Q1 2023 Shake Shack Inc. Earnings Call
Speaker 2: Greetings, and welcome to the Shake Shack first quarter 2023 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. If anyone should require operator assistance during the conference, please press...
Speaker 2: star zero on your telephone keypad.
Speaker 2: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Annalee Luggett, Director of Investor Relations and FP&A. Thank you. You may begin.
Speaker 3: Thank you and good morning everyone. Joining me for Shake Shack's conference call is our CEO Randy Garutti 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.
Speaker 3: prepared in accordance with GAAP. Reconciliation to comparable GAAP measures are available in our earnings release in the financial details section of our 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 .
Speaker 3: called on February 23, 2023. Any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change. By now, you should have access to our first-quarter 2023 shareholder letter, which can be found at investor.shakeshack.com.
Speaker 4: in the quarterly results section or as an exhibit to our 8k for the quarter. I will now turn the call over to Randy. Thanks Annalee and good morning everyone. 2023 is off to a strong start with first quarter results ahead of our expectations as we grew sales.
Speaker 4: expanded margins, and remain disciplined on expenses across the company, including G&A and CapEx investments, as we execute against our strategic priorities. We generated total revenue of $253 million, up 25%.
Speaker 4: It averaged weekly sales of 73,000 up by more than 7% year over year. System-wide sales grew 28% year over year to nearly 395 million as our licensed business globally posted our strongest quarter ever.
Speaker 4: Same shack sales were up 10.3% with positive traffic of 4.8%.
Speaker 4: And as we've shared the team has maintained an intense focus on growing profitability. We executed on that goal to bring restaurant margins up to 18.3 percent, a 310 basis point improvement over the last year. We opened six company operated and seven licensed shacks in the quarter. We have 25 shacks currently under construction on our way to opening about 40 new company operated shacks.
Speaker 4: Ape rising to 77,000. Same Shaq stailed about 4% and tracking well towards increasing our Shaq level margins back above 20%, which Katie will talk more about in a bit. Now I want to provide an update on how we're executing our strategic plan.
Speaker 4: We're really proud of the team's progress in each of our priority areas. First, we're focused on recruiting, rewarding, and retaining a winning team. It's been a challenging few years for staffing in our industry, and this quarter our team showed solid progress.
Speaker 4: We believe the macro hiring environment while still demanding has begun to improve. With that backdrop and the new tactics of our people team, we've improved application flow, turnover and retention since last year. Our increased pay, benefits and opportunities for leadership development at all levels are resonating with our teams.
Speaker 4: There's no question this will translate to better performance overall.
Speaker 4: Each of these metrics contributes to better throughput, optimizing sales, and increasing our operating profit while building a bench of talented leaders to achieve our growth goals and provide real advancement for the lives of our team members. Our work here is never done and we plan to double down on these efforts to expand on this improvement.
Speaker 4: Our second priority is our relentless focus on the guest experience.
Speaker 4: With the people and improvements I just mentioned as a strong foundation, we can better execute our core operations focus, menu strategy and digital tools. This quarter we captured strong performance and guest satisfaction with our premium white truffle menu.
Speaker 4: At our Innovation Kitchen and throughout our supply chain, we are constantly testing new and exciting menu items for our guests that highlight our commitment to premium ingredients and the kind of menu items that only happen at Shake Shack.
Speaker 4: We have a strong line up through the remainder of the year. We're continuing on a path of leading with innovative culinary offerings that use premium greens to drive frequency and new guests.
Speaker 4: This week we launched our new Veggie Shack Nationwide to delicious only at Shake Shack burger patty packed with real food full of mushrooms, sweet potatoes, carrots, farrow, quinoa.
Speaker 4: topped with American cheese, crispy onions, pickles, and shack sauce.
Speaker 4: We also launched our non-dairy frozen custard shake nationally.
Speaker 4: In addition to our long time guest favorite Trumberger, we believe these options can target current guest frequency and capture new guests over the long term.
Speaker 4: This summer, on top of the success of our premium lemonade category, we'll be launching caffeinated Shaq lemonades for those guests looking for our classic lemonades with an extra zip.
Speaker 4: Stay tuned for more to come this year.
Speaker 4: And just one more fun brand note. Our team continues to execute dynamic chef collaborations, regional marketing programs in our local communities, and attract valuable national media attention.
Speaker 4: Last month we teamed up with Universal Studios as they took over our Brooklyn Shack for the launch of the Super Mario Brothers movie premiere. The event was MCD by Chance the Rapper and helped kick off the extraordinary success of the movie.
Speaker 4: The team continues to target national media partnerships as we look to grow our brand and footprint. The team continues to target national media partnerships as we look to grow our brand
Speaker 4: Third, we're executing on a targeted development strategy for growth. As we've discussed, and you're seeing around the industry, persistent inflation in construction costs, permit delays, and equipment availability continue to impact openings and our near-term returns.
Speaker 4: But the team is making significant progress on accelerating pipeline, prototype design, and new shack openings. Year to date, we've opened nine shack with strong sites in Walnut Creek, Portland, Oregon, Jersey, City, and more. I want to take some time today to share some of the work the team is doing to improve our returns on shack builds over the long term.
Speaker 4: This year we expect to open up 15 drive-thru.
