Q3 2023 Shake Shack Inc Earnings Call

Greetings and welcome to the Shake Shack third quarter 2023 earnings call.

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

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

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Mike Koehler Yellow senior director F. P. M. A N I R. Thank you Sir you may begin.

Thank you and good morning, everyone. Joining me for Shake Shacks Conference call is our CEO Randy already CFO Katie pro rate 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 reis.

<unk> is prepared in accordance with GAAP reconciliations to comparable GAAP measures are available in our earnings release and 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 filed on February 23rd 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 view.

<unk> change by now you should have access to our third quarter 2023 shareholder letter, which can be found at investor Dot Shake Shack dotcom and the quarterly results section, whereas an exhibit to our 8-K for the quarter I'll now turn the call over to Randy.

Thanks, Mike and good morning, everyone.

Really proud of the team's strong and sustained execution of our strategic plan Shake Shack remains laser focused on profitable growth. This quarter. We grew total revenue by 21% to 276 million with two 3% growth in same shack sales. We achieved average weekly sales of 74000, <unk> trailing 12 month <unk>.

Across our shacks at $3 9 million.

We grew system wide sales by 24% year over year to $439 million as we build shacks across new and existing markets sales began the quarter strong in July moderated a bit through the end of the quarter. In September. However October has reaccelerate it with same shack sales or three 5%.

As we increased various digital and in shack marketing initiatives driving October traffic well above September trend.

In the quarter, we continued improved profitability, increasing shack margins over 20% again with expansion of 400 basis points year over year grew.

We grew third quarter adjusted EBITDA by nearly 16 million to $36 million up over 80% year over year and.

And we improved our adjusted EBITDA margins by 430 basis points growing from eight 7% last year to now 13%.

We also continue to grow our footprint around the globe, helping twenty-five shacks in the third quarter 10 company operated 15 with our licensed partners and we're on a path to open approximately 80 shacks. This year system wide roughly 18% unit growth and we are building a robust pipeline of growth in the coming years.

Our license business continues to perform and we see tremendous white space in this highly accretive and asset light part of our business. We expect to open approximately 40 shacks. This year at approximately 40 more in 2024 now.

Now with a fair amount of global macro and geopolitical headwinds, we expect to navigate a more challenging environment in the coming years and this is why we built a diverse portfolio of domestically and around the globe to help offset regional volatility.

Well move deeper in existing markets with proven and newer formats like drive through as well as into several new markets in the coming years.

In our company operated business, we've opened 30 shacks, so far this year well on our way to open approximately 40 before year end looking.

Looking ahead, we have 20 shacks under construction and if you recall last year, we had a much more heavily weighted fourth quarter, we're really proud of the team for better executing a balanced year with a strong class of 23.

And our 24 pipeline is solid as we target approximately 40, new openings next year.

We're also working through new prototypes for the long term because the 'twenty 'twenty four target to bring down our net investment cost by about 10% from today's average cost now.

Now let me give you an update on how we're tracking on our strategic plan. Our first priority has been on recruiting rewarding and retaining a winning team and similar to what we reported last quarter. We've achieved some of the best turnover and retention numbers, we've seen and we're generating more than twice the team member Apple inflow compared to last year.

Not only our team members staying longer competitive wages are also attracting more candidates, which is contributing to better operational execution and profitability in our shacks. This commitment to our workforce remains unwavering and we're constantly exploring avenues to enhance their experience and provide more opportunities for career growth within the company.

Our second priority so relentless focus on our guest experience and we continue to execute a broad culinary strategy of improving our core menu, while delivering exceptional L. T OS that keep operations running smoothly and efficiently in July we offered our Bourbon Bacon Burger, which sold out quickly if you'd start of August we pivoted to marketing a core menu favorite our avocado.

Bacon Burger and chicken sandwich before launching our hot chicken and spicy shack MISO Burger at the start of September while guest reception for our current hot menu has been solid we do have a tougher compare towards the end of the quarter as we lap last year's launch of our hot ones L. T O would start off especially strong due to the very high number of media impressions, we received with that part.

Sure.

We've also been featuring spicy fries, one of our strongest Friday all tiers to date are eliminated lineup featuring harvest Barry Cherry Hibiscus and Kiwi Apple has also resonated well with guests.

We look to the rest of the fourth quarter. We're excited about additional brand building opportunities in culinary, including our holiday shake lineup that just hits shacks yesterday, we've teamed up with Universal Studios for their launch of the trolls three movie Trolls band together and we'll be serving a series of shakes based on characters in the movie highlighting puppies sugar Cookie complete.

With Blue and Pink cotton candy topper that resembles the iconic trolls hair branches chocolate peppermint and Veeva cinnamon roll as our first national offering in partnership with the movie and we're excited for these delicious and fun shakes just in time for the holidays.

Many of our shacks approximate to movie theaters, giving us the opportunity to benefit and play a unique role in partnering with films and we have an engaging marketing strategy lined up around trolls, including bolt messaging advertising in many shacks as well as social media Activations.

Some of our shacks will even have a special activations for kids this coming weekend, including glitter bars coloring stations in photo booths.

Our third priority, our targeted development strategy and improving returns on our shacks are recent openings have performed well, including a number of drive throughs as we continue to learn more about what makes an optimal shake shack drive through site and build out we opened four more drive throughs in the quarter and one in October through Washington State, Utah, and Texas, bringing the total to 21 company op.

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Continue to score well with our guests on overall satisfaction and order accuracy and we're proud of winning innovation by design Award from fast company highlighting our teams work.

That said, we know in drive thru and in shacks generally some of our biggest areas of improvement remain consistency speed and throughput and this is going to be a big focus for our designs and operational improvements through 2024.

Our license business showed strong performance overall in the quarter as we opened our first resort shack in the Bahamas at the Atlantis with a dramatic format that includes a full service bar later in the quarter. We opened our second shack within Incheon Airport in Seoul, and we continued deepening our footprint in China.

Our domestic licensed shacks performed well driven by continued strength in U S airports and the opening of four more domestic roadside shack, which we believe can be a growth opportunity for us.

