Q3 2024 Shake Shack Inc Earnings Call
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Speaker Change: Greetings. Welcome to Shake Shack's third quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Speaker Change: I would now like to hand the conference over to Michael Oriolo, Vice President of FP&A and Investor Relations. Thank you. You may begin.
Michael Oriolo: Thank you and good morning, everyone. Joining me for Shake Shack's conference call is our CEO, Rob Lynch, and CFO, Katie Fogertey. During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance.
Michael Oriolo: The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release and the financial details section of our shareholder letter.
Michael Oriolo: 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 29, 2024.
Michael Oriolo: 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.
Speaker Change: By now, you should have access to our third quarter 2024 shareholder letter, which can be found at investor.shakeshack.com in the quarterly results section or as an exhibit to our 8K for the quarter. I will now turn the call over to Rob.
Rob Lynch: Thank you, Mike. Good morning, everyone. It's been a great third quarter. We delivered our 15th consecutive positive quarter of same-shack sales growth, our ninth straight quarter of restaurant-level margin expansion, and we grew adjusted EBITDA 28% to $45.8 billion.
Rob Lynch: We grew our footprint around the world to over 550 shacks, opening a total of 17 new shacks during the quarter, comprised of eight domestic company-operated openings, including three new drive-thrus, and nine new licensed shacks.
Rob Lynch: We are on a path to open approximately 75 shacks system-wide this year, representing mid-teens unit growth.
Rob Lynch: Our new company units are tracking the strong cash-on-cash returns as we continue to bring down build costs and pre-opening costs per shack. The team continues to find ways to deliver efficiencies, and we are on target for an approximate 10% cost reduction 2024 build costs.
Rob Lynch: Our new shacks are also outperforming initial sales expectations, and company restaurant-level profit margins continue to expand.
Rob Lynch: We expect to deliver further improvements across these metrics in 2025, and as a result, we'll accelerate our new unit openings to approximately 80 to 85 next year, including 45 company-operated shacks and 35 to 40 licensed shacks.
Rob Lynch: A direct result of our sales driving strategies and our consistent differentiated premium positioning which has allowed us to continue to outperform even in an uncertain macro environment.
Rob Lynch: A big part of our success in the third quarter, and an even bigger part of our future, is Shake Shack's continuous culinary innovation.
Rob Lynch: Memorial Day weekend we launched our summer barbecue menu which featured two burger options each with either a smoky or tangy sauce along with barbecue spiced fries.
Rob Lynch: Then in mid-September, we brought back our guest favorite, the Black Truffle Burger, including shroom and Shaq's Back options, as well as the Parmesan Garlic Fries with Black Truffle Sauce.
Rob Lynch: The Black Truffle LTO is a perfect example of Shake Shack's elevated culinary program and our ability to offer differentiated culinary experiences at great value, which particularly stand out in today's value wars environment.
Rob Lynch: In addition to culinary innovation, we continue to strike the right balance with strategic promotions and marketing campaigns to raise awareness and drive conversion.
Rob Lynch: In September, by popular demand, we brought back Chicken Sundays, which we originally ran for four weeks in the second quarter.
Rob Lynch: Chicken Sundays have been a solid sales contributor in the short term, but even more importantly, we have seen promising results in our overall chicken awareness, which we expect to drive chicken sales at Shake Shack long after the promotion ends.
Rob Lynch: We also ran other value-added campaigns for spotlight menu highlights, such as Free Shake Fridays and our Dog Days of Summer.
Rob Lynch: Our marketing continues to attract new and repeat guests, and we will continue to make these strategic investments moving forward.
Rob Lynch: And as I look ahead, I am encouraged by the fact that we still have multiple sales driving platforms and initiatives to build on and implement. Among the significant number of sales driving initiatives in our pipeline, three stand out.
Rob Lynch: The first is the development of a strategic product innovation calendar.
Rob Lynch: The second is the development and launch of a Shake Shack loyalty platform. And last, but certainly not least, is the additional operational enhancements that will increase guest satisfaction, decrease service times, and improve throughput. I'll touch here briefly on each.
Rob Lynch: As we work to build and highlight the upside potential of a strategic product innovation calendar, it's not lost on me that culinary innovation is already a part of Shake Shack's DNA.
Rob Lynch: However, we have an opportunity to become more strategic and ensure that new innovation works in a complementary way with our core menu to drive outpaced comp growth.
Rob Lynch: We are actively working to build this capability in the first half of 2025 and to leverage the benefits moving forward.
Rob Lynch: As you know, beyond the hospitality and guest recognition our team members exude each day, Shake Shack does not currently have a systematized loyalty program.
Rob Lynch: I can't help but find that a bit ironic, given that Shake Shack was built on the principles and culture of enlightened hospitality, where understanding the wants and needs of our guests is paramount.
Rob Lynch: I truly believe that given this heritage, we have an outsized opportunity to deliver enlightened hospitality in a world that increasingly craves it, but across a digital footprint.
Rob Lynch: We will be making investments in 2025 to develop the right platform to realize this potential over the long term.
Rob Lynch: Lastly, on operational optimization that drives sales, in the third quarter we further decreased wait times and improved guest satisfaction metrics and as a result drove higher sales and margins.
Rob Lynch: However, we still have a lot of opportunity for improvement, both short and long term.
Rob Lynch: In the short term, we are working on the blocking and tackling of operational excellence, including speed of service initiatives, process improvements, and world-class training of our people.
