Shake Shack Inc. Q2 FY2020 Earnings Call

Greetings, and welcome to Shake Shack's Second 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 would now like to turn the conference over to your host, Mr. Rik Powell, Senior Vice President of Finance and Investor Relations.

Thank you, Laura, and good evening, everybody. Joining me on Shake Shack's 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 a substitute for the results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release in 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 Form 10-Q filed on May 4, 2020, as well as our Form 8-K business updates throughout the quarter and into July. 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 second quarter 2020 earnings release, which can be found at investor.shakeshack.com in the News section. Additionally, we have posted our second quarter 2020 supplemental earnings materials, which can be found in the Events and Presentations section on our site or as an exhibit to our 8-K for the quarter. With that, I'll 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 healthy and safe. Through this difficult time, I've been incredibly proud of our team. They have continued to show up, support each other, our guests, our communities, and our suppliers. They had an unwavering commitment to excellence in hospitality in the face of an incredibly challenging operating environment. We owe them a debt of gratitude and remain committed to their safety, well-being, and ongoing development and growth. In the second quarter, we committed to pay an incremental $2.4 million across premium pay, guaranteed bonuses, and scheduling-related premiums to our teams in order to recognize the incredibly challenging conditions they are facing every day. We're happy to share that we will be continuing to support our teams in this way into the third quarter. Looking at the second quarter, Shack sales were down 39% compared to last year, while same-Shack sales declined 49%. However, sales showed continuous improvement throughout the quarter. Sales in June did see a significant impact from the temporary Shack closures and reduced operating hours related to nationwide protest activity. Tara will go into this in further detail. But given the high-growth nature of our business and the relatively small size of the comp base, same-Shack sales should not be the sole metric on which to understand current business performance. Total sales and average weekly sales continue to grow. In fiscal July, we saw an 8% increase in average weekly sales compared to the prior period. As of today, approximately 95% of our domestic company-operated Shacks are open, an improvement from the roughly 90% open at the time of our last earnings call. Less than half of our Shacks are currently operating with interior dining, however, a reduction from a few weeks ago as some previously reopened interior dining rooms have once again needed to close as we prioritize safety, particularly in high-risk states. Of those that are open, they're operating at limited capacity and utilizing outdoor patio seating where available. Since the beginning of our company, we've built some of the world's favorite community gathering places. People's desire to gather with other people, share great food, and enjoy hospitality, is a very thing most challenged right now by COVID-19. While so much of our real estate footprint has been centered in urban office travel and dynamic traffic-driving sales environments, these are the most impacted restaurants around the globe, and that's what you see in our numbers. Our suburban Shacks tell a slightly different story with a less acute impact than our urban Shacks, achieving a faster recovery with consistently improving performance across all regions over the last four months. We continue to believe in the strength of the strategy that has led us to industry-leading AUV in those deep connections we make with our communities. In the meantime, we're going to improve those Shacks most challenged by the current environment while doubling down on the places around the country where we're learning and growing, and in some cases, doing even better than last year. We remain fully committed to our long-term growth opportunity, which we believe is as strong as ever. With a robust real-estate pipeline that was paused earlier in the year, we're back in a place where we've restarted new Shack development. We've opened four company-operated Shacks in the first quarter and have successfully opened five Shacks since the pandemic started, with a total of nine openings year-to-date. We're pleased that this class has opened with encouraging levels of sales and are so thankful to our teams for getting them open during these challenging times and working so hard to become an essential part of their new neighborhoods. In today's ever-changing environment, nothing is certain, especially the permitting, construction, and opening of restaurants. But assuming current conditions persist and no major work stoppages get in our way, we expect to open between six and eleven additional domestic company-operated Shacks, back-weighted towards the end of this year, for a total of fifteen to twenty for the full year. COVID-19 effectively cut our development plan in half for this year from our original guidance. Looking ahead to 2021, we have a strong pipeline of leases. We're being proactive and opportunistic when it comes to real estate. With a strong balance sheet and a robust multiyear development plan, we are aggressively in market, looking to benefit from additional opportunities that we expect in a forever changed retail landscape. In our license business, total sales have also shown gradual improvement as approximately 80% of our licensed Shacks have now reopened. We successfully returned to Shack unit growth with the opening of four new licensed Shacks since the onset of COVID-19. All Shacks right now in Hong Kong, Mainland China, Japan, and Korea, with the exception of our airport Shack in Korea, are now open, although in most cases, with limited hours and smaller capacity diners. It's an ever-changing situation, and even this week, we've seen Hong Kong close and then partially reopen dining rooms again due to a recent spike in cases. In the Middle East, the majority of Shacks have now reopened, but primarily for takeout and delivery, with the slow reopening of dining rooms. In the