Shake Shack Inc Class A Q1 2023 Earnings Call

Great, good morning everyone. We are proud of our strong results this quarter that are a direct outcome of our team's solid progress on our 2023 strategic plan. We grew revenue by 25% year over year as our teams executed well on recent openings and drove higher sales in our existing company-operated and licensed Shacks. We also showed strong improvement in our restaurant margin this quarter, expanding it by 310 basis points year over year to 18.3%. This is the highest first quarter restaurant profitability margin we have posted since COVID, and we generated record high quarterly restaurant profit dollars and adjusted EBITDA in what is typically the softest sales quarter of the year. We accomplished this despite the many profitability headwinds we face, including the large number of Q4 and Q1 new Shack openings, ongoing inflationary pressures, and mobility measures in key markets like New York City still deeply impacted from COVID. And we did this by executing on our plan with some important highlights and actions, including tactically increasing menu prices to protect margins against broad-based and persistent inflationary pressures, by driving sales into our own more profitable channels, by showing better cost controls over our other operating expenses, and by bringing more kiosks into our Shacks driving efficiencies and other benefits. We are encouraged by these results and we look forward to showing continued progress through the rest of the year. We understand the many macroeconomic risks that may further impact the restaurant sector and our results. However, our business has demonstrated a level of stability that now allows us to go back to our pre-COVID guidance practices and reintroduce full year guidance for total revenue, same Shack sales, our licensed business, and Shack level operating profit. We are also providing a new guidance metric with full year adjusted EBITDA. And as we continue to observe a normalization of our trends, we are reducing our urban/suburban disclosures as regions are now a stronger driver of our performance compared to just the level of urbanicity. So now on to first quarter results. Total revenue was $253.3 million, up 24.5% year over year. Shack sales grew 24.1% to $244.3 million. Licensing revenue grew 36.7% to $9 million. System-wide sales reached a record high at $394.7 million, up 27.5% year over year. With stronger sales and flow through as well as expense discipline across all points of our 2023 strategic plan, we grew adjusted EBITDA by 163.9% to $27.6 million. This quarter we generated $73,000 in average weekly sales and grew same Shack sales by 10.3% versus 2022, with 4.8% higher traffic year over year. Price was up high single digits and our mix was driven by more guests returning to pre-COVID behaviors including channel shift into in-Shack and smaller group sizes. We have discussed that a key strategy for us to improve our restaurant profitability is to drive sales into our own channels where we are most profitable. We showed strong progress against that goal in the first quarter as we grew in-Shack same store sales by more than 20% year over year and more than doubled our total kiosk sales versus last year. Putting kiosks into our Shacks is another key way we have identified to improve our sales and profitability, and we shared a goal last year to roll out kiosks to nearly all Shacks by the end of 2023. We are proud to report that we are executing ahead of this timeline. Kiosk order values are higher than traditional cashier transactions. Kiosk is our highest margin channel and we are pleased with our return on investment here. We are also pleased with April same Shack sales of about 4% versus last year and average weekly sales of $77,000, up versus the $76,000 in March despite shifts in the spring break calendar. In April we benefited from driving a strong mix of sales into our own channels and had a lesser benefit from menu price than we did in the first quarter. Our licensed Shacks also performed well this quarter as we grew sales 33.4% year over year to $150.5 million. We have had successful recent openings across the world and our partners have performed exceptionally well serving the strong guest demand, in particular in the US with airports and our new roadside Shacks, as well as China and Mexico. First quarter Shack level operating profit was $44.7 million or 18.3% of Shack sales, 310 basis points higher versus last year despite margin pressure from a large number of recent Shack openings and persistent inflation. Our strong performance this quarter was a direct outcome of progress