Q4 2022 Shake Shack Inc Earnings Call
Good day and welcome to the Shake Shack fourth quarter 2022 earnings conference call.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
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At this time I'd like to turn the call over to an elite luggage senior manager of Investor Relations and F. P N a.
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 prepared in.
Yeah.
Installations to comparable GAAP measures are available on our earnings release and financial details section of our shareholder letter.
So on today's statements may be forward looking and actual results may differ materially.
Abreast and uncertainties, including those discussed in our annual report on Form 10-K filed on February 18 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 fourth quarter of 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 Good morning, everyone.
2022 was a year of continuous improvement in shack formats, and feel culinary innovation and focused strategic planning for the exciting road, we haven't had.
We ended the year opening 69 shacks globally growing our unit count by more than 18% with system wide sales expanding more than 22% year over year to a record $1 $4 billion.
Our total revenue grew over 21% to approximately 900 million.
Led by new openings and seven 8% same shack sales.
We continue to build back our shack level operating profit margins to $17 four for the year exiting the year at 18, 8% in the fourth quarter all the while continuing to demonstrate the global appeal of our brand as we stand for something good and all that we do elevating our teams and communities along the way.
We ended the year with solid momentum in the fourth quarter, raising average weekly sales expanding our margins and investing with discipline on G&A and Capex. Our performance was led by price and strong in check and traffic growth, reaching $76000 in average weekly sales and five 1% same shack sales.
This momentum has carried into January with total revenue up nearly 35%, including a 17% comp and double digit traffic growth as we lapped last year's heavy impact from Amazon.
Our license business performed well in the fourth quarter, despite pressures from Covid related disruptions in China and other regions.
Some of that volatility in our China shocks has subsided in January and we're cautiously optimistic that things can begin to level out towards a more normalized sales environment internationally. This year.
Our 18.8% shack level operating profit margin in the fourth quarter was supported by our October menu price increase efficiencies in labor and positive channel mix as more guests return in shack rest assured, though that our work to build our profitability is far from done we have a plan in place to continue this improvement in 2023.
Given the uncertain economic backdrop, we expect conditions to remain challenging for some time. However, we're confident that we have the right strategic priorities and team in place across the company to navigate these pressures and set us up for solid long term growth.
We shared a lot of detail around our 23 strategic plan at the ICR Conference in January .
A replay of which is available on our IR website today I want to recap, where we're focused this year.
Our number one focus is on recruiting rewarding and retaining a winning team fielding.
Fielding an exceptional team is the key ingredient to operating efficient and successful shacks.
We've not been immune to the staffing challenges the industry is face and we've doubled down on recruitment retention and training efforts. We've raised pay expanded benefits added chips and enhanced access to the opportunities our team members have to advance and making shake shack a real career choice.
Last year, we filled nearly 60% of operations leadership positions with internal candidates a critical pipeline to meet our growth goals.
77% of our promotions were awarded to people of color and over 50% to women.
While many shacks remain below their optimal staffing levels, we've seen marked improvement in hiring over the last few months now that's remember that we opened 22 domestic company operated shacks in the fourth quarter. So we're still in the midst of a lot of training and moving team members around to support new openings were expecting to have some additional costs running into the first quarter as we get to.
More optimal operations, we still have a lot of work to do but we're incredibly proud of all the team is developing.
Our second priority key.
Keeping a relentless focus on the guests experience shake.
Shake Shack has always been differentiated from traditional fast food and we win by doing what most U S are in all the restaurants are either unwilling or unable to do.
Between collaborating with celebrity chefs from marquee events and L. T OS.
Partnering with media companies like hot ones as well as brands like Maker's Mark for our Bourbon Bacon Jam, we're continually learning how to better drive engagement with new and existing guests.
This past week, we launched our white truffles L. T O, which includes the white truffle Burger a vegetarian option with the white truffle shroom.
And parmesan why trouble for US. This is a great example of something only shake shack can do creating an elevated affordable culinary experience.
So also be a big year for plant based innovation, we plan to launch our non dairy chocolate shake as well as our new Veggie Shack Burger developed right here in our innovation kitchen in the West village.
An elevated and delicious alternative to the highly processed meatless offerings in the market today.
It's packed with mushrooms, farro, quinoa, sweet potatoes, carrots and more.
Talk with American cheese, crispy, onions, pickles and shack sauce.
We landed on a vegetarian option that is craveable, and we'll look forward to and introducing it to a wired audience.
Wider audience to get feedback this year.
We also plan to keep a rotating group of L. T O is to drive frequency and you'll see various tests on a number of new items through the year, including new packaging caffeinated eliminates many shakes and more.
We're offering a better overall experience committed to premium ingredients and greedy or guests with genuine hospitality. This is our competitive advantage and our focus when we do this well we believe more people than ever will come.
Our third priority is focused on development and how we grow from here, we believe our total addressable market globally continues to expand.
We opened 36 domestic company operated shacks in 2022.
In the fourth quarter alone, we opened 22 restaurants.
And a balance of formats, including core shacks small formats and five new drivers while many of these shacks open just weeks and in some cases just days before the quarter ended.
We're encouraged with the early results as they settle into 2023.
This coming year, we expect to open about 40 shacks with roughly six of them in this first quarter, having just opened a new drive thru in Dublin, Ohio and of course Shack right here in New York City in Brooklyn's bedside neighborhood.
Currently we have 24 shacks under construction.
On drive through specifically with 12 open today, we're encouraged by the initial reads and are targeting to nearly double that with our plans to open 10 to 15 more drive throughs. This year. We know there's still much we have to learn and much to prove out as we've been rolling out a few different designs as well as kitchen flows. So that we can optimize this investment for learning quickly.
And evolving the model for the long run.
Our licensed Shack business is the other key part of our development strategy in 2022 our partners opened 33 licensed shacks 20 of those in Asia three in the Middle East region, two in Mexico, and eight in the United States in our airports travel plazas and event venues.