We remain highly confident in the long term trajectory of our license business, but we do expect that geopolitical pressures and uncertainty, namely in the middle East and Asia could present pressures into the fourth quarter and into 'twenty four in terms of our number and a number of openings in sales.

Our fourth priority driving more profit in our shacks. The team is doing really great work focusing on the profitability opportunities in our restaurants, we expanded our third quarter restaurant margin by 400 basis points year over year to 24%, our second consecutive quarter, where our restaurant margin grew back above 20% showcasing.

The continued progression of our strategic priorities.

We're winning share in our own more profitable channels kiosk rollout has made our best channel, even better from a profitability and guests experience perspective.

There are many pressures that lay ahead, including an unknown consumer backdrop in beef inflation. However, we are focused on driving continued improvements that help us outperform historical patterns in light of these crosscurrents and finally, the fifth pillar of our plan as we build an enduring business, we are committed to investing with discipline when deploying capital towards stronger.

Turns in four main areas building shacks updating current shacks investing in digital infrastructure and structuring our home office capabilities to support our restaurants, we're moving purposefully to address opportunities in the supply chain operations.

Leveraging G&A and long term cost to build we remain committed to reducing build costs next year by about 10% as well as pre opening costs by at least 10% per shack as we continue to lead with disciplined capital allocation in 'twenty four and beyond.

Excited to see our strategic plan driving improvements as we continue the evolution of shake Shack, we remain one of the fastest growing publicly traded restaurant companies and we're growing profitably, while strengthening our brand and our opportunity ahead, and I'll hand, it off to Katie to share more about the details of the quarter and expectations for the fourth quarter great. Thank you. Good morning, we're pleased with.

The Companys performance in the third quarter as we drove a material 400 basis points of margin expansion and grew adjusted EBITDA by more than 80% year over year to 13% of total revenue. That's a 430 basis point improvement versus last year's levels.

While industry trends remain challenging we built our 'twenty to 'twenty three strategic priorities as a roadmap to deliver improvements in our profitability and cash flow even against a less certain consumer spending backdrop and ongoing inflationary pressures. Our momentum has picked up in October with three 5% same shack sales and approximately.

Really flat traffic are meaningful improvements in September and we are strategically executing opportunities to drive profitable traffic growth across our shacks.

On to our third quarter results total revenue was $276 2 million up 21, 2% year over year, driven by strong performance in new shack openings system wide and positive same shack sales. We grew system wide sales by 24, 3% year over year to a record high of 438.

9 million.

We ended the quarter with 495 shack system wide at 23, 1% year over year with approximately 40% of our system wide sales in the quarter generated by our license business and about 60% from our company operated shacks.

And license we are executing ahead of plan and are pleased with the many strong recent shack openings as we entered new markets and deepened our presence in existing markets in the third quarter along with our licensed partners. We opened 15, new shacks growing our total licensed shack count to 215, we grew sales by 31% year.

Every year to $173 9 million, we've opened 39 shacks in our license business year to date, and we're targeting opening about 40 in fiscal 2023 and the <unk>.

Company operated side figure shack sales, 27% year over year to $265 million.

Supported by 10 shack openings, including for drive throughs, plus the continued strong performance of recent NSS and two 3% year over year growth in same shack sales.

Our sales cadence in the quarter it resemble more of a normal return to pre COVID-19 seasonality than we've seen in recent years with a stronger July then softening in August and September.

Pre Covid September sales typically fell seasonally from August levels around back to school.

In more recent years traffic patterns between August and September had been more muted, but beyond seasonality that was more pronounced in our urban shacks. We are also navigating a backdrop of consumer spending pressures on restaurants broadly on top of other macroeconomic factors.

We've also faced some headwinds from weather to the quarter with a particularly rainy east coast and the hurricane in Southern California, which we believe together represented a loss of approximately $500000 in sales.

We lap some digital marketing promotions from last year and comps over the highly successful hot ones L. T O at the end of the quarter, but.

But importantly, we are encouraged by the momentum we saw in October.

Despite transitioning from high single digit to now low single digit menu price October same shack sales grew three 5% with approximately flat traffic and positive same shack sales growth both in shack and in our digital business.

Traffic also improved in all of our regions compared to September level with the strongest improvement seen in our northeast and mid Atlantic regions.

October AWS of 74000 grew one 4% year over year.

We continue to drive more guests back to inject dining and we're also leaning into various strategies and marketing and operations to navigate these uncertain macro.

But obviously needs to pulse on value added offers and our own and third party digital channel, we're still focusing on our premium ingredients and delivering hospitality as well as further optimizing our four wall performance.

We've seen strong returns from our free Friday promotion in our afternoon happy hour Bogo shakes, plus we've had opportunities to dive deeper in select markets with performance marketing strategies, all of which are driving traffic and sales into our own channel.

We grew third quarter same shack sales for our in Shack channel by approximately 9% with benefits from high single digit menu price continued tailwind from a kiosk retrofit program and positive traffic growth.

Mixed headwinds improve sequentially from the second quarter aided by strong demand for our premium sandwich and spicy Fry offerings.

Kiosk sales now represent well over half of our in shack sales and are up more than 140 basis points year over year. He asked is our highest margin channel and we remain very pleased with the at least high single digit check lift we're seeing with this order mode versus traditional cashier yourselves in the check in the shack.

We're also testing some new capabilities to continue to drive enhanced Upselling. This channel, which is now our largest order mode across our company operated store base.

Net stronger in check trends helped offset some of the pressure from seasonality and laughing digital promotions driving a positive two 3% same shack sales and negative four 2% traffic.

Shack level operating profit was 54 million or 24% of shack sales, that's 400 basis points better versus last year. Despite continued inflationary pressures across our four wall P&L as we delivered the strongest flow through our restaurants have seen in over two years.

Senator Shack failed down 60 basis points versus last year, and up 10 basis points quarter over quarter.

We continue to leverage our labor strategies that we outlined last quarter, including improve forecasting and labour scheduling and driving broader kiosk adoption.

You might recall that we as well as a broader industry faced some very real staffing pressures in the second half of last year, we have a significantly improved Jackie staffing backdrop here today with the best hourly and manager and their attention that we've seen in years, but even with this more pronounce seasonality pressures in the quarter and.

