly run right from.
Which to grow in in 2022.
Yeah, we're gonna keep growing and here's I used to think about it we're gonna keep growing in the fourth quarter. We are working our guidance implies an R. N. You will see through 2022, we intend to hire we intend to build our teams, we intend to make big digital and tech and marketing investments as well as in the development schedule you know we're bigger.
About to build the largest class of restaurants, we've ever had were also beginning to travel more right. There's G&A costs are international team and.
In some cases has not been able to travel we intend to get back at that in 2022.
We intend you to really continue to just make deep investments in the long term. So you know to the to the point of you know are we gonna leverage G&A anytime soon that's not or you're not gonna hear us use those words or you're gonna hear us say, we're going to continue to invest in the people infrastructure marketing and all the things that will build this brand we have just over 200 company.
Operated shacks, we got a lot of opportunity out there and we're gonna keep investing in it.
Great and then and then last last quick quick question. The digital sales mix. It truly you know held in I think more than more than most you send that's enough monthly basis, and an absolute kind of average weekly sales, but how how incremental is that it's a little different you know with other time since we think about off premise being really totally incremental you is this just something.
Could just be a shipping people using that channel and doing the same behavior that they did before so how do you think on about how that increases your opportunity that the the digital mix here and it really.
Incrementality of it.
Yeah, I mean, what are the stat that I I find could you really helpful. In understanding how would that is on next to it is it's only talks about how we grew our first time at in lab purchasers by 14% and the quieter and we have seen in the study and our our data when we bring a cat I didn't get into our digital.
Ecosystem with the higher frequency when you see a higher lifetime value of that gas and so it's kind of that through Omnichannel uhm get that we're looking to get here. So we are really encouraged and excited about the fact that we were able to you know routine about 80% of the digital business that we had built in the peak of the pandemic and that you know are a mixture of <unk>.
Strong even though in check is growing much faster than our digital business right now all of that aside you know this is just <unk>.
You know kind of planting the seeds as a.
Greater frequency.
<unk> and your <unk>.
Great. Thanks, a lot I appreciate it.
Our next question is from Crystal call from Stifel.
Great. Thank you guys. This is Patrick on for Chris Uhm I wanted to ask a quick follow up on the Johns question, but you know is the new store curve that you're seeing today and and new openings the way they're outperforming the system is that similar to what you saw pre COVID-19 or do you still have room, there for the honeymoon period to recoup.
<unk> relative to what you saw before the pandemic and then I'd want follow up.
You know we haven't we we never really talked about those numbers in the past so it's hard to get into that today other than to say.
In the past we have talk for many years about how shakes shacks, especially in new markets generally performed strong out of the gate and then come down to some extent and you're too and then generally come back out but.
It's hard yeah, they're all different every class is different every shaq is different so that that comment was really about this year as we look at recovery and and our overall sales having been remained out of it.
I think it's piling on here, it's really hard to make broad sweeping uhm, yeah generalizations here, given we are still recovering and in the midst of Covid Sam.
Got it that's helpful. And then you know just a quick longer term question on the international business and the license segment you continue to grow there in your partner's do obviously, there's the near term challenges of Covid, but is there a point you know in the longer term, where you see density get to a point, where you can actually have a step change in the level of development Petite.
<unk> markets, we have a lot of white space like China.
Yeah. We're we're obviously really excited about Asia, generally, especially China. We've had just incredible starts there.
I noted that hung Zhao, which is a new city, which is a smaller city I mean, [laughter] small by Regina relative terms, but a very major city in the world outside of Shanghai, where we've had a tremendous start and we have still just very few shacks in China, but.
But we're gonna keep growing there so but we we want to focus on the most important markets and we're also really proud of our mature markets like the middle East, where we have a huge business like the U K.
Where we have a number of great restaurants that are still recovering so look we got our eyes on a big global license opportunity and domestic license opportunity that we noted we loved this part of our business, it's really asset like cash accretive and brand brand exciting. So everything about it is is an important and exciting piece of our business we can.
Can't wait to keep growing up.
Great. Thanks, guys.
Our next question is from David Tarantino with bird.
[noise] Hi, good afternoon, Katie just a quick clarification on the guidance for fourth quarter.
Comps can you can you give some perspective on what that would imply for a two year comp or I guess Ah Kam versus 2019, I guess the number I would calculate.
It would be different given the physical period shift so just wondering what that would be.
Yeah. We're we're not gonna go into that again, <unk> 19 had a lot of different noise. It had a lot of noise in it and we have you know that the.