Speaker 4: And now with this higher mix of drive-throughs and ongoing inflation pressures, we do expect our build costs for the class of 23 to be somewhat above last year's average.
Speaker 4: While our core shacks are impacted by inflation, most of that system average cost increase is due to our commitment to drive-thrus that cost more to build than our traditional core shacks. So what are we doing about it? Well, since the drive-thru project has begun, we've learned a lot, and we are honing in on cost reduction elements of the design, which we call add-ons, or add-on system dismissal.
Speaker 4: We're refining templates for efficient and more standardized operations. This year, we expect to reduce drive-through costs by about 10% versus 2022. And in future years, we'll be rolling out new and tighter prototypes for drive-through and core shacks focused on combining the great shack experience we're known for at a reduced cost and ability to scale. Long-term costs will vary depending on sites and geographies that we target. As an example, next year we may spend more on certain drive-throughs in the New York metro and California market.
Speaker 4: intense focus, balance portfolio of shock types, and new next generation prototypical designs will add up to more savings over time on our cost of build and overall returns.
Speaker 4: We're committed to further improve this part of our economic model, and we're really excited about what's ahead.
Speaker 4: Regarding the license business, we saw extraordinary growth and execution in the first quarter, and we expect that trend to continue.
Speaker 4: Our team has performed exceptionally well in China, and our domestic business continues to grow.
Speaker 4: We continue to expand our global footprint as only the shack brand can do. We're unlocking new regions and formats with the introduction of development agreements in Israel and Canada, as well as new shacks opening in roadside travel plazas throughout the US.
Speaker 4: I was fortunate to join our teams on a multi-country Asia trip this spring. I have the privilege of welcoming our first shack in Bangkok to an incredible crowd with strong sales since opening.
Speaker 4: I had the chance to connect with our teams and mature markets such as Singapore and Japan where our growth continues and to plan ahead for upcoming opening in Malaysia and potential other markets in Southeast Asia.
Speaker 4: There's a lot that's probably underappreciated and undervalued about this part of the shack's story and our strategy My hope is that our shareholders take the opportunity to visit some of our international sites We take great pride in the amazing brand we share globally and I'm really thankful for our team members around the world Continuing to execute and standing for something good wherever shack burgers are found
Speaker 4: Our fourth priority is being even more profitable in our Shacks.
Speaker 4: Ahead of our own expectations, we delivered 18.3% SHAC level off-profit this quarter. We showed strong progress on our key initiatives including driving sales, especially in our own channels, labor efficiencies, off-premise profitability, and managing controllable supply chain and other operating expenses.
Speaker 4: There's still much work to do and there is risk around the macro environment and continued cost inflation this year. But with a plan the team has put in place, we're guiding shack level off-profit of 19 to 20 percent for the full year and we see the opportunity to return over 20 percent. Katie will share more details on the work here in a bit.
Speaker 4: Finally, the fifth pillar of our plan is we build an enduring business. We are committed to investing with discipline. We're deploying capital towards strong returns in four main areas. We're going to build Shaxx, update our current Shaxx, invest in our digital infrastructure, and structure our home office capabilities to further support our restaurants.
Speaker 4: We remain confident that we can meet or exceed our long-term unit, cash on cash return targets over time by growing sales and profitability and lowering development costs, all of which we emphasize in our strategic plan. We've got the right plan in place. We're pleased to see progress taking root. Now hand it off the K to share more about the details of the quarter and expectations for the rest of the year.
Speaker 5: Great, good morning everyone. We are proud of our strong results this quarter that are a direct outcome of our team's solid progress on our 2023 strategic plan.
Speaker 5: We grew revenue by 25% year-over-year as our teams executed well on recent openings and drove higher sales in our existing company operated and licensed shack.
Speaker 5: We also showed strong improvement in our restaurant margin this quarter, expanding it by 310 basis points year over year to 18.3%. This is the highest first quarter restaurant profitability margin we have posted since COVID, and we generated record high quarterly restaurant profit dollars.
Speaker 5: and adjusted EBITDA and was typically the softest sales quarter of the year. We accomplished this despite the many profitability headwinds we faced, including the large number of Q4 and Q1 new check openings, ongoing inflationary pressures, and mobility measures in key markets like New York City still deeply impacted from COVID. And we did this by executing on our plan with some important highlights and actions including
Speaker 5: and we look forward to showing continued progress through the rest of the year.
We understand the many macroeconomic risks that may further impact the restaurant sector and our results. However, our business has demonstrated a level of stability that now allows us to go back to our pre-COVID guidance practices and reintroduce full year guidance for total revenue, same-shack sales, our licensed business, and shack-level operating profit.
We are also providing a new guidance metric with full year adjusted EBITDA. And as we continue to observe a normalization of our trends, we are reducing our urban-suburban disclosures as regions are now a stronger driver of our performance compared to just the level of urbanicity.
So now onto first quarter result.
Total revenue was $253.3 million, up to 24.5% euro per year.
Shack sales grew 24.1% to 244.3 million. Licensing revenue grew 36.7% to 9 million. Systemwide sales reached a record high, at 394.7 million, up 27.5% year-over-year. With stronger sales and flow through, as well as expense discipline,
all points of our 2023 strategic plan, we grew adjusted EBITDA by 163.9% to 27.6 million.