Marked improvement in staffing levels with just more people available for shifts are new scheduling capabilities and management have allowed us to be more efficient with their labor usage.

We are proud of the progress here, but it's also important to note that we have delivered this improvement despite the many headwinds that add to our overall labor costs, including the larger degree of team members needed to support our dining rooms with the return of in check traffic and our commitment to improving the guest experience as well as a significant wage investments we've made in our team members.

But importantly, we're not resting here, we expect to continue to show benefits from these improvements in labor strategies that set our team members our managers and our shacks up for success in the coming years with improvements on deployment refinements to the order journey and more scalable and consistent processes.

As we scale.

Have a greater diversity of formats from larger drive throughs to streamlined food court and a variation in menu and channel mixer crosser restaurants on top of efficiencies like kiosk at the right time to refine and evolve our labor bottle as well as a broader staffing and deployment standards.

This work is rooted in in time and motion studies and various variables that will help us to stop to best optimize the unique needs of each of our shacks. This will give her operators much improved tools and we will update you as we test enrolled this new staffing system out to the shack this quarter and enter 2024, we plan for this methodology to also any.

Lance how we train and open our shacks and reduce the overall drag on her piano from new check openings as we aim to reach optimal profitability at a much faster pace than today's performance.

Other operating expenses for $37.3 million or 14.1%, a shack sales down 120 basis points from the third quarter of 2022.

Our strategy to reduce R&M expenditures has lowered this expense per store week by $300 a year over year.

We also benefitted from lower delivery Commission expenses per store week is more gas returned it and check dining, but we're anticipating that delivery sales will pick up in the fourth quarter in line with recent historical patterns.

[noise] occupancy and related expenses for $20.3 million or 7.7%, a shack sales down 20 basis points from last year's levels.

All and we are very pleased with the level of margin improvement we delivered in the quarter and we continue to build back our profitability, which is vital for our long term growth.

G&A with $30.9 million, excluding $200000 in severance costs, G&A with 30.7 million or 11.1% of total revenue 70 basis points favorable to last year.

We showed strong leverage on this line in the quarter with G. N. A X seventh expense up just 14.1% year over year versus total revenue that grew 21.2% year over year and system wide sales of 24.3% year over year.

We continue to believe that we have a meaningful opportunity to make greater investments in our direct marketing spend to drive sustainable longterm traffic growth.

As we continue to show progress in leveraging home office G&A investments will look to open up additional funds to invest in strategies to drive traffic will also still delivering on our strategic priority to invest with discipline and enhance our cash position.

Reopening costs were $5 million, a quarter up 63.4% year over year as we open 10 checks in the quarter versus only two in the third quarter of last year. We are seeing higher preopening expenses per shocked you to an increase in labor expenses other operating expenses and occupancy a majority of Preopening expense is non-cash of preopening.

Occupancy expense is non-cash rent and we're seeing higher cost here driven by extended opening timelines. We're also experiencing elevated labor and other operating expenses most of which are impacted by development pipeline pushes around items, including utilities and available availability of critical equipment needed at the end of a project that can cause.

Anticipated delays in opening.

We have plans in place around development training and operations to get tighter on execution here is we target lowering our preopening expenses by at least 10 per cent per shaq and 2024 versus this year's levels and further opportunity to lower these costs in the coming years.

With a combination of strong for awhile performance and discipline spending and G&A and other places we grew adjusted EBITDA by more than 80% year over year to 35.8 million or 13% of total revenue up from 8.7 per cent of total revenue last year.

And the quarter depreciation was 23.1 million up 24% year over year as we continue to invest in new shacks in our business.

We realized net income attributable to Shake Shack, Inc of 7.6 million or 19 cents per diluted share, we reported and adjusted pro forma net income of $7.5 million or 17 cents per fully exchange and diluted share.

Justin pro forma tax rate, excluding the impact of equity based compensation was 12% <unk>.

Finally, our balance sheet remained salad with $285 million in cash and cash equivalents and marketable securities at the end of the quarter, a decrease from $295.2 million in the prior quarter, representing a material improvement in her <unk> cash usage versus last year. Despite having open more than twice the number of shots by the end of the third quarter compared to <unk>.

Last year and.

In fact, our third quarter Capex declined three per cent year over year to $38.3 million with new Shack capex, representing the majority of the spend followed by our I T spent.

We invested more to maintain or shacks as their early generation fleet ages and completed the bulk of the expenses around the kiosk retrofit program.

These investments were somewhat offset by a lower degree of Capex investments in our digital business as we scale, our current offerings and leverage in check dining experiences.

And the last few years, our Capex has been elevated due to the higher cost for new shack built heavy investments to build our digital platforms. As we went from effectively no digital sales pre COVID-19 to approximately 30 per cent of our business currently.

We executed a number of special projects, including the rollout of our kiosk retrofit program, but we're committed to bringing the net cost to build of our 20th 24 class down by about 10% next year as a starting point and we're also finding efficiencies in other areas of Capex spent including I T.

Now onto guidance, which reflects the degree of uncertainty around the spending outlook and inflationary headwinds.

This ranch does not reflect any unknown additional delays to our development scheduled or any changes to the macro landscape beyond what we are experiencing today.

For the fourth quarter, we Guy total revenue of 276.25 million to 281.75 million with 10.25 to 10.75 million of licensing revenue.

Approximately 14 company operated opening.

Approximately five license Jack openings, and first name Shaq sales to be up low single digits year over year with low single digit menu price and relatively consistent mixed trends in the fourth quarter as we had in the third.

Our guidance for the full quarter to achieve low single digit same check sales as soon as we returned to more typical seasonality patterns in November and December.

Well, we're not providing guidance beyond the fourth quarter. Just a reminder, that we will lap the popular white trouble Burger L. T O starting in February.

This was our most expensive L T O ever and drove traffic so lapping it will likely be a headwind to a traffic price and mix. We have a strong <unk> L. T. O lineup plan for next year. However, we're gonna be keeping an eye on this tougher compare.

Regarding four Q restaurant margins to be approximately 19 per cent.

Items for the fourth quarter as a material improvement from historical seasonality and reflects the least amount of menu price. We have carried since early 2021, despite ongoing inflationary pressures.