Rob Lynch: Over the longer term, we're working to optimize our kitchen flows, equipment packages, and guest service models.
Rob Lynch: All of these initiatives are expected to be long term builders of repeat visits, which will increase frequency and overall sales.
Rob Lynch: Speaking of great operations, we're driving a significant margin improvement even as we make additional investments in marketing and promotions to grow top-line sales.
Rob Lynch: Third quarter restaurant level margins expanded 60 basis points and adjusted EBITDA margins grew 140 basis points.
Rob Lynch: And we expect fourth quarter to end on a high note as well with fourth quarter restaurant level margins expanding 220 basis points and exceeding 2019 levels for the first time
Rob Lynch: The team is doing a great job at utilizing our increasing scale to find supply chain efficiencies, improving labor utilization across both staffing and scheduling, and being more disciplined among other costs.
Rob Lynch: All in, the third quarter was another successful quarter of sales, restaurant level margin, and adjusted EBITDA growth, which we expect to continue into the fourth quarter.
Rob Lynch: Looking ahead, we expect this momentum to extend into 2025 as we accelerate unit growth.
Speaker Change: With that, I'll turn the call over to Katie for a more detailed discussion on third quarter financial results and our outlook for the rest of the year.
Katie Fogertey: Thank you, Rob, and good morning. We are really proud of Shake Shack's strong third quarter results as we grew total revenue by 14.7% versus last year.
Katie Fogertey: expanded restaurant level profit margins by 60 basis points and grew adjusted EBITDA by 28% to 14.4% of total revenue up 140 basis points.
Katie Fogertey: This continues our trend that for each quarter over the past three years we have generated positive same-check sales and grown total revenue, restaurant-level profit, and adjusted EBITDA by double digits.
Katie Fogertey: This quarter, we also achieved record-high total revenue in system-wide sales, as well as the highest third-quarter restaurant and adjusted EBITDA margin since 2019.
Katie Fogertey: And I'll share more in a little bit, but our guidance for the next quarter on restaurant and adjusted EBITDA margins well exceeds our fourth quarter 2019 performance as we continue to execute against our strategic priorities.
Katie Fogertey: Now for the details of our third quarter results.
Katie Fogertey: We grew total revenue by 14.7% year-over-year to $316.9 million, and system-wide sales by 12.8% to $495.1 million.
Katie Fogertey: We opened 17 shacks system-wide in the quarter and achieved the 15th consecutive quarter of positive same-shack sales.
Katie Fogertey: In our licensed business, we grew revenue by 7.1% year-over-year to $12 million. Sales grew by 9.4% year-over-year to $190.2 million, with nine new license shack openings and strong trends in our domestic business that was led by airports and roadway travel plazas.
Katie Fogertey: In our domestic company-operated business, we grew shack sales 15.1% year-over-year to $304.9 million, with 8 shack openings and 4.4% year-over-year growth in same-shack sales.
Katie Fogertey: traffic crew 30 basis points and check roads approximately 4% with approximately 6% vending price.
Katie Fogertey: Mixed with sequentially flat at negative low single digits with levels driven by planned marketing strategies.
Katie Fogertey: Items per check was slightly positive in the quarter.
Katie Fogertey: Throughout the quarter, we remain focused on driving sales through our marketing initiatives in culinary innovation as well as operational improvement.
Katie Fogertey: These efforts have driven our outperformance and we are encouraged by the trends that we saw across our region.
Katie Fogertey: In fact, we improved or maintained our strong same-check sales trends in every region this quarter relative to last quarter, and grew same-check sales by double digits in Florida, Arizona, Georgia, and Ohio, and by high single digits in markets such as Washington, D.C., Virginia, and Maryland.
Katie Fogertey: We continued our strong sales performance into October with a positive 4.5% same-check sales and approximately flat traffic for the month. We are excited about this continued momentum to start off the fourth quarter.
Katie Fogertey: To help offset continued inflation, we implemented an approximate 1.5% price increase in October across our menu.
Katie Fogertey: This will allow us to maintain the approximately 6% menu price for the remainder of the year. Heading into 2025, pricing will drop to approximately 4.5% in the first quarter and low single digits for the full year.
Katie Fogertey: In addition to driving sales, our focus on flow-through and operational improvement means that we are bringing this momentum to the bottom line. And this was the ninth consecutive quarter of year-over-year restaurant margin expansion.
Katie Fogertey: We generated $64.2 million in restaurant-level profit, or 21% of SHAC sales, 60 basis points better than last year, and the highest third-quarter restaurant profit margin since 2019, despite continued inflationary pressures across our restaurant P&L.
Katie Fogertey: Our strategy of identifying and executing on operational efficiencies to reduce the total cost to serve has allowed us to grow profitably while investing more in marketing strategies to drive sales and increase brand awareness.
Katie Fogertey: Food and paper costs were $86.1 million, or 28.2% of shack sales, down 90 basis points versus last year, as menu price and strategic cost savings in our supply chain helped us offset continued inflationary pressures and our total cost to serve.
Katie Fogertey: Labor and related expenses were $85.5 million, or 28% of shack sales, down 80 basis points versus last year.
Katie Fogertey: Our team did an excellent job transitioning to our improved hourly labor model late in the quarter and provided us with real-time feedback, which allowed us to show significant progress on hourly staffing while at the same time delivering improvements in operational and guest perception metrics, including having the lowest wait time since at least 2019.
