Q2 2022 Shake Shack Inc Earnings Call

Yeah.

So I'll come to shake Shack second 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. 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 turn the conference over to Emma Li Senior.

Senior manager of Investor Relations and S. T E. Thank you you may begin.

Thank you and good morning, 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 results.

In accordance with GAAP regular 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 on February eight.

18th Twenty-twenty, Joe 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.

By now you should have access to our second quarter 2022 shareholder letter, which can be found at investor Dot Shake Shack Dot com in the quarterly results section or as an exhibit to our 8-K for the quarter I will now turn the call over to Randy Thanks, Emily and good morning, everyone.

We're really pleased with our second quarter performance and how our team is navigating this moment of persistent inflation and an uncertain consumer spending environment against this backdrop. The team delivered total revenue growth of 23% year over year to over $230 million with total system wide sales up 25% to over 351 million.

Average weekly sales across the country continued to strengthen rising 12% quarter over quarter to 76000 with a trailing 12 month SUV of $3 8 million.

Same shack sales grew 10, 1% year over year, driven by 7.8% traffic growth led mostly by the return of in Shack sales.

We generated a shack level operating profit margin of 18, 8% one of our strongest profit quarters since the onset of Covid and the highest total dollars ever at $42 million.

All of this strength was supported by a consistent return to in shack dining a trend we'd like to see.

And with more guests wanting together you can feel the increased energy in our shacks, which has always been a competitive advantage for us.

We retain and kept building upon a strong digital business, representing 38% of total sales.

And this is all part of our strategy to provide a great guest experience no matter, how our guests prefer to order.

I'm trying to know through the quarter as so many businesses in our sector have experienced with continued strong growth through mid may that began than too little level off through June clearly related to a pullback in mobility and.

A muted returned to office trend and some caution on the part of the lower income consumer.

While our urban shacks continue to come near 20% over last year. These.

These factors caused us not to meet or even higher expectations for the quarter.

We're pleased to see the July has remained consistent and retained normal seasonality trends.

However, while we remain aggressive in our push towards full urban recovery and the long term.

We're cautious as we navigate an uncertain macro environment ahead.

Our new Shack development, we opened five company operated shacks in the quarter, including two new drive throughs, we are.

We're poised for growth with a strong pipeline of shafts identified and leased and under construction.

That said the availability of certain HVA see switch gear and kitchen equipment has impacted our ability to open all the shafts we'd hope this year.

However, all these shacks remained strong investments and will open.

We're going to have a challenging pushing Q4 working to open approximately 20 to 25 company operated shacks at this time.

Actively building our pipeline.

We're targeting to increase our development schedule for 2023 as long as construction equipment availability returns to more historical reliability.

As we execute our long term strategy to diversify and build new shack formats, we're leaning heavily into our drive thru plants.

Today, we operate six drive throughs expecting another four more to open this year.

We've optimized these investments were learning testing various markets building and kitchen designs and how we flow food through the kitchen.

All of these shacks still so new we only have a small data set but we are pleased with what we're seeing.

Average weekly sales over the last four months of trended above $80000 for the group.

We're also experiencing roughly 50% of those sales coming through the drive through channel as we continue to invest in a great in shack experience for those guests who prefer to die in that way with us.

Consistent with our targets. These results are trending higher than our traditional suburban formats and leaves us encouraged for what this can mean for our long term growth opportunity.

By the end of 'twenty, two we expect to have at least 10 drive throughs open.

And our targeting opening 10 to 15 more in 2023.

We spent a lot of time identifying a great pipeline for our 2023 drive thru shacks, but understand that this new format takes longer to build and is more capital intensive than our traditional formats.

Today, we're operating environment of higher build out cost.

Lower shack level operating profit and big investments in our more expensive models like drive too.

As we've noted in the last couple of years, we've not changed our long term expectations, but we know there'll be shacks that have a lower return profile given recent and near term factors.

Longer term, our real estate strategy is to continue to invest in new shack types and locations.

We've consistently outperformed our <unk> targets over time.

And we'll drive through we'll be targeting a higher AUR opportunity, which could be a huge unlock towards increasing our total addressable market.

We're really excited for what's ahead and we'll keep sharing are learning as we go.

Meanwhile, our licensing business continues to thrive with revenue up 29% year over year.

Growing with eight new shacks this quarter now.

Now despite strong performance broadly at our business in China was impacted by Covid lockdowns in intermittent market disruptions.

Our partners are growing in the U S and abroad and our teams are working on a number of new market launches in 2023 and beyond.

Going deeper in our current markets.

We're proud to announce that on Sunday, we opened our first ever shack in the city of Chengdu, China to a crowd of excited fans.

I'll provide an update now on the four pillars of our strategic plan and give more color around what's been accomplished thus far and what the future holds.

I'll begin with our commitment to elevating our people.

In May we brought together over 1000 leaders license partners and key suppliers from around the globe for a week long leadership development history highlighted by new learnings and amazing collaboration our growth can only happen as we give our teams the opportunity to develop and.

And we have a strong track record of growing leaders from within and our investments here will continue.

This quarter, we've raised wages in certain markets. We've added tipping functionality for those guests who have consistently asked for the opportunity to leave a tip for our hard working teams. We've added even more health benefits and educational opportunities for team members at all levels and.

In light hospitality begins with taking care of our team and you can count on us continuing to invest directly in their future.

Digital transformation, our second strategic pillar has provided us with incredible opportunities to get to know our guests better.

The learning curve is steep and our investments are critical as we add data capability functionality and new tools across our digital products.

We're pleased with our retention engagement within our digital channels, and we're leveraging new marketing tools that better helps us target. Our guests. This quarter. We've added day part functionality for the first time and you may have seen our happy hour shack promo, which is driving afternoon shake sales.

You'll also notice a much more capable E mail push notification and guests lifestyle component to our personalized and more regional marketing efforts all geared towards more connection to drive frequency. Additionally.

Additionally, we've been testing enhanced performance marketing efforts across digital channels, we're learning a lot about our ability to acquire Reengage and drive connection through new channels as we invest more deeply in direct marketing spend towards the future.