Historically, our fourth quarter average weekly sales have been the lower end of seasonality and <unk> shaq level operating profit margins had can compress by approximately 300 basis points versus the third quarter.

Our fourth quarter guidance reflects food and paper inflation to be up mid single digits year over year, driven by beef up mid cheese, we expect labour inflation to be in the low single digit range year over year.

Our full year 2023 guidance called for total revenue of approximately 1.08 billion growing about 20 per cent year over year Fame.

Same check sales to grow by mid single digits with high single digit price, we expect licensing revenue to reach 40.5 to 41 million <unk>.

Restaurant margins of 19.7 to 20 per cent, that's 220 to 250 basis points improvement from last year's levels. We got <unk> 2023, G N a of $125 million to $128 million. This is absent at 3.5 million and non-recurring costs that are excluded from adjusted EBITDA year to date at the midpoint G&A would be <unk>.

11.7 per cent of total revenue, that's approximately 90 basis points of leverage versus 2022 levels.

Other guidance point, we are lowering our equity based compensation expectations do approximately 16 million guiding preopening to be 17 to 19 million depreciation of 88 to 93 million and adjusted pro forma tax excluding the impact of equity based compensation to be 16 to 18 per cent.

Altogether based on our performance. So far this year, we are raising our fiscal 2023 adjusted EBITDA to 125 to 130 million, representing approximately 70 to 80 per cent growth year over year.

Thank you and I'll turn it back to Randy.

Maybe I Wanna and today's call with a moment of celebration as well as sharing our focus heading into 2024.

Last week, our team celebrated the opening of our 500 <unk> globally.

I'm gonna have our entire team past present and future. This milestone means so much to us.

The organization is incredibly excited for the possibilities of late.

Now here's a quick snapshot of where the teams are lining our focus and strategic plan for 2024 first.

Core focus will be on delivering a consistent just experience.

We know our <unk> our next phase of growth has to be more consistent and we'll be working to improve throughput speed and consistency across all our trucks.

Focusing on a back to basics operation strategy of excellence in every interaction.

Second.

<unk> and strengthen our brands.

<unk> 33 states in 18 countries with many more to come our brand is incredibly strong.

2024 will focus on driving that brown, even further and deeper around the globe connected with our fans in new ways that can drive traffic sales and brand awareness.

Third will continue our journey to making <unk>, even more profitable.

Main committed to improving shock margins in the next year to expense discipline in all areas of the company, including Gina.

And to ensuring profitable growth as we scale.

Holding it on near and long term strategies to scale, our supply chain improve our labor and efficiency and checks <unk> throughput to Maximise peak sale hours and improve profitability across channels.

I believe there are several opportunities to continue to grow longterm profitability doubling down on those strategies to execute in 24 that'd be all.

<unk> <unk> and approve how we build an open checks.

While retaining the exceptional experience should check is known for.

On our way towards new prototypes in standards throughout our future shock classes that are lower cost overtime.

And create an improved yeltsin team member experience, while driving strong returns on capital and finally, we will continue our lead focus on developing rewarding high performing teams are people lead everything we do every burger interaction and every feeling <unk> and will continue to invest in them.

He was looking forward to what's ahead and we hope we see you soon for hot chicken and a troll shake this holiday season with that operator will go ahead and open up the call for questions.

Thank you that'll.

That would be called the questions. Mr session. If you would like to ask a question <unk> on your telephone keypad, a confirmation totally became her lines are the questions Q you.

<unk> <unk> <unk> <unk>, if you would like to remove your question Q.

<unk> search <unk> up your headset before press this Turkey.

Our first question comes from <unk>. Please go ahead.

Thank you and good morning, I have two questions just on the development. So I'd come up from two different angles first you talked about opportunities to improve operations throughput et cetera that you'll just studying as you go through 2024 could you add any further contacts just on where some of those opportunities might be perhaps you could come.

And maybe how much variability there is in the system today and into the gap between the most efficient you that's the least efficient units.

Of course for controlling for sales.

Started there if we could.

Yeah. Thanks, Brian look there's a lot of <unk> you know relatively still a small company right. We're just around 300 company operating in restaurants, not quite in the United States San over that time, you end up with various arrows of kitchen design of overall restaurant design, where we're headed is kind of two pronged approach we've.

Got to look at the continued build of the shock of the future, bringing down the cost and really are lining on the best longer term kitchen design most of our opportunity will come through how we move food through our kitchen and the flow of expediting, how we how we make things was not going to change <unk>.

Have.

Standards of our premium ingredients in the way that we cook that we expect to continue but we can do it faster we can do a better we could do with a greater sense of urgency more often and it takes for us some of the steps of <unk>.

Focus number one making it making throughput and speed. This has not been things that has been our.

Core focus in the past and I think it's the thing that operations in our teams are really working on right now to say hey, it's gonna be about this in 2024, it's gonna be about every second of the day watching this making sure we're consistent and knowing that a <unk> can count on what they're gonna get when they come and we know there's variability I don't think.

There's an easy way to answer the second part of your question, which is well is it about sales is due out lower sales was higher sales I mean, you know.

Anyone who's worked in restaurants her whole life can tell you the easiest thing in the world to do is run a busy restaurant. The hardest thing to do is one on the sometimes busy not busy other times and so I don't think there's an immediate correlation of other than we got off the ride staffing models can you talk a lot about that which we are continuing to get better at and we've got some.

New systems that we're putting in place from a lot of learning and work through this year.

Making sure we've got you know as as in places as we call. It in the team's doing the right thing at the right time. So I think there's just a ton of opportunity there, it's where we're gonna focus and we're just going to continue to look at everything we can to simplify where we can and move our guest through a consistent experience that and that is <unk> that is when you heard very.

Clearly today is what we're focused on for next year.

Alright, that's great and I'm thinking about the the second lens sort of the opportunity to lower development cost.

Unexpected 10% decline in 24, it is a nice down payment, but I'm, assuming there was only so much you can do given the lead times on pipelines et cetera, I guess looking out a few years beyond that is there any way to ballpark a reasonable expectation on where your net development cost <unk>.

