Shake Shack $SHAK Q4 2022 Earnings Call

Great, thank you. Good morning. We ended the year on an optimistic note with increased momentum and evidence that our strategic priorities are the right ones to help build back our profitability and grow our long-term opportunity. We showed strong progress in the quarter with year-over-year measures: high-teens revenue growth, 240 basis points of restaurant margin expansion, and over 55% growth in adjusted EBITDA. We executed on all of this despite facing labor availability pressures, supply chain challenges, high single digit food and paper inflation, and many other pressures across our P&L. We delivered fourth quarter total revenue of $238.5 million, up 17.4% year over year. Shack sales also grew 17.4% to $229.9 million, and licensing revenue grew 16.6% to $8.6 million. We generated Shack-level operating profit margin of 18.8% and grew adjusted EBITDA to $19.3 million. For the full year 2022, including the severe impacts that Omicron had on our sales and our profitability earlier in the year, we grew adjusted EBITDA by 25.8% to $70.5 million. In the fourth quarter we reached $364.1 million in system-wide sales, and for the full year we exceeded $1.4 billion with 436 total Shacks, including 69 new Shacks opened in 2022 in the U.S. and abroad. In October we raised our menu prices by mid to high single digits. This is across a varied strategy of between 2% to 10% across price tiers. This was needed to help address high single-digit food and paper inflation and the continued investments we were making in our team members. With this, we expect to maintain a blended high single digit price across our channels in the first half of 2023 as we'll roll off the March 2022 price increase of 3.5% menu and an additional 5% in third party delivery premiums. In the fourth quarter we generated $76,000 in average weekly sales, up from $73,000 in the third quarter. This was supported by price increases and in-Shack traffic. We grew same-Shack sales by 5.1% versus 2021. Our traffic was down 90 basis points versus the prior year as we lapped a particularly strong Q4 2021 traffic of up 18%. In-Shack traffic was positive as guests returned to more normal patterns. Price mix was 6% in the quarter with the benefit of higher menu prices partially offset by a mix headwind due to stronger in-Shack performance that skews to more single order protein orders. We remain encouraged by the digital frequency and spend measures even as more customers are going back to omnichannel experiences and coming back into our Shacks. In the third and fourth quarter, 36% of Shack sales were from our digital channels of app, web, and third-party delivery. And since March 2020 we have obtained 4.8 million digital first-time purchasers in our app and web channels. This is one reason we are focused on refining and optimizing all of our channels, leveraging many of our existing investments in our app, web, and kiosk to drive acquisition, frequency, and conversion. An example here is our digital work inside the Shacks, where we are on target to roll out kiosks to nearly all domestic company-operated Shacks by the end of the year. Kiosk remains our highest margin channel and guests spend more on kiosk orders than on traditional in-Shack orders. In the fourth quarter, urban same-Shack sales grew 8%. This was a function of positive price mix and traffic growth. Suburban Shack sales grew 3% in the quarter driven by positive price mix and modest traffic declines year over year. Going into January, return to work and overall mobility trends remain strong and in some instances improved. Our fourth quarter openings also performed well. We generated AWS of $72,000 and same-Shack sales of 17%, driven by increases in traffic and price. Now, while Omicron had the largest impact on our sales in January '22, our sales recovered throughout the first quarter, so we expect our comp to moderate throughout the remainder of the first quarter. In addition, we expect a number of the strong fourth quarter openings to see sales come back to more normalized levels in the coming months. Licensing sales in the fourth quarter were $134.1 million, up 13% year over year, and licensing revenue was $8.6 million. Strong holiday demand and travel benefited our licensed Shacks. However, licensed sales saw significant impacts from COVID pressures in China and pressures from the stronger US dollar. In 2022, our licensed partners opened 33 new Shacks, including 13 in the fourth quarter, bringing our net licensed Shack count to 182 at the end of the year. Our licensed Shack expansion is off to a strong start this year with six licensed Shack openings quarter to date, and we expect to open a total of 25 to 30 licensed Shacks in 2023. Fourth quarter Shack-level operating profit was $43.2 million or 18.8% of Shack sales, 240 basis points higher versus last year despite inflationary pressures across our Shack P&L. We achieved this with higher menu prices, strong sales performance, labor efficiencies, and positive channel mix. Our margin performance in the quarter really layers up to the four-point plan we have in place to show a more sustained improvement in our profitability. So first, it's about building back sales with a priority on our own channels as we are more profitable there and can better communicate with those guests. We are highly focused on driving sales in our Shacks while at the same time building our digital guest footprint to support a true omnichannel guest experience. Second, it's on labor efficiencies, and our kiosk rollout here is one way to better utilize labor in our Shacks. We continue to be encouraged by the strong returns on our investment for the strategy and how it allows our team members to better service our guests and manage through staffing pressures in select markets. Third, we're making progress on our off-premise profitability with more discipline on packaging standards for off-premise orders as well as passing along a portion of the higher costs of delivery to our guests. And then last, we're taking a strategic approach to menu pricing and we're pleased with the initial results of our October menu price raise. However, there is uncertainty around the inflation outlook. While we're not yet seeing beef inflation, it's certainly something that's been widely discussed. We hope that in 2023 we see food and paper inflation at the lower end or even below our current expectations. Yet if we do not, we may take some targeted incremental pricing later this year to help protect our profitability. These four points are really the largest buckets which are moving the needle in how we expect to build back our margins in the coming years. But we're really looking at all line items here for efficiencies. And while we're pleased with