Shake Shack Inc. Q1 FY2020 Earnings Call

Greetings and welcome to Shake Shack First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I will now turn the conference over to your host, Mr. Rik Powell, SVP of Finance. Please go ahead.

Thank you, Hector, and good evening everybody. Joining me for Shake Shack's 2020 first quarter conference call is our CEO, Randy Garutti; and President and CFO, Tara Comonte. During today’s call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release and the appendix to our supplemental materials. 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 24, 2020 and current reports on Form 8-K filed on March 17th and April 17th, 2020 respectively. Any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change. By now, you should have access to our first quarter 2020 earnings release, which can be found in the News section. Additionally, we have posted our first quarter 2020 supplemental earnings materials, which can be found in the Events & Presentations section on our site, or as an exhibit to our 8-K for the quarter. In light of the ongoing environment, our supplemental materials also include certain financial information related to the current quarter. I'll now turn the call over to Randy.

Thanks, Rik, and good evening everyone. We hope you, your families, and our entire Shake Shack community are all staying safe and healthy during this crisis. I've had the privilege of leading this company through many challenging and incredible moments. But I think we'd all agree this has been an unprecedented test for our world and for our teams. Our message across the company has been consistent to lead with hope while acting on reality and to make the necessary choices today to ensure our strength and growth continue for years to come. We're confident we've increasingly taken those steps since this crisis began. We're pivoting the business now to ensure Shake Shack captures the opportunity to evolve into an even stronger company as we come out the other side. Today, we'll briefly talk about Q1, which prior to the impacts of the COVID-19 outbreak was in line with our expectations and previous guidance. We'll focus more on Shake Shack today, specifically our teams and the important positive momentum of our operating models and digital initiatives. I want to begin by talking about where the company is right now nearly halfway through our second quarter. Sales have been steadily increasing every week from their challenging lowest point at the end of March. The week ending March 25th, we experienced numerous Shack closures, greatly reduced operating hours, and sales in the comp base averaging down 73% across the portfolio compared with the same period last year. However, since that point, and as we've shared in the supplemental deck provided, each week we've seen encouraging and steady increases in both same-Shack sales and total sales nationwide, driven by growth in our own digital channels, the expansion of integrated delivery partnerships, and our shifting operating models. In our most recent fiscal week, the week ended April 29th, same-Shack sales were down 45% compared with the same period last year as sales continue to improve to varying degrees. From a regional perspective, despite all regions being significantly impacted, there are some notable differences in performance as well as the speed with which some markets are demonstrating improvements, with New York City, not surprisingly, still acutely impacted. Some Shacks in the comp base have however resumed year-over-year growth; some are down mid-teens while others still down as much as 70% to 80%. While these sales in aggregate are still material reductions from pre-COVID-19 levels, we're encouraged by the consistency of week-to-week improvements and the clear signs of a path to recovery. So, how does the Shack operate today? Up until this point, every open Shack is operating without a dining room. Our team's entrepreneurial spirit and innovation around alternative operating models have been extraordinary, creating an entire guest experience around curbside pickup, digital preordering, and building makeshift drive-thrus that never previously existed, creating distinct and separate areas for delivery and courier pickups, all to ensure safety for our team and our guests. Throughout this time, we've got a massive focus on how to continue leveraging our digital tools. In fact, the investments we've made over the last few years as part of our digital innovation strategy have been key to our ability to operate in an environment like this. As a result, quarter-to-date, through the week ending April 29th, digital channels represent approximately 80% of our total Shack sales, with our Shack app and web channel showing the most significant growth, nearly three times higher than last year. As part of this, we're also seeing strong growth in a number of guests purchasing for the first time on our own digital channels, which has more than doubled over the last eight weeks. Now, our own channels remain our primary focus in our longer-term digital strategy, and we believe they continue to represent our most significant opportunity to directly connect with and drive frequency and loyalty with our guests. We've been very clear about this strategy over the last year and intend to use this moment to further those commitments and investments to ensure we capture this significant ongoing growth opportunity. We've talked a lot about the importance of delivery over the last few years and we've taken the time to adapt our strategy to expand our integrated partnerships with more marketplaces, including Uber Eats, DoorDash, Postmates, and Caviar, in addition to our previously exclusive relationship with Grubhub. Our intent by doing so is to provide maximum access to Shake Shack during and beyond this crisis and to drive both near and long-term sales. All the strategic imperatives for delivery we've discussed over the last year remain important leading with a commitment to improving the guest experience and building a long-term and engaging direct relationship with those guests. Moving forward, we expect to continue to partner with all major delivery service providers to ensure our guests have the maximum amount of choice wherever and whenever they want their Shack. In addition to these digital strategies, we've been coming up with other new and creative ways to engage with our guests, giving them access to their Shack. One of these was the launch of a Cook-At-home Shack Burger Meal Kit in collaboration with Goldbelly, a curated online marketplace for regional and artisanal foods. Ready-to-cook boxes are shipped with all the staples needed to recreate a classic Shack burger at home. It has been approved to be a winner with over 12,000 kits sold so far and has created significant market exposure in the process. In terms of menu innovation, our focus has been one of simplification and streamlining as we manage through this challenging operational period. As a result, we've temporarily removed a couple of non-core items from our menu, paused previously planned limited-time offerings, and we'll continue to evaluate the best timing for the launch of additional menu items such as hot chicken and more. We continue to test and create in the background and more to come here as we move through this period of recovery. Throughout all of this, our number one priority has remained safeguarding the health of our team, guests, and communities, while we work to keep our Shacks open to the best of our ability. Our team has been heroic during this time. As of April 29th, all 17 of our domestic company-operated Shacks remain open only due to the entrepreneurial spirit and dedication of our Shack leadership, our team members, and our committed home office support. I'd also like to thank our supply chain team and all of our suppliers around the country who have gone above and beyond to ensure our Shacks are stocked with the necessary supplies and equipment they need to protect our employees and our guests. We've taken significant actions to ensure maximum safety for our team members and guests in these times, such as increased cleaning, sanitizing, hand washing protocols, basic distancing, gloves, and masks at all times. During this time, we also need to make some tough decisions for the long-term health of our business, which include the need to furlough over 1,000 team