This is an asset light way to grow our profitability over the long term speaks to the strength of our brand, which resonates globally across geographies and cultures.
Few if any restaurant companies at our scale have successfully grown with this level of excitement and brand acceptance around the globe.
You'll see us continue to build in existing markets, while adding new markets in the future. This year, we expect our partners to open between 25 to 30 more license locations across formats and regions with six to seven more in the first quarter.
Nearly half of our openings, we expect to be in Asia, including our launch in Thailand later this spring.
Also unlock another format type as we partner with the Atlantis in the Bahamas to open our first ever resort Hotel Shack.
We will also test our first drive thru and our licensed business with our partners all Shire in Dubai.
Lastly, we're spending a lot of time, considering new countries and territories and formats. We can grow this critical part of the shack opportunity for the long term.
Our license business and partners remains incredibly dynamic profitable and powerful way to keep expanding our presence in brands across the globe.
Our fourth priority is improving our overall company profitability with particular focus on our domestic company operated shacks. We know the dynamics of the last few years have impacted our historical margin profile, we're focusing our work to rebuild over the long term, we're committed to improving profitability by driving sales emphasizing our own.
Fire margin channels, finding Cogs labor and opex efficiencies, improving off premise profitability and utilizing strategic menu pricing, we showed margin progression in the fourth quarter and we have the right plan in place.
Leading with sales our priority has to be to retain our winning team we have to keep improving staffing levels. So that we can optimize total hours and sales potential.
Big opportunity, especially in newer markets is around building our brand strength we.
<unk> been testing various brand campaigns across media channels investing in targeted performance marketing and more than ever building community marketing with our regional leaders participating in and supporting more local events than ever on.
On the expense side, we've got an intense focus on every line of the P&L in our shacks. We're building teams to collaborate with our operators designers and suppliers to go after the profitability measures. We can tackle this year Kt will talk more about these efforts in a bit.
Finally, as we build an enduring company, we are committed to investing with discipline.
We see growth opportunities with a strong return potential across development digital and our business overall.
The last few years, we made the critical decision to fortress, our balance sheet with a historically low cap cost of capital.
That's provided us with the dry powder to grow in this current environment and we're committed to doing it with discipline while remaining aggressive.
You'll see us continue to deploy capital towards strong returns in four main areas.
Building shacks updating our current shacks investing in our digital infrastructure and structuring our home office capabilities to support our restaurants.
We have historically outperformed our long term au V targets, while delivering strong cash on cash returns.
Over the last few years with profitability under pressure net build costs elevated on average our new shacks generated returns just below long term targets building back our shack level op profit margin as well as addressing higher build cost is the work to be done to bring us back to our longer term return targets.
Jack Lazar twenty-two average net build cost is tracking around $2 4 million.
Inflationary pressures in the building and construction market worked against US last year, but we're also investing in a more expensive mix of shacks with drive thru is included in.
In 2023, we expect a similar build and cosmetics as we target 10 to 15 drive thru shacks.
We're addressing cost savings, where we can for the class of 'twenty three and beyond we've cast our operational and construction design teams to work towards bringing down long term average cost to build for all formats.
We're going to keep building shacks to win with focused and scalable designs and formats, where we know we can drive strong returns over the long term.
Got the right plan and team in place for 'twenty, three and we'll keep you posted on progress as we go with that I'll hand, it off to Katie to share more about the details of the quarter and expectations looking forward.
Great. Thank you and good morning, we ended the year on an optimistic note with increased momentum and evidence that our strategic priorities are the right ones to help build back our profitability and grow our long term opportunity. We showed strong progress in the quarter with year over year measure it that high teens revenue growth. She wanted it in 40 basis points of restaurant margin.
Spansion and over 55% growth in adjusted EBITDA, we executed on all of this despite facing labor availability pressures supply chain challenges high single digit food and paper inflation and many other pressures across our pan out well.
We delivered fourth quarter total revenue of $238 5 million up 17.4% year over year Shack sales also grew 17.4% to $229 9 million and licensing revenue grew 16.6% to $8 6 million, we generated shack level operating profit margin of 18.
Quaint eight per cent and grill adjusted EBITDA at $219.3 million.
For the full year 2022, including the severe impacts that amacrinal had on our sales and our profitability earlier in the year. We grew adjusted EBITDA by 25, 8% to $75 million.
In the fourth quarter, we reached $364 1 million in system wide sales and for the full year, we exceeded $1.4 billion with 436 total shacks, including 69, New shacks opened in 2022 in the U S and abroad.
In October we raised our menu prices by mid to high single digits. This is across a varied strategy at between 2% to 10% across price tiers. This was needed to help address high single digit food and paper inflation and the continued investments we're making in our team members with this we expect to maintain a blended high single digit price across our channels in the first half of the year.
2023, and will roll off the March 2022 price increase of three 5% menu and an additional 5% in third party delivery premiums.
In the fourth quarter, we generated $76000 in average weekly sales upfront that'd be 3000 in the third quarter. This was supported by price increases and in check traffic.
We grew same shack sales by five 1% in first half 2021 our traffic was down 90 basis points versus the prior year as we lapped a particularly strong for Q21 traffic is up 18%.
And check traffic was positive as gas returning to more normal patterns price mix of 6% in the quarter with the benefit of higher menu prices, partially offset by a mix headwind due to stronger and check performance that skews to more single order for a protein orders.
We remain encouraged by the digital frequency and spend measures even as more customers are going back to omni channel experiences and coming back into our shacks in the third and the fourth quarter, 36% of Shack sales were from our digital channels have App web and third party delivery and since March 2020, we have obtained $4 8 million digital first time correct.
There is in our App and web channels.
This is one reason we are focused on refining and optimizing all of our channels leveraging many of our existing investments and our App Wap and kiosk to drive acquisition frequency and converging. An example here is our digital work inside the shacks, where we are on target to roll out kiosks nearly all domestic company operated shacks by the end of the year.