Katie Fogertey: And we're excited for what this new way of scheduling will allow for our guests and team members. And importantly, we have many additional strategies in test and underway to continue to optimize performance in our shacks.
Katie Fogertey: Other operating expenses were $45.6 million, or 14.9% of SHAC sales, up 80 basis points year-over-year, as we invested more in SHAC-level marketing and other expenses to support our sales strategies.
Katie Fogertey: Occupancy and related expenses were $23.6 million, or 7.7% of Shaq's sales, in line with last year's levels.
Katie Fogertey: All in, we are very pleased with the level of margin improvement we delivered in the quarter and expect to build upon this momentum into the fourth quarter.
Katie Fogertey: G&A was $35.7 million, excluding $800,000 in one-time adjustments. G&A was $34.9 million, or 11% of total revenue, 10 basis points lower than last year.
Katie Fogertey: The increase in GNA was driven by a significant increase in marketing spend to drive higher brand awareness and sales, as well as executive transition. The quarter also saw a benefit from a timing shift with some marketing spend that we initially planned for the third quarter now moving into the fourth quarter.
Katie Fogertey: Reopening costs were $3.7 million in the quarter, down 26% year-over-year, and we continue to track well against our target to reduce pre-opening expenses per shack by at least 10% this year.
Katie Fogertey: We grew Adjusted EBITDA by about 28% year over year to $45.8 million, or 14.4% of total revenue, up 140 basis points from the prior year, and the best third quarter Adjusted EBITDA margin since 2019.
Katie Fogertey: Depreciation was 25.7 million, up 11.2% year-over-year.
Katie Fogertey: In the quarter, we made the difficult decision to close nine checks to better focus our resources.
Katie Fogertey: These shacks in total generated $17 million in sales over the 12 months prior to their closure on August 27th. While the financial performance of these shacks was below our corporate average, they in total had a minimal negative impact on our restaurant-level profits.
Katie Fogertey: We incurred $28.2 million of expense related to these closures, including $26.4 million impairment charge. Our managers at these locations were all offered a similar position in a nearby shack.
Katie Fogertey: Including this charge, we realized a net loss attributable to Shake Shack Inc. of $10.2 million, or a loss of $0.26 per diluted share. We reported an adjusted pro forma net income of $11.2 million, or $0.25 per fully exchanged and diluted share.
Katie Fogertey: Our GAAP tax rate was 25.9% and our adjusted performance tax rate excluding the tax impact of equity-based compensation was 21.9%.
Katie Fogertey: And finally, our balance sheet remains solid.
Katie Fogertey: with $310.9 million in cash and cash equivalents and marketable securities at the end of the quarter. This is up $6.5 million versus the prior quarter.
Katie Fogertey: year-to-date with our focus on profitable growth strategies and lowering our bill costs.
Katie Fogertey: We have increased our cash and cash equivalents and marketable securities balance by nearly $18 million, marking a substantial improvement relative to a $26 million decrease at this time last year and relative to the year prior to that, a $45 million decrease.
Katie Fogertey: Now we will discuss our outlook for the fourth quarter and fiscal year 2024, which reflects the financial impact from recent store closures, including the impact from the loss of revenue.
Katie Fogertey: Licensing revenue of $11.6 to $12 million with approximately 11 license openings.
Katie Fogertey: Same check sales of approximately 3-4% with low single-digit price mix, approximately 16 company-operated openings, restaurant-level profit margin of approximately 22% as we expect to surpass 2019 quarterly margins for the first time.
Katie Fogertey: Our full year 2024 guidance calls for total revenue of approximately $1.25 billion, growing about 15% year-over-year.
Katie Fogertey: We expect licensing revenue to reach $44.6 million to $45 million.
Katie Fogertey: restaurant level profit margins of approximately 21% representing approximately 110 basis points of expansion year-over-year.
Katie Fogertey: G&A guidance of $144 to $145 million that does not include the $5.9 million in non-recurring costs that are excluded from our adjusted EBITDA year to date.
Katie Fogertey: Equity-based compensation expense is approximately $16 million, pre-opening of $17 million, depreciation of $103 million.
Katie Fogertey: million adjusted pro forma tax rate excluding the impact of equity-based compensation to be approximately 22.5 percent
Katie Fogertey: 140 basis points higher than the prior year, and the highest adjusted EBITDA margin since 2019.
Speaker Change: I want to end my remarks today sharing just how proud that we are of the work that the Shake Shack teams are doing to deliver these strong results and also continuing to develop and test additional opportunities to enhance the guest experience, grow our business, and improve our profitability. And with that, I'll pass it back to Rob.
Rob Lynch: Thank you, Katie. It's a great time to be a part of Shake Shack. Thank you to everyone on the call today and for your interest in our company. And with that, operator, please open up the call for questions.
Speaker Change: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: We ask that you please limit to one question. Our first question is from Michael Tammes with Oppenheimer and Company. Please proceed.
Michael Tammes: Hi, good morning. Thank you. You know, you talked about investments going forward into marketing and building out your loyalty program, just to name a couple.
Michael Tammes: and I know you're not going to provide specific 2025 guidance yet, but can you unpack for us, you know, which of these initiatives...
Michael Tammes: you believe can have the greatest impact in the near term into 2025?
Michael Tammes: that could sort of allow you to sustain this flat to positive traffic momentum that you have. And then just directionally, how should we think about the margins related to that? Are you finding some additional cost offsets to offset some of that stepped-up investment, and then you're going to drive P&L leverage through the same store sales? Thanks.