<unk> three years from now it is low twos reasonable maybe sub too is there any way to dimensionalize that too early at this point.

Well I I think what we're gonna God choose what we've said today, which is we think this year was a high watermark. We believe we can take that down by about 10% is a number of ways. We're gonna do that right. It's it starts with format choice and design, we've got new prototypes for a drive through we learned so much with the 20th at a wrote 21 that are open and more and we know we can.

Take down those costs, we've designed that new prototype, we're going to begin to build it but that takes time as you said the restaurants will open next year and 24 were designed in 22 identified in 2021 in many cases and you've got to catch up to that that backlog you can't just tomorrow change and and put together a new prototype there.

There will be elements of cost savings that you're going to start to see in 24, which is what we're committed to with our 10 per cent decline as we look ahead, we're committed to continuing to take that down well, we gotta make sure. Though is that we we continue to balance the format right as we learn a bill drive throughs those are more expensive they will get less expensive for us as rebuild a better proto.

Time, but we believe that that should be some poor part of our class as we move forward. It will keep doing that opportunistically as we build our <unk> the kind of shocks that you know of for the majority of the things we build over time, we believe we have an opportunity to bring those down and that's what our classes and 24 and as we look ahead to 25 and get.

Hang a strong pipeline were communicated continuing that that work and look what's unknown is continuing inflationary pressures were finally, starting to see I would say a little bit of lightning on the contractor side of the pressures that you were really hard to build restaurants you follow all these companies everybody's still in the same thing there are <unk>.

Literally still today restaurants, where you're struggling to get the final H V. A C equipment or electrical panels noticing I expect those pressures to lessen quite a bit these coming years and hopefully that'll help us towards that goal. So yes, you hear a commitment loud and clear I'm not gonna give a number of past next year and and by the way I wanted to call out too we also.

Talked about Preopening costs, we know that's a number we're focused on that we can and will do better next year and believe there's opportunity to be on that as well.

Our next question comes from Sarah and a tour with Bank of America. Please go ahead.

Hi, This is Catherine <unk>. Thanks for the question I think at first I just wanted to ask about some of the restaurant level of margin components in the third quarter, specifically on in a restaurant other operating expense looks like that was down you have a yard per cent of sales. So curious how much of that was leverage on.

<unk> you know in restaurants L versus a delivery, which I think has higher margins and then also just on food Martin's a little bit better than expected is that a function of sales next or you know or commodities, a little bit more favorable.

Uhm hi, so on the other <unk>, we did have a lower we did have a benefit from a lower delivery mixed in the quarter, but we also had some you know pretty good savings on things like R&M and lower T any expenses, which contributed to that outperformance in the quarter we.

Just doing a lot you know in line with our strategic plan with better managing that that expense line and Ah restaurants from you know not only improving the profitability in our third party delivery channels, but also you know through R&M strategies of replacing equipment that with aging and more expense disk.

<unk> within our restaurants, just showing some nice performance on that died on the food side. You know we did have a benefit from higher menu price I will say, though that beef inflation did pick up especially towards the end of the quarter and that is one that we are watching here is we've got it for kind of mid teens level of inflation.

Into your end.

Great. Thank you and then Katie actually I was curious about some of your earlier comments just on scaling some of the digital investments that you've made I was wondering if you could talk a little bit more just about you know the the timeline I guess, how how long it's taken to achieve some of those like scale benefits from investments and then how to.

You measure return on investment for for some of that for those digital initiative.

Yep. So on scaling digital you know I think it would be bringing back a little bit of of the history of our digital journey Uhm you know starting in you know 2019. If you. If you go back to that level, we had a very low digital mix them as a company and you know with everything that happened with Covid we access.

Elevated a lot of investments on that side drove you know a pretty healthy digital mix, which was really critical for the company. During you know times when guess, we're not going to the dining rooms as much uhm, but as we've seen more of that return to normal returned to it and check experience that really aided by kiosks as well it really has changed the.

Piece of investment needed to support this fitness, so kind of going from nothing to you know the the great platform that we have today required a level of commitment.

And now where we are today is on making sure that we are being very disciplined with how we're supporting that and also still investing for a <unk>. So if you look at kind of what we've done with the <unk> and the retrofit program on that side and how we're investing more there an upscale cat capabilities and better software and a better experience.

For that gas Uhm, we're doing that in a way that is more cost efficient and we'll scale over time I think it's important to know too that you know digital businesses require some level of upkeep and that's just something that's going to you know as we are a digital leader in the space. You know that's just something that's going to be part of our cat.

<unk> and we're we're working on strategies and executing on strategies to be more efficient on that side.

Our next question comes from Jim Sanders, Hertford North Coast Research. Please go ahead.

Hey, congratulations on a great quarter, just wanted to talk a little bit more about pricey I think a lot of your competitor you've taken your menu prices up to three 4%. This quarter just wondering how you're looking at pricing. If you have room to take that up further in the quarter or into 2024.

Did you start.

Getting more visibility on inflation. Thank you.

Yeah. Thanks, Jim we've definitely been you know we've been cautious for the history of the company. Obviously, we're rolling off a high single digit from last year, we wanted to be cautious. So we took about 1% just a small price increase in October end of October and I think we're looking at it now to say where where does some of these inflationary pressures go we <unk>.

10, you to see increases in our fries and beef obviously is the biggest part of the basket that we're looking at and you know will continue to look at price as a lever that we may need to take we feel good about the current value scores, but like anything I mean, I think everyone. Whether it's every restaurant retail you see a lot of of consciousness.

The consumer we we just want to be careful that we Wanna make sure. We're building. This company not just for this next quarter, but for very long term.

And we want to make sure we're looking at all of our channels and we're pricing might go there and I think we'll take another look at that probably in the first quarter, but we're not guide and yet at this time, whether and how we will take anything we're rolling kind of a low single digit right now for the next six months or so and we'll keep an eye on that as we go but will be <unk>.

King at 2024, and taking price, where we need to.

Alright, just a quick follow up question, you mentioned, a movie promotion and the overlap and trade areas do you have a sense of how many shakes checks in the U S overlap with trade areas, where that movie will be shown just a ballpark Idaho. It's funny I don't have a I don't have a number of that we've got a lot that are actually in <unk>. You know some of the core shacks or in some of these <unk>.