This quarter we generated 73,000 in average weekly sales and grew same-shack sales by 10.3% versus 2022, with 4.8% higher traffic year over year.
Price was up, high single digits, and our mix was driven by more gas returning to pre-COVID behaviors, including channels shipped into IN-SHAC and smaller group sizes.
We have discussed that a key strategy for us to improve our restaurant profitability is to drive sales into our own channels where we are most profitable. We showed strong progress against that goal in the first quarter as we grew in Shaq, same source sales by more than 20% year-to-year and more than doubled our total Kia sales versus last year.
Putting kiosks into our shack is another key way we have identified to improve our sales and profitability, and we shared a goal last year to roll out kiosks to nearly all shacks by the end of 2023. We are proud to report that we are executing ahead of this timeline.
kiosk order values are higher than traditional cashier transactions, kiosk is our highest margin channel and we are pleased with our return on investment here.
We are also pleased with April same-shack sales of about 4% versus last year and average weekly sales of seventy seven thousand up versus the seventy six thousand in March despite shifts in the spring break calendar.
In April , we benefited from driving a strong mix of sales into our own channels and had a lesser benefit from menu price than we did in the first quarter.
Our licensed checks also performed well this quarter as we grew sales 33.4% year over year to 150.5 million.
We have had successful recent openings across the world and our partners have performed exceptionally well serving the strong guest demand. In particular in the US with airports and our new roadside shacks as well as China and Mexico.
First quarter, shock level operating profit was 44.7 million or 18.3% of shock sales, 310 basis points higher versus last year, despite margin pressure from a large number of recent shock openings and persistent inflation. Our strong performance quarter was a direct outcome of progress on our
by offering the lowest-menu price there early access to exciting LTOs as well as value added day-part promotions.
Second, targeting labor efficiencies and growing throughput. We're seeing great benefits here from recruiting and retention tactics, and better staffing is helping us to extend our operating hours and be more efficient. Kiosks are another important tool to help drive efficiencies in our Shack.
Third, improving off-premise profitability and other strategies to lower our controllable expenses.
From standards for condiments and lessening packaging and to go orders, to premium prices on third-party delivery, we continue to push forward opportunities to be more profitable and off-premise. We also showed strong progress here in the quarter with controlling additional elements of other operating expenses. As just an example, we were able to lower our repair and maintenance expenses that have been a meaningful headwind in prior quarters as we were able to secure additional needed supply for critical restaurant equipment. And lastly, we will continue to take a strategic approach to menu pricing and supply chain opportunities.
Now onto the components of restaurant profitability. Food and paper costs were 71.8 million, or 29.4% of SHAC sales, 100 basis points below last year. Our blended food and paper inflation increased by high single digits year over year, which was offset by the benefit from higher menu price. Additionally, with our focus on operations and investing in our people with training and retention programs,
We were able to improve our waste impact versus last year. Our beef coast cost rose slightly versus last quarter levels and we're down high single digits versus last year. Importantly, nearly every other item in our food basket showed accelerating cost pressures versus last year, including fry costs rising by more than 20%.
and dairy and other costs increasing by double digit percentages.
Labor and related expenses were 74.3 million or 30.4% of Shack sales, down from 30.7% in the first quarter of 2022 and up 150 basis points quarter of a quarter as we continue to make investments and our valued teams needed to staff and operate our Shack.
As expected, we faced profitability pressures from the 28 new check openings over the past six months, still working their way up to optimized staffing levels. However, in our more mature shocks, our teams capitalized on strong sales and produced solid flow through as we executed on our plan to improve our restaurant profitability.
Other operating expenses were $34.9 million or 14.3% of SHAC sales, down 100 basis points from the first quarter of 2022, with our improvement coming from our menu price, driving sales in our own channels, lower marketing expenses, and better management of expenses like R&M.
Occupancy and related expenses were $18.6 million or 7.6% of SHAC sales, down 70 basis points from the first quarter of 2022, with the benefit really coming from higher sales performance.
GNA was 31.3 million or 12.4% of total revenue, excluding 1.6 million in legal settlements and professional fees, adjusted GNA was 29.7 million or 11.7% of total revenue, showing 90 basis points of leverage versus last year as we invest with discipline.
Pre-opening costs were 3.6 million in the quarter and depreciation was 21.3 million. We realized net loss attributable to Shake Shack Inc. of 1.5 million or 4 cents per share. We reported an adjusted pro forma net loss of $290,000.
or one cent per fully exchanged and diluted share. Our adjusted perform a tax rate, excluding the tax impact of equity-based compensation, with 17.2%.
Finally, our balance sheet remains solid, with 293.4 million in cash and cash equivalence at the end of the quarter.
Now, into guidance, which balances the strong underlying business factors we've seen so far in the first quarter, with a degree of uncertainty around the consumer spending landscape and our current expectations for ongoing inflationary pressures.
This range does not reflect any additional unknown delays to our development schedule.
For the second quarter, we guide total revenue of 269.5 million to 274.8 million, with 9.5 to 9.8 million of licensed revenue.
We guide for both our company operated and our licensed partners to each open approximately 10 new shacks and for same shack sales to grow by low to mid single digits year over year with high single digit price inclusive of the 2% price increase we plan to take at the end of the second quarter.