Speaker Change: Thanks for the question, Michael. You know, I'm really excited about the fact that we've been able to drive
Speaker Change: You know disproportionate top-line sales growth while continuing to increase our restaurant margins
Speaker Change: That's the model moving forward.
Speaker Change: We have, our team has really...
Speaker Change: built a
Speaker Change: surgical marketing engine that's allowing us to reach our most valuable customers and encouraging them to come back more often and to increase their basket size.
Speaker Change: And so, even though we have increased our marketing and our promotions, they're coming in, they're buying higher margin items that we're featuring and adding to, you know, the check growth that we saw in the quarter. In regards to next year and top line sales growth,
Speaker Change: You know, we are currently investing in enhancing our guest recognition, which the outcome will be a loyalty platform, and I think I, you know, mentioned in the last call, that loyalty platform may or may not look.
Speaker Change: like a traditional loyalty platform it may
Speaker Change: you know, be how Shake Shack does it. So, you know, but that probably is not going to have a significant impact in 2025. Those are technology investments that we're making during the course of the next year. So, we are going to rely on the key drivers that we used in 2024 to deliver the three to four percent comps that we're guiding to.
Speaker Change: Our next question is from Brian Vaccaro with Raymond James. Please proceed.
Brian Vaccaro: Hi, thanks and good morning. You noted some strong improvements in a handful of states, I think in the South and sort of Mid-Atlantic, maybe in the Midwest as well.
Brian Vaccaro: I guess I'm curious, could you elaborate on what you're seeing from an awareness standpoint, any quantification?
Brian Vaccaro: around that or any more color you can provide also on the traction that you're seeing on some of the digital
Brian Vaccaro: value promotions, any color on either of those would be helpful. Thank you.
Speaker Change: Sure, we...
Speaker Change: obviously are going to grow awareness for the brand just through our our new shack growth. We have seen great opening results.
Speaker Change: to our Shacks so far this year and that's really a testament to our ability and our marketing team's ability to generate excitement in the communities in which we're opening and as you know and everyone knows we have a ton of white space.
Speaker Change: to go out and open more of these shacks to deliver these great sales.
Speaker Change: On the macro front, you know, we did launch
Speaker Change: a brand campaign in New York City in Q3 and heading into Q4, and we have seen strong awareness results as an outcome of that. And we're looking to continue to...
Speaker Change: do the analytics and understand those results better and their impact on driving sales and in the markets where we invest.
Speaker Change: and ideally we'll be able to...
Speaker Change: scale those results nationally to continue to drive awareness. So, we're really excited about our continued growth in market penetration and the awareness in general in the markets that we're in as we grow.
Speaker Change: Our next question is from Lauren Silberman with Deutsche Bank. Please proceed.
Lauren Silberman: Hey, thanks and congrats on the quarter. Same-store sales, really strong momentum, it's continued. I want to ask how you're thinking about the composition of comp as we move into 2025, traffic obviously strong for marketing, seeing an offset negative mix. How are you thinking about balancing traffic and that negative mix component? Should we expect the mix piece to improve over time and anything?
Lauren Silberman: You know that you can expand on that we may not be seeing at sort of face value
Speaker Change: And the script that, you know, the mix is really just a function of our continued investments and promotions. We have seen strong performance on our LTOs and on our premium items. So, you know, we're going to continue to make those investments. That's going to be a part of our model moving forward.
Speaker Change: That's the flip side of that, right? Those investments and promotions and marketing are helping us keep flat, positive traffic in an environment where, as we all know, traffic is really hard to come by. So we are gonna continue to strike that right balance. We've been really excited about...
Speaker Change: You know, the ability to continue to strike that balance moving forward regardless of what the macroeconomic situation looks like.
Speaker Change: Our next question is from Christine Cho with Goldman Sachs. Please proceed.
Christine Cho: Hi, congrats on a great quarter. I just wanted to talk a little bit about your pricing strategy going forward, given kind of a more subdued inflationary pressure as well as increased kind of consumer price sensitivity. I know the kiosk has been a really good mixed support, but what are some of the ways that you can help support price mix going forward without kind of taking direct price hikes? And also, if you can kind of elaborate on the performance of the black truffle LTOs, and specifically how it's impacted the mix in the quarter, it would be great. Thank you so much.
Speaker Change: Yeah, I'll let Katie talk specifically to pricing and mitigating inflation, but you know what I can tell you is that
Katie Fogertey: Pricing has been a obviously a big part of the restaurant industry's growth in the last few years as we faced unprecedented inflation. As we look ahead the fact that
Katie Fogertey: We don't have to take pricing to the same extent is only going to benefit us so that we can continue to improve our value equation with the investments we're making in marketing, the investments we're making in our culinary calendar to drive new
Katie Fogertey: product innovation and drive mix through increased attachment through a strategic product calendar. So...
Katie Fogertey: I'm really excited about moving forward without having to take
Katie Fogertey: as much pricing. But I'm also confident in what we've shown over the last year is that if we do see an unforecasted inflationary environment, we can take pricing and still drive top-line sales growth through, you know, traffic management with our marketing investments.
Speaker Change: Great, and yeah, I'll just add on that, you know, just as a reminder, early this year, we implemented, you know, two pricing strategies. So, first of all, was lifting the digital price, and, you know, we remained under priced relative to the competition on digital channels, but this was, you know, a great step for us to help mitigate that extra cost pressure in that channel.