members across the Shacks in our home office to drastically reduce discretionary expenditure. Our home office and executive teams have taken pay deductions. I'm proud to say that we committed to paying 100% of our furloughed team members' medical insurance through July 1st and have guaranteed full pay for our Shack General Managers, even if their Shacks are closed. The best news is that as sales have continued to steadily increase over recent weeks, we've gradually begun to bring back a number of our furloughed team members. Our recruiting function is hard at work as we do start hiring and check for continued gradual recovery and a return to the growth we expect ahead. We say thank you to those in our Shacks every day in these difficult times across all company-operated Shacks nationwide. We've increased hourly wages by 10% through June 3rd and guaranteed bonuses for the second quarter for all active Shack managers. Throughout our licensed Shack business, it is a country-by-country and day-to-day story. We're working closely with our domestic and international licensed partners, as their businesses remain deeply impacted. As we expected each region is a tapestry of different challenges, formats, and reopening approaches based on local government requirements. Domestically, all eight of our stadium businesses are closed for the foreseeable future, eight of our 13 domestic airport locations are closed, and those remaining open are doing a fraction of normal sales, with travel overall deeply restricted. Across the world, the vast majority of Shacks are operating with reduced hours and alternative models similar to the U.S. After a blanket closure, we just reopened two of our 12 Shacks in the U.K. Our largest region, the Middle East and Turkey, many Shacks remain closed, and those open are seeing dramatically reduced sales. In Mexico, we have just two or three Shacks open for takeout and delivery-only. Across Asia, all 13 Shacks in Japan remain closed. Singapore and the Philippines are open in modified formats, but all are facing significant sales reductions. There is, however, some directionally positive news on the horizon. Our Shacks in Korea, China, and Hong Kong have reopened dining rooms in a limited capacity and see mostly increasing sales, albeit slowly. Needless to say, we do expect our licensed operations to remain impacted for an uncertain period of time and the significant development plans we had for this part of the business in 2020 are temporarily paused. But it is important to remember that our global licensed business has secured real estate in some of the world's best locations. We believe great locations stand the test of time. And it's just a matter of when, not if, they get back to growth again. We're working closely with our dedicated and world-class partners as we move to recovery and then back to growth, sharing best practices and rebuilding together. Looking ahead, what does Shake Shack look like through these next few months and into the future, and how do we capitalize on this moment to strengthen our company? We're starting to plan for dining rooms, albeit in a restricted and modified capacity to slowly reopen regionally. We'll be working closely with local authorities, CDC guidelines, and our landlords in this process and will be clearly following all social distancing and other safety restrictions and recommendations. We expect that the majority of our increased cleaning and sanitation procedures are here to stay. We plan to move thoughtfully through this next phase of operations to keep our teams and guests safe at all times. We expect dining rooms, where we choose to reopen, could be operating with significantly limited seating capacity. Social distancing requirements will result in cashiers and kiosks also operating at reduced capacity as we shift guests to mobile and contactless preordering. We'll be clearly identifying separate areas and spacing for ordering, pickup, and delivery couriers. Unfortunately, many of our Shacks have outside seating which will be opening to some level and these Shacks will likely have some degree of specific adjustment to operations to comply with all guidance and regulations and ensure safety remains the utmost priority. We’re thrilled to announce today the beginning of a plan to add what we're referring to as the Shack Track. This is a prime example of how we intend to use the learnings from our recent business pivots and turn them into long-term improvements to the Shack experience. Shack Track will result in interior and exterior pickup windows or new pickup areas to improve flow and encourage digital preordering. We've been studying current Shack layouts and future Shack designs to identify where this model can be quickly added. It may take time in many forms, but all towards the goal of continuing to build the community gathering places the world needs while adding a level of convenience, safety, distance, and frictionless pickup to meet the needs of our guests. In a supplemental deck, you'll see a rendering example of what this could look like in both a walk-up and a drive-up scenario. When we recently renovated our Upper West Side and Grand Central locations, we started to implement this thinking but the current moment has reinforced how necessary and beneficial this strategy will be for Shake Shack. Across urban, suburban, shopping center, and pad site locations, we expect these new pickup points with both interior and/or exterior access will support our goals of convenience while allowing Shacks to be what they've always been for our fans. These plans will take time, but we're bullish on the opportunity they represent. In the meantime, we're going to continue to invest in and improve the end-to-end digital experience, including order-ahead functionality through our app and web channels, as well as the delivery experience, which we still plan to integrate within our channels over time. Earlier this year, we shared our plans to develop a new and improved mobile-first digital experience, starting with the rebuild of our web platform, and then extending to our app. The intent is to create an experience that will be even more personalized, more engaging, and easy to use that will allow us to have increased control over direct messaging, marketing, and create an even stronger relationship with our digital guests. There's no doubt that this period of time has only reinforced these channels will be key avenues in which we can capture future growth, and we fully intend to do just that. On the subject of new Shack development, during this COVID-19 crisis, we have paused all design and construction of new Shacks. We're committed to getting back on track for those development plans and the execution of our broader growth strategy as quickly as possible and our teams are ready to do so when the time is right. In the first quarter this year, we opened four domestic company-operated Shacks and we have an additional eight Shacks where construction was either complete or near completion when COVID-19 hit the U.S. We plan to fully complete and open those Shacks as soon as it makes sense to do so, albeit, today we do not have firm timing at the moment. Additionally, we have another nine Shacks in a partial state of construction, but they are also currently paused. We have a strong pipeline of future Shacks with timelines already in design. It's too early to give any specific guidance around the timing or number of Shacks for either 2020 or beyond, but we will update you as our planning here evolves. With the strongest balance sheet we've ever had, particularly following our recent equity raise, the Shake Shack brand is in an incredibly strong position as additional real estate and development opportunities become available. We'll be ready to capture the whitespace ahead, what could be a forever change to the retail and restaurant environment. We're also taking this time to look at the opportunity to improve terms with our current portfolio within certain leases and processes to capture some great real estate in what we expect to be an attractive market for us. We fully intend to keep building those necessary community gathering places the world will need while evolving our model to be more convenient, more rewarding, and more accessible than ever. Now, I'll turn it over to Tara to give some more color on our first quarter results and current trends.