on our four key priorities to improve our restaurant profitability. First, driving sales and prioritizing our channels where we are most profitable. We are leveraging targeted marketing strategies to drive awareness and visits. In addition, we are directing more business into our own channels by offering the lowest menu price there, early access to exciting LTOs, as well as value-added day part promotions. Second, targeting labor efficiencies and growing throughput. We're seeing great benefits here from recruiting and retention tactics, and better staffing is helping us to extend our operating hours and be more efficient. Kiosks are another important tool to help drive efficiencies in our Shacks. Third, improving off-premise profitability and other strategies to lower our controllable expenses, from standards for condiments and messaging, lessening packaging into go orders, to premium prices on third-party delivery. We continue to push forward opportunities to be more profitable in off-premise. We also showed strong progress here in the quarter with controlling additional elements of other operating expenses. As just an example, we were able to lower our repair and maintenance expenses that have been a meaningful headwind in prior quarters as we were able to secure additional needed supply for critical restaurant equipment. And lastly, we will continue to take a strategic approach to menu pricing and supply chain opportunities. On this point, we are pleased with the guest reception to the price we've taken thus far, and we will take approximately 2% price towards the end of the second quarter. This level is more in line with our historical annual price increases and is needed to help protect our profitability against persistent food and paper inflationary pressures. The bottom line: we are encouraged by the margin expansion we delivered in the first quarter, and despite the pressures we face, we have line of sight into further improvements throughout the year. Now onto the components of restaurant profitability. Food and paper costs were $71.8 million or 29.4% of Shack sales, 100 basis points below last year. Our blended food and paper inflation increased by high single digits year over year, which was offset by the benefit from higher menu price. Additionally, with our focus on operations and investing in our people with training and retention programs, we were able to improve our waste impact versus last year. Our beef cost rose slightly versus last quarter levels and were down high single digits versus last year. Importantly, nearly every other item in our food basket showed accelerating cost pressures versus last year, including fry costs rising by more than 20% and dairy and other costs increasing by double digit percentages. Labor and related expenses were $74.3 million or 30.4% of Shack sales, down from 30.7% in the first quarter of 2022 and up 150 basis points quarter over quarter as we continue to make investments in our valued teams needed to staff and operate our Shacks. As expected, we face profitability pressures from the 28 new Shack openings over the past six months still working their way up to optimized staffing levels. However, in our more mature Shacks, our teams capitalized on strong sales and produced solid flow through as we executed on our plan to improve our restaurant profitability. Other operating expenses were $34.9 million or 14.3% of Shack sales, down 100 basis points from the first quarter of 2022, with our improvement coming from our menu price, driving sales in our own channels, lower marketing expenses, and better management of expenses like R&M. Occupancy and related expenses were $18.6 million or 7.6% of Shack sales, down 70 basis points from the first quarter of 2022, with the benefit really coming from higher sales performance. G&A was $31.3 million or 12.4% of total revenue. Excluding $1.6 million in legal settlements and professional fees, adjusted G&A was $29.7 million or 11.7% of total revenue, showing 90 basis points of leverage versus last year as we invest with discipline. Pre-opening costs were $3.6 million in the quarter and depreciation was $21.3 million. We realized net loss attributable to Shake Shack Inc. of $1.5 million or $0.04 per share. We reported an adjusted pro forma net loss of $290,000 or $0.01 per fully exchanged and diluted share. Our adjusted pro forma tax rate excluding the tax impact of equity-based compensation was 17.2%. Finally, our balance sheet remains solid with $293.4 million in cash and cash equivalents at the end of the quarter. Now on to guidance, which balances the strong underlying business factors we've