Q4 2021 Shake Shack Inc Earnings Call

Okay.

[music].

Greetings and welcome to the Shake Shack fourth quarter 2021 earnings call. At this time all participants are in a listen only mode. A 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.

Please note. This conference is being recorded I will now.

I will turn the conference over to your host and they get you may begin.

Thank you and good evening, everyone. Joining me for Shake Shacks Conference call is our CEO , Randy gritty 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 adults.

As prepared in accordance with GAAP.

Reconciliations to comparable GAAP measures are available in our earnings release and the final details section of our supplemental materials.

Some of 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 of our views change.

As a reminder, twenty-twenty included a 53rd fiscal week and to normalize for a consistent like for like comparison, when discussing 2021 year over year sales and revenue metrics Tonight that we've excluded the impact of the 53rd week in 2020 .

We have included metrics, including the 50 <unk> week in our press release and a slide detailing the impact of the same shack sales calculation and the financial details section of our earnings supplemental.

By now you should have access to our fourth quarter 2021 earnings release, which can be found at investor Dot Shake Shack Dot com in the news section. Additionally, we have posted our fourth quarter 2021 in the supplemental earnings materials, which can be found in the events and presentation section on our site or as an exhibit to our 8-K for the quarter I will now turn the call over to <unk>.

Andy Thanks, Emily Good evening, everyone. So I will highlight the strong fourth quarter recovery in full year 2021 performance following our prerelease of initial revenue and profitability results earlier in January .

I'll also be giving color on the current quarter's performance, especially in light of omicron impacts as always well take.

A moment to thank our team. This recent omicron wave amidst an already challenging staffing environment has been a tough hurdle for our teams the way to get out there day after day to take care of each other and their communities amazes us and they deserve our thanks more than ever it's important we maintain our commitment to stand for something good by elevating our people. This is shake shacks.

The fourth quarter represented a strong improvement in sales and profitability and highlighted what recovery can start to look like when urban centers travel and a return to pre COVID-19 movement patterns take hold in 2021, but a record system wide sales of over $1 $1 billion growing over 40.

87%, marking the highest sales in the company's history.

Weekly sales outpace historical seasonality at 74000 same shack sales were up nearly 21% versus 2020 and for the first time pushed positive versus 2019 at up two 2% due to the strength in both urban and suburban markets are licensed shacks in the U S and around the globe also performed well contributing a record low.

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That level of operating profit in the fourth quarter was 16, 4% benefiting from strong sales of <unk> offset by continued labor and cost of goods inflation.

The environment of commodity and labor wage inflation is still taking a material impact on our restaurant margins. We expect this dynamic for this foreseeable future.

But in order to offset some inflationary pressures, we took a price increase of three to three 5% in October of last year. Given the continued outlook, we've decided to take another three to three 5% in March resulting in an inflation based price raise of 6% to 7% heading into Q2.

We will also be raising our price premium on third party delivery services from 10% to 15% higher than our in Jack pricing. This gives us the opportunity for better profitability on those channels and even more reasons to drive people to our own digital channels for the best value.

I think Jack has historically taken roughly 2% price per year, and that's given us a strong value proposition for our premium products. We believe these current price range that are necessary to protect margins will be keeping a close eye towards the cost of our business and will consider whether additional price maybe necessary later this year we're.

We're committed to delivering a high quality restaurant experience at a reasonable price and believe this value proposition is key as we expand in new and existing markets across the country.

While the fourth quarter results represented a lot of optimism around a recovery. We started this year with much more volatility on the business due to Amazon.

First quarter typically experiences a seasonal decline in sales versus the fourth quarter, but in January a sharp increase of Covid cases limited, our availability or our ability to staff and keep all of our restaurants fully opened. Additionally, we saw many of the drivers of our business such as office returns events travel tourism and the general gather.

You have people that contribute to shake shacks best results turned downward combination of lower than average sales per hour reduced operating hours and outright closures due to COVID-19 resulted in materially lower sales versus our seasonal expectations.

We expect these trends may continue to impact sales in our company owned shacks in our license business through the first quarter. However, we're.

We're happy to report a steady uptick in sales over the last few weeks with fiscal February month to date same shack sales of approximately 13% as of Tuesday of this week.

I'm, calling rates now plummeting will point back to the fourth quarter as an indicator of the kind of momentum we know can occur as a more normalized consumer environment returns.

No one quite knows the timing of how people will move about following this recent omicron wave, but we're bullish on what spring in a recovery could look like later this year. So let's check in on each of our strategic pillars for 2022 first elevating our people we're not alone in the challenges of staffing and increased turnover amongst our teams I'm a chronic.

Acerbate of this over the last couple of months and our teams worked diligently to hire train and develop leaders at every level will remain an employer of choice there are competitive pay benefits and commitments to our team and the way we take care of them during tough times like these and through their tenure as they rise up through the ladder of opportunity here at shake Shack heading.

Heading into 2022 we have raised our least starting wages more than 13% over where they were at the end of 2020. This year for the fourth year in a row. The human rights campaign corporate quality equality Index gave us a 100% score and named US as a best place to work for LGBTQ plus team.

Yet another way our team is recognized as we stand for something good.

This year, we will also host our biannual leadership retreat, where we will gather all of our managers partners key suppliers for a week of inspiration learning in connection as we prepare for the incredible growth ahead.

In 2020 , one we filled nearly 60% of operations leadership positions with internal candidates, 70% of those being people of color and approximately half of those promotions being women.

We still have much work to do but we're incredibly proud of how the team is developing.

Our second strategic pillar is our focus on digital transformation Katy will go into more specifics here, but I'll begin by sharing that over the past two years, we've invested deeply in our digital transformation shifting guest preferences over to our digital tools, improving our products and guests experience, adding $3 5 million, new App and web purchases since March 2020.

And enhancing all the ways our guests can more easily and more frequently come to the shack on their terms. We are building a true omnichannel experience and this year, we're investing in new brand marketing within our digital products to enhance personalization drive frequency and grow gas connection.