Thanks and good afternoon everyone. Firstly, I'd like to reiterate how proud we all are of our teams in the Shacks and our home office team supporting our Shack as we continue to work through these very challenging and uncertain times. It's been incredible to watch the speed and energy with which everyone in the company has come together to navigate through this crisis and to ensure we come out the other side even stronger than when we went in. In light of the circumstances, I won't go through the details of the first quarter but will focus more on how we were performing before the severe impact of COVID-19 hit fully during March, and then provide some additional color on current quarter-to-date progress and trends. Our priority during COVID-19 has been to keep our teams and guests safe; first and foremost, while keeping all Shacks open wherever we can do so. From a financial perspective, we've seen a material impact to sales performance and a number of new costs enter the business. I'll talk more about some of those in a moment. We remain focused on preserving cash yet strategically continuing to invest in key areas of the business that will solidify our position of strength and ensure we're well-positioned to move quickly back to our long-term growth agenda as market conditions continue to improve. Prior to experiencing the full impacts of the COVID-19 outbreak, our performance in the first two periods of the year was in line with our expectations. The same-Shack sales were down approximately 2% as sales started to steeply decline following the COVID-19 outbreak, with March same-Shack sales down approximately 29%, resulting in total comp for the first quarter being down 12.8% and total revenue for the first quarter increasing 8% to $143.1 million. As at the end of the first quarter, our trailing 12-month average unit volume was $3.9 million with average weekly sales of $65,000 during the quarter. In March across our company-operated Shacks, our weekly sales were severely impacted and quickly as the business reacted to dining room closures, city and state curfews, mall closures, and ultimately stay-at-home orders. For the Shacks in our comp base, in the last three weeks of our fiscal period ending on March 25th, same-Shack sales decreased 10%, 46%, and 73% respectively compared to the same fiscal weeks last year. We're pleased to say that we've seen consistent improvement to the sales trends each successive week since that low at the end of March, much like Randy mentioned, due to the success of additional strategies and the flexibility of all Shack teams. Overall, in the most recent fiscal week ending last Wednesday, April 29th, same-Shack sales were down 45% compared to the same period last year and total Shack sales were down 34%. Average weekly sales for the week ending April 29th more than doubled to $49,000 compared to the week ending March 25th. You can see the weekly table and its gradually improving performance on page six of our supplemental materials. From a regional perspective, despite all regions being significantly impacted, there are some notable differences in performance, as well as the speed with which the markets are demonstrating improvement. All regions have seen improving week-over-week sales over the last four weeks although with all material exposure to acutely impacted markets, like New York City, we expect recoveries to be slower in certain regions than others. As you can see on page 8 of our supplemental materials, New York City is still acutely impacted, and with a significant proportion of our sales originating here, it represents a material drag on our overall results. Many of our highest volume Shacks are in New York, some in transit centers, and many in high tourist neighborhoods, and it's not surprising to us that we're experiencing a more significant decline here in this moment. We're encouraged to see Shacks across the rest of the country faring better and coming back gradually and have confidence in the strength of our New York business post-COVID-19, albeit we expect a slower path to full recovery here. As it relates to our profitability, Shack-level operating profit margin for the first quarter was 19.1%, highly impacted by the sales deterioration caused by the COVID-19 outbreak in March. Shack-level operating profit margin during the first two periods of the quarter, excluding a one-time inventory adjustment benefit, was 20.1%, compared to 19.3% for the same period last year. This 80 basis points improvement was driven by labor cost control and favorable food costs. Shack-level operating profit margin in fiscal March decreased to 15.9%, driven primarily by the reduced sales caused by the outbreak. The aforementioned inventory adjustment had a 40 basis point benefit on Shack-level operating profit margin for the full quarter. I mentioned earlier that we're encountering a number of new and increased operating costs in the Shack specific to COVID-19. These include supplies and equipment we