Speaker Change: And then we also implemented in March about a 3.5% price increase, but that was really inclusive of the 7% price that we took in California to help offset.
Speaker Change: The Fast Path.
Speaker Change: And then, you know, looking forward here, we recently just, you know, basically matched in October, late October, the one and a half percent price that we were rolling off with another one and a half percent price increase.
Speaker Change: You know, this is really to help us offset the inflationary pressures that we're seeing primarily in beef and a little bit of risk that we're seeing here into next year. But what I will say that, you know, the supply chain team that here at Shake Shack is doing a really amazing job at identifying strategies, increasing our supplier base.
Speaker Change: you know, we think, you know, enhances the guest experience and allows us to dedicate more of our time to facing, you know, guest-facing activities.
Speaker Change: But at the same time, also reduces our total cost to serve. So, you know, there's a lot of things that we're doing organically to help us address the inflationary pressures. We do think that we still have continued pricing power across various channels, but, you know, we also are leaning on strategic alternatives as well.
Speaker Change: Our next question is from Brian Mullen with Piper Sandler. Please proceed.
Brian Mullen: And related to that, can you just speak to how the new class will incorporate any learnings the company has already had? Or Rob, maybe any new insights you or Stephanie might have brought to the table will be incorporated into the drive-throughs going forward. Any thoughts would be great.
Rob Lynch: As Katie just highlighted, we're working, really our number one priority operationally is to improve our process flows and increase our speed of service. And that's going to be disproportionately impactful on our drive-through business.
Rob Lynch: and we're continuing to test both optimizations to the order zone and how we represent the brand in our menu on our digital and static menu boards and then also in the delivery zone and how we bring the food to the customer and how long it takes us to execute all of that. So there's a lot of work going on to significantly improve our speed of service which is the number one thing we need to optimize through the drive-through.
Rob Lynch: as I look to the future, you know, even beyond 2025.
Rob Lynch: formats and improved kitchen flows and optimizations are all part of the things we're exploring for us to be able to go into different types of real estate and different markets.
Rob Lynch: and succeed and succeed and deliver great operating productivity and restaurant margins regardless of the format that we that we build. So that is a big part of our strategy moving forward.
Speaker Change: Our next question is from Andrew Charles with TD Cowen. Please proceed.
Speaker Change: great
Speaker Change: Thank you. Thank you.
Andrew Charles: Were you able to see an October outperformance, you know, in the New York and Miami markets within same-store sales versus what you reported? And secondly, Rob, I'm curious, you know, what do you need to see before you roll out that campaign to other markets as well?
Speaker Change: a great question you know so we
Speaker Change: made a strategic decision not to put any type of promotion or incentive
Rob Lynch: on that ad. You know, most ads in the marketplace in this industry have some type of
Rob Lynch: price-pointed promo to drive a short-term purchase.
Rob Lynch: you know, where we are in our marketing.
Rob Lynch: really defining our brand and the hearts and minds of our target customers across the country. And even in New York, where we have a huge amount of awareness of Shake Shack, really defining how Shake Shack
Rob Lynch: stands out and is differentiated from our other competitors is it's really key to the long term
Rob Lynch: you know, value proposition that we're going to offer to our customers.
Rob Lynch: you know, equity score. And so, you know, there there are a lot of strong indicators that what we're doing is working.
Rob Lynch: I would tie that back to sales will be an ongoing, you know,
Speaker Change: Our next question is from Brian Harbour with Morgan Stanley. Please proceed.
Brian Harbour: Thanks. Morning, guys.
Brian Harbour: You know, I don't know maybe it's freeing up your your staff just with kiosks or such Or anything else you'd call out that drove that and then you know my sense from your comments Rob was it
Brian Harbour: A lot of stuff on like kitchen process and whatnot is still to come and so do you have targets for you know kind of how much wait times should continue to improve and you know when we should expect to see that?
Speaker Change: Yeah, I mean, we're still in the early stages of optimizing all of this work, but what I will tell you is that
Speaker Change: You know, from an operations standpoint, we're focused on three or four things. Katie talked about our labor utilization and making sure that we're getting the most productive.
Speaker Change: use of our labor hours. You know, another big thing that we're focused on, because with 300 and, you know, 330 shacks opening 40 to 45 company restaurants a year,
Speaker Change: We really need to develop
Speaker Change: are our leaders, our restaurant leadership talent pool. And so we're spending and investing and focused on the training and development necessary.
Speaker Change: to really create a pipeline of leaders, not just at the GM level, but below the GM level. And I think that company, that level of leadership and management is only going to benefit us.
Speaker Change: from a speed and service standpoint. And then, you know, lastly, which is really just blocking and tackling, but...
Speaker Change: You know, it's a little bit new to our organization.
Speaker Change: is really staying focused on what we're going to measure.
Speaker Change: and how we're going to create a performance and accountability culture around what we measure.
Speaker Change: And I think just that alone is really helping to drive some of the short-term improvements that we're seeing in service times, and some of the other process improvements, training and development, and even longer-term, you know, kitchen flow and equipment optimization are going to really continue that momentum and allow us to continue to improve beyond where we are today.
Speaker Change: Our next question is from Sharon Zakafia with William Blair. Please proceed.
Sharon Zakafia: I wanted to kind of come back to the strategic product innovation dynamic that you're looking towards. And I'm sorry if you answered this. I accidentally hung up for part of the call and I had to dial back in. But are there gaps in the menu that you're looking to address where you think Shake Shack
Sharon Zakafia: could be more relevant. And then secondarily, with the wait time improvement, did you see that across channels in the quarter, meaning like walk-in, delivery, and drive-through? Thanks.