We're also leveraging digital tools to improve operations, allowing teams to manage the digital business based on current traffic and wait times will be focused on improving the shack track digital experience upgrading and adding kiosks in shacks and developing more personalized ways to connect and reward our digital community.

But can it go ahead of growth and development of our third strategic pillar to build a better shack in 'twenty 'twenty. One we opened 36 domestic company operated shacks currently with an <unk> of $3 $9 million. This year, we're targeting our largest ever development class of 45 to 50 company operated shacks with our development schedule heavily.

Weighted to the back half specifically to the fourth quarter of the year.

So I want to level set those targets because we've been shooting for that schedule for a couple of years, we expect to open a total of seven company operated shacks in Q1 and between five and seven in Q2.

As we're already feeling the impact of supply chain disruption labor availability in construction and extended permitting timelines pushing this year's opening schedule heavily into the fourth quarter, there's risk to these numbers as uncertainty and availability of timeline critical items has continued to grow even over the last quarter.

We will keep you posted on timing and final guidance, but we're really excited about this year and into the coming years as we transform our portfolio of shacks around the country.

The class of 2022 will feature a big commitment to new formats like drive thru, while expanding proven formats like urban Street retail suburban freestanding now we expect 25% of the class to have a shack track walk up or drive up window.

In December we opened our first ever drive through locations Maple Grove, Minnesota Lee's Summit, Missouri.

This past week, we opened our third drive thru in Lavonia, Michigan outside of Detroit and are preparing upcoming openings in Vineland Pointe Orlando in Castle Rock, Colorado.

Our strategy is to open this first group and busy traffic locations. So we can optimize learnings from the markets and our guests.

We're building an experience that provides the elevated hospitality, we're known for including made to order burgers in hand spun shakes balanced with the convenience that guests expect at a drive through.

Our preliminary results have been impacted by Amazon, We're really encouraged about what we're seeing how the drive thru is operating in all the use cases, we can already imagine for how we'll build these in the future.

We look forward to continue to expand with up to a total of 10 drive throughs operating by the end of 2020 two.

Locking this potential can have a tremendous impact on our long term addressable market. We're focused on deepening our investments resources and learning about this critical New addition to the shack family of experiences.

We continue to anticipate buildout costs for the class a 2022 to increase 10% to 15% above historical levels due to sustained inflation of material costs and labor costs.

We continue to be pleased with the growth of our license business. In 2021. This part of our business drove over $400 million of system wide sales contributing to this was the opening of 26, new licensed shacks highlighted by new market launches in Monterrey, Mexico, Macau, Shenzhen, Hangzhou and the deepening of our commitment to growth in Korea, Mexico.

And more in the fourth quarter, we opened six new licensed shacks, including our second in the city of Shenzhen.

We're really excited to continue building on this momentum in China, and we see this region as a major potential growth focus with expansion this year into brand new markets, such as Guangzhou and Chengdu.

We're also proud to announce that we'll be targeting opening in Malaysia in 2023 through a new development agreement.

Our international license business remains a key focus asset light strategy to grow our brand and profitability over the long term.

On the domestic side of our business in Q4 benefit for me increased air travel, especially serving holiday travelers will be building on that momentum with a slate of new roadside shacks in New Jersey in upstate New York in a new development agreement, we now have with Apple Green to grow this format.

Finally, we're always working on improving our guest experience and our kitchen, we're uplifting our culinary program with exciting L. T OS and Buzzworthy, Collabs, which drive engagement with new and existing guests.

Lee, we ran our truffle Burger and fries, which were the strongest performing L. T OS of 2021 and our digital channels after being launched early exclusively on our App and right now, we're highlighting our new Buffalo Chicken Sandwich, crispy hand, breaded chicken breasts, covering our Buffalo sauce topped with a ranch sauce over pickles and shredded lettuce on a towson potato bun.

This pair is great with our Buffalo Spice Fries classic Crinkle cuts dusted with our Buffalo season served with our ranch sauce.

Our seasonal shakes in the first quarter incorporate delicious flavors with a connection to our communities.

The wake and Chegg as a coffee Shane can spun with vanilla frozen custard maple syrup in Orange zest topped with whipped cream and Orange candies.

We've partnered with Red Bay coffee Black owned Coffeemaker out of Oakland, California, as yet. Another example of our commitment to gather communities and enrich our neighborhoods by supporting local businesses have.

We've got an exciting lineup of L. T. O is planned for this year focusing on chicken Burger shakes and lemonade all with the goal of driving frequency check and brand love and with that I'll hand, it off to cater to share more about the details of the quarter and our expectations moving forward great. Thank you Randy and good afternoon, everyone. I wanted to thank our amazing team and our shacks at our home office for the time.

This work that they do as we continue to work together and navigate this challenging landscape our deep dedication perseverance and innovation is shining bright through the lingering pressure from Covid.

We ended the year on an optimistic note with encouragement about what a recovery for more urban and tourism heavy restaurant footprint can start to look like we saw notable green shoots across shacks, even as can see north we're still not fully back to pre COVID-19 behavior patterns in terms of international and domestic tourism returned to office as well as dining and restaurants are.

Fourth quarter revenue grew over 38% year over year to $203 3 million as our same shack sales rose 28% more than closing the gap to 2019 same shack sales. This was a long awaited milestone for the company and this happened even as many of our shacks that had the largest sales volume prior to Covid, we're still.

Far from recovered we generated shack level operating profit margin at 16.4% up 40 basis points year on year, our license business had a record quarter and we generated adjusted EBITDA of $12 4 million up 36% year over year.

System wide sales were $314 3 million in the quarter and more than $1 1 billion for the full year up over 47% year over year and by more than 25% relative to 2019 levels. We are learning more insight as we enter a new country market and format. As there are now 379 shake shacks operating.

[noise] across 15 countries and we have a strong digital president intercompany on business.