deem necessary to keep our teams and guests safe, such as face coverings and gloves, additional secure packaging for all orders, directional signage, and cleaning supplies, among others. We expect these to be ongoing for a period of time. As sales continue to ramp up, we also fully expect to incur labor inefficiencies for a period compared to our previous staffing model as we work to establish new protocols and operating models in the Shack, with our goal to remain as efficient as possible while always offering safe and high-quality service to our community. In addition, while we’ve seen strong growth partly as a result of the expansion of our delivery partners, these sales do come at a higher cost due to the non-exclusive commission agreements with the various marketplaces. We're also closely monitoring the ongoing volatility in the beef market, as we're starting to see a material increase driven by industry constraints due to plant closures. Over the last month, we've seen significant increases in beef, with the largest increase being realized over the most recent week. From a cost standpoint, we're in a slightly more predictable position with chicken and pork due to locked-in pricing agreements, albeit we'll continue to monitor the broader environment closely. Moving on to cash. We've been operating in a conservative cash preservation mode with strong cost management discipline since the initial impacts of COVID-19. We'll continue to do so until the operating environment fully stabilizes. As a precautionary measure, on March 24th, we drew down on our $50 million revolving credit facility and have subsequently finalized a number of enhanced modifications to our credit agreement to reflect the current and ongoing impact of COVID-19. In addition to further strengthening our balance sheets and securing our ability to revert to growth quickly, we raised gross proceeds of $150 million from an equity offering on Friday, April 17. This represented twice our initial target amount of $75 million by an approximate $10 million at the market rate as well as a $140 million block intraday trade, the latter becoming possible following significant reversal inquiries from both existing and new shareholders. We were extremely pleased with the outcome here. As of April 29, we had $247 million in cash and marketable securities, putting us in an extremely strong position to continue to weather the storm and to exit ready to quickly resume execution of our long-term strategic growth plan. The context entering 2020, we had $74 million in cash and marketable securities against the previous high point of $92 million at the end of Q2 2018. This further strengthening of our available liquidity allows us to continue to strategically invest during this time of depressed sales, solidify our strength and ability to revert to growth, and gives us the opportunity to plan longer-term to capture the many opportunities a post-COVID-19 world could provide. At current sales levels, our weekly cash burn has reduced to approximately $800,000 per week. This number assumes pay increase and guaranteed second-quarter bonus for our Shack team that Randy mentioned earlier. It also excludes new Shack capital expenditure, which for the most part has been placed on temporary hold. Cash burn is a key performance indicator for us as we decide the timing and degree of deploying growth capital. Although, as I mentioned, we are restarting a number of key digital initiatives, as we believe these continue to be a critical differentiator for the business and opportunity for continued growth. We significantly reduced discretionary spends in G&A in late March and are currently running at approximately 75% of our original G&A budget for the year. As sales continue to recover, we'll gradually increase the spend, although the extent of this or timing thereof is not yet determined. As I mentioned, we do, however, expect digital marketing and technology to be two areas where we will increase investment spending as the quarter progresses. Finally, we're continuing to evaluate several of the tax regulatory changes that were enacted subsequent to the quarter. We expect to benefit significantly from the retroactive change to the recovery period for qualified investment property, which will make the cost of our leasehold improvements eligible for 100% bonus depreciation, as opposed to the 39-year period enacted with tax reform. The full extent of this and other regulatory changes will be reflected in our Q2 financials, and we expect this change to fully eliminate our TRA payment obligations for the rest of this year. As usual, we've also included a reconciliation of our effective tax rates in our supplemental materials. Lastly, in terms of outlook, we withdrew our financial guidance for 2020 in mid-March given the level of ongoing uncertainty surrounding COVID-19 and will continue to update you as we have more information to share. With that, I’ll pass back to Randy for some closing comments.