seen so far in the first quarter with the degree of uncertainty around the consumer spending landscape and our current expectations for ongoing inflationary pressures. This range does not reflect any additional unknown delays to our development schedule. For the second quarter, we guide total revenue of $269.5 million to $274.8 million, with $9.5 to $9.8 million of license revenue. We guide for both our company-operated and our licensed partners to each open approximately 10 new Shacks, and for same Shack sales to grow by low to mid single digits year over year with high single digit price inclusive of the 2% price increase we plan to take at the end of the second quarter. COVID has had a larger impact on our business than many of our competitors, and its lingering impacts on consumer mobility patterns including work from home trends has been a challenge for us. However, even with the pressures we face and persistent inflation, we guide second quarter Shack level operating profit margins to reach approximately 20%, marking the highest level of quarterly profitability that we have delivered since the onset of COVID. And with more consistent trends we're seeing in our business, we're able to finally reintroduce full year guidance for many metrics. For the full year 2023, we guide total revenue of $1.06 to $1.11 billion, representing 18% to 23% year-over-year growth, with licensing revenue of $39 to $41 million. We expect to grow our system-wide Shack count by approximately 70 to 75 units this year, about 40 of which will be domestic company-operated and 30 to 35 operated by our licensed partners. Our guide is for same Shack sales to grow by low to mid single digits with mid to high single digits price and consistent trends in our mix. Despite ongoing inflationary headwinds, we expect to deliver at least 150 to 250 basis points of restaurant margin expansion in 2023 and guide for a full year Shack level operating profit margin to reach 19% to 20% as we continue to execute on our strategic priorities. While we are focused on exceeding this bar, inflationary pressures are not abating. In this guidance we're reflecting a greater degree of impact from potential consumer softness as well as beef inflationary pressures above and beyond what we're experiencing today. But all else equal, if both of these risks did not materialize, we see a path for our restaurant margin to surpass 20% this year. We are planning for food and paper costs to rise by mid to high single digits year over year, led by beef costs rising by a similar degree. We do not hedge on many components of our basket including beef, which is the largest single part of our basket and an area where we see a significant degree of uncertainty around the cost this year. In the first quarter our beef costs were up just modestly versus the fourth quarter and were down year over year. However, we have recently started to see cost increase with broad-based challenges across the supply chain and we anticipate this to be a material pressure throughout the year. We are also seeing signs of even further inflationary pressures from many other items in our basket, including fries that are likely to cost us approximately 20% more this year than last. But above all, we are also making continued investments in our people as we focus on building up and supporting our winning team. This is resulting in mid-single digit year-over-year wage pressures. Taken together, our operating backdrop is not easy. Inflationary pressures still remain, and we believe we have the right plan in place to navigate and continue to show higher operating profitability despite these continued challenges. In fact, even with the inflationary and potential macroeconomic pressures, we are planning to grow fiscal 2023 adjusted EBITDA by at least 50% to 70% this year to $110 to $125 million as we target achieving record profits this year. We have line of sight to exceeding this range, however this will be dependent on the degree of pressures we face throughout the year. We reiterate that our 2023 G&A guidance of $125 million to $130 million. Absent the $1.6 million in legal and professional fees that are excluded from adjusted EBITDA this quarter, at the midpoint G&A would be 11.8% of total revenue, more than 80 basis points of leverage versus 2022 levels. Other guidance points: equity-based compensation expense of approximately $17 million, pre-opening of $17 to $19 million, depreciation of $88 to $93 million, and adjusted pro forma tax rate excluding the impact of stock-based compensation to be 16% to 18%. So thank you for your time, and with that I can turn it back to Randy.