We generated $74000 in average weekly sale upfront 72000, we reported last quarter and each month of the quarter outperformed historical seasonality driven by a function of higher menu price and at building recovery in our urban shacks as well as continued strength in our suburban shack.

In the fourth quarter, our urban same shack sales were 4% below 2019 levels and material improvement from down 15% in the prior quarter. Most urban markets outside of Manhattan were up relative to 2019, and New York City had the largest impact on the sequential improvement in total same shack sales.

Our suburban same shack sales were 9% above 2019 levels also a material acceleration quarter over quarter, even as our urban business performed well.

Towards the end of the quarter, our mall based shacks benefited from more of our gas out shopping for the holiday our traditional freestanding an outdoor shopping center same shack sales also showed continued strength we saw strong performance across all regions in the fourth quarter, Texas, Connecticut, and Georgia same shack sales were each up 20%.

More relative to 2019 level.

Then with rising Covid case, count and the end of December and throughout January we thought Swift reversal of strong fourth quarter trends. Our average weekly sales fell to $63000 in January flat to last year, and our same shack sales momentum slowed to up 2% year over year rising.

Rising case count in addition to weather drove 87 full days of shack closures and a high single digit reduction in operating hours. We also throttled digital channels in some cases. These pressures of course are not new but rather consistent with what we have experienced in prior COVID-19 wave.

While the timing of when our guests will return to pre Covid momentum our movement patterns is uncertain. Our sales in February are showing strong improvement from January levels, and our same shack sales are now up approximately 13% year over year as of Tuesday. This week, we are cautiously optimistic on recent sales trend, but this uncertainty is understandable.

Impacting our ability to guide one Q and full year 2022 with precision as it pertains to sales cost staffing development and other metrics.

We are guiding first quarter shacks sales of $190 million to $195 million supported by an assumption that our sales remain impacted by COVID-19 , but that the impact will continue to lessen from January levels.

However, this assumes no major new unanticipated disruptions throughout the quarter, we expect our same shack sales to grow high single digits to low double digit year over year.

We are encouraged by the results of our October price increase and believe our brand has pricing power. The extent of inflation. This year remains uncertain and we may take additional price later this year to help build back margin I'll focus focusing on a tiered approach to pricing and ensuring that our guests still realize a great value in terms of superior food quality.

And gas serviced as well as a wide range of offerings across price points.

With rising Covid case count in January we saw a significant sales impact and deleverage across our restaurant P&L desk.

This along with the higher delivery mix ongoing inflationary pressures and added expenses to support the return ever in shack sales are likely to negatively impact our shack level operating profit margins for the first quarter.

We are guiding to shack level operating profit margin to be between 11% and 14%.

We are taking price late in the first quarter. So we'll have a little benefit to this quarter shack level operating profit margin.

We generated nearly 40% of our system sales through our licensing partners in the quarter with license sales, reaching 118.4 million up 50, 50% year over year. This performance was driven by new openings increased holiday air travel domestically and relaxation of Covid related restrictions in select international markets.

Our partners are now operating more than 150 licensed restaurants worldwide and we expect to see 20 to 25, new licensed shack openings in 2022.

Our license partners are seeing a wide range of impact from the recent increase in Covid case, count and restriction and we expect this impact to continue throughout the year.

As such we are guiding for our licensing business revenue of six to $6 4 million in the first quarter and know risks and uncertainties around rising restrictions, particularly in Asia.

Well our momentum in the fourth quarter was encouraging the swift sales pressure, we faced in January simply reinforced the importance of our strategic plan in terms of our commitment to elevating our people our digital transformation evolving our formats and making sure that our guest experience rule in terms of quality and hospitality we believe.

We must continue to invest in a digital transformation of the company and are committed to building a true omnichannel guest experience, where our digital platform, meaning our app and our web or their preferred channel and the fourth quarter. We grew our first time, Wap web and App customer base by nearly 10% versus the prior quarter and by more than 80% for the.

Full year 2021, as we leaned into more personalized and digital marketing as well as launching key limited time offers through our own app channels.

Our digital retention remains strong and December we retain nearly 80% of the digital business that we had generated in January 2021 even as our in shack sales nearly doubled our digital sales mix with 42% in the quarter and nearly 60% when considering kiosks and our digital channels combined.

The long term and sustainable growth of our digital business is top of mind in our 2022 G&A guidance and overall investment plan. We believe our initiatives are important to lay the groundwork for improved digital frequency and lifetime value of these cats.

Now onto the cost side of our shacks.

We are committed to working with the best in class suppliers and our supply chain team has done a memorable job navigating macro driven challenges in an inflationary backdrop in the fourth quarter, our food and paper costs were $68.

Flat.

The price increase we implemented in the quarter helped offset low single digit quarter over quarter, and low double digit year over year food and paper inflation.

We realized cost pressures across many inputs by particularly protein.

We may take more price this year as the inflationary environment warrants. However, we currently anticipate mid to high single digit inflation across most of our non protein and put and double digit inflation across our paper and packaging the <unk>.

Biggest part of our basket is our 100% all natural Angus beef, where we expect continued inflation and are subject to a weekly and monthly moving price it.

Labor with $57 9 million or 29, 6% of total shack sales down from 31, 1% in the prior quarter and 33% in the fourth quarter of 'twenty 'twenty with a leverage driven primarily by higher sale. The staffing environment remains challenging and we are going to continue to invest to build our teams for their growth.

Hey.

Operating expenses were $29 2 million or 14, 9% of total shack sales up from 14, 2% in the third quarter at 2021, and 14, 7% in the fourth quarter of 2020, our in shack business doubled year over year in the quarter and with that came some additional expenses as it relates to maintaining our shacks.

Including our dining room and in local marketing, we are committed to delivering a great guest experience being a community gathering place and enriching the neighborhoods we operate at.

Occupancy was $15 8 million or eight 1% of total shack sales down from eight 9% in the fourth quarter of 2020 with leverage coming from stronger sales.

