Q1 2022 Shake Shack Inc Earnings Call

Greetings and welcome to the Shake Shack first quarter 2022 earnings call.

At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Note that this call is being recorded.

I will now turn the conference over to our host and elite Leggett senior manager of Investor Relations and S. P. N. A thank you 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 joined.

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 quarterly shareholder letter.

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 February 18th 2022.

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.

By now you should have access to our first quarter 2022 shot shareholder letter, which can be found in the investor Dot Shake Shack dot com in the quarterly results section or as an exhibit to our 8-K for the quarter. This shareholder letter and the new more in depth format, replacing our prior supplemental presentation I will now turn the call over to Randy.

Thanks, and good evening, everyone, you'll notice our remarks tonight are going to be a bit shorter than prior calls said the team has provided a new shareholder letter format, which dives much deeper in the numbers visuals and strategic plan. We hope you will spend some time with this excellent new report.

So before I get into the results of the first quarter I want to highlight our team members now more than 10000 people strong in the United States and many more working through our licensing partnerships abroad.

We recently hosted our board of directors meeting at our newest drive shack in Orlando and it gave us a chance to tour the market and reconnect with our leaders and team members across the six shacks in the region, who are driving a recovery everyday.

I am continually amazed at how many of those leaders have been with us for so many years and how many have graduated up through the shack development experience to become general managers area directors and more <unk>.

<unk> check is let everyday by an extraordinary culture and its these people who continue to lead a recovery and a thriving business. We're building ahead.

After being significantly impacted by Covid waves in January and February Shake shacks performance rebounded in March.

Experienced meaningful improvement in sales and traffic trends that have continued through April this highlights the momentum shakes that creates as offices travel events tourism and consumer mobility trends improve.

Total revenue grew 31% year over year as we generate over $203 million in revenue total revenue and over $309 million in system wide sales with average weekly sales improving through the quarter and into April as traffic has rebounded in both urban and suburban markets to more seasonal patterns are.

Our same shack sales grew 10, 3% even after the significant all mccahon waves early in the quarter.

With our urban same shack sales posting a 19% growth over last year.

We expect these overall trends to improve further into Q2.

Our licensed shacks in the U S and in select global markets performed well offsetting significant ongoing COVID-19 impacts in Asia.

We generated shack level op profit of 15, 2% driven by sales levels and ongoing and volatile inflationary headwinds.

Given the persistent inflation, we've experienced and expect to persist in the near term we took a menu price increase in March in addition to raising our premium on third party delivery orders are currently running about 6% to 7% increase to menu price over last year, excluding the impact of delivery premiums and we will remain patient as we watch price.

And closely through this bumpy period of cost inflation.

I'll provide a brief update on our four pillars of our strategic plan.

First our focus on elevating our people in just a few weeks our shack leaders home office suppliers and licensing partners are coming together for a leadership retreat.

Focus on development building our team member bench that is so critical to achieving our accelerated growth goals.

I hosted our first ever retreat in 2009 with just nine attendees.

This upcoming retreat will bring together more than 1200 leaders.

I'm thrilled that our culture and our growth. We've created can now provide this opportunity for Laurent learning across the shack low.

This remains a challenging time for hiring retaining and developing our people which is why this is where we are focusing investments and where you can count on us to continuously strive to be better employers, providing solid wages benefits and most importantly opportunity to make shake shack a career choice for the long term.

Second we remain committed to our digital transformation and we're ramping up investment in every digital channel to the shack track digital experience, whether you want your shack in our App web kiosk drive up curbside delivery and now drive through were.

We're building tools to add even greater convenience to the Omnichannel shack experience.

Even as in Shack sales rose significantly year over year in the first quarter, we continue to drive digital engagement retention average check and higher frequency through these channels. All this takes time with every click we're getting to know our guests better connecting with them more directly and building touch points that can set the foundation for long term growth.

Third we continue to evolve our shacks focused on format evolution and development expansion.

We opened seven company operated shacks in the first quarter and two more in April .

We opened up six licensed shacks in the first quarter, including a strong market opening in Nanjing, China and two more in April including another market opening in Guangzhou China.

Bringing our total system count to 386 shacks as of fiscal April and.

Since December we've opened five company operated drive throughs, which are an exciting and transformational step in providing even greater convenience than ever before.

That experience in our drive throughs feels great. We know we have much to learn and evolve.

With at least five more drive thru set to open this year, we're optimizing for fast learning.

See this is a major piece of our growth strategy ahead.

Well, we're really excited about our pipeline COVID-19 in supply chain related delays in permitting construction landlord readiness and equipment availability remain intense and in many instances are impacting our planned opening timelines.

Since the beginning of this year, we pushed a number of openings into 2023 and as we stand today, we expect to open 40 to 45 company operated shacks with a back weighted scheduled for the fourth quarter and our license business. We're actually running ahead of our initial development plans and expect to open between 23 and 27 licensed shacks this year.