He asked remains our highest margin channel and guests spend more on kiosk orders than our traditional in check orders.
And the fourth quarter urban same shack sales grew 8%. This was a function of positive price mix and traffic growth.
Suburban same shack sales grew 3% in the quarter driven by positive price mix and modest traffic declines year over year.
Into January return to work and overall mobility trends remained strong and in some instances encrypt our fourth quarter openings also performed well we generated AWS at $72000 in same shack sales at 17% driven by increases in traffic and price now.
Well I'm, a crown had the largest impact on our sales in January 'twenty, two our sales recover throughout the first quarter. So we expect our comp to moderate throughout the remainder of the first quarter.
In addition, we expect a number of the strong fourth quarter openings to see sales come back to more normalized levels in the coming months.
Licensing sales in the fourth quarter were $134 1 million up 13% year over year and licensing revenue was $8 6 million strong holiday demand and travel benefited our licensed shacks. However license sales saw a significant impact from Covid crushers in China and pressures from the stronger U S dollar.
In 2022, our licensed partners opened 33, new shacks, including 13 in the fourth quarter, bringing our net licensed shack count to 182 at the end of the year. Our licensed shack expansion is off to a strong start this year with six licensed shack openings quarter to date and we expect to open a total of 25 to 30 licensed shacks in <unk>.
23.
Fourth quarter Shack level operating profit was $43 2 million or 18, 8% of shack sales 240 basis points higher versus last year, despite inflationary pressures across our shack P&L.
We achieved this with higher menu prices strong sales performance labor efficiencies and positive channel mix.
Our margin performance in the quarter really layers up to the four point plan, we have in place to show more sustained improvement in our profitability. So first it's about building back sales with a priority on our own channels as we are more profitable there and can better communicate with those guests.
We are highly focused on driving sales in our shacks, while at the same time building our digital guests that practice support a true omnichannel guest experience.
Second it's on labor efficiencies and our kiosk rollout here is one way to better utilize labor in our shacks. We continue to be encouraged by the strong returns on our investment for this strategy and how it allows our team members to better service, our guest and manage through staffing pressures in select markets.
Third, we're making progress on or off premise profitability with more discipline on packaging standards for off premise orders as well as passing along a portion of the higher cost of delivery to our guests.
And then last we're taking a strategic approach to menu pricing and we're pleased with the initial result of our October menu price raise however, there is uncertainty around the inflation outlook, while we're not yet seeing beef inflation. Its certainly something that has been widely discussed we hope that in 2023, we see food and paper inflation at the lower end or even below our current expectation yes.
We do not we may take some targeted incremental pricing later this year to help protect our profitability.
These four points are really the largest buckets, which are moving the needle and how we expect to build back our margins in the coming years, but we're really looking at all line items here for efficiencies.
And while we're pleased with our shack level operating profit margin progression in the fourth quarter, we know full well not every quarter will show linear improvement. However, we believe addressing our profitability is one of the right priorities for home office and our operators.
In the fourth quarter food and paper costs were $67 9 million or 29, 5% of shack sales down 140 basis points quarter over quarter, and down 150 basis points year over year with benefits driven by menu price offset by high single digit food and paper inflation beef costs declined by low double digit percent year over year.
However, the cost of many other items in her basket were up sharply led by Gary and fried both of which were up over 25% in the quarter packaging was also up about 15% year over year.
Labor and related expenses were 660, or $66 4 million or 28, 9% of shack sales down from 29, 6% in the fourth quarter of 2021, and down 50 basis points quarter over quarter, well staffing levels improved throughout the quarter, we still have an opportunity for further improvement in certain shacks as well as increasing our overall throughput.
Inefficiency with many of these newly hired team members.
Other operating expenses were $34 $1 million or 14, 8% of shack sales down 10 basis points from the fourth quarter of 2021 benefiting from a lower delivery sales mix, we continue to face inflationary pressures and aspects needed to operate are in check business, including energy repair and maintenance costs and cost to maintain a dining room.
But we are focused on managing these expenses as much as possible.
Occupancy and related expenses were $18 2 million or seven 9% of shack sales down 20 basis points from the fourth quarter with this really driven by sales leverage.
G&A was $31 8 million or 13, 3% of total revenue up from 11, 7% of total revenue in the prior quarter driven by investments needed to support our growth across marketing operations and technology.
We ended 2022 with $112 million in G&A adjusted for legal settlements up over 30% year over year.
Preopening costs were $6 5 million in the quarter as we opened 22, new shacks depreciation was $19 $2 million on a GAAP basis in the quarter, we reported a pretax loss of $4 3 million and a tax expense of $6 8 million.
On an adjusted pro forma basis, we reported a pretax loss of $4 2 million and a tax benefit of $1 6 million, excluding the tax impact of stock based compensation, our adjusted pro forma tax rate in the fourth quarter was 38, 5%. These adjustments can be found on page 32 of the shareholder letter.
We realized a net loss attributable to shake Shack, Inc of $10.7 million or a negative <unk> 2027 cents per share on an adjusted pro forma basis, we reported a net loss of $2.6 million or a negative six cents per fully exchanged and diluted share.
Finally, our balance sheet is strong and we ended the quarter with $311 2 million in cash and cash equivalents and marketable securities.
Now onto guidance for the first quarter and full year 2023 that does not assume any material changes in the macro macro economic conditions or further COVID-19 disruption for the first quarter stronger than expected January results and what we're seeing so far in February. This is inclusive of the performance from the recently opened shacks gives us confidence to raise our guide.
For shack sales to 232 million to 237 million and same shack sales to grow by high single digits percent year over year.
Well January results were far ahead of the range and just as a reminder, our compares will get sequentially harder posting mid February as the omicron impacts subsided.
I was going to be lapping the three 5% menu price and 5% delivery premium we took in March 2022 and we have no additional price is factored into our guidance today.