Total shack level operating profit in the quarter was $32 2 million or 16, 4% of shacks out upfront 15, 8% of shacks sales in the third quarter and up from 16% of sales in the fourth quarter of 2020.

Sales pressures realized in January plus a combination of inflationary pressures across a variety of restaurant P&L line items, and a higher delivery mix compared to pre Covid times is pressuring our restaurant margin recovery in the near term we are taking some important steps to build back the profitability of our shacks with an eye to the long term health of the business.

Yes.

First we believe we are a strong brand with pricing power, we are taking price as the inflationary environment today warrants on menu and through third party delivery and May take additional price increases this year if need it.

Also as we saw in the fourth quarter sales leverage can help offset some of the cost pressures. We face we are accelerating investment and going deeper in marketing and digital as we look forward to a more sustainable sales driven recovery over time.

Our G&A was $25 6 million up 24, 7% quarter over quarter, bringing our full year 2021, G&A spend to $86 million inclusive of $2 5 million in equity based stock compensation expense for the fourth quarter and $7 9 million for the full year, the largest increase in G&A year over year.

Came from our additional marketing and technology investment.

We are investing in G&A this year with an eye on our long term growth potential for the company and expect to spend between 108 and $114 million inclusive of approximately $12 million in equity based stock compensation expense.

The rise in equity based stock compensation as a function of us, but making key investments this year and our team, including our general managers. This level of investment is necessary to open those shacks on record and build out our digital and marketing strategies.

Reopening expense with $4 5 million in the quarter as we opened 13, new shacks and we expect 2022 preopening expense to be between 14 and $17 5 million dip.

Depreciation and amortization expense was $15 6 million up 24% year over year, we expect 2022, depreciation and amortization expense to be between 70 and $75 million.

We realized a GAAP actual net loss of $9 7 million in the fourth quarter or a negative <unk> 25 earnings per share on an adjusted pro forma basis, we reported a net loss of $4 8 million or negative <unk> 11 per fully exchanged and diluted share excluding.

Excluding the tax impact of stock based compensation, our pro forma tax rate in the fourth quarter with 39% a full reconciliation between our GAAP and adjusted pro forma net income and earnings per share can be found in our earnings release and a reconciliation of our tax rates can be found in the financial details section of our supplemental materials.

We expect our adjusted pro forma tax rate, excluding the impact of stock based compensation to be between 28% to 30% for the full year. However, we could see variability from this range, depending on the extent of our business recovery and higher tax jurisdictions and other factors.

Our balance sheet remains in a strong position and we ended the quarter with $382 4 million in cash and marketable securities we will be using our healthy cash balance to support our strong growth in new shack openings across a variety of formats, including drive through as well as continue to make investments across our business.

Thank you for your time and with that I'll turn it back to Randy.

Thanks, Kenny I, just want to end at a sharing the optimism that our team feels around what's ahead. There is no doubt the whipsaw of Covid induced impact continues has been felt already in this first quarter, but the team is forging ahead, we're driving excitement around our products, our shacks and each and every way our guests can experience shake shack, we've got a big year ahead, and we're thankful.

Youre along for the ride with US as always hope that you and your families stay safe and healthy with that operator. Please go ahead and open the call for questions.

Thank you and at this time, we'll be conducting a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad.

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One moment, please while we poll for questions.

Yeah.

Our first question comes from the line of Michael Tamas with Oppenheimer and company. Please proceed with your question.

Hi, Thanks, good afternoon, everyone.

You said, you're planning to take more price in March to protect your margin.

I think the comment to protect margins it sounds like a little bit of a shift in the last few calls and so how do you want us to think about that comment specifically on protecting margins is that meaning that 2022 should look similar to 21 or what's the right way that we should all be interpreting them protecting margins comment. Thanks.

I think you've got a I think we interpreted as the price of 67% that we're going to have in total running through the system as we head into Q2 and.

There's a lot of puts and takes there's a lot of uncertainty and inflation the cost of goods entering our business and our continued investments in our people and all the things. So we're not going to run this business to just hit some expected margin, we're going to run it for the long term return of sales. The number one thing we'll do to protect margins is getting our sales fully back.

Jack.

And those are the dust and a more focus will always be sales on that and we will take price appropriate with that I think what we're what we've shared today is it's clear that.

Inflation and it's it's hit on our business remains persistent may remain persistent and we will watch closely to see if it gets worse.

Into this year. So we'll keep you posted with any change on that Michael but that's the plan for right now and as Katie said a couple times, we'll we'll keep an eye on whether we need more price next year, but at this moment, we have no plans to do that but we'll keep an eye on that as is the business inputs come.

Makes sense and then obviously you're still really early in the process of drive throughs and dry box.

10.

End of 'twenty, two and so as you think about your unit.

Growth beyond 'twenty, two I know youre, not giving us numbers, but if you were to just say grow 50 units. I mean this is just such a transformation for your business is there a point, where we might see these be 30% to 40% or 30%.

Those 50 units.

If that wouldn't be the case.

Why not.

Well I think we've got to get to know drive through right. So we're not gotten any of those numbers today and you know you can see here in my comments. How excited we are about to have three open and we've got less than two months of experience running a drive through so we got a lot to learn a lot to do and as the words I continue users were optimized for learning on that we have various kitchen designs various <unk>.

Rive up scenarios that we're practicing we're learning.

There's going to be places, where drive throughs, we believe will be a critical part of shake shacks future, but we've got to prove that and we've got to figure out how to build that so a lot of had a lot of optimism on that and quite a few shacks that are coming our way soon so look forward to a drive through near you.

Thanks very much.

Our next question comes from the line of Jared Garber with Goldman Sachs. Please proceed with your question.

Hi, Thanks for taking the question wanted to circle back on the commentary on pricing, obviously, encouraging you guys kind of stuff.

An increase in price there.

Help the margin profile, but wondering what your what your studies would show on pricing elasticity I think one of the things that.