Our license business, we continue to experience recovery around the globe and our airport and stadium shacks here in the U S. Yet.

Yet our business in China remains significantly impacted today co.

Covid lockdowns in intermittent market interruptions across China are impacting near term licensing revenue, creating uncertainty for this important market for the foreseeable future as.

As we look towards growth in our licensed business, we see this as a massive white space opportunity our brand resonates around the world and we're taking this time to expand partnerships and open up new markets.

This week, we announced that we'll be expanding to Thailand.

15 shacks over the next decade, and we also recently announced our expansion to Malaysia.

And we've got our sights set on more license growth opportunities with strong partners in key international markets.

Finally, we are relentlessly focused on our guest experience through our shacks and our products, we just wrapped up our Buffalo chicken and Fries T OS and this week, we've launched our newest altos, featuring our Bourbon Bacon Jam Burger and chicken Sandwich, we partner with maker's Mark to create a delicious summer menu and don't Miss out.

Our slate of summer lemonade and shakes as always our food raises the bar I'll now pass over to Katie to discuss our financial performance in more detail.

Great. Thank you Randy and good evening, everyone I want to begin by taking a moment to thank our incredible team members for their continued perseverance and dedication these past few years.

Navigating through ongoing Covid pressures has not been easy and I speak for all of US here. When I say, we are so excited for what's in store for shake shack in the coming years and I'm looking forward to spending time with many of our amazing team members at our leadership retreat in just a few short weeks.

By now I hope everyone has had the opportunity to view, our new quarterly shareholder letter that's replaces our past supplemental presentation is available on our website and our Investor Relations section as I approach My one year anniversary here at Shake Shack I want you to take the opportunity to provide a greater level of detail into the trends that are driving our reserve.

Today, as well as articulate our ongoing and upcoming strategic initiatives and their impact on our long term growth potential.

Now onto our financial results I'm, a crown impacted our early first quarter results and we are especially proud of our recovery and current trajectory. Our first quarter total revenue grew 31% year over year to 203.4 million well shack sales grew 36% to $196 8 million licensing revenue grew 43.

3% to $6 6 million system wide sales grew by 36% year over year to $309 5 million and we generated shack level operating profit margin at 15.2% Roe.

Raised menu price in March by approximately 3.5% and the premium on third party delivery to 15% from 10% as we remain focused on building back our profitability in light of labor and Cogs inflation as well as delivery costs, we have the ability to raise prices further if necessary and if the inflationary environment warrants.

Sales declined early in the quarter from fourth quarter levels as consumers avoided travel gathering and returned to office, particularly in our urban market I'm, a crime and weather drove more than 160 days of closure 87 of which were in January .

Those were impacted further during certain shifts and some operators needed to throttle channels and reduce hours to provide a great guest experience during these impacted times.

We generated $68000 in average weekly sales down from $74000 in the last quarter, but up over 6% year over year AWS trends increased throughout the quarter from 63000 in January accelerating to $74000 by March and most recently $76000 in April with higher track.

And the benefit of our price increase.

First quarter same shack sales grew 10, 3% year over year supported by traffic growth of 11, 6%.

As a reminder, we exclude closures that are two days or more from our same shack sales calculation. The increase in one day closures and reduced operating hours. However was an incremental headwind to our same shack sales in both urban and suburban market.

April same shack sales rose, 13% and we are pleased with the continued traffic growth we are seeing in particular in our urban shacks.

Robin same shack sales grew 19% versus 2021 and were heavily impacted by amarin sales pressures in January and February However, recent trends have been positive.

Despite these headwinds early in the quarter Manhattan same shack sales still rose, 35% year over year, Our New York City teams executed on the largest sales volume since COVID-19.

We're seeing similar patterns and other heavy hit urban markets like Las Vegas, and Washington D. C, where same shack sales grew by more than 20% in the first quarter.

Suburban same shack sales grew 4% year over year lapping a positive 20% comp in the first quarter of 2021 even as we realized strong recovery in our urban shacks the operational pressures, we face during omicron had a larger negative impact on our suburban same shack sales compared to urban.

While traffic trends were positive year over year, and our suburban shacks, a greater portion of our sales are coming through in chat channels, which skew to more single orders than patch delivery orders, we remain encouraged by our opportunity in suburban markets as we expand development and if all formats like drive up curbside and now drive through.

Our digital transformation is evident and we continue to invest in marketing and technology to grow our own digital channels and the first quarter, 43% of shacks sales came through digital channels, even as our in shack sales grew significantly year over year.

Once it gets moved into our own digital channels, meaning our own shake shack app or orders from our website, we find that they end up coming to shake shack more often and they spend more since this time last year driven by our own digital investments more than 60% additional guests have made it first time purchase in our own digital channels and we're excited about the path.

It's a trend that we're seeing with these new guy.