We're seeing strong performance in our domestic and international license business, including a rebound in China since letting the zero because of the policy and raise our guidance for the license revenue in the first quarter to $8, two 5 million to $8 $75 million, we cannot be certain that this strength will persist throughout the quarter and this guidance range does not assume any new COVID-19.
Closures or pressures.
So taken altogether, we now expect total revenue of 242 5 million to $245 $75 million growing about 18% to 21% year over year.
We guide first quarter shack level operating profit margin of 16% to 18% we're tracking towards the mid to the lower point of this range, primarily due to the pressures from the heavy opening calendar at the end of the fourth quarter. It typically takes several months for a new shack to reach normalized profitability as new teams and managers train and grow our fish.
Fees. However, we're pleased with the sales that we're seeing for this group and expect that this pressure will subside in the coming quarters and the first quarter. We're also planning for high single digit year over year inflation in food and paper costs with these pressures led by fries dairy and paper and packaging, we expect beef costs and that's the largest part of our Brac basket to decline.
And by mid single digits year over year, but this will still be up by a low single digits percent quarter over quarter.
The inflationary outlook remains uncertain and we do not contract on many of our key inputs, we expect mid to high single digit inflation pressures across our food and paper basket for 2023, we outline more details around our inflation expectations on page 10 of the shareholder letter.
We expect other operating expense as a percent of shack sales in the first quarter to be similar to the fourth quarter and to be impacted by changes in delivery mix and other variable drivers.
With the macro economic uncertainties, we face today are 2023, G&A guidance of 125 million to 130 million represents growth of 12% to 16% year over year.
Our plan reflects a disciplined approach towards spending while still affording us the ability to invest and grow our business well there are a number of unknowns that could impact our total revenue for the year. We believe this range is appropriate we're building towards leverage relative to our unit guidance that represent approximately 16% year over year growth for the company operated business and 14%.
16% for our license business.
We expect approximately $17 million of equity based compensation expense with about 15, and a half million N G N a.
We expect full year depreciation of $86 million to $91 million in preopening of $17 million to $19 million.
On tax we're not going to provide an adjusted pro forma tax rate guidance. At this time, however, we're expecting to realize a minimal tax benefit this year. Our overall tax rate will be impacted by a number of factors, including the level of our profitability tax credits state mix and other impacts. So thank you for your time and with that I'll turn it back to Randy.
Thanks, Katie just want to wrap things up and thank all of our teams for executing in 2022 and evolving for the work ahead. In 2023 were all squarely focused on our strategic plan, which begins with taking care of our team that's what fuels our great culture. We believe our results from the fourth quarter, showing what our focus and dedication can do to help drive.
Continued improvement in our business and longer term returns because we all seek out what the new normal looks like in a post pandemic 2023 we believe more than ever that people need places together, great food at the right price soared by warm and hospitable people and we'll look forward to sharing our white drop a burger with you soon at the Shack as always we hope you and your.
Your family stay safe and healthy with that operator. Please go ahead and open the call for questions.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Take our first question from the line of Lauren Silberman with Credit Suisse. Please go ahead.
Thank you very much because my first one on new classes shocked historically shocks has opened at high volumes at the honeymoon period and settle have you been seeing the same trend with your newer classes of shocks recognizing there's a lot of noise in there just trying to understand if you're getting to a stage, where there's lots of a honeymoon period.
Yeah. Thanks, Lauren is a great question, because that's obviously been such a big dynamic of both our comp and just in general the Big pop I think the answer is yes in a lot of places still and no in others. So generally the way we think about it is in a really mature market like let's say, New York City or Los Angeles or some of the plays where we have quite a few.
<unk> built out.
Generally you don't see the same like huge pop and then come down you just kind of start to see better better kind of run rate out of the gate and we've seen that kind of sticking but there's so many places that we still haven't gone even if it's a tangential.
Tangential part of a neighborhood, where we already are I'll give you. A example from last week, we just opened in Dublin, Ohio, right. We have a number of shacks in Ohio already but dublin's kind of far enough away that there's a lot of people had neighborhood, who were coming out in that first week or so to really check it out that'll probably level off over.
Time, so I think the way the best way to think about it when you think about our roughly 40 shacks. This year is if they are kind of new far enough neighborhoods <unk> launch markets. We generally will see that shake shack trend of a big pop that then settles over time and then we believe rises overtime, if it's something that is.
Mature market unlikely to see the same dynamic.
Very helpful. And then just a follow up on your commentary around opportunities adult costs can you expand on where you might see potential cost out just given the uniqueness of your sites are there opportunities for more standardized images or how you're thinking about that thank you definitely yeah. Thank you a lot of ways first of all.
We will see where the inflationary environment goes.
We're still living in a very highly elevated construction environment around the country and we know that everyone's experiencing that so that'll be something that the macro environment will will tell us where that heads hopefully we'll get some wins there.
On the proactive side of what we're doing with each of these formats, we're continuing to try to make them more standardized more temporal did.
Better prototypes in some cases, just kind of a leveling down the size of things drive through is probably the best example, right that first roughly 20 plus drive throughs I mean, we got out of the gate with a big investment doing kind of a little bit of everything so that we can learn what we like best now as we learn that we started design are.
Drive throughs for 'twenty, 'twenty, four and 'twenty 'twenty five we expect we can really start to templates is that a lot better and bring down some of those costs. The same is true for small formats. The same is true for our core shacks, which is mostly what we build so we're and we're also looking at different kinds of deals there right. We may employ a couple build to suit.
Type deals that are a lot lower construction costs.
Do some of those we may do some more small format to lower the average total and and it's really one of the most important focuses of the company right now.
And again, we were in this elevated environment, we don't expect to reap those rewards this year, but as we look ahead towards the long term and building back our return profile over time, we think we've got a lot of opportunity in how we build our restaurants design them and get more efficient for the long term.
Thank you very much.
Thank you well take next question from the line of Mike Tamas with Oppenheimer and co. Please go ahead.