Thanks, Tara. I want to take this opportunity to just say thank you for all of you for joining us today. In the midst of this crisis, our responsibility and commitment to our communities has never been more important. And our teams just keep stepping up to that challenge. Shacks around the country have been providing countless meals for hospital workers, first responders, firefighters, humane societies, food banks, and more as daily examples of our core values in light and hospitality. While we work through this extremely challenging time, I could not be more thankful for our Shack and home office teams for their dedication to keeping our Shacks operational. I couldn't be more grateful to our guests for their continued trust and support. During this time, we are working hard to take the lessons we're learning now and bring them into our business plans moving forward, ensuring we’ve come out even stronger on the other side, and are more prepared for anything that can come our way. Remember, Shake Shack was born as a community gathering place in Madison Square Park in New York City. You can bet that when the day comes, when friends, families, co-workers, travelers, and everyone in our communities chooses to gather again, Shake Shack will remain a place they choose to do so. And with that operator, you can go ahead and open the line for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. Your first question comes from the line of Sharon Zackfia with William Blair. Please proceed with your question.

How much information are you currently gathering on your customers through the app and the Shack website? How does this relate to any loyalty initiatives you may have, both in the short term and looking ahead?

Sharon?

Yes.

Hey, Sharon, I'm sorry, at the beginning of your question, you were muted. We only caught about the last 10 seconds. Am I missing the question?

That's okay. This is the joy of everyone working remotely.

Yes. We are in the New World.

Yes. So, congratulations on the 80% digital. I guess what I'm curious about is what percent of that are you getting information for either the customer either via the app or your website? And kind of along with that, how does that inform what you're learning about your customers? And any potential thoughts on loyalty layering into that platform?

It's truly exciting to see how quickly our tools, originally designed for a smaller percentage of sales, have evolved and have effectively kept us operational. Customers can choose to check out as guests or provide full information. When they do provide full information, we gather valuable data that we use to connect with them if they are interested in engaging further. This data is substantial, and the connections we forge are meaningful. We're enthusiastic about the implications since, as is well-known in the industry, those customers tend to remain loyal. Especially during this time, guests experiencing Shake Shack have expressed it feels like coming home. We've seen notable social media engagement when customers receive their Goldbelly packs and prepare their Shack Burger kits. In these unusual times, comforting connections are significant. Looking ahead to loyalty programs and other initiatives, we will continue to explore various strategies. We've achieved some success with promotions through our delivery partnerships recently. As we invest in and develop our tools, we expect to do even more. While there's still much work to be done on these digital tools, we are genuinely excited about their future potential for us.

Thank you.

Your next question comes from the line of Nicole Miller with Piper Sandler. Please proceed with your question.

Thank you. And thanks for a great update this afternoon. One question would be the Goldbelly partnership. I mean, that was just really fun. We experienced it on our end. Just wondering, it's clearly aligned with the DNA of supporting the community. How much of it was novelty? Could it be permanent? And even if it's not, what did you learn?

It's a great question, Nicole. Thank you for hanging in there with us. I think what we've learned is there is an incredible demand for Shake Shack all around the country. One of the powerful things about a thing like Goldbelly is it starts to tell you where people order, right. It's a way for us over time to maybe even learn about real estate decisions, how to see the market, where there's different demand that we may or may not even know. We're going to be listening and learning through that. Look, I don't think it's going to be a material part of our business anytime soon. We certainly want to be back to Shake Shack burgers for you, Shacks more than having you have it at home, although we love that for the moment, but we'll be keeping on. I think it's going to give us an opportunity about other products down the road. And who knows? Who knows what this could mean? I also just want to follow up on one thing from the previous question too. As we look at our digital channels, one of the cool ways where people are experiencing Shake Shack right now is when you do go to the Shack, we have a QR code outside the window where you can scan that. The menu pops up, you're immediately in our channel, and you can order. So you don't even have to wait online. You can have fully contactless ordering. It's just another great way to connect with people. So lots of fun things both on new channels like Goldbelly and our own.

Your next question comes from the line of Katherine Fogertey with Goldman Sachs. Please proceed with your question.

Great. Thank you. Actually, one thing of clarification, Tara, you kind of went out a little bit when you were talking about the weekly cash burn and the assumptions you're making there. So if you could kind of get back into that point. But really the question that I wanted to ask was about the pipeline and site selection, the Shack Track seems super interesting and wondering if that changes the way in a post-COVID world that you think about site selection, and if you anticipate there being more sites or different sites opening up that maybe Shake Shack might look a little different post-COVID than the more unique larger scale units that we've seen so far? Thank you.

Yes, hey, Katie. Yes, I apologize. I'm not sure what happened at that first part of the cash burn discussion. So what I said was at our current sales levels coming off the last week, our cash burn is now about $800,000 a week. That's obviously an improvement from the business update we posted a couple of weeks ago. That assumes full cash rent payments of about $800,000 a week. We're pleased with that progress and expect that to continue to improve as sales gradually recover.