Licensing sales of $112 8 million rose, 45% year over year, while COVID-19 restrictions in mainland, China, and Hong Kong pressured sales, we realized strong performance across our domestic and other international markets.

Total shack level operating profit was $29 9 million or 15.2% of shacks sales, including a 50 basis point positive impact from a benefit related to gift card breakage, our shack level operating profit margin improved throughout the quarter and we realized strong flow through on the higher sales in March, especially in our ERP.

Markets.

And the first quarter, our food and paper costs were $59 9 million or 34% of shacks sales down 60 basis points quarter over quarter as our March price increase helped offset some inflationary pressures overall many of our key cost remain highly elevated specifically beef, but also chicken dairy and Pat.

Marketing, we outline more details on page 12 of our first quarter shareholder letter.

The inflationary environment remains uncertain and we continue to target opportunities for improvement wherever possible.

In the first quarter, we realized low teens percent year over year food and paper inflation and we expect this to persist into the second quarter moderating to high single digit to low double digit year over year inflation for the fiscal 2022.

We use a unique beef blend that we do not contract are 100% all natural non hormone Angus beef is about 25% to 30% of our food and paper costs.

In the first quarter, our beef costs rose approximately 20% year over year.

Is that in the fourth quarter of 2021 driven by sales deleverage and higher delivery commissions due to an increase in our delivery mix.

Occupancy was 16, 3% or eight 3% of total shack sales up from eight 1% in the fourth quarter of 'twenty one.

G&A was $31 3 million, excluding a $6 million legal settlement G&A was $25 3 million up 37, 5% year over year as we increased staffing to support the largest opening class on record as well as executed on key digital technology and marketing projects.

Preopening expense was $2 7 million in the quarter as we opened seven new shacks depreciation and amortization expense was 16, 9% up 23% year over year.

We realized a net loss attributable to shake Shack, Inc of $10 2 million in the first quarter or a negative <unk> 26 in earnings dollars and earnings per share sorry negative 26 cents in earnings per share on an adjusted pro forma basis, we reported a net loss of $8 2 million or negative <unk> 19 per fully exchanged and diluted share.

Excluding the tax impact of stock based compensation, our pro forma tax rate in the first quarter was 28, 7%, resulting in pro forma adjusted income tax benefit of $3 1 million.

Our balance sheet remains in a strong position as we ended the quarter with 380, $58 9 million in cash and marketable securities. We will continue to leverage our strong cash position and supportive of investing in new shack openings and a variety of formats, including drive through in addition to supporting our other companywide initiative.

Now onto guidance for second quarter of 2022, and full year, our guidance assumes no new COVID-19 related disruptions or additional unknown inflationary pressures for.

For the second quarter, we are guiding total shack sales of 227 to 232 million same shack sales to grow low to mid teens percent year over year and six new company operated shacks openings.

Licensing revenue guidance of $6 8 million to $7 5 billion reflects a degree of ongoing uncertainty around COVID-19 pressures, specifically in China, which is a key market.

We expect total revenue of $233 eight to $239 5 million growing 25% to 28% year over year.

Our guidance calls for a sequential improvement in our shack level operating profit margin to 16% to 18% and reflects ongoing inflationary pressures and investments to support our in shack traffic growth.

We are continuing our investments in G&A this year with an eye towards our long term growth initiatives, excluding the 6 million legal settlement in the quarter. We now expect to spend between 110 and $114 million on a full year basis, including approximately $12 million of our total $13 million in equity based compensation for the company.

We're not going to provide quarterly guidance for G&A. However for your modeling purposes, we expect to recognize an approximate $3 million expense in the second quarter to support the biannual leadership conference and this is included in our annual G&A guidance.

We continue to expect full year, depreciation and amortization expense to be between 70 and $75 million Preopening of 14 to $17 5 million and adjusted pro forma tax rate, excluding the impact of stock based compensation of 28% to 30%.

This quarter. We also recognized two items I want to add some more texture around first a $1 3 million gift card breakage income catch up which is included in our GAAP metrics, including shack sales and total revenue as well as system wide sales.

<unk> adjustment was accumulative catch up done in accordance with GAAP second a $6 million legal settlement and G&A. Both are reflected in our consolidated statement of loss in the first quarter.

Our GAAP results include the benefit from gift card breakage income and the expense from the legal subtle at our calculation of shack level operating profit include Shack sales, which includes the gift card breakage, we called out the adjustment in our remarks today and in our shareholder letter same shack sales average weekly sales and digital mix, However, our key metrics and <unk>.

Not impacted by gift card breakage.

We have made an adjustment to how we categorize regions to better align with how we analyze performance internally you can read more detail about our regional performance on page seven of our shareholder letter.

So while we continue to navigate a challenging operating environment, our sales and profits are steadily improving we are investing ahead of a robust global shock pipeline and building more formats and offering more convenience than ever before and we are also investing alongside our current shacks with so many critical initiatives such as proudly supporting our team members our digital transfer.