Hi, Good morning, Thank you I know, you're not giving exact margin guidance for the full year in 'twenty.
With analysts' consensus has you guys expanding margins quite a bit versus 'twenty, two which would be pretty unique in the space. So I know you gave guidance from mid to high single digit Cogs Cogs inflation mid single digit labor inflation, but if you think about how you guys are modeling your business internally for sales and cost.
Sort of qualitatively think that you can expand margins in 'twenty three versus 22.
Thanks for the question you know, we haven't given guidance for the full year, how I would say about where our efforts are focused here. It really is to expand our margins again, not saying it's for a particular year, but we are building up to you know continue to build on the progression that we had in the fourth quarter and it's really a focus on for you know for key.
Task here, so one its on our sales and building back ourselves with a focus on driving those sales in our own channels, where we're most profitable kiosk sales are our most profitable across our entire mix, but you know in chocolate will take that to them and certainly what we saw you know us as being a big margin pressure to us kind of at the onset of the pandemic was a lot of our sale.
Moving to digital channels as they come back more in shack at the margin tailwind for us and just really investing overall them through marketing and other strategies to just grow brand awareness and continue to build build our sales overall as a company. So the second thing is on our strategic approach to menu pricing, which you know.
We've talked about before we are running you now expect to run about high single digits, our price throughout the first part of this year and you know we haven't talked about any new edition, you know potential to raise prices to offset inflationary pressures, but you know we are watching we are watching beef in particular, you know if that does start to pick up a little bit here you know.
Another price increase very small could be on the table and we're looking to be more efficient as well with labor and so its about you know building efficiencies with our current team members. We've hired a lot of people very recently investing to train and optimize our teams grow our hours, making sure. Our staffs are fully staff, our shacks are fully staffed and oh.
And until we can maximize sales and then you know again back to kiosk, it's about making sure that we're giving our operators tools that they can use to be just more efficient in the shacks.
And then and you know kind of the final our focus here is on or off premise profitability. So we do charge a premium through third party delivery, but we've done a lot of work also to help refine our standards or packaging on off premise orders Randy talked about they are packaging tests that we're gonna be trying out this year I'd really look there is another example of it.
The potential opportunity.
Okay. Thank you and then just wanted to follow up on the commentary about some of the new store designs and being more efficient with drive throughs.
I think Randy just mentioned in 'twenty, four and 'twenty five relative to the ones that are already on the ground. So when you think about like what are some of those big changes that we can expect to see in or are they more like guest facing or are they more sort of like back of house operations things.
There's a little bit of both it's really about how we build it even from the the skills in an hour right.
Everything from whether you use steel or wood construction, how our windows and things work some of those things the guest will note, but in a positive way, we think and it's really about us saying, okay. Well. We built. These this first group of 20, roughly with some varied kitchen designs some varied flow how.
How do how many.
Lanes do we need and how will the tech work all of those things, we really needed to as I've said in previous calls the optimized for learning we wanted to spend there now as we get in the ground and we understand how these things work.
You know, we got to make sure that we can standardize more and more elements of that but still keeping the unique and powerful aspects that makes shake shack I'm, we're pretty confident that.
When you go to a shake Shack drive through you go through that and you say this is really cool is different this makes sense to me and I understand the continued elevated.
Proposition that shake shack always brings in our design.
We're also learning the right size right. When you learn we've noted before it depends on the drive thru, but roughly half of our sales that drive through or in the shack, we really like that so we got to figure out how many seats do we need inside and out what type of atmosphere, We building and we're clearly building shake shack drive to to be.
A community gathering place as well.
We are not just building a drive around and leave only option at this stage, we may try that someday, but today, we're focused on kind of allowing our guests to choose whatever channel they really like.
And we believe that's part of it so look a lot of work to do on that I think.
We'll have lots of different versions that were going to test and learn from but you know we're really targeting the efficiency of our of our builds as we look forward.
Awesome. Thank you.
Okay.
Thank you we'll take next question from the line of Sharon Zackfia with William Blair. Please go ahead.
Hi, good morning.
I apologize if you talked about this my cell phone dropped in the middle of your comments, but I think I heard you say Katie that your staff in is getting better, but still I think kind of fully optimal can you give any kind of framework around like where you are relative to ideal staffing maybe currently versus the fourth quarter, you know where you are on.
Hours of operation across all channels and then on the drive through I'm, just curious whether youre seeing that bring in new customers or if it's really more a function of increasing the accessibility and the frequency of your existing guy. Thank you.
Thanks, Sharon on people, it's certainly gotten better over the last few months, but it's still hard.
Let's be clear we wish we were fully staffed everywhere. We're not there are some restaurants that feel great. All the time and there are some that it's still really hard to optimize our teams and feel fully staffed but we feel certainly a heck of a lot better than we did 12 months ago. When it was probably at its most challenging environment right now.
We're feeling better than we were three months ago, but we still have work to do and I think a combination of all the things we do for our people raising wages now including tips.
Added benefits development opportunities all of the things we're doing to really highlight this as a great career choice for people.
It's working and it's still tough so well.
On hours, you know, we've been able to expand some of that over this over the fourth quarter are there some of that that we still have opportunity in certain shacks and somewhere we wanted decided if we can push a little bit and a little bit of that is going to be how the world continues to move around and where we think that optimal hours can really be for a shack. So we think theres still.
Some opportunity there.
And on drive thru guests I think the I think we're learning is the answer we are seeing our omnichannel use I think the what we see as the most valuable shake shack guests is an omnichannel guests that uses us in all channels that drive through that that is included as well and what we're trying to figure out here is can we do.
Get people to come more often because of the convenience because of it.
We're getting pretty high experience scores from people, who go through the drive through and we really like what we see there so little early to say on any any real data there, but we think it opens up new areas. It opens up the total addressable market for our real estate team and new opportunities to meet guests in a way where they want to be met.
Yeah.
Yeah.
Thank you Sharon do you have any further questions have a fall off.
And I think he is.