Yes, we hear investors talk about a lot is that.

The price of a shake shack Burger so just.

I'm curious how you view that.

That pricing.

Tower that you talked about Katy or Randy and maybe what what kind of research you've done to suggest that you have sort of six to possibly more than that percent price.

Thanks.

You know what we do keep a careful eye on where we are relative to where we think our competitors are and we still feel very good about what that price gap is and that's probably all that you know all kind of go into today, we do take a tiered approach to our pricing and so are very you know are we we take into account.

Our guests are kind of willingness to pay in various markets and that that kind of what we look at when we see pricing.

<unk> of our you know we raised price in October .

We saw you know pretty good reception to that price increase and that gives us more confident here, but you know it is the rest and something that we're very mindful of and Jared I think look none of us have seen this kind of inflationary environment in a generation certainly no. One alive has ever seen it following a pandemic. So I think theres just going to be a lot to watch and learn but we have as we said like <unk>.

We really feel good about where we sit when you kind of look at your typical shack meal.

Jack Burger Fries, and a drink does that sit comfortably against other options that you might have for lunch or dinner and we sure think it does and we.

And we feel like that gives us a strong platform to grow from.

That's great. Thanks, and then just one quick follow up on the delivery pricing.

Taking that that incrementally higher than the.

Third party channels does that drive sort of a channel agnostic.

Scenario in terms of margins or is are those margins down lower than your direct channels.

I would say with that this is an important step to improve our profitability and our delivery channels.

Okay.

Cool thank you.

Uh huh.

Our next question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question.

Hi, good afternoon.

Yes, a question on the the the pricing I'm sorry.

I remember Randy we were sitting together in New York.

Week before the pandemic really started in the U S. And you were doing pricing elasticity analyses at that point and I recognize you don't want to get overly into where you can take price and where you can.

But have you seen any noticeable consumer resistance.

Over the past years, you've taken a bit more price.

And then secondarily can you the margin range for the quarter was a bit wider than normal is that just reflecting the uncertainty was sales given the pandemic volatility.

Okay. So on the on the pricing look we've got we just took three and a half in October right towards the end of October that is all new and we've had a wild consumer environment. Since then so really hard to say we continue to believe Sharon that we've got some really strong pricing power that's one.

Two more than two years ago has what you're referring to we continue to believe and we also have just gotten smarter about how we price how we price for a fair value exchange and things like our delivery channel channels.

And and market by market tiered pricing. So we feel really good about getting smarter about price and still keeping him within a range that we think is reasonable and and yet.

This company has a history of a roughly 2% price take every year for us to be at seven is indicative of the time, we're living in and I think we're we're probably on the conservative end of that if you look at us against the industry us against at home cost of food and I think that would tell you that where we're probably in a pretty strong pricing position as we.

Enter this next phase of things getting more expensive around us, which is why we'll keep an eye on things for for the future and then Sharon on your question on the wide range of margin I mean, it's something that we we talked about in our prepared remarks. There is you know kind of growing uncertainty here about our ability to really nail down the the true cost landscape here.

And the impacts from Alcon until we've done our best to reflect that in the guidance today.

And also want to make sure you catch that like we were very clear that Q4 really starting to see those drivers for shake shack that we know can drive our business results happen and we celebrate what that looked like in Q4.

Q1 in January was really tough and yet the last three weeks in February have been consistently better every week. So you know you can kind of see that wave and as we've talked about for two years Shake shack is generally more impacted by these waves given our unique real estate.

<unk> proposition and we look forward to more of a return of normal traffic patterns, we're hopeful, but we're gonna be cautious in that in our profit and our sales guidance for this quarter and beyond.

Okay. Thank you.

Our next question comes from the line of Nick.

Sachin with Wedbush Securities. Please proceed with your question.

Thank you you.

Q4 to average weekly sales were above the average T cells and.

In Q4, 19, and you know even the best of times pre Covid year over year. Your average weekly sales tended to decline.

Because of the new unit volumes.

Can you maybe just take a step back and explain to us what we.

Sophie robot favor a little bit about Q4, 'twenty, one versus Q4 19 beverage sales and as we go forward and sales do normalize.

Post arm across you know what we should expect there.

Yes, Nick.

A couple of things on that we Buck the seasonal trend in Q4, and I think that's the that's the optimism of what we're talking about here you start to see that you saw a little bit of that towards the end, where we had some price but.

Most of that was that urban recovery to start to see what what the shack, we all know and love.

It looks like it will look like and some of that with some pretty strong openings that we had through 2021 as I noted some above average continued average weekly sales in Suvs for that class that kicked off and that gives us confidence and that's why you know.

Nobody's excited about.

Being slower than we expected AWS for January but as we look ahead, and we know and we can see the kinds of things that shake Shack has always been it gives it it's why we're confident and optimistic for where this thing is headed but we're not going to quota average weekly sales number but all of the strategies, we just talked about.

Specifically to our people, our digital and our shacks.

Is what we're building towards to to get that back.

Back and growing.

And just a tail on their you know New York City that recovery of that New York City saw in the fourth quarter, while still many of our shacks were below our 2019 levels that improvement was you know a very significant driver of our total same shack sales.

In the quarter and so you know we really were very encouraged by what we started to see as you know movement trend started to get you know not we're nowhere near fully returned to pre COVID-19 levels, but you started to see more international tourism, you're starting to see more returned to offset all those things are just such great benefits for us and where it left us encouraged.

For what the recovery could look like once we move past I'm a crime.

Okay and Katy.

Let's say Q2 recovered to pre omicron levels are.

Of sales you know what the incremental price increase are you now see.

You mean again pre omicron sort of levels of sales.

You know what could be a little margin look like in Q2.

Yeah, we're not going to go into that at this point, there's a lot of uncertainties to them as we go throughout the quarter and into two camps.

Yes.

Okay. Thank you.

Our next question comes from the line of Lauren Silberman with Credit Suisse. Please proceed with your question.