Emission and delivering on that get great guest experience I'm just extremely proud to be part of this amazing team. So thank you for your time and with that I'll turn it back to Randy Thanks, Judy I Wanna closer to assuring the tremendous work of our team towards our focus on ESG by.

By now I hope you've all the opportunity to read our stand for something Good report released last Thursday. This third installment of our ESG report provides an update of where we are as a company and where we're headed for the future with a focus on our overall business impact diversity inclusion initiatives sustainability and so much more.

So the work that went into creating the report engage stakeholders in the entire shack community. We've collected an audited our environmental social and governments that are aligned with our leadership team to envision and execute programs that live our vision.

Partnered with suppliers to highlight the good work, we do together.

Building on our previous reporting we've now included our first scope, one and two emissions analysis and lay the foundation for the next stage of this journey yes.

ESG is an evolving focus we recognize there is much for us to do.

Our San for something good reports solidifies our commitment to the initiatives that make us unique our shack family.

Highest level quality ingredients digital innovation exciting new formats and more.

We're really excited to share this with the world and we hope Youll take a look cover Reed.

Find yourself, yet again of the positive impact shake Shack is working to have as we grow our business has always hope that you and your families stay safe and healthy and with that operator go ahead and open up the call for questions.

Thank you.

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

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Our first question comes from Michael Tamas with Oppenheimer. Please go ahead.

Alright, Thanks, first a new shareholder letter and the level of detail you provided great. So thanks for putting that together.

You gave some great color on there on the margin do you expect for the second quarter and obviously the cost pressures that are impacting the business.

The next question is how youre thinking about the rest of 'twenty, two and potentially even beyond that.

They're taking more pricing.

And if there's any specific comments do you want to make a specific number that would be great, but assuming you won't do that and assuming the cost environment plays out the way you think.

Is it fair for us to think about margins.

Better in the second half of the year versus the first half of the year and potentially even growing year over year, yes.

Yes. Thank you.

Look there's a few things that play there we've given clear guidance for <unk>, which just shows what we expect to be increased margins. There's a wide range there because there's a lot happening.

We're not going to comment on the back half other than to say I think there's a lot of uncertainty.

We are all living every day and a continued inflated environment that continues to surprise us and everyone else and every every company you see.

That happens across our cost of goods.

Katy and the team have given more detail than ever and ill, let katy to talk about that a little bit so.

Look we expect we're going to continue to be a company, who can generate strong margins I think we're in a near term pressure point here, where so many of our ingredients are up and we expect them to continue to be up for this year. So.

We don't know exactly where the beef market is going to go where are our key inputs are going to go we've given the best guidance, we possibly can on that and we'll see we'll see how it goes but we're encouraged by how the first quarter went and our expectations for where the second quarter. We hope will go.

If we see a continued urban and recovery trends that we've been experiencing now I don't have a lot more to add on that and thank you very much and thanks to the team also who helped put together that's that's great. A report here, but it would put you a point you to page 12, it sounds like you've already kind of taken a look there, but we get a great dive on our basket our comp.

Position as well as our outlook for <unk> and then the rest of the year and as Randy had on this is our best look at this point in time inflationary environment is quite dynamic here and we are working through as best as we can to kind of manage the pressures that we're facing.

Yes, it makes sense I appreciate that on the drive throughs and drive up your and its really more specifically in the drive thru. So.

I know youre, not giving specific financial metrics out yet or anything but you know when you were doing the planning process can you just describe some of the differences between those units.

The legacy suburban units is at a higher cost labor models to run structured different just anything to help us think about what that model might look like just even qualitatively.

Sure Yeah, it's really early we've got five open we should open one this quarter and as I said, we should get about five total more opened by the end of this year. So by the end of this year, we'll have about 10 in really varied environments right. We just opened in castle rock in Colorado.

We have seen shacks opened and we were in with our team in Orlando last week.

And then some cold weather openings that we did towards the end of the year.

But what are we targeting we're targeting obviously, we believe in a in a higher potential au V. That's that's we're not sure if that will happen or not and we're not sharing our numbers today, but that's the goal.

In terms of our operating margin our goal will be to have strong argue V <unk>.

<unk> strong margins with a strong return at the moment and we shared this number of times you should expect that those are going to cost more to build in our normal shacks.

That will again depend on market conditions, we're living in an inflation environment, where everything is up a little bit the whole class. This year should be up 10, 15% than normal.

And some of that will be some of those drivers that are going to be more expensive and this is why we built the balance sheet that we built over the last year. Because this has given us the opportunity to optimize for learning as I've said really get after this is a format that we believe will draw a lot of opportunity for shake shack and ultimately.

<unk>.