And Katie on the Shack Track, I think it's going to be fun to learn. We've got to try this out. We'll do it in different places. One of the things we've learned in this time is that, more than ever, we want to build community gathering places. I truly believe that the world will gather again. We shouldn't do it in the same way right now. But as time passes, I believe we will be thirsty to do that, as a society and as human beings. People want to gather with other human beings. We're going to keep building those. We're going to keep building really special architecture and design like we always have from the beginning. That's the very thing that has always set Shake Shack apart. In this time, we're looking forward to building more of those. In addition to that, we want to make those Shacks and others even more accessible and more convenient, no matter how you want to order. We have one that's nearly built in University Village in Seattle. That's a great community gathering place. It's a beautiful design, and we're going to add one of those Shack Track windows to it. I think it'll be an exciting way to do it. We have a couple of other Shacks where they would never have intended as a drive-thru, but now we think we might be able to punch a hole in the side of the building, create a lane, and allow you to have pre-ordered at our channels and drive up to pick it up. We may even be able to set that up for delivery couriers. All of that in the near term is to separate people, give them space, and control the crowd. Over the long-term, we'll try to give you whatever way you want your shack with convenience. To your direct question, I think it will open up new opportunities for us in real estate. We've never had more cash on our balance sheet than we have right now. That's a tremendous position for a company to be in during this time, and we intend to use that wisely when the time is right to capitalize on what we expect will be a changed retail environment. I think there will be companies like ours that can expect to be even more coveted than we were before by developers and landlords to capture the best pieces of real estate out there.

Your next question comes from the line of Lauren Silberman with Credit Suisse. Please proceed with your question.

Hi, thanks. Just a quick follow-up on the prior question. To what extent do you think the existing Shacks will be able to be retrofitted for the new enhancements? And how could the new design potentially impact investment costs? And then just the question on the recent comp improvement, what do you think are the primary drivers of the improvement in trends and anything you can share about what you're seeing on the consumer behavior side? And then just to clarify the comp closed store?

Sure. Comp excludes closed stores. Let's start with the comp. We've closed stores, and those are out. In the comp base, we've seen gradual improvement every week for the last six weeks since the bottom occurred towards the end of March. I think it's really been a few things. There's been tremendous efforts by our team to quickly and radically alter the way we operate today. For those drive-up pickups, curbside, and keeping everyone out of the dining room. I think it's extraordinary what the team's done. I think people are getting used to that. Diners and guests are looking around and saying they want to eat out, and when they do, they need to trust that brand. The way we've done that, I believe, has gained us a lot of points in our community. Additionally, the digital initiatives have seen our app and web channels grow and become the leader of our sales right now as well as continue to add integrated partnerships with new delivery companies. It's giving people the opportunity to experience Shake Shack during this time quite a bit. In terms of the shacks, how many will be able to directly benefit from a Shack Track kind of setup, it's hard to say. We're reviewing those now. There will be some that'll be obvious, and we're working toward having separate areas to have windows and shelves that can be accessed separately to keep people as much as possible apart. This will be tough, as Shake Shack is generally crowded, and we're going to be working carefully to disperse those crowds while still trying to maintain the best we can. I don't expect it to be a material increase in a new Shack build. We do expect to drive some level of CapEx as we look to do this at current Shacks. But we aim to do it quickly, wherever we can. There will be lots of things we can learn, but it's something we believe in and are excited to test at a few places and get going.

Your next question comes from the line of Jake Bartlett with SunTrust. Please proceed with your question.

Great. Thanks for taking my question. Your mind is around restaurant-level margins, and maybe if you can clarify, Tara, you said that the restaurant margins were 15% in March, despite same-store sales being down 29%. I might just be surprised by that level, if you could confirm that and just, you know, at the current levels of things same-store sales, what do the restaurant-level margins look like? Or maybe said in another way, what is the breakeven given how the stores are being operated right now?

Yes. Hi, Jake. The team has done a great job overall across the company and particularly in the Shacks of responding as quickly as they possibly could as it related to cost within the Shacks, and variable costs and fixed costs, trying to react as quickly as possible to those week-on-week sales trends that I talked about. So I think hats off to them for moving as quickly as they did. We obviously saw a meaningful impact to margins in the quarter and with that kind of sales drop off. But when it comes to looking forward, and where we are now, I would say you sort of made the pivot from shack-level operating margin to cash burn, really, we're very focused on that cash burn number first and foremost. That's where we'll be looking for it to continue to improve as sales return. Ultimately, with the intent to get back to the high-margin business we were before COVID-19 hit. But that's not going to happen overnight, and there's going to be a path to get there. Different costs will start coming back into the business at different times. As Randy mentioned, we were really pleased to be bringing team members back into those Shacks as sales recover. We're encountering inefficiencies and extra costs in the operating models right now. It's really hard to be clear; as we reopen dining rooms, that's not necessarily going to get any easier in the short term as we operate under restrictions. Cash burn is the key area of focus, and as of today, we are not giving any forward-looking statements related to breakeven points on the call today. But we are pleased with the progression so far in the last few weeks with sales continuing to increase. We're looking forward to that continuing to get better. As we start to spend more, we'll likely increase spending on digital marketing and technology as the quarter progresses.