Speaker Change: So, you know, I wouldn't say that there are gaps in our core menu. I think there are opportunities for our core menu to work.
Speaker Change: more harmoniously with our LTOs and our product innovation to drive, you know, mixed benefit.
Speaker Change: core to what the, you know, how the QSRs drive comp and, but still something that we're developing here to strategically make sure that we have our menu, our core menu and our LTOs optimized. So that's the work that's moving forward.
Speaker Change: on the wait times, you know.
Speaker Change: I would just tell you we're seeing overall improvement. I don't think we're going to get into each of the different channels, but for us to be able to make a big impact, we have to improve our channels, across our channels, both from how we service...
Speaker Change: The dine-in business, how we deliver drive-through as it becomes a growing, bigger part of our business. And obviously, even with our delivery, you know, third-party delivery transactions, those are also becoming a big part of our business as well. So we need to make sure that we're delivering the customer service.
Speaker Change: that our guests expect across each of those channels.
Speaker Change: Our next question is from Peter Sla with BTIG, please proceed.
Peter Sla: Yeah, great. Thanks and congrats on a great quarter. I wanted to ask about the restaurant-level margin outlook for the fourth quarter of 22%. It's substantially higher than what we were modeling.
Peter Sla: Can you give us a sense, does that reflect the benefits of the new labor model that you guys have been working on and looking to roll out? Or is that more of a 2025 initiative? And then also, how do you want us to think about 2025 margins at this point, given all the initiatives you guys have in place?
Peter Sla: on throughput and price.
Speaker Change: Thank you. So, you know, the 4Q guidance we have for restaurant margin expansion is about 220 basis points higher than last year.
Speaker Change: You know, it's showing significant progress.
Speaker Change: There were, you know, I would just also caveat that with, you know, last year at this time we started to see kind of higher deep inflationary pressures.
Speaker Change: So, you know, while we expect these to be continued inflationary pressure this year, kind of that incremental step up, it's a little bit more muted. And we also have, you know, a number of new SHAC openings happening later in the quarter. So that always can cause a little bit of noise. But what you're really seeing here is, first of all, if you look at top line, you know, driving top line momentum in the business.
Speaker Change: and through the focus that we've had in supply chain efficiencies and also, you know, in operations, really being able to bring more of that down to the bottom line.
Speaker Change: We're not giving guidance for next year, there's still a lot of puts and takes here around inflationary pressures on, particularly with ETH, but we will let you know at due course what that guidance will be.
Speaker Change: Our next question is from Jake Bartlett with Truist Securities. Please proceed.
Jake Bartlett: Great, thanks for taking the question. Mine's a follow-up on the restaurant-level margin opportunity. Rob, my impression was that the margin expansion opportunity was a really big one, is a really big one for Shake Shack. Back when the activists were involved,
Jake Bartlett: a year and a half ago, you know, that seemed to be their focus as well, and they're talking about, you know, really significant opportunity on margins. So, my question is, you know, do you view the margin opportunity as very large, as really meaningful at Shake Shack? So far, it sounds like
Jake Bartlett: You focus much more on the top line, which obviously does drive margins at the end of the day. But I'm just trying to understand what you view as the opportunity with margins, and then within that, maybe what inning you are on what you've identified so far. For instance, in the supply chain, you're benefiting from that already. Is there much more to come? If you could just give a little more detail on the longer-term plan and vision for margins.
Jake Bartlett: so
Speaker Change: You know, as Katie just said, we're not guiding for next year, so we're not going to talk about necessarily how much growth in the margin.
Speaker Change: Magazine Co-Founder & President
Speaker Change: I mean, we could come in and just cut the labor significantly and compromise.
Speaker Change: our team member development, and that's not the model.
Speaker Change: So, we are not, our plan is not to come in and deliver a big bang kind of margin expansion through doing things that impact us in the long term. Our focus...
Speaker Change: is 100% on driving a performance and accountability culture, driving process improvements and, you know, training and development of our teams. And all of those things continue to drive, you know,
Speaker Change: sustained margin enhancement. We've seen it really, you know, for the last...
Speaker Change: year and a half, and I think it's going to continue to improve.
Speaker Change: as we evidenced in our guide for the fourth quarter. So those are, I know you talked about, I'm focused on the top line. We are, marketing is a big part of our strategy, but there's not an hour in this building that goes by where we're not talking about restaurant productivity. And Stephanie, our new COO, is...
Speaker Change: you know I hardly ever see her because she's in the field so much you know making sure that this this mindset and this performance culture is permeating through all the levels that that need to to get down to the shacks and that's why we're seeing such great results and then the last piece on supply chain um look
Speaker Change: Shake Shack is what it is because of the quality of our ingredients and the quality of our food. We are never going to impact that. We are focused on being a fine, casual restaurant, delivering fine, you know, fine dining food through a fast, casual format. And so our supply chain optimizations are about efficiency and productivity, not about changing any of the ingredients or degrading the quality of our food. And so I'm.
Speaker Change: very pleased with our team's ability to find ways to be more productive, help us maintain or grow our margins despite inflation without negatively impacting our food.
Speaker Change: Our next question is from Sarah Senator with Bank of America. Please proceed.
Sarah Senator: Thanks. Just a couple of...