<unk> shopping lifestyle centers adjacent to movie theaters. We've seen you know there are various pops over the summer with Barbie and some of the other strong movies that happened and drove themselves and we do see a correlation and some of our songs I'm sorry, I don't have the number but I'm gonna I'm Gonna just roughly guess, it's probably around 10 per cent.

So that are pretty close to just to having some kind of impact there yep, we're gonna be doing a lot of cool activations at you know close to I'm not going to get an exact number on the side, but there's you know about over 50 shacks, they're gonna have some really unique exciting activation for their troubles specific vinyl takeovers.

A exciting things going on around the shack with strategically placed pick some of these just due to their proximity to movie theaters.

And there's even gonna be you know, it's Randy alluded to and described there's even going to be a few of them that are getting kind of this extra plus up with glitter bars for kids coloring stations photo booth, it's gonna be a really fun way to engage with our gas around this exciting movie.

Our next question comes from just farmer <unk>. Please go ahead.

Thank you so for the 21 drive through operation or Dressers, you have an operation a <unk> a handful of those have only been in operation a few few months here, but can.

Can you touch on the common themes of of those drive throughs that have outperformed or underperformed expectations in the early going.

Yeah, you bet. Thank you and we said we look we've shared some of these targets I would say on the outperformance like anything like any shack, it's always gonna be about the location right. There are some shots, where we got it better than we did at others certain shots, where we would say you know what we probably could have.

Put a shock there, we probably could have gone to a higher traffic location or a better way to get in and out of that location. So I think our best ones are the ones, where we're seeing the best high traffic zones are lined with high brand awareness areas, where shake shack kind of have striked and.

I would say, we've still got a lot to learn operation. We are you know kind of scaling that whole operation down slightly not just for cost the bill because what we've learned is you don't have any seats, we really need how many seats, we need outside what the vibe should be we think we can continue to build a drive through that's really distinct and exciting in the industry, but take <unk>.

Down the size and cost of it in the kind of 2025 models. If you look at this coming year, what we're what we're excited about for the next batch of drive throughs, we're gonna start to do it and what has traditionally been some more stronger more coastal markets there'll be some some shock drive thru open on the east coast.

New Jersey long island looking at so I'm on the West Coast in California. So we feel really good about the opportunities there to keep learning and we're <unk>, we're investing in this in and we'd like it and it should be a part of our future growth, but we still got a lot to learn and improve upon.

That's helpful. Just one follow up on the October comp, which was 3.5 per cent you guys touched on that you were rolling off some pricing.

At some point in October, but I'm not entirely clear to me when so the October comp was 3.5 per cent what level of pricing was captured.

And that 3.5 per cent comp.

Yeah, we had I would say the blended to a kind of a mid single digit range be rolled off of that high single digit in the middle of the quarter. We're gonna be exiting <unk> December at about three and a half per cent price. So as to think about that and October cop was roughly flat on traffic, which was an improvement as we have seen some.

Of those negative traffic periods towards the end of the third quarters. We said so I think that was the that was the encouraging thing driving some good sales in October and I'm looking ahead looking ahead.

Our next question comes from Brian Harper is Martin Staley. Please go ahead.

Yeah. Thank you good morning touched ask about the <unk>. The comments you made on staffing model, what we should observe there and what you think of the timeline for rolling It out is.

Yeah. So I would say we're early days here on this I think it's a natural evolution of just the company as we have layered in some added efficiencies here with kiosk, we have new formats here like much larger drive throughs. We also have you know smaller format like food courts, and then we have our traditional kind of cool.

<unk> expression.

There's just more differentiated factors that we Wanna take into account with how we're thinking about staffing not only to just to get more precise an hour's used for a number of of you know variables, including menu mix channel mix them in format, but also to you know make sure that we are maximizing peaks as well.

So I would say it's still early days, we're looking to roll out some tests by the end of this year into next year, we're going to keep you updated on how that goes but nothing really more to share on this breath today.

Okay. Thanks, just a smaller question maybe Randy made some comments just about.

Kinda Asia, maybe some uncertainty there how that affects the license businesses is that are you kind of referring to just sales of those units are you referring to how do you think about kind of a mix of openings. As you go into next year will what were you kind of suggesting there.

Both of those I think you've got a obviously leaves with China, We've got a significant part of our business there.

It goes without saying, there's macroeconomic uncertainty in the region, there and that'll that'll decide ultimate pace of our openings as well as what are where are <unk> Ah line too for sale. So that's really the reason you're looking at obviously, that's what happens in China also.

Mmm spills out into our other Asian businesses through Korea, Japan, Uhm through various travel and economic indication. So that'll be something I think that's probably the biggest uncertainty as we look at our license business. Obviously, the middle East has for amount of uncertainty as well right now and will but those deaths. What my comments were really looking at do I have to.

You can tell it's a little bit of an unknown as to how that part of our business will grow and this next coming year.

Our next question comes from Sarah <unk> William Blair. Please go ahead.

Hi, Good morning, I guess, you know labor has has been tough fried across the entire space I think you're kind of within 150 bits of where you are pre pandemic, which is great considering on all the information that you've had to digest there.

With with kiosks and it sounds like much better tenure at the employee level and now a new staffing system that'll be going into place do you think kind of achieving pre pandemic labor is a bogey that you can shoot for or is this just all kind of trying to.

Battle, what might be ongoing labor inflation going forward.

Well I think it's hard to say sure and we're not Gonna guide specifically to any new Labour percentage. We've got a lot that we are really looking out there in terms of just be more effective and efficient with how we scale. The good tailwinds happening we've mentioned as potential turnover is improved but you can't deny the continued increase in labor costs, that's not going down.

We will have $20 an hour in California in April that's a significant part of our business and we will have I expect continued wage increases over time, and that's not gonna settle anytime soon and that'll be part of our pricing structure and how much we choose to offset with that but again, our our commitment to yours.

Being as efficient as we possibly can so we've also got a pay a great rate to sustain if you look at our profitability improvements a lot of it has had to do with our ability to keep retain and find great people as that happens better like any company and certainly like us will get better at that so we're committed to keep trying to improve it but we're not.