There is an endless list of projects, we want to tackle here and you'll see us invest with discipline as we go.

Our third pillar the evolution and development of our shacks continues earlier I noted the key elements unfolding. This plan and while the current environment of construction delays is frustrating. We believe this is a challenging season will get passed and take all of our learnings into a robust long term pipeline.

We expect to open approximately three new shacks in the third quarter with.

With a challenging fourth quarter ahead, we now update our new unit guidance expectations to 35 to 40 shacks for 2022.

Our license development, we now expect to increase guidance for the year with 16, New shacks opened as of fiscal July we expect to open a total of 25 to 30 licensed shacks for the year.

Finally, we're always focused on our food and our guest experience. This quarter, we partnered with maker's Mark to create the Bergen excuse me Bourbon Bacon Jam Burger and chicken Sandwich, which has performed well.

Our slate of some are eliminated and shakes were also well received by our guests and prove to be our strongest lineup of cold beverage and shake L. T O us to date.

Proud again to partner with the Trevor project for our June Projet guilty OS with a portion of sales donated to this important and impactful organization.

Look out for some more L. T O is coming in hot at the end of the year. Our food continues to raise the bar with premium ingredients and quality preparation and I'll now pass it over to Katie to discuss our financial performance in more detail. Thank you Randy and good morning, I want to thank everyone on the line for joining us at this new earnings call time.

The leadership role here in Tucson, and gave me a front row seat to the amazing culture and leadership Shake Shack has built and scaling across the world the strength of our people our pipeline and our ability to elevate our valued team members into management positions directly impacts our growth opportunity I am so proud of our amazing leaders of today and is strong.

Our future leaders, we continue to build here.

Now onto our financial results, our second quarter total revenue grew 23, 1% year over year to $230 8 million.

<unk> sales grew 22, 9% to $223 1 million licensing revenue grew 28, 5% to 7.7 million system wide sales grew by 24, 8% year over year to $351 7 million and we generated shack level operating profit margin of 18, 8%. These are.

Our strong growth and profitability metrics and represent the highest level of revenue and shack level operating profit dollars on record in spite of low double digit blended food and paper inflation as well as substantially growing our investments in our team members shack.

Shack sales were tracking in line with our expectations for most of the quarter. However, we faced several sales headwinds in June that drove shack sales below our expectation.

First our a 10, 1% same shack sales growth in the quarter and positive seven 8% traffic was led by strength in our higher income gas base and gas to live near our shacks.

Shake shack locations tend to over index to higher income guests than traditional fast food. However, starting in June we saw less traffic from guests with lower income.

Also we know the number one reason our guests tell us that they would come to shake shack more often is it the shack was built closer to their home.

We saw traffic growth from guests, who live close to our shacks are consistent with the rising gas prices in June we saw some traffic pressure from gas to lift farther away from our shack.

Additionally, some key urban recovery trends that had benefited us in prior quarter broadly held but did not improve despite that are deeply impacted urban markets like New York City, Boston and Washington D. C. Also our same shack sales growth by more than 25% in the second quarter, we expect that recovery would have been even.

<unk> had mobility metrics in urban locations, including return to office incrementally improved.

In some areas, where COVID-19 cases rose in the quarter. We also realized a degree of added operational pressures and temporary shifts in consumer behavior and then further we lost sales from opening fewer restaurants later in the quarter than we had anticipated as.

As Randy noted construction and supply chain delays are impacting our timing of expected openings.

We now expect to open approximately 35 to 40 shacks this year with many occurring late in the fourth quarter, we faced where it's got a kitchen equipment availability and permitting and inspection delays build costs are elevated the supply chain is challenging and we are seeing cost pressures across our restaurant P&L, we remain committed to executing on our strong unit growth.

However, I also keeping a careful eye on preserving strong unit returns and building restaurants that stand the test of time. This discipline will impact how we achieve development targets in any given year as we scale our business for the long term.

While we cannot be certain how consumer spending and mobility patterns evolve throughout the rest of the year or how a wide range of scenarios could impact our business. We remain laser focused on delivering a great guest experience in digital and in shack channels with elevated offerings reflective of our fine dining culinary ribs.

And the second quarter, we generated 76000 and average weekly sales up 12% from 68000 last quarter and up 6% year over year.

This is the highest quarterly AWS that we have generated since the onset of COVID-19 as our results have shown over the past two years, we generally show stronger recovery at times in consumer mobility metrics improve and lesser when they are impacted.

With consumer and mobility trend stabilizing in May and June AWS trends went from 76000 in April to 75000 in May and June July AWS held flat with June at 75000 in line with historical seasonality.

Second quarter same shack sales grew 10, 1% year over year, our in Shack check was the highest on record and our same shack sales were negatively impacted by channel mix as in Checkmate <unk> momentum continued to build items per check were flat across our channels compared to the first quarter and performed in line with historical seasonality.

Items per check remain above 2019 levels, driven by more digital sales and our focus on cold beverage innovation.

We remain pleased with the guest reception to our March price increase and believe we have additional pricing power to help address persistent inflationary pressures throughout the year.

In mid fourth quarter, we plan to increase price by.

5% to 7%, reflecting an even more targeted approach to pricing across various markets and tears with this we will maintain a blended high single digit price across our channels for the remainder of the year.

July same shack sales rose, 5% led by high single digit traffic growth year over year and urban markets.

June to July or progression with consistent with historical seasonality as macro and mobility and Covid pressures we experienced in June persisted into July we expect they will remain for the rest of the quarter.

Urban same shack sales grew 19% versus 2021 and we believe our recovery would have been much stronger if not for mobility, namely returned to office urban transit and urban tourism leveling out and in some instances for instance is reversing consider that without an improvement in mobility metrics Manhattan same shack sales rose 30.

7% year over year, and our New York City teams executed on the largest sales volume since Covid, However, Midtown New York City weekday lunch and dinner traffic is still on average more than 40% below 2019 levels.