The 53rd week adjust that we've made here so yeah I feel very good about and think I didn't that we've given you in as much detail as that we're gonna get into on the back of that comment, though I do want to clarify the guidance that we're providing you for our <unk> on shacks sales and on our same store sales guide.
That is using the trend that we are seeing today uhm and expecting that the trends will continue with normal historical seasonality pattern to help kind of address that at point. Okay. That's that's essentially answers. The question. Thank you and then Randy I just wanted to ask.
What do you think the ultimate.
Solution is for the staffing issues do you think it's just my iron grates.
Greats or do you think I guess something else related to the employment proposition is necessary I guess what is.
Think about your long history in the industry I'd be curious to get your thoughts on that question.
It's such a deep quietly we're gonna need a lot more time for that one and I think I'm not sure I'm gonna answer that for the world's challenges right. Now I look there is such a host of things that are causing this and I think it's probably nine or 10 different things I'm not going to name one or the other they're all included.
All leading towards I believe ultimately we have to be the best employer in our industry I do believe the restaurant business is an incredible occupation I've lived here my whole life and I have seen how many people we have lifted from entry level jobs into leadership jobs across the country and.
You know in the restaurant business is not for everyone, but it is for a lot of people and we've got to keep focusing on that I do think time will be a heel for this as well I do think we have to get people I do think will continue to return to the workforce.
I believe we've got a we've got to be leaders there and we've got to give people reasons to join shake shack instead of somewhere else part of that is pay part of that is there should development and all of it is pride in in the place that you work so but it's it's a it's a great question. It's a host the things I wish I had the silver bullet and I think it's just going to be.
Heads down tunnel work for our operators and our people teams for awhile as we get back to optimal staffing waivers and I and I believe we will and I believe the industry will and we'll we'll we'll we'll probably move forward.
Alright, Thank you for your thoughts.
Our next question is from Peter cellar with B T I G.
[noise] great. Thank you I wanted to ask about the menu price Anna you guys have taken some recently, but I guess, if you look back in the last maybe a couple of menu prices that you've taken have you seen any resistance from the customer on the menu pushed back and and how how have you guys measure that in the in the past.
I'm not really I mean, you, obviously see it through salesman and traffic I mean, that's that's the best measure of anything in this regard I think it's hard to answer that.
Definitively, but no look that's why we've always been cautious and it always been in that 1% to 2% range. So and we've talked a lot about on this call Tonight, the different pieces of that and how we see it now and another plane to adhere because they'd send a little bit more time of observation here and submit that now 10% that were charging through <unk>.
Our third party delivery channels now, we're still seeing our guests favor that.
Look into and willing to <unk>. They are willing to pay for that convenient channel. So that gives us a little bit of hope there too.
[noise] got it and then I I know, there's one maybe a little bit more difficult to answer but as you talk to your suppliers and your partners on the supply chain is there any sort of sense on how much of this inflation may be transitory and nature Uhm I clearly I think everybody's struggling with the same.
Thing, but nobody's really sure you know how much of a commodity inflation is transit trying to think of the labor component is likely not at this point.
Yeah, I think that's probably fair I'm not Ah.
A big a greer with with transitory inflation at the moment I think of course everything is is supply and demand curve and we're gonna swing very far in one direction year. During this tough time, and then I believe that will ultimately swing back certain commodities will swing back sooner than others. Some I'd never N and I think we're going to live in.
And a high cost environment for awhile, and that's gonna that's going to translate into inflation. So.
You know I I don't think anyone knows I think every quarter has been more surprising than the last for everyone involved in discussion and we're.
We're just going to keep watching reacting as as we can and making sure we give a good great guest experience in the meantime.
[laughter].
[noise]. Thank you very much.
Our next question is from Brett Lovey with M Cam partners.
Thanks for taking my question.
I'm Gonna try one I know you you might not want to answer.
With all of the different performance as you say now a question different segments would.
Would you care to either share a little bit more margin color on segments or top and bottom quartiles just how far.
How far down the bottom of fallen or how well the top or holding up thanks.
Yeah, that's okay, I mean, I've I've answered with exact numbers other than to say, it's the same team. We've talked about there are restaurants and high urban density areas that are significantly down from their highs very far down that remains if you are in Midtown Manhattan Wild things continue to get.
Better every day and you've seen that through our numbers quarter after quarter. They remain deeply impacted and there are some.
Shacks in high traffic suburban areas that continue to win by the way. There's some urban checks that continue in for various reasons. So it's balance it's balance and you can see it on numbers. It look at period 10 look at the third quarter every region continued to grow and improve and we're still down in the deep urban regions.