COVID has had a larger impact on our business than many of our competitors, and its lingering impact on consumer mobility patterns, including work from home trends, has been a challenge for us. However, even with the pressures we face and persistent inflation, we guide second quarter shack level operating profit margins to reach approximately 20%.
marking the highest level of quarterly profitability that we have delivered since the onset of COVID.
And with more consistent trends we're seeing in our business, we're able to finally reintroduce full year guidance for many metrics.
For the full year 2023, we guide total revenue of 1.06 to 1.11 billion, representing 18 to 23 percent year-over-year growth with licensing revenue of 39 to 41 million.
We expect to grow our system-wide shot count by approximately 70 to 75 units this year, about 40 of which will be domestic company operated and 30 to 35 operated by our licensed partners.
Our guide is for same-check sales to grow by low to mid single digits with mid to high single digits price and consistent trends in our mix.
Despite ongoing inflationary headwinds, we expect to deliver at least 150 to 250 basis points of restaurant margin expansion in 2023 and guide for a full year shack level operating profit margins to reach 19 to 20 percent as we continue to execute on our strategic priorities.
While we are focused on exceeding the sparse, inflationary pressures are not abating. In this guidance, we're reflecting a great degree of impact from potential consumer softness as well as beef inflationary pressures above and beyond what we're experiencing today. But all else equal. If both of these risks did not materialize.
we see a path for our restaurant margin to surpass 20% this year. We are planning for food and paper costs to rise by mid to high single digits year over year, led by beef costs rising by a similar degree.
We do not hedge on many components of our basket, including beef, which is the largest single part of our basket, and an area where we see a significant degree of uncertainty around the class this year.
In the first quarter, our beef costs were up just modestly versus the fourth quarter and were down year over year. However, we have recently started to see our beef costs increase with broad-based challenges across the supply chain and we anticipate this to be a material pressure throughout the year.
We are also seeing signs of even further inflationary pressures from many other items in our basket, including fries that are likely to cost us approximately 20% more this year than last. But above all, we are also making continued investments in our people as we focus on building up and supporting our winning team.
This is resulting in mid-single-digit, year-over-year wage pressures. Taken together, our operating backdrop is not easy. Inflationary pressures still remain, and we believe we have the right plan in place to navigate and continue to show higher operating profitability despite these continued challenges.
In fact, even with the inflationary and potential macroeconomic pressures, we are planning to grow fiscal 2023 adjusted EBITDA by at least 50 to 70 percent this year to 110 to 125 million as we target achieving record profits this year. We have line of sight to exceeding this range.
However, this will be dependent on the degree of pressures we face throughout the year.
We reiterate that our 2023 G&A guidance of $125 million to $130 million, absent the $1.6 million in legal and professional fees that are excluded from adjusted EBITDA this quarter. At the midpoint, G&A would be 11.8% of total revenue, more than 80 basis points of leverage versus 2022 levels. Other guidance points? Great. Alright.
Equity-based compensation expense of approximately 17 million, pre-opening of 17 to 19 million, depreciation of 88 to 93 million, and adjusted performance tax rate, excluding the impact of stock-based compensation to be 16 to 18%. So thank you for your time, and with that, I can turn it back to Randy. Thanks a lot, Katie. We're really proud of the team and the way they...
margins and investing with discipline for strong returns.
I spent a lot of my time recently in our shacks with our teams and visiting our partners around the country and around the world. We've been listening, learning, and working collaboratively across our teams to run better shacks that are great investments and stand the test of time.
I can tell you confidently that our brand carries a weight well beyond our scale today, and we continue to execute a plan to scale our business for tomorrow.
Operator, go ahead and open up the call for questions.
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Our first question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.
Great. Thank you very much. One question, one follow-up. The question just on the...
The near-term concerns and Katie you mentioned you know the uncertain macro in the short term I think investors are concerned of slowing comps of late And your first quarter results beat expectations. I'm wondering if you can maybe share
your thoughts on the trend through the quarter x the noise has obviously been a lot of noise, but how do you read those first quarter results? And more importantly in April with a 4% cop looks like it would be a deceleration from the first quarter, but hard to tell when pricing is being lapped and different shifts and whatnot. So I'm just trying to get your sense for how you think the consumer is behaving through the first quarter and through April as that impacts your.
But then really kind of in February and with the launch of White Truffle kind of co-decided about the same time, we did see above average sales performance in our more mature shacks. We saw pretty healthy behavior from high-income consumers where we over-indexed to.
of the reasons that you just discussed and see, you know, are baking in, you know, some views about how the back half of this year could play out. But from what we're seeing right here, we are pleased with our performance. I will say as it pertains to April , you know, you're right, we rolled off about, you know, 3.5% menu price and an additional 5% increase on DSP that we took in March.
And so that is part of what you're seeing right there. There are also some spring break shifts as well. Understood. So, it doesn't seem like you're seeing a material change in consumer behavior of late when you back out those unusuals, or as April would you say somewhat of a deceleration.
We're very pleased with the trends that we have seen in April consistent with what we saw exiting the first quarter. But you know.
That's just one month, so we'll have to see how the rest of the court will play that.