So suburban same shack sales grew 3% year over year lapping a positive 52% comp in the second quarter of 2021, even as we realized strong sales in our urban shacks.

Positive same shack sales in our urban or suburban shacks were driven by positive price mix, while traffic trends were flat year over year July saw similar macro headwinds as June and we see a strong opportunity in suburban markets as we expand development and if all formats like drive up curbside and drive through.

As Randy noted, it's a very exciting time for our digital business as we are seeing benefits from our marketing and technology. That's been all made with an eye on growing our digital channels.

In the second quarter, we held our general sales even as in check traffic grew more than 20% year over year, and we retain nearly 80% of the digital sales that we generated during the peak pressures on our dining business. In January 2021, we continue to invest to build our digital business to drive long term traffic growth and here are just.

A few exciting things that we've been cutting up and our digital labs.

In July we launched our first ever digital day, part promotion, where guests can buy one shake and get one free from the hours of two to five P. M on weekdays.

Our shacks are very busy at lunch and dinner. However, we view this mid day as underutilized from a staffing perspective and are excited about the early read on the income mentality of this offer.

Driving digital frequency and App downloads and as it added plus many of our guests are coming in for the shake Shack happy hour and getting other items as well, we're excited to learn and try new things with this new capability.

Second we have just rolled out a new automated marketing strategy to better directly communicate with our guests. This is giving us a new opportunity to build frequency for our long term traffic growth among the $4 2 million and growing unique shake shack digital guests in our system on top of the millions more I've got to have assets to directly communicate with them through digital channels.

Email.

This new automated marketing strategy will allow us to better segment, our guests to target specific offers and messaging across multiple platforms.

Third kiosk continues to show that.

Showed strong sales and margin opportunities and with labor efficiencies are part of our longer term initiatives to build on shack level operating profit margins. Today, we are doubling down here on kiosk with plans to roll them out to nearly all shacks by the end of 2023 targeting significant progress on this goal by the end of this year.

And as a company deeply rooted in providing enlightened hospitality, we are developing more digital capabilities for an improved guest experience across our channels and to learn more from our guest feedback.

Finally, youre also going to see some new exciting improvements to our app and website over the coming months as we continue to target conversion building, our digital business for long term sustainable growth.

Licensing sales of $128 6 million rose, 28% year over year, our domestic shacks. In addition to select international markets performed well.

Licensing sales were impacted by continued Covid lockdown and intermediate market disruptions in mainland China as most of our licensing sales are generating currencies outside of the U S. Dollar we faced headwinds from a stronger dollar during the quarter a pressure that we anticipate will continue impacting this area of the business.

Total shack level operating profit was 42 million or 18, 8% of shack sales, our shack level operating profit margin improved despite growing sales headwinds and low double digit inflationary pressures.

And the second quarter, our food and paper costs were $66 million or 29, 6% of shack sales down from 33% in the second quarter of 2021, and down 80 basis points quarter over quarter as our March price increase and a 38 basis point benefit from credits related to our biannual leadership.

Retreat helped us offset a portion of the low double digit higher costs in our basket.

Full details can be found in our shareholder letter on page 12 the.

The inflationary environment remains uncertain and we are planning for low double digit blended food and paper inflation throughout the rest of this year led by chicken dairy and paper and packaging, but we're also facing significant incremental cost pressures in our crinkle cut fries stemming from historically high inflation in the potato market that is being passed along to us.

Our paper and packaging costs rose around 20% year over year in the second quarter and we continue to plan for a mid to mid teens percentage year over year for fiscal 2022.

Labor expense was $65 9 million or 29, 5% of total shack sales down from 37% in the prior quarter and up 50 basis points year over year, we continue to invest in their teens and have raised starting wages by high single digits year over year as we work towards optimal staffing levels.

We continue to invest in growing efficiencies within our own four walls and generating flow through on incremental sales. However, it staffing pressures and elevated turnover remained a headwind to our sales and margin performance as new team members. It takes time to get trained and to optimize throughput and high volume shacks at peak period.

Our best restaurants, generally tend to meet our sales expectations and we know that we're staffing is not optimized its harder for our teams to meet full opening hours and strong throughput.

Other operating expense was $32 6 million or 14, 6% of total shack sales up from 13, 4% in the second quarter of 2020, one given inflationary pressures on cost to operate our dine in business. We are seeing elevated costs to keep our shacks sparkling clean and to repair and maintain restaurant equipment.

Occupancy was $16 7 million or seven 5% of total shack sales down from eight 2% in the second quarter of 2021 aided by strong sales recovery in our shacks, especially in some of our highest volume locations.

G&A was $29 1 million, which includes a nearly $3 million expense to support the leadership retreat.

Preopening expense was $2 8 million in the quarter as we opened five new shacks depreciation was $18 1 million up 25% year over year, we realized a net loss attributable to shake Shack, Inc of $1 2 million or a negative three cents in earnings per share.

On an adjusted pro forma basis, we reported a net income of <unk> 1 million or zero cents per fully exchanged and diluted share.

Excluding the tax impact of stock based compensation, our pro forma tax rate in the second quarter was 12%.

Our balance sheet remains in a strong position as we ended the quarter with $358 million in cash and marketable securities. We will continue to leverage our strong cash position in support of investing in new shack openings and a variety of formats, including drive through and in addition to supporting our other company wide initiatives.

Now onto guidance for the third quarter of 2022 and full year 2022.

So our guidance assumes no new COVID-19 or supply chain related disruptions additional unknown inflationary pressures are a major shift in consumer spending. We are also assuming that urban and suburban consumer mobility trends remain constant with what we realized in June and July.

For the third quarter, we are guiding total shack sales of $213 million to $218 million mid single digit year over year growth in same shack sales and approximately three new company operated shack openings.

While we are not yet providing guidance for the fourth quarter, we plan to open 20 to 25.

Any operated shacks most of these will acquire our cartridge the end of the quarter. So new shack openings will have a minimal impact on <unk> revenue.

Licensing revenue guidance of eight to $8 5 million reflects a degree of ongoing uncertainty around international travel as well as COVID-19 pressures specifically in China.