So the thing we're really after is increasing the potential addressable market for shake Shack and we believe should drive throughs can give us a new look at the way. We can think about sites think about sales capture and really our ability to capture as much share in a market.

Of the burgers that are available to sell there and I'll tell you I don't know if you've been to one yet but when you go it's pretty cool. It's working teams working hard to figure a lot of things out, but it feels really good and we'll share more as the time goes on.

Appreciate that thank you.

Our next question comes from Nicole Miller with Piper Sandler. Please go ahead.

Thank you. Good afternoon, just two quick ones. The first was around the commentary about a customer coming in to your digital ecosystem. When they do that my question is who is that customer do they look a lot like your average customer or a certain cohort specifically wondering about gender.

Income and however, you compare and contrast that you know what does that leave you to be encouraged about these first digital users in your own ecosystem.

Yeah.

Hi, Yeah. So on that point you know when we are our digital guests they vary across the board, but overall very consistent with what we've been seeing with our traditional gas base and what we're really excited about and where we're investing is helping that gas really understand our menu and they we see that they're spending more than our engine.

That's what we've shared is that it's a 25% more than 25% premium and we can see that when they come into our own channels that they come back more often and you know that personalized connection that we're building with the gas delivering enlightened hospitality through all of our channels through digital and in Shack, It's really the great Omnichannel experience that we are.

And it's awesome to see it resonate with you know our digital guests and also you know were starting to see more and more guests come into the digital channel through various ways. If it's in <unk> or maybe they're going to kiosk and then we're getting them to download the app, it's a really exciting time.

Okay, I was thinking maybe younger or maybe more like value seekers or something like that or if it's just kind of everybody's coming in and then I guess that that's good too.

It is it is it all and I think one of the it's not a different guests I think is the answer to your question, which our guests generally probably a younger than many others. As you know we've got that kind of sweet spot of young all the way up into the all age is really but pretty pretty dynamic.

Younger age guests that we expect to have coming and it's very balanced for Ya man and women generally is shake shack over time, and that's been consistent over time and it hasn't really changed even as we've gone to more suburban are different.

But it's so different per shack radar suburban shacks, often have higher average checks. We know our digital guests have a higher average shacks and theres just so many more new ways. We're getting to know everybody has they come into the shack more often but I think this is what has been one of the most encouraging data points of our continued recovery and we're not there yet.

Is.

In shack sales are up up up right, where this first quarter up in our like for like shacks up over 50% in shack, but our digital sales still holding and our percentage of total sales that is digital still holding even as <unk> continues to grow and that's a really encouraging sign for.

Or where we believe the business is headed.

Thank you and just a last quick one on unit development more on our rest of world focus them I think we all understand there's a lot of moving pieces and I was starting to think more about the complexities that even if certain situations change the complexities of just going abroad are likely to be any better.

For quite some time, so what's the reality of like you know the international unit growth percentage tapering maybe the the number of units holds but the acceleration there is on pause not to say into perpetuity, but just for some you know pretty good chunk of time here and maybe within that context talk about the unit level economic model.

In particular, if you can share anything in regards to China. Thank you.

Yeah sure so let's start with China deeply impacted right now most of our restaurants in Shanghai are closed those that are open or can only do self delivery right now themselves in Beijing, where we have four shacks that market is mostly close Dewey.

Doing just just delivery pickup type of options. There. So we just don't know what's going to happen to China in the near term long term, we're very bullish on China and I think the answer to your.

Accelerated or potential unit growth will lie significantly in China, and as we continue to do that how how much can we grow there and how quickly do we want to part of increasing that development is adding new markets. So we've added Thailand, we've added Malaysia.

And <unk>.

Frankly, even with the world.

Travel being different or.

Our international opportunities have not ceased to continue at a rapid pace. So for us it's really about taking our time not doing too much too fast.

Why we're doing these two new markets next year.

But in addition, we often forget because we talk about licensing as the global business we.

Our domestic license business continues to grow.

We've got new event spaces, new stadiums that we've opened up we just opened in St. Louis.

For the Blues this last quarter, we've got a new deal with Apple Green, where we're gonna do New York Throughway and more in our New Jersey Parkway in Turnpike opportunities and we love that piece of the business. So too early to say because we need to unlock that model and really figure it out, but we're really bullish about that and today.

We increased our guidance on what we expected for units and licenses. This year. So we were at 20 to 25, we feel confident in at least 23 and potentially up to 27. So that is that's.

Going to be a nice add for us, but we really we really.

Like this part of the <unk> and want to keep growing it to your unit economic question it really depends on the market.

We have extraordinary <unk> and many of our Asian business in our middle East business. It's much more mature so generally tends to have the newer openings less new openings lower evs, but really dynamic unit economic model as well as Youll see our partners continue to grow so lots in that.

I Love the international business, we think it's a super smart part of the asset light opportunity we have to have a <unk>.

Roughly 40% of our sales in a in a license.