And then my follow-up was just the...
the restaurant margin outlook. I mean, very impressed with the 19 to 20 percent guidance. I think you even mentioned this potential upside to that 20 percent. Just wondering if you can maybe prioritize.
What you think are the greatest drivers there or maybe more importantly what's the greatest risk to that because obviously that's that's above expectations and it just seems like the environment inflation is getting worse pricing is easing.
and the consumer is just so uncertain, it would seem like that's aggressive. So I'm wondering where you think there's upside versus where there's the greatest risk to that margin outlook. Thank you.
Yep, thank you. So, you know, as we're thinking about the margin progression throughout this year and what really helped us in the first quarter achieve that 310, which actually is closer to 360 basis points of improvement versus last year when you adjust for the gift card benefit we had in the first quarter of 2022, you know,
Let's talk about what we did. You know, we drove sales and we drove sales into our own channels. And we expect for that to continue to be a tailwind for us this year. We have key strategies in place to reward our guests to come into our restaurants, to come in and use our app and to do delivery through us as well. So.
We want to see more of that throughout this year and we think that's going to be a benefit. And we're also really encouraged by the work that we've done around staffing and improving retention around our team members. And I think we're just really kind of early days in seeing that benefit. Randy talked about the big increases that we saw in retention in the first quarter.
We're seeing some lower waste here on the back of it, and we were able to be open longer hours. These are all things that you want to see to help us be more profitable. But conversely, you know, we have some of this in our guidance. I would say, you know, one of the biggest risks to achieving that range is, you know, if we had macroeconomic uncertainty outside of what we're expecting today.
We had a more significant fall off in the consumer. And then beef, you know beef, we continue to say beef is the largest part of uncertainty in our basket this year. We're starting to see it pick up here. We've baked in our views right now as to what that is, but if you're asking me where the biggest part of uncertainty is on the cost side, to me it's beef.
Our next question comes from Michael Smoswick, Oppenheimer & Company. Please proceed with your question.
Our next question comes from Michael, Tomas with Oppenheimer and Company. Please proceed with your question.
Our next question comes from Michael Tomass with Oppenheimer & Company. Please proceed with your question. Hi, thank you, good morning. I wanted to follow up on the...
or softness comment within your guidance. You know, can you talk about what you're assuming on the sales side of things? You mentioned margins could exceed 20% if there was no softness, but how much of a headwind to sales are you sort of thinking about right now? Thank you.
We have reflected a modest degree of slowing into our guidance at the midpoint. If the consumer remains healthy, there's a path to exceed that. However, if there is more material macroeconomic...
contraction, and what we're pricing in our guidance, we may miss that. So that's how I would think about the guide on that side. We over-indexed to higher income consumers. We were really encouraged by that 4.8% traffic we generated in the first quarter. And we have to just really talk about white truffle was the most expensive LTO that we've ever launched.
and we've had very strong success with that. So what we're seeing today is that, we're kind of at attainable luxury, we're definitely gaining share at the high end. And we hope that that continues, but for planning the business, we think it's prudent to take a balanced approach through the rest of the year.
had very strong success with that. So what we're seeing today is that we're kind of at attainable luxury, we're definitely gaining share at the high end. And we hope that that continues. But for planning the business, we think it's prudent to take a balanced approach through the rest of the year. Gotcha, thank you. And then...
success with that. So, you know, what we're seeing today is that, you know, we're kind of at attainable luxury. We're definitely gaining share at the high end. And, you know, we hope that that continues. But for planning the business, we think it's prudent to take a balanced approach through the rest of the year. Gotcha. Thank you. And then, you know, can you talk about what you're seeing?
from consumer habits and your drive-throughs or maybe kiosks versus your traditional stores. Do consumers use your drive-throughs differently, maybe less beverage attached or less shake attached or something like that? More importantly, how do they shape the way you're thinking about that drive-through business as you're building new units and going forward? Thanks.
So on drive-thru, we're still very early here to really record on key trends, but I will talk about kiosks because we've had those in our system for longer and we feel better about talking about those trends. So what we see in kiosks and what we continue to see even with doubling the sales year over year and having a substantial higher number of restaurants in our system with them, is that every operating system is not containerized for the Door, it's containerized, sho integrates
is that when a guest goes to our kiosk and they see the visual merchandising of our menu, we see that they have higher checks than a traditional cashier order. We see that they add on more premium and higher margin items. And so that together really makes that our highest margin channel. We're ahead of plan here with rolling out kiosks to nearly every shack by the end of this year.
And we are very pleased with the returns on that investment. Thank you. Our next question comes from Jack Bartlett with Truist Securities. Please proceed with your question.
Thank you and it's Jake but thanks for taking the question. So the first is on sales drivers. My sense is that it's improved staffing in turnovers. It was maybe hours. It's one of the biggest drivers of that. Can you give us any metrics around that? Maybe how turnover might be improving?
maybe average hours now versus last year, anything that can demonstrate the improvement that you're seeing on the staffing and the productivity levels.
Thanks Jake and this is why it's the number one part of our strategic plan because you know when we see what we reported here which is a lower turnover higher retention and a lot more people applying for jobs at Shake Shack in the first kind of year to date here that's just a huge win in every way. Turnover is expensive.