Your next question comes from the line of John Glass with Morgan Stanley. Please proceed with your question.

Thanks very much. And thanks for all the detail around sales and cost. When I look at your sales declines, even outside of New York City sales are down 35% to 40%, which in a way surprises me just given us a limited service brand. We've seen others, even without drive-throughs, have lesser declines in sales. Is there another way to cut that data to look at like the suburban stores and you get away from like tourist areas, areas which are being more impacted by traffic some other way to help understand if there's a differentiation either way people are just not using your brand differently or is it just the geographies and locations you're in that causes more significant sales declines?

Well, John, I think there's so many variations within that, and it's the right question. The most heavily impacted are the deepest urban environments, right? New York City and urban Shacks and many other places around the country. The hard part when you try to break it down is, look, there’s many malls where we're either closed because we're inside, or open, but the mall is closed. So it's hard to say a suburban shack is doing okay. Shake Shack real estate has been its strength, and there's no doubt that in times like this, we're not a brand with 2,000 units around the country that has a wildly dispersed portfolio. We have just 167 company-operated Shacks. They're all in really good locations. Really good locations are deeply impacted by this moment. I think it's a little bit harder to say, but generally, you're right to say that suburban areas do a little bit better during this time because you can access it more easily. But we've seen fascinating trends, and it truly is a learning moment that’s teaching us a lot about different kinds of real estate opportunities we have today and will have in the future as these situations develop. But Shake Shack is likely to be a little more impacted than your average fast casual or certainly than the QSR, just because of the type of real estate we operate. We have no official drive-throughs.

Your next question comes from the line of John Ivankoe with JPMorgan. Please proceed with your question.

Hi. Thank you very much, everyone as well. The first is a clarification. I think Randy you said that some stores are actually up year-over-year. So, could you explain what the characteristics of those stores are? And secondly, having $247 million of cash is a lot of money given what your cash burn is? Are you beginning to think about other strategic or non-Shake Shack opportunities now that you have a truly fortress balance sheet?

Yes. At that level, the most cash we’ve ever had in this company ever, in the history of this company is over $90 million. We now have nearly $250 million. That's a truly fortress balance sheet to withstand anything, no matter how long this takes. We believe we can withstand it. I do think it creates tremendous opportunity for us. First and foremost, John, on our own channels to continue to build, and we believe the truly opportunistic in our growth moving forward. Now, we got to get past this thing. We're not going to get over our skis; we’re making sure that we preserve the cash we have so that we can do that. We have no current plans for anything outside of building our own Shacks. We've got a big country and a big world out there, and we want to do that, but you never know. Liquidity was the number one goal over the last two months, we've achieved that. We're really happy about that. In terms of the Shacks that are up, it's funny. First of all, there aren't that many, as you can see in the numbers. The ones that are interesting tend to be accessible via car, drive-up, and where people are feeling comfortable getting during their work. Mid-town Manhattan is not one of them, if you get what I'm saying. It would be opposite of that, seeing more strength. But we think they’ll continue to improve.

Your next question comes from the line of Jeffrey Bernstein with Barclays. Please proceed with your questions.

Thank you very much. Just a question as we think about the reopening to come. I mean, obviously, you're primarily doing a lot of dine-in business. So, that's a big opportunity for you. I'm just wondering if you've given any thought or can share anything in terms of your thoughts on timing and maybe how the strategy changes in terms of social distancing like you said, you're a gathering place, but that doesn't necessarily fit well with that. So any thoughts around profitability that'll come out of these capacity constraints or maybe if you’ve already opened some of the dining rooms in terms of any learnings you can share in terms of the improved comp or the risk of losing pickup at the expense of dining being reopened anything, it would be great? Thank you.

Thank you. The only place in the world where dining rooms have reopened has been in mainland China, in Shanghai, Hong Kong, and Korea. Those are severely limited dining rooms, and each country has its methods. We've learned a lot from our partners overseas. We're taking a lot of that to our ops teams here. So domestically, there are zero Shacks that have dining rooms open and we haven't announced yet when or how exactly we will do that. But we are watching closely and are making sure it can be done safely. You've seen regions like Texas, Georgia, and some others begin to open, some being aggressive, some being more cautious. We’re going to take the more cautious route. And when we do, there will be a lot of blocked-off or removed tables, a lot of space between any guests, clearly delineated lines with space in between, and pickup areas as spread out as possible, along with our staff spread out for their own safety. It's going to take time. We have to work with throttles right now. There is no reason to start trying to do all the sales that these Shacks once did. That is not safe. We need to be careful. That said, our teams are being incredibly entrepreneurial and as aggressive as they can to get back to sales where there is an opportunity. I think we could continue to encourage guests to pre-order as often as possible. The opportunity we had started with kiosks and our app and web channels. Our own channels are incredibly attractive to people, and they're becoming more so every day. So, we're excited to see that continue going, and we'll proceed slowly and deliberately.