We expect total revenue of 221 to $226 5 million growing 18% to 21% year over year.

We guide three Q shack level operating profit margin of 16% to 18%, reflecting ongoing in a wide range of potential inflation inflationary pressures, including dairy packaging and price as well as investments to support our team members and drive our in shack traffic growth.

We continue to have a disciplined growth minded G&A investment approach for this year, however, with consideration for development delays and unknown macro impacts we have tightened our guidance range to 111 $213 million, we remain committed to investing in our long term growth and strategic initiatives, including elevating our people our digital trans.

Information and the evolution of our formats that drive through we've also seen some encouraging success with various marketing efforts. However, we are finding efficiencies to meet our lower development schedule as we think about planning over the next 18 months.

We continue to expect full year depreciation of $70 million to $75 million Preopening of 14 to $17 5 million, we are accruing more noncash rent than normal and preopening expense given the level of delays we are experiencing and are tracking at the high end of the pre open full year guidance.

We expect our adjusted pro forma tax rate, excluding the impact of stock based compensation to be 28% to 30%.

We are planning and managing through ongoing inflationary pressures and potential shifts in consumer spending patterns with an eye on improving our long term profitability driving sales growth and are investing ahead of our robust pipeline across the world. The operating environment is likely to remain challenging for some time, but we believe we have the right plan in place to elevate our people.

And drive the long term growth at shake Shack as we navigate these uncertain waters.

Thank you for your continued interest in our business and with that I can turn it back to you Randy. Thanks, Kerry just to close off I want to end today's call, noting yesterday, we opened our 400 shake shack worldwide.

To achieve that milestone is a dream none of us ever imagine when we create a little hotdog cart to raise money for Madison Square Park in New York City 21 years ago.

We connected with a thousand shack leaders recently at our leadership retreat as a reminder for me.

All of US have very special this group of people is.

Celebrated leaders who've been here for more than a decade.

And those who've just joined.

And beyond proud and thankful to our team today more than ever as they work to create an environment where people can do their best work one burger at a time.

As always we hope you and your families stay safe and healthy with that operator. Please go ahead and open up the call for questions.

Thank you if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star.

Our first question is from Michael <unk> with Oppenheimer and company. Please proceed.

Hi, good morning. Thanks.

The first time, you're disclosing any metrics on the drive throughs. So I was hoping you could dig into that just a little bit more I mean on the $80000 in average weekly sales per week are you seeing any staffing issues like you mentioned with some of the other units that could be holding that number back at all that could push it even higher and then you also mentioned in greater frequency from drive thru customers.

What's the base that you're referring to when you were saying there is greater frequency.

But are you willing to characterize how much more.

Yeah. Thanks, Michael Yeah, let's say drive through broadly really excited about it we've only got six opening and some of those have just opened so all the data is brand new.

Obviously, you want to be careful not to.

Share too much data at this early stage, but we continue to be encouraged about.

<unk> potential number one which is what I led with in my comments as well as the long term profit and return metrics that we think we can get out of this model I think it is going to open up new real estate opportunities all over the country for us.

Could increase our longer term Tam and we're really excited about it as with anything to your question. Yes. When staffing is not optimized it's tough and I would say each of the six drive throughs have had various moments where they have not been fully SAP. We opened a few of them right in the heat of the early omicron wave in December January lots of learning there.

And I think we're putting most of our most of our efforts on learning how best to build this model you saw and I noted in my notes, we've already committed to at least 10 to 15 of them next year and we're looking to do more beyond that so really excited about what drive thru could mean when it comes to frequency, we havent shared any.

A frequency data metrics, what we can see and again very early is that the goal of a drive through is to give convenience to the already amazing shake shack experience.

When we've done that the early signal is that people would come a little more often than a traditional suburban format that we have that's really exciting that's good news and the last piece of data. We gave was that about half of the.

People are using the drive through and about half were using our other channels.

And that feels really good to us because you'll go to a shake shack drive thru and someday you might want to be inside and have the full shack experience. This is why we're investing in this full beautiful design and some days you might want the convenience of driving around and moving on towards what you Gotta do in your deck. This is brand new for shake Shack, and it's really important when I talk about 400 shacks over 'twenty.

One years.

For us to just be doing this now getting all this learning and thinking about what could be ahead is really exciting. So that's the that's the early data. We'll keep you posted as we go I'm sure. We're going to have lots of ebbs and flows in shacks that'll be way above that shacks there'll be below that average that we just shared.

But we got four more this year to learn from and a whole bunch more coming.

Okay. Thanks, Ron that's Super helpful and just a follow up you mentioned some headwinds from the lower end consumer.

So it sounds like you have some pretty sophisticated data here when you bifurcate in your customer base. I mean is there any way you can talk about how big of a cohort at the lower end consumer.

Actually makes up out of your.

Customer base. Thanks.

Yeah. So you know across our company, we generally tend to over index to higher income consumers, especially relative to traditional fast food and.

That being said you know we have a number a wide range of customers and that we service and in the quarter you know, while we saw some strength from the higher end guests in June we did see especially in certain pockets of little bit more weakness from the lower end consumer. We also saw you know when we talked about kind of people who we are.

Increased traffic from people, who live close to our shacks that we did see some pressure on the periphery from people who are got to make kind of like longer road trips.

We saw that in June with the Spike in gas prices that Canada was a little bit weaker for us.

Thank you.

Okay.

Our next question is from Nicole Miller with Piper Sandler. Please proceed.

Thank you good morning could you define low income the threshold there and high income and also when you say live near a shack what is the distance you're measuring.

Yeah, we're not going to get into that granular detail, but just when you look at across the income scale. The lower income Ah that our guests were the more of a traffic impact we had and then same thing kind of with the periphery.

And then when you talk about afternoon happy hour, what was the food attach rate to some of those.

Sheikh incidents and is there potential to include food and the discounts going forward.

Yes. Thanks, Tycho, we're really excited about leaning into something that looks shacks never been a discount brand. We don't intend to be we're a premium brand with premium ingredients and we're not looking for cheap value meals, that's not how we serve our food.