our Shack-level operating profit margin progression in the fourth quarter, we know full well not every quarter will show linear improvement. However, we believe addressing our profitability is one of the right priorities for a home office and our operators. In the fourth quarter, food and paper costs were $67.9 million or 29.5% of Shack sales, down 140 basis points quarter over quarter and down 150 basis points year over year, with benefits driven by menu price offset by high single-digit food and paper inflation. Beef costs declined by low double digit percent year-over-year. However, the cost of many other items in our basket were up sharply, led by dairy and fries, both of which were up over 25% in the quarter. Packaging was also up about 15% year over year. Labor and related expenses were $66.4 million or 28.9% of Shack sales, down from 29.6% in the fourth quarter of 2021 and down 50 basis points quarter over quarter. While staffing levels improved throughout the quarter, we still have an opportunity for further improvement in certain Shacks as well as increasing our overall throughput and efficiency with many of these newly hired team members. Other operating expenses were $34.1 million or 14.8% of Shack sales, down 10 basis points from the fourth quarter of 2021, benefiting from a lower delivery sales mix. We continue to face inflationary pressures in aspects needed to operate our in-Shack business, including energy, repair and maintenance costs, and cost to maintain our dining rooms. But we are focused on managing these expenses as much as possible. Occupancy and related expenses were $18.2 million or 7.9% of Shack sales, down 20 basis points from the fourth quarter, with this really driven by sales leverage. G&A was $31.8 million or 13.3% of total revenue, up from 11.7% of total revenue in the prior quarter, driven by investments needed to support growth across marketing, operations, and technology. We ended 2022 with $112 million in G&A, adjusted for legal settlements, up over 30% year over year. Pre-opening costs were $6.5 million in the quarter as we opened 22 new Shacks. Depreciation was $19.2 million. On a GAAP basis in the quarter we reported a pre-tax loss of $4.3 million and a tax expense of $6.8 million. On an adjusted pro forma basis, we reported a pre-tax loss of $4.2 million and a tax benefit of $1.6 million. Excluding the tax impact of stock-based compensation, our adjusted pro forma tax rate in the fourth quarter was 38.5%. These adjustments can be found on page 32 of the shareholder letter. We realized a net loss attributable to Shake Shack Inc. of $10.7 million or negative $0.27 per share. On an adjusted pro forma basis, we reported a net loss of $2.6 million or negative $0.06 per fully exchanged and diluted share. Finally, our balance sheet is strong and we ended the quarter with $311.2 million in cash and cash equivalents and marketable securities. Now on to guidance for the first quarter and full year 2023 that does not assume any material changes in the macroeconomic conditions or for further COVID disruptions. For the first quarter, stronger than expected January results and what we're seeing so far in February, inclusive of the performance from the recently opened Shacks, gives us confidence to raise our guidance for Shack sales to $232 million to $237 million and same-Shack sales to grow by high single digits percent year over year. While January results were far ahead of this range, just as a reminder our comparison will get sequentially harder post-mid-February as the Omicron impact subsided. We're also going to be lapping the 3.5% menu price and 5% delivery premium we took in March 2022 and we have no additional prices factored into our guidance today. We're seeing strong performance in our domestic international licensed business, including a rebound in China since lifting the zero-COVID policy, and raise our guidance for licensing revenue in the first quarter to $8.25 million to $8.75 million. We cannot be certain that this strength will persist throughout the quarter and this guidance range does not assume any new COVID closures or pressures. So taken all together, we now expect total revenue of $240.25 million to $245.75 million, growing about 18% to 21% year over year. We guide first quarter Shack-level operating profit margin of 16% to 18%. We're tracking towards the mid to the lower point of this range primarily due to the pressures from the heavy opening calendar at the end of the fourth quarter. It typically takes several months for a new Shack to reach normalized profitability as new teams and managers train and grow efficiencies. However, we're pleased with the sales that we're seeing for this group and expect that this pressure will subside in the coming quarters. In the first quarter we're also planning for high single-digit year-over-year inflation in food and paper costs, with these pressures led by fries, dairy, and paper and packaging. We expect beef costs, and that's the largest part of our basket, to decline by mid-single digits year over year, but this will still be up by a low single digit percent quarter over quarter. The inflationary outlook remains uncertain and we do not contract on many of our key inputs. We expect mid to high single-digit inflation pressures across our food and paper basket for 2023. We outline more details around our inflation expectations on page 10 of the shareholder letter. We expect other operating expense as a percent of Shack sales in the first quarter to be similar to the fourth quarter and to be impacted by changes in delivery mix and other variable drivers. With the macro economic uncertainties we face today, our 2023 G&A guidance of $125 million to $130 million represents growth of 12% to 16% year over year. Our plan reflects a disciplined approach towards spending while still affording us the ability to invest and grow our business. While there are a number of unknowns that could impact our total revenue for the year, we believe this range is appropriate. We're building towards leverage relative to our unit guidance that represents approximately 16% year over year growth for the company-operated business and 14% to 16% for our licensed business. We expect approximately $17 million of equity-based compensation expense with about $15.5 million in G&A. We expect full-year depreciation of $86 to $91 million and pre-opening of $17 to $19 million. On tax, we're not going to provide an adjusted pro forma tax rate guidance at this time. However, we're expecting to realize a minimal tax benefit this year. Our overall tax rate will be impacted by a number of factors including the level of our profitability, tax credits, state taxes, and other impacts. So thank you for your time and with that, I'll turn it back to Randy.