As a light environment.

And a positive cash flow so lots to do.

Lots of head.

Thank you.

Our next question comes from Jake Bartlett with <unk> Securities. Please go ahead.

Great. Thanks for taking the question Blayne was on the average weekly sales that you saw in March and April if you could just help us understand the trajectory there and what is the typical March to April change in average weekly sales I'm just worrying about seasonality just so we can see really the underlying improvement that you're seeing.

And then also how does April compare for the rest of the year is that a.

Reasonably low or high seasonal months appreciate check.

Yeah. So at this point you know what the bigger driver here of our trends is just the overall recovery that we're seeing with <unk>.

I'll call it consumer mobility, but let's just break it down to what the parts are it's returned to office at travel and tourism.

People moving about in there and their normal routines and when we look at you know day parts of what we saw in in March and into April we're seeing particular strength that you know urban weekday lunch. Those are all signs that our business is being driven much more by these macro undercurrent of of people kind of emerging from omicron and less really for many.

Calendar shifts and Jake one of the things point you to page seven on the on the letter as we think about regionally we've talked about this story through Covid.

Some of the most encouraging things we're seeing is while suburban is kind of holding where its been urban continues to grow in Manhattan, specifically up 35%.

In the first quarter, that's a that's a that's a big number.

Now and and it's not back to what it was still Manhattan right in Manhattan as a proxy for our deepest urban restaurants around the country still remain impacted but are they are coming back in that and that's what we feel good about when we think about AWS.

But the trends in the right direction for sure.

Good to see that 76000, that's pretty strong when you when you play that out for in April .

Average weekly sales.

Got it and so I guess I was trying to understand whether April is typically below March just so we can kind of really understand.

The improvement that's going on so if you could maybe share whether April is typically below margin in years past.

So generally it's generally it's not.

Not below March generally it's up I don't have the number and frankly, we haven't broken it out than in years past as to what that difference is bad but just kind.

Generally better month. It also also Jacobs it depends on holidays, too and when vacations and Easter and all that gets and gets in the way so better to look at it quarter over quarter I think.

As we look at those AWS numbers and just one thing is that it's kind of obvious but if you look at pre COVID-19.

And it looks completely different than it did prior to COVID-19 our exposures are regions.

Our footprint is very different so it is really hard to kind of get a true read on what you know normal.

Seasonality would look like.

Got it great.

One question I think there's been a.

Vessels are really trying to kind of way.

Why shake shacks recovery hasn't been as strong as some of the peers right.

Versus pre Covid and you have a big unlock with digital and really taking away a bottleneck at the ordering and pay in and pick up which seems to be a powerful driver.

I know I think the big answer there is that the type of markets you're in and the type of.

Just urban and also the type of suburban markets you have but are there any stores or types of urban stores, where you're seeing the same sort of lift versus 19 that we see at some of your fast casual peers and where your consumer sure I missed it.

Unlike.

Yeah absolutely.

We're not breaking out we're not breaking them out but there is it really depends on them. You know there there are some of your it's similar story as we've told this whole time, you're most impacted urban environments are those that are kind of your Midtown office event tourism related we have some restaurants that are or some of our highest volume ever shacks now just in New York, but in.

Urban areas that rely on those kind of traffic trends that are still not back to where they were in 19, whereas there may be some other urban environments, where we're well up on 2019.

And again, we're not talking about 2019 anymore. We've moved on when we're talking about 2021 now when we look at comparisons but.

I again I've used the language for a while here and I still feel this way when I look at every shack every day, where we're up it makes sense, where we're down it makes sense and we still when you compare us to peers any peer youre going to compare us to has multiples of thousands more restaurants than ours.

Across a much wider geographic dispersion that we have and that's just part of our part of our story today with just over 200 shacks in this country that we're talking about right now needing to be balanced out with roughly half of those still being urban environments. So we've still got some recovery to go but the.

The trajectory is definitely in the right direction.

Great I appreciate it and one quick one on beef and my understanding is that your your hamburgers are really ground up stakes right. So you use whole muscle you don't use the trimmings that fast food users.

They look at the whole muscle state cuts I think most of them if not all I see being down year over year. Currently so the question is how you price my understanding is that your price against our commodity index that you that you get on a regular basis.

Understand help us understand you know as we look at the commodity markets, what should I know I don't I know, you're not going to give the specific blend that would never asked for that but.

But if I look for most of the cuts they're down year over year, you've guided to the low single digit growth for beef in the second quarter, just trying to reconcile that.

Well I can't tell you, which cuts there are Jake as you know so we can't officially answer that other than to say look there were moments last year, where beef was really high there's been moments this year, where it's been high in a little bit lower we've shared our outlook for the year, a kind of a low single digits and I and the answer is going to be it depends of course, we're going to generally.

Trend with what the market is doing but it's going to depend on those specific cuts.