But we are looking especially in this economic time to think about how do we provide additional added value for people. So for instance, we're doing this the shake.

Kind of a buy one get one between the hours of two and five and what we're seeing is a significant attach rate almost to the point of a close to normal average check.

So thats pretty exciting because what we're finding is yes, I'm going to come in get to shake, but I'm also going to get maybe a burger fraud and some other things with it. So we feel really good about instrumentality that can be that can be driven by this and.

The ultimate return on sales and our op profit because we're gaining a whole other sale out of it now we'll see again very new we'll see what we can do what we intend to do is test as you said other items. So why not use this new functionality and test some of our other maybe burgers, maybe fried some of the other things that the guests love as well as other hours.

Right. We have you know shake shack competitive advantage has always been that we have is very high frozen custard sales. We also have alcohol that can drive some potential later evening sales opportunities and we think this new functionality the ability to really connect.

B, so additive over time and you know what.

We're still a young company here, our digital tools, while a massive apartments are still really at the early stages. So we can unlock stuff like this over time and this is small in a minimal impact today, but it has opportunity to really grow so excited about all the new marketing and.

Digital opportunities we have.

Okay. Thanks for that thank you so much.

Thanks Scott.

Our next question is from Jared Garber with Goldman Sachs. Please proceed.

Hi, good morning, and thank you for the question.

Wanted to just circle back to me and I know that.

The business, obviously has a pretty hefty exposure in Midtown and I think you noted those locations are still down about 40%.

Is there any way to get a sense of.

How some of the restaurants are doing maybe not in that part of Midtown, but some of the more residential areas.

And or some of your urban environments, maybe that are.

Forming a bit better.

I mean, it seems a little bit macro related but is there any ways that you guys are thinking about offsetting some of those challenges or is that just really a week.

The macro normalizes.

Yes, it's a great question and you are correct in saying that there's variability right I think we've we've got caution you and everybody. When we talk about urban suburban that not all urban was born equal right. There's a lot of restaurants, both in New York and other urban centers, let's not just make this about Midtown New York, we tend to do that in these conversation because shake shack was born here.

Talking about a lot of urban centers large cities around the country. So we do that there are lots of neighborhoods in New York, and otherwise where sales are up versus 19 solid jacks.

Feeling really good getting back to profitability signals are really good we should all that that's the most encourage you think about this and then there are shocks and core urban centers, some in Midtown and others were.

Look when JT share is a piece of data that 40% of our lunch guests just arent here, yet and you look at whether it's subway mobility tourism and other things that just haven't returned to their to where they were and as we talked about sort of the challenge of where we're at right. Now is thats also started to level off.

In June so we see mobility trends today and some of our core urban centers that are lower than they were a year ago and that are lower than they were at the end of last year. Even so while there are moments in pockets of places that feel really busy or travel you see headlines of certain places that aren't in fact very busy there are many others that just arm and.

So how do we feel about that and we're not going to predict the future I don't think anybody knows where this is going to go nor do we but we're believers in the urban ecosystem. We're believers in those high volume shacks that have led the company for so long that continued to be deeply impacted we think theyre going to continue to get back overtime.

Hard to say when and at this moment what was what do we need to see happen and where is the where's the upside the upside is going to be more return to office, we'll see where that goes after this summer.

More general mobility for commuting the way people move around town.

More a higher.

Higher occupancy around hotels convention centers in both regional and international tourism. So all of that stuff together has come in come in come and go and ebb and flow through this last few years, but there's still a long way to go in with that that's how we will trend. So to your last question of how do we what do we do about that well, let me keep running better restaurants.

France day in day out we lean into our real estate strategy that next year will be majority suburban.

And we're really excited about those your hero drive through year, our drive up models shack track in others.

But that doesn't mean, we're abandoning urban centers, we are going to be a lot of urban shacks next year and otherwise. We're also going to go to some new markets next year. So as we target a really robust pipeline, it's going to be diverse it's going to have a lot of formats and it's going to take on.

Lots of trends that will help balance that portfolio over time, the imbalance of our portfolio towards heavier urban centers traditionally has been the challenge for us and that is where that is what has happened this summer.

Thanks, and then just one follow up Katie you noted the kiosks.

A major initiative over the next let's say 18 months or so and I know we've talked about this quite a bit can you just remind us.

Maybe how what you plan on achieving.

Achieving and penetration of those kiosks by the end of this year.

Versus that full 23, and then just remind us of some of the same.

And margin benefits youre seeing in the stores that already have those thank you.

Great Hey, Jared Yes. So you know we're very very excited by what we're seeing yes, we're seeing that we have a higher check in kiosk channels, we're seeing a better attach rate of our L. T. OS. This is really kind of when I think of kiosk. It really is kind of the only digital ecosystem in the shack beside people's phones that people can fit.

There with the menu and really understand and go through the entire process and we see guests responding quite positively to it.

It's also one of our highest margin channels as well and we see that we're able to get some staffing efficiencies.

Our shacks, where we had cats. So we're very excited to sit here and roll them out to essentially all of our shacks over the next 18 months.

Marking significant progress on that by the end of this year, we're not going to get into the exact number there, but you know this is one of our top priorities here.

Okay.

Thank you.

Our next question is from Jake Bartlett with true as Securities. Please proceed.

Great. Thanks for taking the question Mike.

My first one is just on seasonality.

And in the summer months, you gave us what July was for your for your average weekly sales I'm just wondering in a typical.

Third quarter, you know how do versus July August and September .

Remember average weekly sales trend just just wondering with the normal seasonality.

Yeah normal seasonality as you know call. It August roughly flat with July and then you know it will see kind of what happened in September , but you know consistent with the rest of the industry it tends to be softer.

Okay.

That's helpful and then I'm wondering on the restaurant level margins, you've beat pretty significantly in the last couple of quarters I'm wondering what surprised you the most.

The quarter to kind of drive such such upside.