Thanks for the question. We haven't given guidance for the full year. How I would say about where our efforts are focused here: it really is to expand our margins again. Not saying it's for a particular year, but we are building up to continue to build on the progression that we had in the fourth quarter. It's really a focus on four key tasks here. One, it's on our sales and building back our sales with a focus on driving those sales in our own channels where we're most profitable. Kiosk sales are our most profitable across our entire mix, but in-Shack we'll take that too. Certainly what we saw as being a big margin pressure to us at the onset of the pandemic was a lot of our sales moving to digital channels. As they come back more in-Shack, that's a margin tailwind for us. And just really investing overall through marketing and other strategies to grow brand awareness and continue to build our sales overall as a company. The second thing is on our strategic approach to menu pricing, which we've talked about before. We are running, expect to run, about high single digits of price throughout the first part of this year. And we haven't talked about any new potential to raise prices to offset inflationary pressures, but we are watching. We're watching beef in particular. If that does start to pick up a little bit, another price increase, very small, could be on the table. We're looking to be more efficient as well with labor. It's about building efficiencies with our current team members. We've hired a lot of people very recently, investing to train and optimize our teams, grow our hours, making sure our Shacks are fully staffed and open so we can maximize sales. And then again, back to kiosk, it's about making sure that we're giving our operators tools that they can use to be just more efficient in the Shacks. And then the final focus here is on our off-premise profitability. So we do charge a premium through third-party delivery, but we've done a lot of work also to help refine our standards for packaging on off-premise orders. Randy talked about the packaging test that we're going to be trying out this year. I'd really look there as another example of a potential opportunity.

Great, yeah. So we did last quarter call out pressures around a couple of items that were impacting us. First of all, it was higher R&M. Equipment availability has impacted our ability to open up restaurants but also is impacting how quickly we can replace equipment inside our restaurants, and we're having to service it where we normally might replace it. So that was a little bit of an overhang. Higher T&E expenses to help support team members, and higher utilities. The good news is that our teams did a good job managing that in the fourth quarter, but it was still higher than average levels. And we're continuing to focus on ways to bring that down overall. T&E to support Shack openings is also going to be a function of the number of Shacks that we open in a specific quarter, especially if there's overlap in certain markets. So aiming towards having a more smoothed out development year would help on that side. And then on utilities, just really the broader commodity landscape is a key driver on that. But to your question about if we have any specific plans in place, I would say yes. And we've tried to outline those in the shareholder letter and on the call. We are taking a very focused look across driving sales, labor efficiencies, training our team members. All of that is definitely part of the focus here.