Sarah Senator: clarifying questions. The first is just on the
Sarah Senator: to our closures. You mentioned, I think you said $17 million in trailing 12, trailing four-quarter revenues but immaterial to operating profit.
Sarah Senator: Could you just quantify what that means in terms of, it sounds like it would probably be a tailwind to restaurant level margin rates, just because they are below average. I couldn't, you know, I don't know how precise the numbers were, but is it maybe 30 basis points?
Sarah Senator: something like that. So I just wanted to quantify that and then
Speaker Change: Quick question on the license business, you know, that store count came down a little bit, I think, and if you could maybe just talk about that. I don't know if there's international, some of those, if a geopolitical tumult that might be affecting it or anything worth noting there. Thanks.
Speaker Change: So on the nine checks that we closed, we disclosed that those checks in total generated about $17 million in sales over the past four quarters. What I would say is that we're not disclosing the actual cost impact of that, but these restaurants not only were they below company average profitability, they were actually a lot making.
Speaker Change: When you roll it up in total, it's not a material part of our overall profitability, but it is a benefit to our restaurant profit margin line now that they are closed.
Speaker Change: some shacks that we expected to open up in Q4 are now going to push to Q1. I think we've already disclosed on the last call that we are seeing, you know, there are some headwinds and
Speaker Change: China and the Middle East, given the macroeconomic and geopolitical challenges in those markets.
Speaker Change: But they're still our fastest-growing.
Speaker Change: international markets. So we have a lot of confidence in our partners there. We've got amazing
Speaker Change: licensee partners who are continuing to build despite those challenges because of the results that they're seeing. So license is going to continue to be a bigger and bigger part of our business.
Speaker Change: We have a ton of white space, a ton of opportunity to go and open up new markets with new partners while continuing to grow and get more productive with our current partners through format innovation and menu innovation. So, really bullish on our licensed business moving forward.
Speaker Change: Our next question is from David Tarantino with Baird. Please proceed.
David Tarantino: Hi, good morning. Rob, I wanted to ask about the strategic product innovation and
David Tarantino: Maybe I'm being a little dense here, but could you maybe explain exactly, you know, what you're thinking with that strategy and maybe provide an example that brings it to life? Thank you.
Rob Lynch: Yeah, David, I'm probably not going to talk about future innovation, but I can give you an example. I mean, right now, you know, Black Truffle Burger and the Black Truffle Fries are
Speaker Change: representative of the of the kind of innovation that makes Shake Shack special and you know I would also say the Korean chicken sandwich is another one you know things that you're just not going to get anywhere else executed with excellence and I'm challenging the team to look at all kinds of burger and sandwich innovation.
Speaker Change: and some of that could be protein, some of that could be flavor, some of that could be culinary.
Speaker Change: you know, driven.
Speaker Change: innovation, also side items. You know right now we've got
Speaker Change: that might have been in place. So I'm really excited. I think product and food innovation has been a part of my DNA for a long time, and we've got a great, amazing team here.
Speaker Change: Our next question is from Andy Barish with Jeffries. Please proceed.
Andy Barish: Good morning, guys. Just on the development side of things, I think you noted, you know, some infill pressures in a couple of the, you know, the big coastal markets.
Andy Barish: Is there anything we should expect, you know, kind of changing on that front as we look out to the 25 development or, you know, do you see sort of the brand and marketing awareness in those markets being able to offset some of that sales transfer, if you will?
Speaker Change: Yeah, you know, I'm actually really excited about...
Speaker Change: some of the more penetrated historical markets because of some of the format innovation that we're looking at.
Speaker Change: Just kind of the way we've changed a little bit of our strategic purview where we definitely have green field, white space.
Speaker Change: growth markets that we're gonna go in and still be able to build out a lot of these big kind of flagship core shacks and deliver great performance without a lot of cannibalization. But in the more highly penetrated markets, I think there's a lot of infill opportunity. And I think that our drive-throughs and the other formats that we're looking at will help us facilitate that. So.
Speaker Change: We're still building in New York, New Jersey. We're still building in California. We're building in markets that are already really penetrated, but we're maybe doing it in a little bit of a different way that still allows us to drive great restaurant margins.
Speaker Change: but in a little bit of a different way than we might have historically.
Speaker Change: Our next question is from Jim Sanderson with North Coast Research. Please proceed.
Jim Sanderson: Thanks for the question. I just wanted to go to unit growth. I think your growth guidance for 2025 implies a slight pickup in company-operated unit growth. Wondering how we should look at that as a run rate going forward, if it's the percentage that's most relevant or the actual number of units as we're trying to imagine.
Jim Sanderson: the total size of Shake Shack in the U.S. going forward. Thank you.
Speaker Change: They're also doing really well in terms of
Speaker Change: the margins given some of the increases in productivity that we have implemented, but also
Speaker Change: of 10% this year, continuing to work on productivity, opportunities, looking forward into next year and beyond. So we are really bullish on the returns, the cash-on-cash returns that we can see from continuing to build new shacks.
Speaker Change: new company, Operated Shacks, and so we are going to continue to increase in 2025. And, you know, unless something changes dramatically, you know, we're going to continue to double down on development.
Speaker Change: And, you know, we're building the infrastructure and the resources internally. You know, we're making our, you know, S&B investments in G&A. A lot of that is in development.
Speaker Change: So that we can continue to have the real estate resources to find the sites and the construction resources to get them opened up. And then lastly, I'll talk, the last thing I'll say is that the training and development that we talked about in the shacks and operations, that's probably the most critical piece.