Cuts that we have and the specific market conditions. I mean, there are so many variables playing into beef with cost of cost of moving things around cost of corn feed.

International markets and what that might do.

That we're.

We're doing our best to give as much of a guide as we can here, but you know what.

We're telling everyone very clearly we're not exactly sure either and we do ride that market price so and.

And we're not going to sacrifice the quality of what we put in our foods. So we're going to continue to buy great meeting.

And price Accordingly, so we've got about 7% price going into the system right now, we'll keep looking at that if we feel that things are headed even higher and they may be then we will look at price sooner rather than later as well or we may look at at the end of the year as we normally do but we havent chosen we haven't decided on that yet and we're looking at it closely every day.

Great. Thank you very much I appreciate it.

Yeah.

Our next question comes from Brian Mullan with Deutsche Bank. Please go ahead.

Hey, Thanks, just wondering if you'd be willing to offer any thoughts on any technology or automation efforts that are being worked on at the industry level are there are there any functions in the kitchen that at least in theory could be automated at shake shack, any pilots or considering or products for tools.

Evaluating just basically asking me if anything could actually be viable in the next few years.

Hi, Brian . Thanks for your question, so where we have focused a lot of our technology investments in automation and streamlining our process has actually been on the payment side.

And you know you'll you you'd see us talk about kiosk a lot. That's a great example of something where we started to leverage technology to help make our team members' jobs easier and help them be more efficient in the restaurant.

Never say never but you know we're not currently testing any kind of robotic equipment right now in our kitchen.

Okay. Thanks, and then just to follow up on the drive throughs.

If you were forced to choose now do you think you'd be opening more than 10 drive throughs in 2023 or less you know I guess when would that decision needs to be made from a planning perspective.

Just any early thoughts on <unk>.

The pipeline for drive throughs beyond this year yeah.

It's a fair question I mean, we're bullish on drive thru, we've not announced a number yet.

And those that.

They definitely have a longer build time than other formats right drive throughs, just generally take longer to get entitled.

Entitled permitted and built so it's a longer timeline, we're not waiting to see on the first 10, what happens, we're obviously going to commit to to more the question will be how quickly and we'll keep you posted on that as we go.

The focus right now is building a potential pipeline.

<unk>.

It goes across our formats, which will include an in this next few years, we absolutely believe it will include.

Some doctors and we're excited about that and want to build more.

Thank you.

Thank you. Our next question comes from Lauren Silberman with Credit Suisse. Please go ahead.

Thanks for the question. So just a lot going on in the consumer environment can you talk about how you see shake shacks positioning in a more challenging environment. We don't have the history and now eight or nine so any high level thoughts would be helpful.

Yeah, it's something we talk about a lot Lauren I think it'll be.

Nobody knows exactly where the consumer spending environment is going to go.

If we expect it to be pressured as it as it seems to be right now.

I think the answer is how does shake shack provide perform in that environment right. That's the question.

We have never been through truly a recession. When we opened we started grow this company in Oviedo nine that's when the company's initial growth really took off and as we've always thought about ourselves, we really straddle that fine line of a really.

Exciting trade up from traditional fast food for not that much more money, even though it cost more to serve our premium ingredients and also an available trade down in the event, where you may not want to spend as much money. So hard to say, but we've always felt good about that positioning in any economy, and we're hopeful that that positioning today.

<unk> will benefit us, but again hard to say not going to make a claim on who we're going to be in an unknown consumer spending environment, but.

It gives us a lot of confidence to know that that that we can straddle both ends of that consumer spectrum.

Great. Thank you for that and I'm going to try one on restaurant margins. Obviously, a lot of noise is there any way you can contextualize where margins are running for restaurants that are fully regain sales versus those in urban market just trying to understand the magnitude of what some of the outliers are weighing on the system.

Yep Hey.

So yeah, we saw a tremendous flow through them on the added sales that we had in March and into April and you know it was north of 50% and what we saw in our urban restaurants. In particular are restaurants that had been the hardest hit by Covid that flow through with particularly strong and so I think that kind of gives you a.

A little bit of order of magnitude of where there is potential for margin recovery on that side.

Thank you very much.

Yep.

Okay.

Our next question comes from drew North with Robert W. Baird. Please go ahead.

Great. Thanks for taking the question I wanted to ask about the revised guidance on the company operated side. It looks like the range came down five minutes or so just due to some slippage in the 'twenty three I guess could you provide more color on what you're seeing out there and while recognizing you won't provide specific guidance for 2023, I think it's still might be helpful to hear some high level.

Perspective, and how youre thinking about the development pipeline in the context of those delays and challenges.

Yeah for sure yeah. Thanks for noting that I think look we've got a few units that we had hoped as we had been sharing that we that we're going to have a really busy late fourth quarter, we that's still going to be true.

But there's a handful of those that likely end up in 2023, now and we're okay with that there are great restaurants, they're gonna open they didnt disappear, they're just taking longer to get open.