Your next question comes from the line of Andrew Charles with Cowen and Company. Please proceed with your question.

Great, thank you. And I hope you guys are all staying well. Two separate questions for me. Tara, in Q1, can you quantify the revenue dollar impact of the temporarily closed company stores given this wasn't picked up in the same-store sales calculation? And then, Randy, my question for you is that, when we eventually get back to the new normal, what factors are you evaluating to determine if you want to return to an exclusive third party delivery partner or continue what you're doing now with several partners?

So, Andrew, we actually haven’t quantified that impact on revenue numbers for Q1. It was fortunate that it wasn't very many Shacks towards the end of the quarter, but we haven’t broken that down.

And just for context, everyone should understand the Shacks that are closed and why: certain Shacks are closed because they are within the interior of a mall that's closed, or we’ve closed certain Shacks, like Grand Central Station, which is just experiencing significantly lower numbers. So, we close that Shack and some others where it's a hotel or a truly destination tourist area like international drive in Orlando. Those are closed. In terms of delivery partnerships, Andrew, at the moment, we don't see a scenario where we would return to an exclusive arrangement. What's become clear to us through the first quarter and certainly now is that we want to give opportunity for our guests to have it whatever region they're in and whichever platform they choose to use. We want to make sure that we're there for them. We've really formed strong relationships with all those partners and are excited about what it means for our future as things return to more normalcy over time, we hope. Obviously, we're doing elevated delivery. It’s all about being able to connect with diners, and ultimately, we want them to experience Shake Shack whether they take it to go or dine-in.

Your next question comes from the line of Brett Levy with MKM Partners. Please proceed with your question.

Thank you for the call. I agree with what everyone else has mentioned, and I hope you are all doing well. You've covered a lot of topics, and your management team has always been thoughtful and systematic in approaching various initiatives. Throughout this call, you've discussed operational protocols for reopening multiple delivery partners and advancements in digital technology. It seems like you have a lot on your agenda. How do you plan to prioritize once the reopening is complete? What do you need to achieve to establish a steady state where the corporate structure is fully rebuilt, and you have what you consider a complete corporate staff? Thank you.

Brett, that's such an important question. Thank you. I think, number one, you have to see safety. You have to see environments where our team and our guests can remain safe. Everything has to be driven from there. Once we see that, we'll make sure that the priorities are done to take care of our team and begin to grow sales again. We look at those initiatives all the time through that lens. So for instance, on the operational side, we've called down our menu, removed some things that are harder to operate that make up a smaller percent of our sales. We've paused on introducing any limited-time offerings for now, so we have a nice core menu we’re working with. In terms of internal priorities, we'll also focus on investing in tech and marketing as we come back. But we are being disciplined. If you look at the graphs, you can see the recovery we’ve begun to have, but we’re still below pre-COVID sales, and we expect that to be the case for some time. So, we need to make sure we are disciplined. We are not spending anything unnecessary. We don’t expect travel to ramp back up either. As things begin to resume, we'll start to add back appropriately. We have to understand what the new normal level of sales will be, and soon, it’ll be time to support new openings too. We haven't had an opening in a couple of months. New openings will also look different now, and it will be a new challenge potentially opening with limited seating. So we’re focused on securing a thoughtful balance between rebuilding and executing on our real estate development as conditions evolve.

Your next question comes from the line of Jim Sanderson with Northcoast Research. Please proceed with your question.

Hey, thank you for the question. Just wanted to dig in a little bit more to beef cost. We've heard a lot about ground beef pricing increasing. One, hoping you can provide some feedback on your own unique blend and how that's trending relative to ground beef costs and then remind us of what share of food costs are related directly to beef? Thank you.

Yes, look, generally in the first quarter, it was fine. The beef basket has roughly been around one-third of our company costs for many years. So, call it that roughly. What has been something we're watching literally every hour now is the supply and costs of those as you've seen a lot of headlines lately. We are happy to say that, at the moment, we've had zero supply challenges in getting our beef. The plants that we use have not been impacted. Although many plants you've seen across the country are working at reduced schedules. We do not expect supply issues for the time being. However, costs have really jumped over these last few weeks and some expectation of moving forward. I think you're starting to see challenges in that market. It's something we've got to watch very closely. We're expecting much higher costs on the beef market currently. We don't expect that to be a long-term problem. Watching closely, we believe our supplies are intact, and we believe it's going to be more expensive. On the rest of the baskets, we're kind of right where we were. There are both wins and losses, chicken and bacon things we've locked in supply and cost, so we feel good about that. Generally, we don't see an issue in any major direction. There will be fluctuations with the rest of the basket from the moment, so beef is really a thing we’re watching closely and will keep you posted.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Mr. Randy Garutti, CEO for closing remarks.

Thank you so much everyone for taking the time to be with us today. We look forward to continuing to be in touch in China, trying to take care of our team as we slowly recover here and we hope we can see you at a Shack sometime soon. Thanks, everybody. Take care.

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