Thank you for the question.

I just wanted to ask about your longer term outlook on restaurant margin a little bit.

To the last question, but.

Near term a lot of volatility across the P&L transitory headwinds, creating noise high volume shacks pressuring margins, an outsized degree because we moved towards a more normalized environment, which I guess means a full return to pre COVID-19 a disease across the base and no further acceleration in cost what do you see at the right margin for the system is it 20% is that how we should.

You're still thinking about it.

Yeah, Lauren we're haven't given that long term official guidance yet we know we have work to do to rebuild you starting to see that rebuild in Q4 and kind of finishing out the year.

So we've got work to do that that a lot of that is going to.

Be watching this inflationary environment, how much things continued to increase where our digital channels end up landing in the cost of delivery.

Some of the other things that impact that but look we fully fully believe in the long term strength of the margins of this brand. We've we prove that for every year prior to Covid and Covid has had an impact for last two years and I think given how volatile it's been given how many of our restaurants still have some ups and down.

<unk>.

It seems done a great job getting.

Basically three quarters of that profitability back and we've got we've got a road and a lot of work to do to to get that back and that's our work ahead. That's every strategic pillar that you heard me say is what that is all based upon and that'll start and always begin and end with driving sales and that's that's the next part of the work at.

Got it Okay then.

I can transition to I'll say I'll try it for a near term question are you willing to give what January and February same store sales were versus I guess month to date versus 'twenty, 'twenty, which was normalized at the time or I guess, where average weekly sales are trending through February relative to 63000 in January just as we try to.

Yeah, no we are going to be comparing to a one year stack at this point and we're doing this very very specific reason we are growing so fast our comp base is so different today than it is versus 2019 or 2020.

And so we you know are reverting to kind of more of a normalized reporting pattern here.

Thank you guys.

Thanks.

Our next question comes from the line.

Andrew Charles with Cowen. Please proceed with your question.

Just my first question, maybe just follow up on that last one.

I'm, a long term guidance before for margins to 18% to 22% and look of course, there is a lot of things for the industry is facing right now it's going make it very challenging for that number.

He's going to have challenges with margins for the foreseeable future, but I just want make sure I mean is that still the number you guys are thinking about longer term and.

If so you know.

Do you view that kind of has some of the confidence into something that's a bit more of a stretch from where we are today.

Well I'm not sure anything different that I could say to that question Andrew that I. Just said so I think we are not changing our long term guidance that we've given about the long term opportunities for shake Shack, we've got work to do to rebuild that beyond the the last last 16% plus in Q4 so.

<unk> certainly got work to do we believe in the strength of the all profits of this brand in the Evs being.

Being strong moving forward. So we will keep you posted and we're going to rebuild it.

Got it Thanks and then my other question was just on marketing for this year, you know would love to know the brand historically has done some fun collaborations.

Things that have been a little bit outside the box like with game of Thrones with quite Thompson I'm looking beyond menu innovation I mean are there plans to create some buzz for the brand in 2022.

We should think about in terms of new marketing ideas.

Definitely well you can see our recently, we've been running with our Buffalo chicken and you'll see that new digital channels and we've also we ended Q4 with.

Some different out of home advertising and various localized things for a black truffle and the team's just having a ton of fun, creating some super fun. We've got some we'll have some great chef and brand Collabs. This year, we'll have some great L. T OS that will have a wider brand collab.

Attachment to it and you'll see us doing more digital marketing specific even on channels right now like we're testing some work with Youtube TV and Hulu and some things that you may see our Buffalo chicken pop up from time to time. So team is definitely starting to dabble more and more into a greater marketing spend as part of our G&A guide for this year.

Good stuff thanks, Randy.

Our next question comes from the line of Brian .

Brian Mullan with Deutsche Bank. Please proceed with your question.

Hey, Thank you just a question on deliveries specifically around consumer demand.

Curious what you've seen over the last few months is that a channel that has transactions growing year over year across your system and you know I'm asking because I imagine there are some tough compares from the year ago period, So any color on what consumer demand for delivery looks like right now it would be helpful.

Yeah.

So you know delivery.

The business did a lot of delivery clearly in <unk> 'twenty 'twenty. One if you think about where the market why there versus now you know the rising auto crime cases, we did see an increase in our delivery mix them. However, you know we are comparing against a pretty you know is the airtime the year before.

I think it's going to be interesting to just watch I think it's just it's it's unknown. We have a strong continued demand for delivery. That's the that's the punchline, we'd like to do that in our own channels and we have great relationships with our third party delivery partners. So we will see that I think it's proven to be a little more seasonal right when it's cold.

When COVID-19 , we generally tend to do more delivery when people are out and about and you really saw this even in the fourth quarter. Our in shack sales really rose. So to me that just starts to show you two win win how.

A return to more normalized traffic patterns happens.

We expect that to to lean more towards in shack sales.

Okay. Thanks, and then just a question on the labor environment, you know high level, maybe you could talk about what has gotten objectively better or easier of late what still remains really challenging you know and then labor is always important will always be important but any thoughts on when the industry gets to a point, where this is no longer what is being labeled as a crisis where at least socially.

Q challenge.

Can that happen over the course of this year.

I wish I knew I wish I knew and the reality is I don't think anyone knows theres labor challenges across every industry at every pay level.

Look with it that was really hardest I would say in December and January went omicron really hit because on top of a challenged environment. You just had a lot of COVID-19 cases, and that just made it even harder to work in a restaurant.

I'm a believer that people will continue to return to work in restaurants is a great career choice. That's what shake shack aims to do and were.

We're going to we're going to work to keep building that backs one one great team member at a time.

And I just wanted to note operator, we have limited time and a lot of questions I'm going to ask each.

Person to maybe limit to one question from here. So that we can try to get to as many people as possible.

Yeah.

Alright.

Next question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your question.

Great. Thank you.

Randy just one question.