It is hard to train people and mostly because you're just not up to the reps. You're just not up to the speed and throughput. That's where the most gains are going to come from. And I think that was a part of the strength of Q1. It's also a part of our confidence in the uh, our profit guide for this year. It's a huge part of how we think we can get there. Now we need to see that trend continue. Obviously this last few years has been
especially just on the opportunity to optimize throughput. On ours, we've been able to, it's not like we all of a sudden magically just increased hours across all the shacks. This is really just recapturing some of the hours that we had given up when staffing challenges were more challenging over this last couple of years. So we're starting to be able to get some of those back in the first quarter.
There's a little bit more probably to go on that depending on the Shaxx and you know, generally seasonally our stronger quarters are the second and third quarter. We generally we can look at some of that expansion of ours, but you know, taking care of our team, having a stay is a huge win in every part of the business.
probably to go on that depending on the shacks and you know generally seasonally our stronger quarters are the second and third quarter we generally we can look at some of that expansion of ours but you know taking care of our team having to stay is a is a huge win every part of it
Great, I appreciate that. As a follow-up, or actually a question, I saw in the release, and you mentioned your target of ROI, used for ROI of over 30%, or over 30%. I was a little surprised to see that that's what the recent store class has achieved.
given the margin pressures that we've seen over the last couple of years, elevated costs. So maybe if you could kind of break that down, how the recent store glasses have performed. Was achieving that 30% or over 30% ROI really purely from new store openings, or any other metrics to kind of…
I was understanding where that 30% is driven by. Okay, so our return metric that we use here, cash and cash return, we measure in the third year of operations. So really when we're talking about the shocks that were impacted by COVID pressures where our returns were impacted, we're talking about our 2017 class came into its third year of measurement.
2018 that comes into its third year in 2021 and to a little bit more, you know, lesser of extent, the class of 2019. So with our expectations here to generate, you know, about 19 to 20 percent shack level operating profit for the overall company and the recovery that we have seen in the class of 2020 Shaxx and the rest of our overall base.
you know, kind of with the targets to hit, you know, $110 to $125 million in adjusted EBRDA this year on the bill costs for the class of 2020, we expect that to exceed our long-term guidance range of at least 30%. Great. Thank you very much. Appreciate it. Thank you. Thank you.
Our next question comes from Drew North with Baird. Please proceed with your question.
Great. Thanks for taking the question. I just had a quick follow up on Labor. Randy, you mentioned the lower turnover as providing confidence in the op-profit guide for the year. But maybe this is for Katie. I guess how are you thinking about the magnitude of leverage on the labor line in the context of your guidance for the year? Yeah, so we're expecting... you know...
We're kind of in our guidance range for 19 to 20 percent. We're kind of expecting everything to kind of hold here from what we're seeing. It's possible that we do better than that. It's possible that we have more pressures on that side. But we think that right now kind of assuming that we hold the current level is appropriate for guidance.
There's also some things that are helping us on the labor side, probably with retention, end up actually costing us a little bit more as well. So let's talk about tips. We offer tips to our team members and basically every channel right now. And our guests have been stepping up and rewarding our team members for such excellent service.
there's a cost to that that we also face in our restaurant P&L on the labor side as well. So that's just something to think of as you're thinking about this year versus last year and prior years. Okay, thank you. And one other it looked like the shareholder letter mentioned lower marketing expense.
benefiting the other OPEX line. Sounds as though you're being more targeted there. I guess perhaps you could just expand on your plan for marketing this year relative to prior years. Thanks. Well what you're seeing there is a change of classification for marketing programs that used to hit the SHAC level that are more national.
And then in the first quarter we did have a little bit of shift in some of our shock level marketing projects which we expect to kind of realize later this year.
Okay, thanks for the clarification there. That was helpful.
Our next question comes from Jim Sanderson with North Coast Research. Please proceed with your question.
Thanks for the question and congratulations on a great first quarter. I wonder if you can walk through how pricing will impact same store sales on a quarterly basis. I think you've got 3.5% that's rolling off in March and then you're going to take an additional two. So just kind of level set that for us so we can understand how that's going to flow through for the next three quarters. Great. Thanks, Jim.
So, you know, starting off the year we had, you know, very high single-digit pricing. That's what I would kind of describe that as. And then you're right, we rolled off in March, we rolled off 3.5% menu pricing and 5% additional DSP pricing. We're kind of now trending at the lower end of that high single-digit range.
And depending on menu mix and other channel mix, kind of expect to have that be the case for most of the quarter. Then we're going to be taking the 2% late in the second quarter. We're going to be holding that, and then in October , we're going to be rolling off that. We said we took between 2 to 10% late in the second quarter. And then we're going to be rolling off that.
youíve observed as far as higher average check but Iím wondering if those key asks once you have those in all of your stores in the United States, if thatís going to unlock some lower labor cost in the form of fewer budgeted hours or anything you can tell us about how that could enhance store labor productivity.
once it's rolled out. No, it's a great point. And we're really excited about kiosks. And I think we're just really early days here on both that point. We're certainly seeing some signs of labor efficiencies in checks with kiosks. But then also just on unlocking additional capabilities with the kiosk. So I'm really excited by what this enables our team members to accomplish. Our strategic plan to support yourself anywhere, anywhere, wherever, wherever. And damn it, customer anything gracefully feels like the biggest fractions of every purchase ever entered into a loans Dharma. So just think, I could use more we like for trade
to what we can do here.
to what we can do here. All right, I'll pass along. Thank you very much.