Yeah. So we had a pretty inflationary year for beef in general. It's been kind of a pressure for us for a while. So calling for flat to up mid-single digit inflation on that side does reflect a pickup in beef prices overall for the year. Certainly we'll have to see how the year plays out and if it ends up being more extreme or less extreme than that. But we are factoring in a degree of beef inflation in our outlook. And the other things to keep an eye on are chicken, dairy, fries, fryer oil. Those are a lot of these big drivers of our COGS that are seeing pretty material pickups here, and we don't contract on a lot of it. So that would be how I would think about the inflationary cadence for the year. Thank you very much.

Just the staffing between those two, suburban and urban? Yeah, I mean we are still, as Randy talked about, there is still an opportunity to regain our sales here from focusing on staffing. We had some success in some suburban Shacks in the quarter, and really kind of exiting the quarter it started to get on a stronger footing with some. But there's still opportunity in others, and a lot of the trends that we talked about still hold. Thank you very much.

Also, just a reminder, we over index to higher income consumers, and we're generally seeing pretty good trends from that group as well. So it's just also something to keep in mind.

I mean, we, you know, just as you look at the difference between the first quarter and the full year, we're guiding for the first quarter to be down mid-single digits. So just that alone would imply that we have baked into that guidance range a pickup in beef prices in the back half of the year. We again don't contract on beef. We are both talking to our vendors and hearing what they're saying, and also triangulating that with broader industry and analysts' expectations. So there is a wider range of uncertainty around that, as we've definitely been clear about.

Sure. I mean, when you boil it down, it's really that we have a much more advanced development calendar than we did last year. We just talked about having 24 Shacks right now under construction, and at the end of last year we had a number more, and we opened up a lot in the quarter. So I think what you're seeing on that side is just us having a lot more investment in our pipeline than we were at this time last year. We also have some pickup in investments in IT and in digital, but the big chunk of that is really around that. And then we also had some added investments as we've rolled out kiosk to a larger part of our Shacks.

Yeah, we're not going to be talking about any guidance on that point because we haven't given anything. But what we are focused on is building, we're bringing down our build costs overall for our Shacks, and really having a disciplined approach to capital investments and to G&A. That, inclusive of also building back our profitability, we feel like we're on a really good path here.

I think that's definitely a very good way to be looking at it. Certainly when we're building up our initiatives to bring back our profitability, we start with sales, sales in our own channel. But really driving sales overall is exactly for this point. There's going to be a number of factors though that impact that, including our overall channel mix. So nothing really to share at this point, but we do believe that sales will be a strong contributor to a raw profitability improvement.

That's a great question. We do have a range of margin performance within our base. If I was to classify where our strongest Shacks are, it's probably the ones that have the highest sales. We have a great group of Shacks that have very, very strong sales, and when you have great sales you can leverage your rent, you can leverage your occupancy. So those tend to be the best performers. You can also really get great labor levels as well, and you can leverage a lot of the fixed costs. Where we have opportunity to improve and where we've been focused is in the Shacks that have a little bit lower sales and how we can kind of bring those back up. And that's a lot of the work that's been going on right now. Kiosk is one example, broadly, of a strategy that we're using to help improve labor throughput overall. So instead of having two to three, maybe four people taking orders depending on how busy the Shack is, we're able to then redeploy that labor and have people go to the kiosk when they come in the Shack. So that's how we would think about it. There are obviously areas where certain Shacks can improve and areas where other Shacks are doing exceptionally well, but if you're looking at the biggest driver overall, it's likely sales.

Yeah, hi Brian. So I would say we continue to do better at staffing in our urban markets and in our suburban. And we see potential to recapture some sales in suburban markets just due to better staffing levels. And then also there's a couple other added dynamics really in suburban just to be mindful of. First of all, some of our suburban locations are in malls or around malls or near outlet centers and whatnot, so ebbs and flows of consumer behavior of going to malls or not going to malls can kind of swing that around. And then just frankly, these suburban Shacks massively outperformed our urban Shacks throughout COVID. So there's likely to be a little bit of shift as people go back to three days a week in the cities or four days a week in the cities, however that lands. We're expecting to see a little bit of share shift between suburban and urban around the fringes, but these restaurants, we're really pleased with how they're performing and continuing to hold on their same-store sales strength even as urban recovers.