Thank you we take next question from the lineup Jake Bartlett with twist Securities. Please go ahead.
Great. Thanks for taking the question.
My first one these are follow ups on the questions about margins, but my first is.
There were some some kind of abnormal or elevated costs in 'twenty, two like repair and maintenance like the teeny as you kind of exit existing staff had to go help open stores will stick around so the question is how much in 'twenty. Two was abnormal that we can expect maybe it should go away. So we can provide a boost in 'twenty three and then are you all.
So just bigger picture on the margin side it sounds like you're very focused on building margins.
But I'm wondering whether there's some bigger new initiatives going on you know we have companies that are 50 years old and they're still getting 30 basis points of savings here and there are others are doing you know time motion studies really taking a look at.
Operations and whether it can be really materially improved so I'm wondering whether that's going on whether you.
Thinking thinking kind of big as well as you think about building up margins.
Great. Yeah. So we did last quarter, we called out pressures around a couple of items that were impacting us. So first of all it was a higher R&M and equipment availability has impacted our ability to open up restaurants, but also is impacting how quickly we can replace equipment inside of their restaurants, and we're having to service it.
We don't normally might replace it so that was a little bit of an overhang them higher teeny expenses to help support team members and higher utilities cost you know the good news is that our teams did a good job managing that in the fourth quarter, but it was still higher than average levels.
And you know, where we're continuing to focus on ways to bring that down overall teeny you know to support shack opening that's also going to be a function of the number of shacks that we opened up in a specific quarter, especially if there's overlap in certain market, so kind of aiming towards having a more smoothed out development year would help on.
That side and then on utility is just really kind of the broader commodity landscape as it's a key driver on that.
But to your question about you know if we have any specific plans in place I would say, yes, I'm you know and we've tried to outline those in in the shareholder letter and on the call. We are taking a very you know tape.
Tape across you know driving sales and labor efficiencies training our team members and all of that is definitely part of the focus here.
Yeah.
Okay.
Yeah, I guess on that point.
The efficiencies I mean, I'm wondering whether there's a whether you're looking at doing things really materially different like a real concerted effort to Ben.
Obviously growing faster young concepts.
And I would think Theres a lot of opportunity you know Q2, maybe just do things more efficiently in the kitchen, but.
But I'm wondering whether that's a concerted effort.
So that's just one question there the other is on the food cost outlook can you just want a better understand.
Most investors.
We're more focused on beef as being a risk Easter actually on your outlook pretty good you know flat to mid single digits. You had other things are driving the inflation that you're seeing so what is the visibility on those other items I'm trying to figure out what the big pieces that we should be looking at to kind of gauge whether you're.
On track to hit the guidance or not or whether it's.
Gary or poultry or any other big items, we should be really tracking there.
Yeah. So yeah, we had a pretty inflationary year for beef and in general it's been kind of a pressure for us for a while so you know calling for a flat to up mid single digit inflation on that side that does reflect a pick up in in beef prices overall for the year and.
Certainly we'll have to see how how the year plays out and if it ends up being more extreme or less extreme than that but yeah. We are factoring in a degree of beef inflation our outlook.
And then the other thing to keep an eye on it is chicken. It is Gerry it's fries prior oil like you know we've called out a lot of these you know big drivers here of our Cogs that are seeing a pretty material pickups here.
And we don't contract and a lot of it and so you know that that would be kind of how do we think about the inflationary young cadence for the year.
Thank you very much.
Yeah.
Thank you we take next question from the lineup Peter salary with B T. I G. Please go ahead.
Great. Thanks for taking my question Randy I think you mentioned this a couple of times on the no tipping that's been implemented can you talk about the consumer response to the tipping you know maybe parsing out urban versus suburban or just how often you're seeing consumers actually tip the employees.
Thanks, Peter Yeah, we're not gonna break out any of the urban suburban or or data on that other than to say since the beginning of shake Shack, you know 20 years ago people of <unk>.
Asked us if they could add a little extra something for our team and we always said no.
And this year, we've said, yes, and I think the beauty of the way we've done it is it's not in your face we don't start with this 20, 25% expectation like many restaurants do and you you have this kind of moment as a consumer where you're like whoa 2021 and so that's a lot.
We make it very.
On your side and if you would like to do that great and we're happy to see how many people are doing it and there's a lot of people, who don't and that's cool to.
This is really an optionality feature that if you really want to take care of our team and feel like it and you want to give a little something.
Buck or two or 10% or whatever.
That can work and it's it's making a material impact for our team you know in some cases, it's two $3 more per hour that our teams can make thanks to a percentage of people who are who are tipping. So we're hopeful that that's a continued strategy that will help us.
Find the right overall wages for our team to take care of them and hopefully have people be retained and and allow our guests to feel good about it. It's like we always says you. We all experienced this when you go to a coffee shop or anything else. If you don't want to tip, that's totally cool.
We appreciate that and we're never going to have a pressure filled environments trying to make that work it should feel great to both sides of the equation.
Thank you that was very helpful. Just on staying on labor for a second Kitty isn't the last time. We spoke you had mentioned that it was maybe a little bit more challenging too.
Stop some of the suburban versus urban lately.
Have you guys seen any improvement on that front.
Just the stuff in between those two are suburban and urban.
Yeah, I mean, we are still seeing it as Randy talked about Theres still an opportunity to regain our sales here from focusing on staffing and we had some success in some suburban shacks in the quarter and really kind of exiting the quarter. You know it started to get on a stronger footing with sun, but yeah, theres still opportunity in others and a lot of the trial.
Tim you talked about still holds.
Thank you very much.
Yeah.
Thank you we take next question from the line of Andrew Charles with Cowen and company. Please go ahead.
Great. Thank you when do you guys see open minded about taking more pricing in 2023 as you mentioned would be prices that you'll potentially can revert higher later this year.
Talk about what gives you confidence that you guys have further pricing power just given the well documented trade down across the fast casual industry in quick service.