Great, thank you. So overall, I would describe the cadence of the first quarter as we started strong. We had a lot of very good new Shack openings as well kind of helping as a tailwind at our back. But then really kind of in February, and with the launch of white truffle kind of coincided about the same time, we did see above average sales performance in our more mature Shacks. We saw pretty healthy behavior from high income consumers where we over-index too. But kind of throughout income cohorts, we were pretty pleased with what we saw. We are taking a mindful approach though as we're going throughout the year for all of the reasons that you just discussed, and are baking in some views about how the back half of this year could play out. But from what we're seeing right here, we are pleased with our performance. I will say as it pertains to April, you're right, we rolled off about 3.5% menu price and an additional 5% increase on DSP that we took in March. And so that is part of what you're seeing right there, and there were also some spring break shifts as well.

We're very pleased with the trends that we have seen in April, consistent with what we saw exiting the first quarter. But that's just one month, so we'll have to see how the rest of the quarter plays out.

Yep, thank you. So as we're thinking about the margin progression throughout this year and what really helped us in the first quarter achieve that 310, which actually is closer to 360 basis points of improvement versus last year when you adjust for the gift card benefit we had in the first quarter of 2022. Let's talk about what we did. We drove sales and we drove sales into our own channels, and we expect for that to continue to be a tailwind for us this year. We have key strategies in place to reward our guests to come into our restaurants, to come in and use our app, and to do delivery through us as well. So we want to see more of that throughout this year and we think that's going to be a benefit. And we're also really encouraged by the work that we've done around staffing and improving retention around our team members. I think we're just really kind of early days in seeing that benefit. Randy talked about the big increases we saw in retention in the first quarter. We're seeing some lower waste here on the back of it, and we were able to be open longer hours. These are all things that you want to see to help us be more profitable. But conversely, and we have some of this in our guidance, I would say one of the biggest risks to achieving that range is if we had macroeconomic uncertainty outside of what we're expecting today, a more significant falloff in the consumer. And then beef. We've continued to say beef is the largest part of uncertainty in our basket this year. We're starting to see it pick up here. We've baked in our views right now as to what that is, but if you're asking me where the biggest part of uncertainty is on the cost side, to me it's beef.

We have reflected a modest degree of slowing into our guidance at the midpoint. If the consumer remains healthy, there's a path to exceed that. However, if there is more material macro economic contraction than what we're pricing in our guidance, we may miss that. So that's kind of how I would think about the guide on that side. We over-index to higher income consumers. We were really encouraged by that 4.8% traffic we generated in the first quarter. And we have to really kind of talk about white truffle was the most expensive LTO that we've ever launched and we've had very strong success with that. So what we're seeing today is that we're kind of that attainable luxury where we're definitely gaining share at the high end. And we hope that that continues, but for planning the business we think it's prudent to take a balanced approach through the rest of the year.

So on drive-through, we're still very early here to really report on key trends. But I will talk about kiosk because we've had those in our system for longer and we feel better about talking about those trends. So what we see in kiosk, and what we continue to see even with doubling the sales year over year and having a substantial more number of restaurants in our system with them, is that when a guest goes to our kiosk and they see the visual merchandising of our menu, we see that they have higher checks than a traditional cashier order. We see that they add on more premium and higher margin items. And so that together really makes that our highest margin channel. We're ahead of plan here with rolling out kiosks to nearly every Shack by the end of this year, and we're very pleased with the returns on that investment.

Okay, so our return metric that we use here, cash-on-cash return, we measure in the third year of operation. So really when we're talking about the Shacks that were impacted by COVID pressures where our returns were impacted, we're talking about our 2017 class came into its third year of measurement in 2020. That was a year of deep impacts here at Shake Shack and for the restaurant industry, no surprise there. Sales have improved a lot for the 2017 class as they have for the rest of our company, and our profitability trends have done better too. So same story can be said with the class of 2018 that comes into its third year in 2021, and to a little bit lesser extent the class of 2019. So with our expectations here to generate about 19% to 20% Shack level operating profit for the overall company and the recovery that we have seen in the class of 2020 Shacks and the rest of our overall base, with the targets to hit $110 to $125 million in adjusted EBITDA this year, on the build cost for the class of 2020 we expect that to exceed our long-term guidance range of at least 30%.

Yeah, so we're expecting, we're kind of in our guidance range for 19% to 20%, we're kind of expecting everything to kind of hold here from what we're seeing. It's possible that we do better than that, it's possible that we have more pressures on that side, but we think that right now assuming that we hold the current level is appropriate for guidance. There's also some things that are helping us on the labor side probably with retention end up actually costing us a little bit more as well. So let's talk about tips. We offer tips to our team members in basically every channel right now, and our guests have been stepping up and rewarding our team members for such excellent service. There's a cost to that that we also face in our restaurant P&L on the labor side as well. So that's just something to think of as you're thinking about this year versus last year and prior years.