So you've got an outsized U S company operated pipeline in 2020 to that 45 to 50 units, which equates to a low 20% unit growth I think your long term guidance for 20% plus obviously your bases many multiples the size that it was at the IPO I'm just wondering if you still believe that that.

20% is appropriate not being necessarily changing it today, but whether or not its just increasingly difficult either to find the right sites with the right people. Obviously, you want quality over quantity, especially when I think you've noted the building costs are up double digits. So kind of how do you think about that as you get to a larger and larger base at some point, presumably having to temper that that unit growth algorithm.

Thank you.

Yeah, Jeff. Thanks, We you know we haven't we've got she performed well above those percentages for the history of the company, we haven't really guided anything like a long term, 20%. So just to be clear the only guy. We have is to this year's <unk> 45 to 50, we think that's a great number we have a lot of good growth in front of US Jeff We've got.

More opportunity I would say than ever a stronger better team than ever and more formats that can find more places for strong shacks than ever and.

We are not at all.

Dismayed by a higher cost to build environment that is why we have $400 million roughly and our balance sheet, we're going to use it to grow restaurants, we're going to do that an appropriate pace, we're not going to go build 100 restaurants next year.

But we're working on that now and we'll keep you posted for this year 45 to 50 is the right. One we'll keep you posted on what that looks like in the coming years, but I think the opportunity for strong growth ahead for shake Shack remains one of the most exciting parts of our story and we still feel like we've barely gotten started.

Thank you.

Our next question comes from the line of John Glass with Morgan Stanley . Please proceed with your question.

Okay. Thanks very much.

I'm wondering how how do you measure new store returns in this environment, just because you've got good sales, but margins are uncertainty cluster going up how does the mechanics of it work is it a discounted cash flow and you know do you.

You have to plug some margin assumption in there. So so how do you do that related to the increased building costs are you thinking about ways to make shacks cheaper. So you can start to offset some of that in place or is that not part of how you think about building new stores right now.

Yeah, John It's a great question and the math is really easy when cost to build is up and profits are down the payback takes a little longer we look at it in lots of different ways. Obviously, we have a pretty good cost of capital given our situation here with our balance sheet, but.

We're going to keep building with confidence and we're also going to keep building restaurants.

Optimized for learning specifically with drive throughs that will cost us more for a while as we build those so we're not trying to cut anything out of that learning, we're trying to spend money to learn to open up the addressable market as we look at core shacks, we're constantly doing smarter things with our building materials with the ways that we build our designs and teams.

Internal and our and our third party design and construction teams to do that better do that more efficiently, but yeah theres going to be some period of time here in this different environment, where we expect to keep building and the returns you know may not be what they've historically been while margins are depressed, but we believe we're going to get a lot of that back as we've said on this call it.

Today, we've got work to do to do that in the meantime, we're taking this opportunity to continue to grow because shake shack.

It is so small compared to our our opportunity and we've got a long way to go.

Thanks.

And our next question comes from the line of Christopher Combe with Stifel. Please proceed with your question.

Hi, Thanks, This is actually Alex Australia on for Chris.

Nokia are slated to be a big part of the digital initiatives. This year. So I was hoping to get a little more color on that how many of those do you have in place today, and then with 75% of sales of those kiosks restaurants being digital obviously, a lower labor requirements, how much of a benefit is that kiosk model to the labor line from here. Thanks.

Yeah, Yeah, Catherine we're really excited about kiosk and you know about half of our shacks today have kiosks.

In some instances we've taken out one cash register and in other instances.

We've taken out more but we don't really view. He asked at this point in time as being really just a cost savings initiative for us it's more about the sales lift that we see on the back of it and you know the opportunity to drive deeper and our digital strategy and really bring kiosk into that for the digital ecosystem.

We see you know higher attach rates with our L. T O M. Through this channel we can see that gas to really understand the menu items and are really kind of engage with us in a really exciting way and we're investing this year there to increase the number of shacks that have kiosks and it's gonna be really you know a very exciting learning opportunity as we do that as we <unk>.

Have you know digital menu boards and drive through there's a lot of very exciting points of sale type of technology that we're investing in today.

Okay. Thank you.

Our next question comes from the line of David Tarantino with Baird. Please proceed with your question.

Hi, Good afternoon, I have a clarification question on the sales that you're running today and I'm just trying to get a better sense of how much micron is has taken out of the business. So could you give us some sense of it.

You know what the typical seasonality would do to your sales from Q4 to Q1, and then I guess as you look at your February trend, how far off of that.

Are you in percentage terms.

Yeah. So you know as you probably appreciate our business is growing incredibly fast and it makes compares to prior years very challenging, but we do typically tend to see sales or at least AWS trend decline from fourth quarter from December into January .

And we are pleased with where our.

Our same shack sales are trending in February relative to typical seasonality, but you know it's hard to really talk about typical seasonality. When you know our comp base has basically doubled over the past three years.

Understood.

I guess, maybe said differently I guess, it's February we're still under the run rate you were in Q4, I guess, if you adjust the however, you adjusted internally.

You know I think February is still as we said improving every week from January but still impacted by Amazon is still impacted by the number of shacks in our base that rely on the kind of traditional shack traffic. So yeah, I mean, there's going to be some impact in February .

Remaining down is all part of our guide for Q1.

And I think it's going to take some time to rebuild that through the year as we've said today.

Okay. Thank you.

Our next question comes from the line of Peter <unk> with <unk>.

Please proceed with your question.

Great. Thank you I'm, just taking into consideration because aren't you raised prices in October .

And again and planning for in March can you just give us a sense of.

How much of that pricing how much of the inflation, you think that'll offset get.

Based on your current forecast for both commodities and labor for the year.

Yeah, we're not going to give that for the full year. This is a very dynamic environment and we've given you our expectation so for how we expect certain parts of our bass that basket to play out over the air, but there's going to be and volatility potential in beef.

In other parts of our protein basket and you know we are subject to to that as well.