Yeah, I think it's something we got to be cautious about and we're watching very closely as every company is.
We've we've probably taken less prices than.
Many others certainly of our of our competitors in fast casual and even fast food as a percentage over this last few years I think we've been more cautious and we want to remain that way that that's true to every way we thought about shake shack since the beginning of time here.
Yet we have to make sure we protect our margins. So again sitting here today in February we have no plan to.
To take new price, where we'll look at something you know as we see how inflationary pressures do or do not continue to persist at high levels, we expect they're going to persist at some level here. This year, but I don't think anybody knows and we got to make sure that we're providing the great value that we always have that we also got a lean into all the strategic.
Planning that we talked about today, making sure we're executing on our operations and hospitality and the premium nature of shake Shack that provides good value. So it'll be something we watch I think if we look at the evidence so far we feel pretty good about the trends that we see generally in our average order values are.
Items per check in the kind of things that we track to look at how people are looking at our value scores overall been very consistent.
But I think it's everyone's living in a pressured inflationary environment and we gotta be there who are we not going to be we're not going to be massive discounting fast food giant.
Things like that we're going to lean into ingredients I mean, we're literally.
Right now running a luxury ingredient of white truffle and when you think about our strategy of Who's Shake Shack is we want to capture that trade down and that person, who says you know what for 999 or less I can get a white truffle Burger that I could never get at any fast food type restaurant.
While that's an elevated experience.
For that style is a great value and continues to position us as I think the leader in the data affordable opportunity to just have something great. So that's that's who we intend to continue to be and we will see how the year goes and we'll let you know if we change our mind on price anytime soon.
Okay.
Now a reminder, you know we over index to higher income consumers.
And we're generally seeing pretty good trends from that group as well. So it's just all sorts of things to keep in mind.
That's helpful and then Katy beat guidance for the year flat to mid single digit guidance. So obviously, a very wide range just anticipating uncertain backdrop.
Curious, though.
Mentioned that you guys aren't seeing any inflation, yet or any inflation on the come but can you just help us within the guidance fair to say that conversations with vendors would suggest that you guys would be closer to flat in that mid single digit perhaps be just conservative conservatism baked in just going to just understand the gist of it.
For the year.
I mean, we yeah, just as you look at the difference between the first quarter and the full year, we're guiding for the first quarter to be down mid single digits. So just that alone would just imply that we are baked into that guidance range as a pick up and you know N beef prices in the back half of the year.
We again don't contract I'm beef, we are both talking to our vendors and hearing what they're saying and also triangulate that with broader industry I'm an analyst expectations. So you know there is a wider range of uncertainty around that as we definitely been clear about.
Yeah.
That's helpful. Thanks, guys.
Yeah.
Thank you we take next question from the line of David Tarantino with Baird. Please go ahead.
Hi, Good morning, Katie I had a question about capex.
I think the the final number for.
2022 came in quite above what we would've been anticipating at the beginning of the year. So I was wondering if you could maybe breakdown where some of the increases came from.
And and then I have a follow up.
Sure I mean, when you boil it down it's really to you know we are much more pad development calendar and then we were last year until we just talked about we had 24 shacks right now under construction and at the end of last year, we had a number more than we opened up a lot in the quarter. So I think what you're seeing on that side.
It's just us having a lot more investment in our pipeline than we were at this time last year. We're also have some pick up in investments in M. I T and in digital but that the big chunk of that is is really around that and then you know we also had some added investments as we rolled out kiosk to.
Running out yesterday, a larger part of our shacks.
Great and then I guess my follow up is as you.
You know if you're willing is that a good number to maybe think about going forward or will it come down given that some of that investment might have been temporary and then I guess bigger picture as you think about how the business scales over the next several years do you have a year in mind, where you might.
Get a kind of breakeven on free cash flow or a positive on free cash flow.
Yeah, we're not going to be talking about you know any any guidance on that point, because I didn't give anything.
But what we are focused on it building.
Down our build costs overall for our shacks.
And really having a disciplined approach to capital investments into G&A and that you know inclusive of also building back our profitability you know we feel like we're on a really good path here.
Great. Thank you.
Thank you.
Thank you it would take next question from the lineup Jim Sanderson with Northcoast Research. Please go ahead.
Hey, Thanks for the question I wanted to talk a little bit more about store profit margin longer term. If you can maybe give us your thoughts on how you look at flow through profit margin as you make these improvements, especially in labor, adding some technology into the store with the kiosks. So maybe there's an opportunity to see.
A basis point improvement in store margin going forward as you drive stronger AUR is let's say over the next year or two just how we should look at that as far as flow through profit margin.
I think that's definitely a very good way to be looking at it you know certainly when we're building up our our slap you know initiatives to bring back our profitability. You know that is you know, we we start with sales and they start with sales in our own channel, but really driving sales overall for exactly. This point you know theres going to be a number of factors, though that impact that I'm, including them.
Our overall channel next so nothing really to share at this point, but we do believe that sales will will be a strong contributor to our overall profitability improvement.
Just a quick follow up any thoughts on how you are maybe budgeted labor hours for comp stores. How that's changing are you is it starting to lag sales growth or anything like that.
Well I think it's really just budget to meet demand how busy we think we can be I think we're getting better than ever at the technology we use.
The way that we both take care of our team and budget for trying to meet peak demand and try not to be overstaffed. During the lighter times of the day. So that's that's an ongoing journey, Jim there always will be.
But I don't think there's any real new data to say other than you know I.
I think the team did a really nice job in the fourth quarter will be pressured a little bit in the first quarter as we named with 22, New shacks are really just opened heading into that so they will probably be tighter as we talked about in the first quarter and we've got to we've got to do the work to level all of that out as we go through 2020.
Alright, Thank you very much.
Thank you we take next question from the line of Brown caught up or leave with J P. Morgan. Please go ahead.
Hey, guys. Thanks for squeezing me in I'm just.