I think food cost inflation was about in line with what you expected just what are the moving pieces, there that kind of really drove the beat versus expectations.

Yeah. It really does come down to our beef costs were lower than we had anticipated and we had put in our guidance last quarter beef.

Beef is about a third of our basket. So when that you know moves around it we have pretty big impact and we just talked a little bit lower than we had thought.

Only thing I'll add Jake is.

Through when we have higher sales through this whole time right we're continuing.

We're off our historical highs right, we've had to rebuild and we continue to run our restaurants.

In those restaurants that are returning sales flow through significant and we've got to keep that and that's been really proud of the team for how they ran their restaurants. This year look at the pressures as Katy said is not abating, we're going to continue to have lots of inflationary pressures on a lot of our colleagues in other things continuing forward as part of our guide forward for the moment.

And especially in the next quarter before we take additional price in the fourth quarter.

That'll have some impact but.

One of the one of the solid outcomes of this quarter has been how the team really ran the restaurants with what they had.

Great Great. That's helpful. And then my last question is just on staffing and you did mention that you know some stores or youre not optimally staffed and that's impacting sales at those stores. So the question is what are you seeing kind of at the margin here, you're seeing an improvement.

As turnover going down and stuff when you build really increasing could that be more of a tailwind to the street.

Recovery in sales in the back half of the year do you think.

It's definitely an opportunity when we look over the long term because we know we're not where we want to be or at our historical norms kind of pre COVID-19.

Our industry in the whole world in every industry is grappling with staffing problems, we're not immune to that and we are not where we want to be so our historical.

Turnover today and.

Not optimize staffing levels is not where we want it to be.

It is better than it was in the first quarter for sure. It is better than it was at the end of last year for sure. Those are all encouraging things. We've continued to take care of our teams pay them more adding tipping, adding other benefits. We've really tried to continue to give our teams more and more reasons to join to stay.

But when you have new teams and you have a higher turnover environment youre not optimized in the perfect sales per hour that you could be doing at busy restaurants, and we know that and we see this opportunity as we go forward, we know Thats, where we can continue to unlock but it's still going to take some work and it's not going to we don't expect staffing to get easy anytime in the near future.

Great I appreciate it.

Our next question is from Jeff Farmer with Gordon Haskett. Please proceed.

You have a follow up for you guys and then another question in the prepared remarks, you did mentioned that wage rate increases.

The introduction of <unk> capability in certain markets was what was on the way or maybe it's already happened but.

Can you just provide a little bit more color and what I mean by that is roughly.

Roughly how many of these markets do you think that you have the opportunity to introduce shipping capability as an example.

Yes, it's brand new and it's pretty much rolled out everywhere, but not in all channels. That's I think the key way to understand it today for the most part it's not on any of our kiosk because a significant part of our sales in most of our restaurants. So it's just recently been added to some of our digital channels. So it really began as a ramp.

Up as a test we really like what we've seen and we've been encouraged at how many people want to thank our team in that way. So it can add.

Really nice additional hourly income for our team we're excited by it.

There are new cost to Austin taxes for that but we think it's a great way for our team to continue to earn and we hope over the long term it will help our turnover. So there's just a handful of markets where it isn't rolled out yet.

Some markets, where we were going to take our time with it and others, where we're continuing to go and as Katie said with kiosks.

Functionality and more rollout, we'll look at that channel over time, but it's not in there just yet.

Okay, and then just as a follow up last one on wage inflation, obviously, you mentioned some wage rate increases coming but.

Might have missed this but I am just curious with the wage rate inflation was in the second quarter.

And what the outlook is for the back half of 'twenty two.

Let's get that exact yes, I have it right here in this area of our okay. So we raised starting wages by high single digit percent in the second quarter and the blended rate for our 2022 is going to be mid to high single digit.

Last year, we announced had a pretty big announcement of investments in our team members in <unk> and <unk> that has carried over into this year. So we're going to kind of be lapping that but continuing to invest in our teams.

Thank you.

Our next question is from Brian Vaccaro with Raymond James. Please proceed.

Hi, Thanks, and good morning, I wanted to ask just about the pricing decision and maybe you could walk us through how you landed on the 5% to 7%.

I'm, hoping maybe you could speak specifically to where you think your value proposition is relative to your fast casual peers any quantification there would be fantastic and just also the pricing decision thinking about.

Context.

We may be seeing some light at the end of the tunnel as it relates to commodity inflation, just so how did you balance that decision.

Lots of things in there. Thank you for the question look we've been traditionally been Super Conservative on price for the history of this company right around 2% right in the last year, we've had two different price races in the 6% to 7% range. In addition, we've added some additional price on our third party delivery channels that we charge a 15% prime.

Liam on there so all that has gone into where we are today.

We are going to take another between 5% and 7% in kind of mid fourth quarter right.

Why are we doing that well.

We should wish we didn't have to but it's the minimum really that we need to do as we look at so many of the input costs of our business coming in higher and specifically French fries have had record level increases and inflationary environment our bonds are dairy.

And chicken some of the other things and while beef has kind of leveled it's leveled out a very high level.

And so everything's up.

And that's just a factor everything's up to build restaurants.

So we even with those numbers that are high for us that remains cautious.

In our overall approach and when we look at our <unk>.

Basket, we actually feel really good about where it is relative to other.

Fast casual other even better Burger.

Obviously, we're going to be more than traditional fast food and we should be a premium ingredients need that.

Price point, so we feel really good about again as Katie said earlier, we generally tend to have higher income guests for the most part, but we want this not shocked to be affordable for everybody and it's been traditionally.

Our solid trade up opportunity for people who aspire.

And it's been a nice trade down in moments like this for casual diners, who want to spend a little less but still have great ingredients and a great experience, that's where CGI has always positioned itself, we feel like our pricing today keeps us there and it's something Brian that we're going to have to keep an eye on because.

We'll see where commodity costs go you know, there's some signals of certain things coming down. So a lot of things that are not coming down at all and lot of things that remain very up prior oil I didn't mentioned things like that these are these are expensive items and we are hopeful that those things level off and that can be a.