Great, thanks. Pricing, that's what I would kind of describe that as. And then you're right, we rolled off in March we rolled off 3.5% menu pricing and 5% additional DSP pricing. We're kind of now trending at the lower end of that high single digit range. And depending on menu mix and other channel mix, expect to have that be the case for most of the quarter. Then we're going to be taking the 2% late in the second quarter. We're going to be holding that. And then in October we're going to be rolling off that we said we took between 2% to 10% across a variety of different price tiers. So that will come off, so we'll end the year at basically 2% price. We haven't made any announcements on any additional price increases.

Yeah, so what happened in other Opex this quarter, if you look at kind of where we've been focused on our strategic priorities, it's really on addressing the controllable expenses that we have and the supply chain challenges that we've faced in general, which have been a pressure to our ability to open restaurants. We've also talked about that being a pressure for our ability to replace equipment and it was resulting in higher service costs for that equipment. Our team did a really good job identifying a lot of opportunities to upgrade and replace much needed equipment in our restaurants, and we're expecting them to continue to act on that plan throughout the rest of this year. So that's kind of the benefit we're seeing there. I would say the other pretty important benefit though that you're seeing on other operating expenses is really just pushing more and more sales into our own channels. That's helping us leverage a lot of expenses on that line.

Sure. We had a 36% digital mix in the quarter. Now that includes app, web, and delivery. That does not include kiosk. And really the story there is that we're seeing our gains come back from in-Shack. We doubled our kiosk sales year over year, and that's not part of the digital mix, that's part of our in-Shack transaction. And our same Shack sales for in-Shack grew over 20% year over year. So we're seeing more and more guests come back to the kind of normal pre-pandemic purchasing habits, but at the same time we're also driving more adoption and usage of our app.

Hi, Brian. Yeah, so with our kiosk orders, our kiosk Shacks, what we tend to see is we're able to run them a little bit more efficiently than Shacks without kiosk. And while we made significant improvements in the first quarter in our staffing and retention, if I just look back to the third and fourth quarter where the industry was deeply impacted, we were able to leverage kiosk, our operators were able to leverage kiosk as a key tool to let them operate when they were a little bit thin on staffing. So we continue to be really pleased with having that tool at their fingertips. But really, when you think about the guest experience and what our guests like to see, we still have a portion of guests that come in and they want to have that face-to-face human transaction, communication, connection with the cashier. But we have a ton of guests who come in and they want to just go right to the kiosk, they want to sit there and learn about the menu and see, build up their tray, kind of go from protein to fries to shake to beverage and so forth. And so it's a really amazing experience if you haven't used one. I highly encourage you to go. And what we see is we have higher checks, we have people adding both more premium LTOs, more add-ons on their existing burgers, so maybe the Shack Burger more likely to have some more premium add-ons on it. We have a higher attach rate for cold beverage. Those are great margin additions to our check as well. And a number of our guests eat in our restaurants, and so we get a little bit of a save on packaging as well. So overall, very pleased with what we're seeing in kiosk and I think we're in early days here and learning what the true potential for visual merchandising and other ways to connect with our guests.

Yeah, yeah, so we've guided for COGS inflation to be mid to high single digits. We're seeing inflationary pressures pretty much across the board. And beef is kind of the biggest unknown at this point where we're guiding for our mid to high single digit outlook on that side. Now, what are the other things that are going to impact what the COGS level is? Well, part of it is waste. And certainly we're encouraged by the trends that we saw year over year in the first quarter. Staffing and training, meaning our team members and that retention, that's helpful. And it also has to do with menu mix. The more cold beverage we sell, the greater the attach rate on that side, that tends to be a benefit for us. So we'll kind of have to see how the rest of the year unfolds. But with that kind of mid to high single digit COGS inflation, you're looking at probably kind of a high single digit price for the year. That should help triangulate where that might land.