Wanted to focus a little bit more on the margin side here or is that a significant gap between your highest and the lowest margin stores on other than sales what are the what are the things that the higher margin stores are doing the lower margin stores odd ideally like.
Can be shared with them on is like something like a manager comp.
Changes can be more focused on on this addressable margin opportunities between the higher on the lot much in stores.
That's a great question you know, we do have a range of margin performance within our base.
And you know if I was to kind of classify like where are our strongest shacks as probably you know the ones that have the highest sales we have you know.
Great group of shacks that have very very strong sales and when you have great sales you can leverage your rent you can leverage your occupancy and so you know those tend to be you know the best among the best performers.
You can also you know really great get great labor levels, as well and they can kind of leverage a lot of the fixed costs, you know, where we have opportunity to improve and where we've been focused is and you know the shacks that have a little bit of lower sales and how we can kind of bring those back up.
And you know that that's kind of a lot of the work that's been going on right now kiosk as one example, though broadly of a strategy that we're using to help kind of improved labor throughput overall, so instead of having you know two to three maybe four people were taking orders depending on how busy that the shaq is you were able to then redeploy that labor.
And have people just go to the kiosk and when they come in the shack. So that's how I would think about it. There's obviously you know you know areas, where you know certain shacks can improve and I you know areas, where other shacks are getting exceptionally well, but if you're kind of looking at the biggest driver overall it it's likely sales.
Is that like anything on the manager comp side at this point that you can tweak or adjust addressed a part of this.
Well I think on the manager comp side, we first of all we have competitive pay which is what's most important so that we can have a solid retention, which we do at our manager level and GM level, we feel good about that but you're right to say that managers are highly incentivized on their bonuses by month and by quarter to hit.
Their targets and those targets vary based on what kind of shack, you're in we set aggressive targets, we constantly reset them.
And we feel really good about people's viewpoint into what they need to do to earn their bonus. Our Gms are also shareholders right all of our Gms get a $10000 per year Shake Shack stock Grant and we feel really good about that and that incentivize them to act like entrepreneurs want to see this stay for the long term.
<unk> and and want to see the company succeed overall, so we feel good like we have like we have the right compensation mindset at the shack level.
Yeah.
Thanks for the color on that trying to and just like to follow up on a G on the cyclical the marketing specifically what.
What what kind of spend already planning for next year and like going forward like how can that be how would it look like.
Well, we haven't we don't break it out in the G&A, but when you look at marketing I noted in some of my comments, we continue to invest deeply in a few main categories targeted performance marketing when it makes sense and where the <unk>.
Cost to acquire and and get guess is is really a low cost we think we'd do that real well.
We're spending more money and time thinking about as we scale and grow.
Probably big enough that you would see a you know mass media campaign at this stage.
But at some point, we will get there too, but so we're investing in trials of that sort of.
Localized brand media campaign in lots of different media channels.
And then localized marketing as our community managers and our regional marketing leaders and obsolete or is do various things to support their local communities. So those three buckets are where you will see the main marketing spend into this year, we feel really good about the budget. We have at the scale that we have we've always had a brand that can lead.
For us and we've got to keep ramping up that investment over the coming years, as we scale and get to a point, where we have more shack doors to take in those sales to benefit from some of those marketing efforts.
Understood. Thanks for the color guys I appreciate it.
Thank you we take the last question from Atlanta, Brian Harbor with Morgan Stanley . Please go ahead.
Yes. Thank you good morning.
I just wanted to ask about the mobile App first maybe and.
If you're still seeing kind of increasing usage of mobile ordering.
What that looks like as a as a percent of sales today and I would think that that's a fairly attractive margin order and it probably kind of helps you with throughput. So how does kind of leaning into the mobile out factor into you know some of the margin improvement that you're targeting.
Yeah definitely leaning into it continue I have for the last few years quite a bit. We also feel like we've got a lot of that investment in there right now and now it's about continuing to just improve pieces of the experience. So that it's consistent reliable and something we can rely on all day, we're not going to break out the numbers.
We don't break out the difference between that and our third party and all of the web channels everything we do.
But we are really proud of the overall digital business, we do things like.
Drive engagement and downloads when we launched our white truffle menu last week, we launched that in the App only we also have done a little bit more campaign of delivery through our app are.
What are the margins on that are strong comparatively to straight third party. So theres a lot of ways that we're continuing to focus on the App, We love it. It's a significant part of our business, we see solid frequency usage, there and you'll see us continue to invest.
Okay, great Thanks and.
On the suburban stores.
Obviously, you've seen those moderate a little bit from a same store sales perspective, but maybe talk about you know what's kind of key to continuing to drive those sales you know are those better staffed or they were staffed you know what else could kind of help drive some of the suburban stores.
Yeah, Brian Hi, So I would say you know we continue to do better at staffing in our urban markets and in our suburban and we see potential to recapture some sales and suburban markets just due to better staffing levels. And then also you know there's a couple of other dynamics really in suburban just to be mindful of.
So first of all you know some of our suburban locations are in malls or around malls are you know near outlet centers and whatnot and so you know ebbs and flows of consumer behavior of going to malls are not going to malls are going to outlet centers, they're not going to outlet centers that can kind of swing that around them and then just you know frankly I looked.
These are suburban shacks massively outperformed our urban shacks around COVID-19 and so yeah, there's likely to be a little bit of a shift as you know people go back to three days a week and the cities are four days a week and the city is however that land.
You know, we're expecting to see a little bit of a share shift you know kind of between suburban and urban them around the fringes, but these restaurants you know, we're we're really pleased with how they're performing and continuing to hold on their same store sales strength, even as urban recovers.
Thank you.
Thank you.
The gentleman, we have reached the end of the question and answer session and I'd like to turn the floor back over to Randy go Realty CEO for closing remarks over to you Sir.
Thanks, So much everybody really appreciate your time this morning, and look forward to see you soon take care.
Yeah.
Thank you ladies and gentlemen. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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