Speaker Change: We need leaders to be able to continue to open up our new shacks with excellence. So we're definitely focused on that as well.
Speaker Change: Our next question is from Daniel Guglielmo with Capital One Securities. Please proceed.
Daniel Guglielmo: Hello everyone. Thank you for taking my question. You all have a pretty good vantage on consumer trends in the U.S. and I know you you all also have a pretty robust internal modeling process. Were there any regions or states that came in stronger than you all were expecting or modeling and then on the flip side were there any that came in softer? Thank you.
Speaker Change: And I would say overall, you know, we were really pleased with the trends that we saw. Sequentially, every region we have either, you know, held the same, but most of them increased sequentially. And then also by income cohort, you know, we saw sequential improvement in, you know, high and low and medium income as well. So I would say across the board, just a really strong quarter, a really testament to the success that our teams are having at driving sales through marketing initiatives and the work that our teams are doing on operations to help, you know, better serve our guests.
Speaker Change: And just to build on Katie's comment on income cohort, the one thing I will share is that
Speaker Change: Our data shows that we're one of the few brands, despite
Speaker Change: you know, the pricing we've taken over the last year. One of the few brands to actually improve our value equation, you know, over the last year. So, you know, it does feel like all the initiatives that the team have put in place around service,
Speaker Change: and Speed, coupled with the great food that we continue to deliver, is driving a stronger value perception, which is allowing us to continue to grow both at the top and bottom of the income cohorts.
Speaker Change: Our next question is from Jeffrey Bernstein with Barclays. Please proceed.
Jeffrey Bernstein: Great. Thank you very much.
Jeffrey Bernstein: Two follow-ups. The first one, Katie, I know a lot of people have been asking about the restaurant margin and the opportunity. And I know you're not guiding. I was wondering if maybe as an alternative you can give maybe a range of performance across your system that you're seeing today.
Jeffrey Bernstein: whether it's quartiles or otherwise, just to demonstrate.
Jeffrey Bernstein: you know, where some of the better...
Jeffrey Bernstein: markets or stores are sitting at relative to the opportunity.
Jeffrey Bernstein: And then my other one is just, Rob, you just mentioned the income cohorts and kind of value. I'm just wondering,
Jeffrey Bernstein: with the lower end quick service category doing much more aggressive discounting and seeing improving trends.
Speaker Change: How do you think about that in terms of competition?
Speaker Change: There's a chance you would bundle just to communicate value.
Speaker Change: Presumably not at deep discount prices, but just messaging that will be more value oriented. Thank you.
Speaker Change: Thank you. Bye.
Speaker Change: Thanks for the question. So, you know, on our restaurant margin line, you know, we've been, you know, pretty consistently sharing over, you know, the past year and a half to two years.
Speaker Change: been working on in order to in a restaurant. So, you k sold. Despite continued Inf pressures, we've been focu
Speaker Change: side over the past couple of quarters. You know, some of this is just really basic blocking and tackling of making sure that our teams are aligned.
Speaker Change: and working closer with operations. And then, you know, we've been doing more with the labor scheduling model, which we put into place late in the third quarter. And then, you know, certainly with Stephanie, our new COO in place, it's very in the weeds working with all of our team members here across SHACs and identifying, you know, additional opportunities. And we'll share that with you when it's the right time. But, you know, I'm very confident in the work that is being done today to help us continue to drive profitability in our restaurants. Now, you know, the overarching, you know, unknowns out there will be around inflationary pressures just broadly. Specifically, we're going to just call out these.
Speaker Change: and then also, you know, just top line with macro uncertainties. But we're really excited and proud of the work that is being done today. Yeah, and just to close the loop on the QSR value dynamic right now, you know,
Speaker Change: We obviously don't have national advertising, so we're not out there promoting $5 bundles or $10 bundles. But we are...
Speaker Change: delivering
Speaker Change: targeted digital ads.
Speaker Change: and Promotions.
Speaker Change: across our footprint. You know, we do that in a very targeted surgical way by zip codes and with our guest recognition technology, you know, capabilities to be able to make sure we're sending it to the right people. So we are delivering a great value prop through our targeted channels. But really where we're focused is
Speaker Change: improving the experience, improving the numerator, like improving the quality of food that we deliver. The faster it is, the hotter it is.
Speaker Change: the better customer service and the better experience our customers have. So we're really focused on that numerator, but we are delivering surgical targeted digital promos that do address some of the price
Speaker Change: gaps for the lower income cohorts that we also want to serve.
Speaker Change: Our final question is from Raul Kralapalli with J.P.Morgan. Please proceed.
Raul Kralapalli: Good morning, guys. I have a question and a follow-up. Can we discuss on how you think about the new stores opening in the existing delivery trade areas?
Speaker Change: New York City was said to have an issue before on the delivery sales transfer. Is there any change to the infill or real estate strategy after recent store closures as you approach this channel over time?
Speaker Change: open new shacks in markets where we currently have penetration.
Speaker Change: to minimize cannibalization and optimize operational efficiencies.
Speaker Change: We're only going to get more efficient as we penetrate these markets. We get supply chain efficiencies, we get operating efficiencies, we get marketing efficiencies. So penetrating, you know, these markets to a larger degree isn't a negative, it's actually a positive. And as we scale, we're only going to see, you know, continued benefit to, you know, the restaurant margin lines in these markets.
Speaker Change: This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.