Yeah.

Alright, Thank you very much.

Our next question comes from the line of Brett Levy with M. P. M Partners. Please proceed with your question.

Great. Thanks.

With respect to labor what are you seeing in terms of not just applications, but your ability to hire people with experienced people that are.

Really fit the mold for what Youre looking for a shake shack, we've heard some others talking about applications are up but they're not they weren't necessarily getting that same flow through.

And what are you seeing in terms of just their level of experience.

Yeah, we're coming off some pretty pretty low lows given the omicron environment in January but we've certainly seen that tick back up so I think the.

Answer to all of those parts of that question is slight improvement continuing low more encouraging everyday it's still going to be a region by region conversation, there's gonna be cities, where it's just not that hard to hire and we have strong teams fully staffed ready to roll and then b cities, where it's really hard to hire and those things existed before COVID-19 they are exacerbated.

By Covid and I think what we would say is we're optimistic about trend, but it's a long way from any normalized staffing environment and we're gonna have to see how this goes through this year and for US part of what we're looking for great human beings. We're not so worried about if you're not a spin a milkshake R. R.

Our job as a teacher that and drive your opportunity of leadership development from there. So we feel real good about our training, but we do a lot of trading right now there's a lot of new people. There's a cost to that there is an impact to that and and we will keep investing there.

On that last point.

Can you give any guideposts in terms of what youre seeing in terms of overtime and training costs. Thank you.

We haven't broken that out, but it's it's inherent in the current results right, it's inherited and even the last year's results of that that more challenging environment. It's certainly in the Q1 guide there's a labor cost impact to all of that newness to getting people up to speed.

And to everything that we've gone through in this first couple.

The initial tough period of Q1.

[laughter].

Our next question comes from the line of Jim Sanderson with Northcoast Research. Please proceed with your question.

Hey, Thanks for the question just following up on the Labor issue I'm wondering if you're satisfied currently with the layer of supervisory management and the number of actual arrow employees you have in stores on average or if your experience of Covid and the disruption have made you rethink the need to bolster your team to start rethinking maybe.

<unk> the number of employees per store or supervisory management to make sure that you can handle throughput assuming that business does it does improve in the next couple of quarters.

Yeah, Jim It's a really good question, we've always felt really strong about.

Having.

Significant management teams and paying them well.

Especially our general managers, which are critical to our success. So we've we've always felt like we've never been trying to be efficient in tight on that we're trying to run great restaurants, and you you hit on it I think it's more about seasonality in return. So this is a staffing uptime right. There you've seen the seasonality of our business, we generally grow quite a bit in average weekly sales.

As we go through Q2, Q3 and <unk>.

Now is the time to begin to bulk up those teams a little bit as sales.

He began to return so that's the work I don't think we have any change other than we just want to be better at it we want to be better at running our businesses are we going to be better at hiring great people that want to be with us stay with us and developed in the long term and I don't know if you caught my comments earlier, but.

60% of our promotions came from within.

In 2021, 70% of those people with color and half of those women, we feel credibly good about that opportunity. We've got to do more of that that's just the starting point, but that tells you the kind of culture that we are continuing to build.

Thank you.

Our next question comes from the line of John I Havent go with J P. Morgan. Please proceed with your question.

There we go high Thank you one question.

How are we thinking about your different self-help help things you know to kind of think about what you can do on the margin side, whether you know it is kind of shorter term tactical changes to more medium term actually changes to your business whether too.

The stores that are already in existence, the stores with 22 or maybe you know the store of the future yeah that simply will allow you to run a more efficient business model, even in this high commodity environment difficult labor environment.

Yeah, there's a lot in there John and we're the way we're thinking about first is driving sales first let's drive sales would get back and then let's build new formats that allow us to drive strong EV for the future. That's what drive throughs about that's what all these other additional formats. The second part of that is digital.

And again don't expect shake shack to have robotics anytime soon here right, but in what ways can we automate processes and really when we think about that today that work is happening in the ordering and pick up process, we're getting having more and more check in our digital our kiosks are app and then the pickup experience.

Where you can more and more we're testing guest pickup screens. They tell you when and when and how your stuff is ready, we're making our communications with our guests more direct and more real time engaged so all of that stuff, but yeah. We've got a lot of subsidy. That's why we keep thinking about the menu. It's why we've held off on <unk>.

Returning even some of our classic items that we've kept off the menu for a while and.

Some of our L. T. OS now you may notice are running for longer periods of time, so instead of kind of a three months, we may do for the pet again it depends on the L. T O in the timeline and the goals of it but.

To ease that operations. This is one of our top goals in the company is to reduce the admin produced the operational steps that our teams have to go through.

Every day in that and that's a that's a lot of work over many years. So we've got a lot to do so we're committed to that as part of our our margin recovery continued work in plan.

But first we're always going to focus on the sales side.

Understood. Thank you.

And our final question, we have the line of Brian Vaccaro with Raymond James. Please proceed with your question.

Hi, Thanks, just a quick one on labor if I could what.

Level of wage inflation did you see in the fourth quarter and are you expecting in 'twenty, two and is there a way to ballpark the level of investment and in what form or forms some of those investments could take that you alluded to earlier in the call. Thank you.

The one number we gave that is clear is just our starting wage from.

The end of 'twenty 'twenty chill.

Roughly now we are 13% higher than wage inflation on just our starting hourly wage that doesn't include the continued raises we've given our shift managers are exempt managers general managers and the other support functions around here. So that gives you a little idea of what's running through the system now.

And there'll be continued investments there right there'll be there'll be some shacks in regions, where we need to keep increasing would you be doing various things on that to keep learning and find the right competitive wages and that'll be a journey this year I'm sure.

Alright, thank you.

And we have reached the end of the question and answer session I'll now turn the call back over to CEO , Randy <unk> for closing remarks.

Thanks, everybody for being with US Tonight, we look forward to grabbing a buffalo chicken sandwich with you soon take care.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

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