Gonna give guidance specifically passed today.

And Randy I know you said that tenure was up for for it I think frontline and management staff at the unit level and can you kind of give any comparisons of kind of like what average tenure is now at the manager level or hourly level relative to 2019.

You know we have never broken that <unk> I'd say this is we look at the industry just kind of traditionally look we have we work in a high.

Turnover section of the industry right the industry General and our section of the industry generally is quite high turnover I'd say, we probably tracks. Similarly are hourly T members turnover and retention across the industry, but from from also what we've seen we track much better on our management at all levels.

And we are managers tend to grow with us stay with us and continue to earn E. R. R. G. M. Do we have said this before can generally we all in make over six figures right. Many makes a lot more than that we give stock to every G. M. Every year. This is a significant part of our ability to retain people. So now is we're growing as fast as.

We are we gotta keep developing that right and we got a balance growth and we do invest we've talked a lot about this and previous calls so much time and effort are people team into developing people at all levels and what was the other part of that we Gotta do and continued better you heard a lot of that in today's call is how do we keep simplifying our operation So our leaders.

Have an easier time coming up the ladder and that's the that's the stuff. We look I think that's our sweet spot at a company it'll never be easy and we're gonna keep investing there, but we're real proud of how the teams continue to build.

Our next question comes from Jake Bartlett tourist security. Please go ahead.

Great. Thanks for taking the question Yeah mine was about the the opportunity to expand margins going forward and I know you talked about you know a few things you're looking into and you're you're executing on with Labour scheduling supply chain Uhm, Randy mentioned margins being up in 24 I wasn't sure. If that was just started with some comment on restaurant.

<unk>, specifically, but I'm wondering whether you could help us.

Dimensionalize any of these initiatives you what what the scale of the potential improvement is any metrics that you know that you've found that you can keep can improve upon in any any way to quantify the opportunity and in the line items.

Yeah look we're not we're not giving guidance for 24, yeah, Jake other than to say you've heard a commitment loud and clear through this whole year and today and saying we continue to identify opportunities starting with supply chain. We're really talking about is kind of a total cost to serve and how can we start with the product look at our supply chain opportunities were digging deep.

On that and then look at how that flows through the restaurant in every way and see where opportunities are so we believe we can continue to expand margins at the restaurant level an overall the company and it was just just take a b for a second I think it's really important to do that we we increase our EBITDA margin by over 400 basis points over all in.

The company, we expect some level of love of leverage a G. N E. This year, we continue to expect that that will be part of our plans moving forward. So I think just the core focus on profitability and lots of different ways. We are working to get there and we'll keep you posted as we get into 24 as to what that is gonna look like yeah. That's.

Balance against a lot of the uncertainty of the consumer but we've we've built a lot of this infrastructure now to be going after them identifying where these opportunities Lei and start to go after them one by one they.

I wanted to be cleared here yeah. The teams are moving together, we're moving too they're very purposefully here at a lot of these opportunities, which we've identified you know through supply chain do labor various other areas within our our piano to continue to drive efficiencies and help US outperform you know what has been challenging.

Backup for the industry, you know with consumer spending pressures and you know continued inflationary pressure. So you really encouraged excited about what's going on today, what we've built on and what the plans are afraid to go forward.

Uhm tend to help continue to improve our performance financially.

Great. Thanks, <unk> Ah come in or just a question on the fourth quarter guidance for for companies seem store sales and the progress so far in October last year, you're you're you're compares to get a little easier for the next couple of months. You did mentioned and then you also have the kind of movie tie in.

You you mentioned it returns seasonality and I'm wondering you know in October and December whether there was there was some abnormal seasonal behavior last year. So just Wanna make sure what to make sure I know the puts and takes in terms of how we should think of October and December this year Sharon November yeah. So just yeah.

Yeah. So just a reminder, our compares the past couple of years with just a different pricing cadence and we've had pre COVID-19 are a little bit choppier. So last year, we had taken kinda, we'd we said between 7% to 9% in menu price across the system, which we rolled off of so you know the sequential compares on AWS.

Uhm and on that side will we're expecting that to return to kind of a more normal pre COVID-19 seasonality pattern. We did have some impact you know at the end of last year on our AWS from a very large number of N S out in December.

And it's you know following our company you know our restaurants tend to open very strong and saddle over time are gonna be comparing over that in December of this year and then just you know another note on that side you know we have a pretty solid lineup on the culinary side, but still lapping over hotline.

<unk> as well.

Our next question comes from my co payments with open the <unk>. Please go ahead.

Hi, Thanks. Good morning, you know you're talking about kiosk being over 50 per cent of been checked sales now you know can you talk about any cohort of units. That's involved at 50 per cent level is there anything different about those units versus the rest of the store base and is that inform you about the potential upside that still exist for chaos uhm and anything else. We can talk about maybe margin differentials or anything.

Thanks.

So yeah, we have a large difference in <unk> kiosk penetration for in Shack, it's something that we've been very focused on driving a narrowing of the gap and driving more gas to the kiosk and there's still a lot of exciting opportunity on that front and it's great that we have kind of the most of the entire fleet now rolled out.

We you know it is it is definitely you know our highest margin channel we see a nice check left on the back of it and we still since we're early days here and it really kind of leveraging the full potential of of upsell through this did the order mode.

And how that we can you know start to leverage guest data over the longterm through that channel.

What I will say that you know, there's a number of variables, which can impact the degree of kiosk usage, which you know, we're we're investigating and and you know continuing to refine some of it's just you know simple wayfinding and had to guess interested in that you know is that kiosk in the best optimal place and you know these are easy fixes that will will go after.

Her over the coming quarters, where we can but you know continuing to train and arm our teams and our managers with you know why this is such an important initiative and guiding our guests to that kiosk is working and we're excited for what that potential will be over the longer term.

<unk> you know you're talking about supply chain today I'm trying to use that helped by drive better margins going forward. So is that a reference to sort of looking at longer term contracts or how can you just elaborate on how supply chain can be better utilized going forward.