That can be a long term tailwind for our op profit in the coming years, but at the moment, there's a lot of pressures on the caution in our business, let's say just to add on to that a little bit we are taking an even more targeted approach to pricing with the <unk>.

Extra and then we have in the past.

And really kind of even getting more refined about where we have higher willingness to pay as well.

Alright, Thats helpful color and also on the effective pricing Katy if you took no additional let's just say you take the midpoint, 6% could you just level set where your effective year on year pricing would be over the next few quarters.

Yeah, it's going to be kind of call. It the high single digit range for <unk> and <unk>.

For both <unk> and <unk> yeah.

Yeah.

Obviously higher in part due to pricing because we lap an October price increase so it was about half of that.

In October of 2% to 4%.

Next lap March figures, we took that.

Yes.

Okay, Great Great and then just on the drive throughs.

You mentioned that the strong sales youre seeing the over 80 K could you give us any sense of just what the average build out costs on those six units were and I'll pass it along we haven't broken that out yet theyre going to be a lot of learning on that as we go there are significantly higher than a normal shack at the moment, we're investing in that does it for.

We'll experience drive thru in and out and we're going to spend some money to build those.

It's taken the total class about up 15% this year.

But as we do more and more of those we expect those to be higher and why are we doing that well. It's a full on build out that's something we're building for decades to come we expect to continue to have strong returns even at elevated levels of construction costs for the environment plus this model.

But that said we are also going to keep hopefully targeting stronger avs and profits over the long run. So that's all that's all part of the goal of drive through and at the moment in this in this first couple of years of it you should expect us to invest heavily in the capital of that is going to be a capital and learning intensive environment for us.

And we believe hopefully continues to unlock big sales and addressable market opportunity over time.

Alright, Thank you very much.

Our next question is from Jeff Bernstein with Barclays. Please proceed.

Good morning, Thanks for taking the question this is product on for Jeff.

Andy I wanted to touch on maybe a bigger picture question.

What if hybrid work and less commuting ends up being a more structural longer term factor in the urban shack location.

What can operators due to adjust to that and any color on just how your team members in the store continue to drive sales in those locations would be appreciated. Thanks.

I think it's a great question.

I don't have the Crystal ball to tell you, where it's going to land I think we all expect that the previous world of pre Covid five day, a week normal office hours has changed where it lands I think it's hard to know just yet.

I tend to believe we're not quite back at where it will land.

There still remains a lot of more hybrid then may occur, but I don't know where that will go so in the meantime.

I think those cities generally will tend to fill in with other things, so theres going to be more tourism theres going to be more.

You look at it at the price of living and so many of the biggest cities, including New York has never been more expensive people want to be in these places and that's going to continue to fill in over time.

So what do we do about it well we've got a shift right. If we used to have a Friday order of 100 burgers for the trading desk that order might be on Thursday, now where it might be different.

We've got to continue to shift and figure out how to staff, what our optimal hours should be and how to reach other guests at different times. So what are we doing about that well. It's all in our in our plan that we've talked to your digital transformation, making it easier for people to get to US no matter what channel they want whether it's a small order a large order and the evolution of.

Our shacks.

Making sure that we have convenience built into the suburban and urban experience. So that we can meet people, where they are and all of that's still on the rebuild for us at a number of our shacks that remain impacted by that that return office trend. Although I think there is other things that we still haven't fully recaptured right there.

Things just like conferences that arent booking yet right hotel Occupancies are hotel rates that are still.

Not the same into urban centers, how those things move over time is going to be the self we're watching and trying to trying to manage our restaurants really well.

Add on top of that that.

The investments that we've made on having this digital day parts capability.

That's just not a statement to urban restaurants, it's a statement for all restaurants. It does have an exciting opportunity unlock less utilized part of our day.

Very helpful. I appreciate it.

Our next question is from Andy Barish with Jefferies. Please proceed.

Hey, good morning, everyone.

Randy just on the yield.

<unk> pipeline, I guess, maybe I'm reading into it a little much but.

You noted 23 that you're still building pipeline and obviously theres some units shifting from 'twenty two into 'twenty three so.

How should we read into that do you expect you know more openings in 23, just given some of the delays in the 'twenty two or.

Any color on that I know it might be a little early to guide a specific number but.

Just interested in that wording.

Yeah.

We have been and continue to build a strong pipeline that's going to be ongoing even today as we sit here in August for restaurants that could open in 2023, there's lots of leases being negotiated lots of sites that have already identified and as we look out look beyond 'twenty three 'twenty four 'twenty five we've got our sight set on market plans for every market.

We're building into that we feel fantastic about the shacks that we intend to build during that time lots of various formats lots of new and existing markets and all of that there that said the process just takes longer today and that is what has been the frustrating part of it. So you may have had shacks that we could identify an open within 12 months.

15 months and now you may have that being 15 to 18 months and drive through is even take longer than that because you've got all kinds of different permitting and things. So when we add that as a core part of our business. We've just got to get ahead of it more.

Some of those things are in control for the most part of all of those things are not in our control what's happened and I think when you when you get a restaurant, we've got restaurants sitting built right now that don't have a walking cooler because you can't get to work and we've got restaurants waiting on air conditioning units and these are the things that our team did an amazing job of keeping up with during the Covid last couple.

Years.

And many of them move just caught up so they are taking time. So as we look at the number for this year, we're still going to open systemwide 60 to 70 shacks. This year, that's a big number of restaurants for a company that only has 400 in total today.

It's really exciting our growth for the coming years can be exciting it has been pushed back but it's all still there. These restaurants did not go away, they're just taking a little bit longer to get open. So when we look forward with optimism.

We're going to get these shacks opened are going to be solved investments were frustrated by the things are taking longer.

But we will get there, we'll get there and as we look at 'twenty three we've got a great class of new cities and new shacks and we're looking forward to it.

Yeah helpful color.

Real quick just on the.

The costs associated with the May leadership retreat. It sounded like there were some credits up in the feed food and paper line, but I imagine some.

Some of your own expenses also ran three on G&A is that.