Our next question comes from Maggie Juarez with Raymond James. Please proceed with your question.
Hi, and thank you for choosing the question. I'm Mrs. Nadjivar, I'm from Brian , the Carol. We just had a question on the other op-ax line. Could you quantify the benefit you saw in R&M in 1, 2, 23? Do you expect a similar year-on-year tailwind through the year?
I know there could be a difference in comparisons there, so any perspective there would be helpful. Thank you. Yeah, so what happened in other OPEX this quarter, if you look at kind of where we've been focused on our strategic priorities, it's really on addressing what the controllable expenses that we have. And the supply chain challenges that we've faced in general, which have been a pressure to our ability to open restaurants.
We've also talked about that being a pressure for our ability to replace equipment and it was resulting in higher service costs for that equipment. Our team did a really good job identifying a lot of opportunities to upgrade and replace much needed equipment in our restaurants.
and we're expecting them to continue to act on that plan throughout the rest of this year. So that's kind of the benefit we're seeing there. I would say the other pretty important benefit, though, that you're seeing on other operating expenses is really just pushing more and more sales into our own channels.
That's helping us leverage a lot of expenses on that line. Thank you. And then could you also go over what digital mix was in the quarter and maybe provide on some color what kind of trends you're seeing in those off premise channels?
Sure. We add a 36 percent digital mix in the quarter. Now that includes app, web, and delivery. That does not include kiosk. And really the story there is that we're seeing our gains come back from INSHAC. We doubled our kiosk sales.
year over year, which that's not part of the digital mix. That's part of our InShack transaction. And our same shack sales for InShack grew over 20% year over year. So we're seeing more and more guests come back to the kind of normal pre-pandemic purchasing habits.
But at the same time, we're also driving more adoption and usage of our app. Very helpful, thank you.
Our next question comes from John Avanapote with JP Morgan. Please proceed with your question. Hi, thank you. I know that the industry actually did show net unit growth, at least according to some industry numbers, 22 over 21. I was curious, and I think this could go both ways, both closures and openings.
you know, of how maybe you see your trade area competitive dynamics change. You know, I mean, I think we all know there's not exactly another Shake Shack, but there certainly are many competitors that are going after at least, you know, your type of customer and probably the day parts of which they use it, maybe even the channels in which they use it. So can you talk about, you know, how the competitive environment?
might be evolving, even if it isn't specific markets or when we really take a step back and look at everything, are we pretty status quo 23 over 19 and your success is really going to be dependent on what happens within your four walls. Thanks so much.
John , that's a great question. I'll start with how you end it. Like, there's no question our success can be how we run our restaurants. That said, you're absolutely right in hitting on the changes of dynamic of how real estate and sites are working. So broadly, I would say that the toughest competition out there,
is for great drive-through pad sites right now. Right, you're seeing that with everybody. Everybody's looking for that. We are fortunate we have such a good brand. There's a lot of landlords who really want us to take that space, but that's probably the hottest. You know, I think you're seeing some easing in kind of the regional mall type and some of the urban.
But again, urban is a big word and there are lots of places in urban centers that we are going to continue to go that we think are great. So our strategy within all of that is balance. We've made a big commitment to drive-through as you know. We think it's a huge potential part of our business. And we have a lot to learn on the kind of sites we need. We are going to learn a lot more this year as we add another 15 and more than double the size of our drive-through template.
We're also going to learn a lot more even next year in Drive-Drew as we do more of our Shacks kind of on the coast in some of the some of the markets where we've traditionally had some of our higher AUVs. So I think there's going to be a lot of learning there, but we're also going to be cautious. I want balance. I want balance of course Shacks, some Drive-Drew, some smaller format and within all of that, that's where you heard some of my notes earlier.
talking about making sure that we can better templatize prototype design, save money over the long term. It's not going to happen tomorrow. You're not going to see it this year, but you will see it over the long term and our ability to just do a better job as we've now gotten to a scale where we can grow upon to take those learnings and bring down costs over time.
for drive thru, for core, and for all those. So, um, there's a lot happening out there. We think 40 is a great number for this year and, uh, we'll keep, we'll keep growing in the years to come. I like how you described urban as a big word. I mean, can you maybe talk about that cohort specifically? I mean, is it, you know, is it a more open competitive app, you know, opportunity? I mean, certainly, you know, a lot of people are kind of being scared off.
you know, from your offices and maybe even in certain cities themselves, but who still a lot of people that need to eat lunch and dinner that, you know, that have money. And, you know, it's like, listen, I mean, some of the, you know, the actual, you know, migration trends out of the cities, at least permanently, you know, might be overstated, at least in some of the press. So how would you see your competitive positioning just within
urban itself. I mean, have more customers left in restaurants. I mean, is it have more restaurants left in customers? Just talk about where you think that's that balances and how you're positioned within cities themselves.