And that's just that's just what it's gonna be for awhile, there's high highs low lows and we still believe we you know we haven't closed a single shaq during all of this except for Penn station that we four forced to go is because of a construction project. So if that gives you an indication of how we feel about these shacks ability to recover there you have it.
[laughter].
Our next question is from John Evanko with J P. Morgan.
I'll try to be quick you know it it I thought during this call you know how some of your employees aren't necessarily benefiting directly from customer tips, where some of your service Provider's actually or do you think eight and to some extent. This is get back to David Korean Keynotes question. You can we saw some of the pain.
She was just giving customers more of an opportunity to tip, maybe you know <unk>. Some of the new next generation point of sale systems, whether in your kiosk or to your App. You know if you think pay as part of the problem could you put it to some extent in the customer's hands.
John you're you're always ahead of the curve as usual and I appreciate that we've talked about tips for a long time and.
And I'll tell you how we think about for many many years. Our guests have said can I give you a tip and we've always said no no. We're good.
We don't we don't do that here, it's something we're talking about a lot and mostly because our guests are asked for it and of course for to ultimately hopefully have higher pay we're actually testing right now and just two shacks and it's a test that literally began weeks ago just weeks ago [laughter]. So we're gonna test that we're gonna.
See various versions of that and we want to make sure that we don't ever want to be the brand that people feel compelled guilty about it like they have to do it it should only be for superior service and hospitality and if we can set up a system where that could work in some of our channels and that could then benefit our team that'd be great, but again really knew really.
New and just testing it out too. So this is a long long term projects and don't expect to see a massive rollout anytime soon here, but thank you for asking yeah, and listen I mean, and I'm sure a lot of customers would be we'd be happy just for that opportunity and I'm sure you'll do it in the right way. So the month of October you did mention there regardless truffle Burger.
I'm doing well I think that's obvious.
How significant do you think that actually was for the month of October.
And you also said you know you might consider other higher priced products like that and we do have a full pipeline is kind of the first point and secondly, if I could sneak it in where your staffing levels in the month of October materially better than some of the preceding months that also could have.
Contributed to some of the cross regional performance in that month.
Okay, so starting with staffing no it wasn't materially better staffing wise, but it also wasn't materially worse. It was still challenging let's let's start there. So we we certainly were not optimized that every shack every day to capture the best sales. So that that remains challenge and when it comes to L. T O as we'd love to Shuffle Burger, it's something we tested last year.
And a couple of markets to see and it's hitting and people love it and they're willing to spend so that gives us a lot of confidence in potential premium L. T. O's or also not just L. T O job, but you are seeing us more and more look to the premium is Asian of current items, if you actually pay attention and our app, you'll see bacon avocado, which wasn't L. T O and is not any more.
But you can still get it right you can see more easily able to add on features like.
Like adding bacon like adding avocado on a burger those are those are things that we're really excited about being able to do so troubled didn't really launch till mid to end of October. So it wasn't a huge part of the October performance, but certainly had some fun involved in it. We also last comment we we did that digitally only in that first couple.
[noise] weeks. So there was time when it was only available on our App and there was a time, where we didn't have it on third party channels and it finally did and and we think it's gonna be a fun item to run for a couple of months. So, we'll we'll see where that goes and we've got around on other exciting L. T. O is for next year.
[laughter].
Our next question is from Brian Vaccaro with Raymond James.
Hey, Thanks for squeezing me and just a real quick one I wanted the circle back on the suburban trend I always really appreciate the the monthly total AWS that you provided in the presentation, but could you speak to what you're seeing sort of from a suburban AWS standpoint, specifically I'm just trying to work through any noise in that improvement you're seeing in October that might.
Be seasonality Covid world versus pre Covid and also also I'm trying to get a read beyond just the comp base a bit since you're growing so rapidly so any additional color there would be great.
Yeah, Brian I mean, what we've shown here is and what we're gonna share with you. It's just the same store sales trends uhm. So if you go to page seven this type of mindlessly outline that urban versus the suburban any over all blend just to give you some more color there with a a broad based improvement across the board.
And you know it was across a variety of the different mix of formats in suburban that that we talked about.
Okay. What did you say that the AWS since in the suburban markets were higher in October then they were September in August.
We're not commenting on AWS for October.
We're not commenting on AWS for October.
Understood. Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session I would like to turn the call back to Randy Rudy for closing remarks.
Thanks, everybody appreciate the the long hour plus here and look forward to getting a shack Burger with you soon thanks for joining take care.
This concludes today's conference Shake Shack. Thanks, you for your participation. He may disconnect your lines at this time.
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