A way to think about it or can you quantify some of the.

The G&A costs.

Sure, Yes, we are there's about $3 million.

Gotcha, Okay. Thank you very much.

Okay.

Okay.

Our next question is from Chris a call with Stifel. Please proceed.

Sorry about that I was muted.

Thanks for taking the question I wanted to dig in a bit on the 16% to 18% margin guidance. It seems third quarter inflation is expected to be roughly in line with the second quarter pricing is similar in that mid to mid single digit range. So what's driving the margin guidance below what you ran in <unk> I'm just wondering if it's all in the labor line.

With additional investments.

That you are making or if there's something else I'm missing.

Yeah. So we are I seem to have a little bit of a pickup in inflation in the third quarter on Cogs.

And then also we're just shy of our guidance has lower sales though.

That that pressure has.

Lower flow through.

Okay, Okay and then.

We've seen other kinds of successfully implement delivery menu price premiums with seemingly little impact on the volumes and I was hoping to get an update on how youre thinking about the potential of raising the 15% delivery premiums on third party marketplaces to get closer to margin neutral and then related to that why you wouldn't add a delivery premium may be of a smaller magnitude.

The white label channel.

Yes.

Things, we think about all the time, we've you remember it was a 15% tenant we did 10% and 15 was new to us as well we want to be cautious there and just take our time I think we've seen a lot of resiliency in our delivery.

Guests. So we feel really good about that and that's a conversation we're just going to keep having with ourselves our delivery partners. When when we look at our own white label App delivery. So far our strategy has been to keep that consistent with the best value best price that you get when you come to our channels youre paying a lot less and that's our competitive advantage.

And that is that is our strategy today, something we could look at somebody to look at adding a little bit over time, and making that channel profitable, but again with so much of we've had a solid sticky delivery business that we're really happy about we like it it's costly in some ways, but we also have been seeing so.

In Shack return that we're also we've been focused on that for quite a bit as well. So all the things you say are things, we talk about it and could identify over time for opportunity.

Great. Thanks, guys.

Our next question is from drew North with Baird. Please proceed.

Great. Thanks for taking the question I wanted to ask a follow up on development and specifically the unit level returns Youre seeing on recent cohorts, maybe 2020 or 2021 openings I know you acknowledged that the return could be lower in the near term given the cost pressures that are prevalent in the higher build costs.

Associated but are the recent openings still meeting a return threshold that you'd feel acceptable.

Are you willing to share any details around that return threshold that you're targeting.

As you develop new units in 2023 and beyond just some perspective, there I think would be helpful.

Short answer is yes, we have solid returns we continue to invest in great restaurants.

It's very hard to measure of restaurants that have just opened on a what we see as kind of more of a three year return pattern right and historically, we've done real well on that as you know and I think it's hard to take restaurants that either opened or or have opened in this last two to three years during times, where sales and profit have been off of historical.

Oracle lows so.

There are those shacks are going to have some kind of near term impact obviously to the return profile. As we look ahead, we continue to target strong returns over the long term, obviously I've said, we've traditionally beat on the AAV markers that we've set out there and expect to do that.

But we're going to work.

You also have inflated costs on construction materials right now so you've got a balance of things happening. There overall shake shack has always delivered solid returns. We expect we will continue to do that and in the near term there's going to be some shacks that are more pressured than they were in the past.

But they are still solid restaurants with solid returns.

Okay.

Our next question is from John <unk> with J P. Morgan. Please proceed hi.

Hi, Thank you.

Morning.

You know looking at and thank you for the average unit volumes for the drive throughs, which I think I heard or $80000 a week for the six correct me if I'm wrong hopefully not so that's where my question is based on it's not that much higher.

Then the average I mean thats. The average is running 70 576, but.

Averages are tricky to look at because obviously each trade area is different demographics what have you.

Is there a way to kind of think about that dry three volume.

In the specific markets in which you open saying Hey, you know this we would have targeted 30% to 40% or 20% whatever the number is lower for the same unit without a drive thru just to give us a sense of.

How much incremental volume on a trade area or the trade area basis. Those units are generating drive through versus non drive thru, if that's a possible exercise to go through.

So, yes and to your first part your question is based on the right numbers. Those are early averages from just four months of data that we've shared okay. You've got some who've been opened for eight months some that had been open for one month.

So there's lots of it within that okay.

So we're really encouraged by John and you are correct in saying that we expected.

It's hard to say, where it's going to land we're targeting.

A premium significant premium to what that shaq would have been in that similar area. So when you look at like for likes suburban shacks, either our core model or others that don't have a drive thru. We're targeting this model to have a significant sales uptick. So yes, you can't it's you can't compare four months of data for six restaurants too.

Decades of data for 200 restaurants, which is what you were talking about with some average AWS right. So here's what we were trying to build.

Number one trying to open up our total addressable market number.

Remember to try and do that with potential higher <unk>, both for those shack types areas and the overall company.

And a solid return on investment over time, and that's what we're looking for would drive thru. It is so new for us.

I know if you've been to one yet, but we're really excited we think the guest experience is awesome. The team member experience is fantastic to work there and when you roll up to a shack drive through you really look at it you say this is something else. You know. This is this is exciting this is a different thing.

And.

Let's see how we can all market over time, but we will be the first to very humbly say, we got a lot to learn about drive thru. So any data we given the near term is going to up and change we've got to understand seasonality patterns that we don't really understand yet right. We haven't really lived through any historical seasonality on that.

And locations like we're going to get some things right and we get some things wrong.

And even in the shacks the six that we have there is lots of things we wish we did differently and that will go into the learning of the next batch.

And that's why we're saying today, how significant our commitment will be to these 10 in the next 10 to 15 at least for next year and beyond so.

It's big bet.

It's an important part of our future strategy and we believe will be a healthy unlock towards towards a much bigger opportunity down the road.

This does conclude.

<unk> and answer session I would like to turn the conference back over to Randy for closing comments.

Thanks, everybody for joining our first ever a morning call really appreciate your time and look forward to connecting thanks take care.

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

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