And again, we've got a really strong pipeline for 'twenty three we're not gonna named numbers today and.

We're still working through there is so much uncertainty in the market of all the things that I talked about what's happening out. There is this permitting construction timelines availability of construction labor and costs are all more challenging than they've ever been certainly since since I've been leading this company.

And that's just it just takes time things have taken longer shack that might have taken 12 months in the past is taking longer now and.

And that just timelines are extended.

All out of our control, sometimes our landlords don't even get us the building in the time that they're supposed to write it which allows us to then take over our construction and get open. So it is hard those things I don't expect to get any easier certainly this year. So we will see we expect to have a strong class for 2023, but.

But we're not going to get into specifics of that just yet today.

Understood. Thanks for the perspective.

Our next question comes from Andrew Charles with Cowen. Please go ahead.

Great. Thanks, guys.

Seen in the last few months a lot of restaurant concepts raised their ultimate store potential and you know I recognize that you guys. The 450, plus ive outlined leaves it a bit open ended around how high you could go and so I'm wondering in your early days with drive through but obviously, it's been pretty exciting to see the number that you have open there what do you guys need to see before you potentially raise this long term range.

<unk> then there's obviously a new format out there for you guys to capture a lot of share, especially at such a high volume.

Yeah that format drive through plus the other formats, Andrew we really think about there's a lot of those that we're targeting and I was just at our when we were in Orlando last week is a perfect market example of we kind of have a couple tourist shacks you kind of have a couple of traditional mall shacks. We've got a food court, that's a really strong restaurant for us and we've got a draw.

<unk>.

And then we have kind of a neighborhood core type of shock right. So getting I got everything in one market in the in the six shacks.

That's a perfect way that we're looking at our growth. So what do we need to see we just want to concede can we want to see continued strong returns. We've obviously over delivered on everything we promised there over the years, we're being impacted a little bit more now in the higher cost to build and lower margins at the moment, but we expect that we're going to continue to have really.

Strong returns for the very long term, it's it's a number that requires a lot of conversation market by market, both art and science a lot of deep data diving a lot of learning.

Lot of getting past the craziness of Covid sale.

Sales over this last two years and get into kind of more regular run rate and understanding what each of those formats can deliver but I expect we will be doing quite a bit of growth in all of those formats ahead, and we'll keep you posted if that number changes, but our goals of these format evolution because it's consistently been shared that our goal.

Those are two increases our total addressable market with these new formats.

Okay. That's super helpful. And then Ken a question for you. Just obviously, we were pleased to see better than expected margins in the quarter and as you know obviously you guys get your Mojo back.

Recovery in expanding throughout the country that should help with your scale as well.

You guys have visibility for the returned to kind of a long term, 18% to 22% margins or is that still kind of TBD.

Yeah, I mean, as we've guided to for next quarter, we're guiding to 16% to 18%.

And and shack level operating profit margin.

So that kind of gives you a sense of where we think we can build back to you even still not being fully recovered.

There's a lot of unknowns out there that we've talked about inflationary pressures and and and how that will all play out, but we feel really good about how the business is recovering and where we stand today.

Very good thanks, guys.

Thank you.

Next question comes from Gerald HUD Minsky with J P. Morgan. Please state your question.

Hi, This is Jared on for John I haven't got it. Thanks for the question can you discuss the tipping for shack employees, that's being tested for the in store pay at the cashier transaction as well as for the digital transactions on the Shack App.

How customers absolutely.

And are these Ted yeah, that's the needle mover for employee pay.

Well, we'll see it's Super early right. It's a test it's definitely something that we've we've committed to testing and learning and listening to our teams one of the things that is consistently be shared been shared since the beginning of shake shacks opening.

Is certain guests who have asked for the opportunity to chip and we've never accepted those tips. So we're happily testing that to give our team members that opportunity to make a little more money.

And again early days not sharing any data yet other than it's only available today at your in person.

Cash year transaction, where you pay with a credit card.

We will be and we are now testing it in a small number of shacks.

Shacks within our App.

Web channels.

And Android OS.

Over time through this year, we'll begin to test that and roll that out in more of our digital channels.

First in our App later in kiosk, hopefully we will see.

But I think.

You know whenever we can create an opportunity for our team to make more money, we want to do so and it's totally.

<unk> Terry we don't we don't put people in a position where they feel like they have to temper any of that and if you choose to its great and thank you for taking care of our team and a little bit of an extra way.

But it's something that we hope the goal obviously is more money for our team and an increased retention better pay overall.

Thank you.

Thank you there are no further questions at this time I'll turn the floor back to management for closing remarks.

Thanks, everybody, we'll I appreciate all your time today dig deepen the the new reports and we'll look forward to taking some time with you soon cheers.

Thank you that concludes today's conference all parties may disconnect have a good evening.