Yeah, I don't think it's landed yet is the answer. I think there's a lot of great headlines to read and for the most part urban centers are Really doing great, but as we've shared even some of our highest volume shacks in some of our deepest urban communities New York Downtown San Francisco some others are still impacted still impacted and when you lose
some portion of workers, whether it's some Monday or all the Friday or some shifting, that's going to have impact. We still have that impact as a lag on our business. It's part of this drag that we've seen. But again, we continuously those trends improving, which is all part of our guide for this year. That's why I said Irving's a big word because, and part of why we're...
not going to continue to show the urban suburban breakdown is because these things are stabilizing and also bourbon is not equal and all urban is not equal. There's lots of different types within there. When we think about our strategy, we will continue to go to urban environments where we think there's great opportunity. Let's just take a second on.
because I know sometimes we overdo New York and it's impact on this company, but when we think about what we just opened in New York. You know, in the last year we've opened a great site in the meatpacking districts. We've opened one in Brooklyn in King's Plaza. We've opened one in Jamaica, Queens, and you'll see us open on the lower east side. These are neighbors of hoods we haven't gotten to yet. These are neighborhoods.
markets and probably more of our Shaxx in this next couple of classes will be kind of more suburban type.
and probably more of our shacks in this next couple classes will be kind of more suburban type. Thank you.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Brian Harbour with Morgan Stanley . Please proceed with your question. Yeah, thank you, good morning. I don't know the question about the key asks too, but besides kind of the track benefits that you mentioned.
Are there other things that you see in terms of, I don't know if they're any labor hours savings or maybe you can just redeploy some of those labor hours? Do you see better throughput in the units that really have higher kiosk order volume or how else could you quantify that?
Hi, Brian . Yeah, so with our kiosk orders, our kiosk shacks, what we tend to see is we're able to run them a little bit more efficiently than shacks without kiosk. And while we made significant improvements in the first quarter and are staffing a retention, if I just look back to the third and fourth quarter where the industry was deeply impacted.
and what our guests like to see. We still have a portion of guests that come in and they wanna have that face-to-face human transaction communication connection with the cashier, but we have a ton of guests who come in and they wanna just go right to the kiosk. They wanna sit there and learn about the menu and see, build up their tray, kinda go from protein to fry.
more add-ons on their existing burgers, so maybe the Shack Burger more likely to have some more premium add-ons on it. We have a higher attach rate for cold beverage. Those are great margin additions to our check as well. And, you know, a number of our guests eat in our restaurants, stay in our restaurants, and so we get a little bit of a save on packaging as well. So, you know, overall, very pleased with what we're seeing in the Kiyatsk. And, I think we're, you know, a-
more just see kind of spot commodity prices. Do you typically or versus some of your your large peers do you typically see less volatility in some of those key items like beef or fries or how does it move differently than what we might see for some of your peers?
Well, I think it really depends on the item in the year. It's not an easy question to answer. So, yeah, generally commodity prices are going to be the directionally where we head. But again, we're not just buying commodity B for buying, especially all muscle blend. You know, this is really good. All premium no-hormonal antibiotic B, for instance, same with our...
are vacant. So we generally ride the market. When the market is up, it's generally up for us as well. So that's part of what Katie is talking about. Be probably being the thing we're looking at most for this year. But when it comes to other things, I mean, yes, we've got some pretty premium ingredients. But I don't think there's anything necessarily more specialized about what we do generally. I think if you're going to continue to see inflation up, which we do,
it's going to continue to back shake shack and that's, you know, and then when you see one thing that might be down, those things lag as well. And just because, you know, for instance, the cost of chicken might be down, that doesn't mean the cost of processing chicken is down.
And there's a lot of other things that are going into supply chain expensive inflation right now. I think the market's not talking about it often. Most of that is labor costs. A lot of it continues to be shipping and logistics costs that are expensive and more expensive. Those things are not going to ever go down, even if the cost of the commodity might temporarily be down.
Look, long term we think we've got some opportunity, hopefully, if inflation cools. But this year we're still expecting moderate inflation on most of the things that we will serve.
We think we've got some opportunity, hopefully, if inflation cools, but this year we're still expecting modern inflation on most of the things that we will serve. Thank you.
Our next question comes from Jake Bartlett with Truist Securities. Please proceed with your question. Great. Thanks for taking the quick follow-up here. My question was on COGS and your expectations. It sounds like food cost inflation and menu price are going to be pretty similar.
So the question is, do you expect COGS to be lower as percentage is sails in 23? You know, maybe driven by some of the packaging changes, maybe some supply chains and issues that you have. Trying to understand, just better understand what we should think about for COGS in 23. Yeah.
Yeah, so we've guided for COG inflation to be mid to high single digits. We're seeing inflationary pressures pretty much across the board. And beef is kind of the biggest unknown at this point, where we're guiding for a mid to high single digit outlook on that side. Now, what are the other things that are going to impact what the COG's level is? Well,
on that side that tends to be a benefit for us. So we'll kind of have to see how the rest of the year unfolds, but with that kind of mid to high single digit cost inflation, you're looking at probably kind of a high single digit price for the year, that should kind of help triangulate where that might land.
Great. Thank you so much. We have reached the end of our question and answer session. I would now like to turn the floor back over to Mr. Goode.
for closing comments. I just want to thank everybody for taking time with us this morning and we look forward to seeing you soon at the shack. Thanks. Take care.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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