Yeah, I mean, you Gotta you Gotta start with our actual scale as I as I noted earlier I mean less than 300 company operated Jackson like [laughter], we have so much opportunity just on economies of scale. It starts also with development and how we choose to cluster of our shots more closer together, we've got a very spread out class of restaurants over this last decade.

And we're <unk>, we can begin to see opportunities and shipping and how we move frayed all of those things, but separately from that we're gonna start to look at just backing up supply, making sure. We have other suppliers more aggressive going after some of the cost opportunities. We're gonna have we're digging through all of that while retaining all the premium.

And improving all the premium way in which we bring our food in in the quality of ingredients. So I just think.

There's always been a process, it's something we're spending a lot more time and effort on today and I think in the coming years will continue identify opportunities, where we can save on the supply chain.

Our next question comes from Andrew Charles Kitty Kallen. Please go ahead.

Okay.

Sorry, I can't hear the question are you still there.

Mmm is there Charles.

You return.

Your line is open.

Move onto the next question will.

Keep that contacts for.

Our next question comes from David Tarantino required. Please go ahead.

Hi, Good morning. My question is about the October sales friends, and and <unk>, specifically wanted to ask about the marketing and promotions that you called can you just maybe explain what you did in October the that maybe you haven't done before.

What drove the improvement in traffic and and whether that's a new strategy. You think you can employ as you think about the the go forward. Thanks Yeah.

In fact, some of the things are new summer just kind of the shifting of things we've done before at various times of the year and employing some of those tactics. So lots of different marketing on all channels as we tee up.

Of course, a L T OS pushing that and we know that that was a little bit of a pressure of a lap but it always begins with that stories. We can tell a few other things we've been leading into additional performance marketing. We're finding good success and strong returns on our AD spend in various performance channels were doing various regional marketing and in areas, where we think we can.

Go deeper and really hit a city a little bit harder more directed and lots of performance digital ways. Those tactics. We continue to spend on an open up some AD spend as we prove that those have good returns and we've done that various things on on different types of offers that feel good for shake shack for it.

<unk>, we did free Fridays and our App channels right. So that that drove some strong uptake on Fridays, where you can get a free Fry when you come in when you order on our channels. We have an afternoon Bogo Shake and then we're doing various things with our delivery service providers as well, where we see where we see potential impact. So when you really look at it it's a ballad.

Marketing approach towards the things that we believe work for US, we'll keep doing some of that as we go and it's still a lot of tests and learn traditionally we have not been a company. That's spent a lotta money on true advertising and it's time for us to wrap those up we see that money being well received and strong returns on that and we expect will continue to.

Do that in this quarter as well as as we plan in the next year doing it with discipline, but opening up as we scale as a company there'll be greater opportunity for us to to spend better on marketing.

Great. Thank you.

[laughter].

Our next question comes from Brian Eno, which Piper Sandler. Please go ahead.

Alright. Thank you just a question if there's a search for a chief operating officer. You know is there a search going on and maybe what are the key characteristics or or factors the executive team and the board.

Is using are looking for in terms of finding the right candidate for sure.

Alright, Yeah, that's a great question and let me just start by saying our current operational leadership team is deep tenured and strong and doing a heck of a job continue to run things in the absence of a direct C. O L. At the moment and I've, obviously involved myself quite quite a bit more than a lot of our executive team jumping in really so.

Morning operation. So they are doing a great job. We're looking for the next grade C. O O and we have an incredible bench of candidates that we've been vetting talking to and considering and we're going to take our time on the search. This is a critical position for the company, we expect to hire someone with deep operational expertise and who will help us continue the street <unk>.

Man that we've shared today. So we'll look forward to it I expect it will take some time and we'll keep you posted as that gets gets closer to being finalized.

Thank you.

Our next question comes for all any shut that with Jeffrey Bernstein. Please go ahead.

Okay.

Alright, sorry, that's very Jaffray Burntsand Barclay mm. This is any Shaun <unk>. Thanks for the National unit growth guidance conceptually, how do you think about balancing thousand returns and a challenging macro and is there any change in your desire overtime to focus on big cities in nature. My address cause you have like suburbs and drive through as being one of Alabama.

Yeah, all of the above I mean, and if you look at the last couple of years, that's exactly what we've done we do certainly believe in urban centres and will continue to grow shacks. There as we have but the majority of our growth is coming outside of traditional urban centers <unk> suburbs and some level of drive throughs and we will keep you posted on that but we think forties a great number of company operated next.

Here think that really balances us out similar to this year keeps a strong classmate for them. We open almost 80 restaurants. This you're totally worldwide. That's a that's a pretty strong unit growth and we expect to be similar to that mid teens unit growth next year, and we think that's right as as we also spend time too.

To continue to refine the cost to build our profitability and this on certain sales environment as we head into the next year. We think that's a really good number to to appropriately focus the company on continue to be a growth company, while getting more and more profitable.

Alright, thank you.

Our next question comes from Brian <unk> Raymond James. Please go ahead.

Hi, Thanks, just a quick follow up Katie on the the four key revenue guidance could you be a little more specific just on what you layered in from the seasonality perspective, just curious what you consider you know quote unquote normal seasonality and also what you later data as it relates to your N. S. O sales performance I think that's outperformed your.

<unk> this year, but the correct me if I'm wrong, there any help on those two would be great. Thank you.

Yeah sure So October better than historical seasonality inner guidance is kind of a return to more normal seasonality kind of with where we would have been in October kind of without that <unk> at the low end and then carrying through some of the reset momentum towards the high end.

But assuming normal seasonality, there's some puts and takes their on the noncom side that I think are important to just reiterate that first of all on development. We're gonna have it you know we're expecting to have a little bit more of a back and waited opening schedule in the fourth quarter. So that will skew some of their contribution from new check openings uhm in the quarter versus.

If you were interested in kind of a bad point opening and then the second point is you know we had 22 nso's in the fourth quarter of last year and they open up very strong.

And those sales have settled to take good levels uhm, but that will continue to also you know it'd be something to think about is your modeling uhm for the fourth quarter.

There are no further questions at this time I would like to explore back over to management for closing comment.

Thanks, everybody really appreciate you taking the time, especially in this busy week I know everybody's got a lot going on so thanks, so much and we look forward to seeing you in a shack soon take care.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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