U.K., approximately half of our Shacks have reopened, but we're excited to be testing four new cloud kitchens in various neighborhoods throughout London, which has helped offset some sales loss and taught us a lot about this model in the U.K. Our domestic license business, Shacks and airports, stations, and roadside, remains the hardest hit in our portfolio with just half of our airport locations now open and operating at severely reduced sales, while air travel remains at a fraction of its pre-COVID-19 level, and nearly all of our domestic stadium venues remain closed. As an example of a dynamic and quickly evolving environment, our terminal three location at the LAX Airport would not reopen as the airport has chosen to take this time to tear down and replace the terminal entirely. As we look ahead, we continue to build opportunities for growth, and we're excited to have recently announced the expansion of our existing partnership with Maxim's Caterers Limited, which targets a development agreement of fifteen additional Shacks across South China by 2030, including locations in Guangdong, Guangzhou, and more. This agreement increases development targets for Mainland China to fifty-five Shacks by 2030, of which just five are open at this time. We're looking forward to continuing our growth in this critical and sizable market. Moving ahead to our menu and product strategies, we've been taking this time to simplify our menu in order to allow our team to focus on execution. We've temporarily removed some of the most labor-intensive items, paused LTOs, and have been more cautious about new item testing. That said, our Innovation Kitchen is still humming along, and we're excited about a few upcoming product initiatives. This fall, we plan to bring back Hot Chick'n, a perennial fan favorite, while upping the offering this year and adding Hot Chick'n Bites and Spicy Fries. Longer term, as we've talked about in the past, we believe we have many opportunities to expand our menu with additional vegetarian and vegan options. We've got a new Veggie Shack further with real vegetables served on grains and topped with avocado and tomatoes on a wheat bun. It's being tested at two Shacks right now, and we hope to expand that test next year. It's a great product, something we've been actively tweaking as we solicit guest feedback. As always, we continue to offer rotating beverages and shakes such as our current Pink Lemonade and smaller shake. And as we head into the fall, we're planning the return of our popular Pumpkin and holiday shakes. There's no doubt that this moment has amplified the need and the speed with which we intend to execute our plan to return to growth and prepare for a strong future. We've been intentional throughout this crisis to double down on those things that have made Shake Shack great and improve those things we know we can do better. For us, that's always meant a focus on creating an uplifting guest experience, crafted one burger at a time. We've elevated every piece of the traditional burger experience. And now we're focused on adding much greater accessibility, convenience, and ease of use to that strategy. That begins with our real estate selection, our Shack designs, our digital journey, and the expansion of the way our teams and guests will experience the Shack. And indeed, while some of our strongest Shacks in the country are the hardest hit right now, we believe this to be temporary. Great real estate stands the test of time. And we're excited about the evolution we have planned to aggressively target a multi-format diversified portfolio of locations that thrives under any circumstances. Our intent is to further the progress we've made during COVID-19 across digital channels and facilitate more preorders with a seamless pickup experience. Here's what we're up to: We've just launched curbside pickup in our app. For the first time, guests can preorder on the app, identify their car, and we'll bring their order out to them with contactless pay and handoff. This is live in test in around ten Shacks right now, and we expect it to be rolled out to approximately fifty Shacks by the end of the third quarter. It's really early, but we're encouraged by the initial results and the convenience this adds for our guests. Next, we're adding Shack Tracks to both existing and new Shacks. The Shack Track experience is an enhanced digital order and pickup solution that includes the ability to order via app and web, and pickup via curbside, walk-up window, drive-up window, or with an improved in-Shack pickup area. Through the end of this year, we expect to add at least eight Shack Track pickup walk-up windows to existing Shacks as well as add our first drive-up Shack Track as we reimagine our Vernon Hills, Illinois Shack where guests leave their cars. For 2021, we expect roughly half the class to have either a drive-up or walk-up window, with the remaining Shacks having a combination of enhanced interior pickup, curbside, and/or dedicated delivery courier pickup areas. We're also really excited to announce that we'll be building our first-ever drive-thru experience in 2021, and we hope to execute more of these in the future as we learn. As you'll see in the initial renderings we've included in the supplemental deck, this is not your average drive-thru. Our design will retain the experience of the great community gathering place that has led our brand for sixteen years, while adding convenience for preorder Shack Track pickup or in-person drive-thru ordering. We've not yet announced the initial drive-thru locations but intend to lead with traditional suburban high-traffic quarters. So why are we doing all of this? The answer is simple. As we look ahead, our goal is to increase the addressable market opportunity for Shake Shack while driving strong AUVs and returns on capital. We're still in the early days for Shack Track, drive-thru, and enhanced pickup models, and we have a lot of learning to do in terms of sales and throughput. We're bullish about the potential white space opportunity these formats could create while meeting the evolving needs of our fans. Moving on to digital, as guests begin to return to ordering at the Shacks, the mix between in-Shack and digital sales will continue to shift. During the second quarter, total digital sales represented 75% of sales, more than doubling compared to the first quarter of 2020. Our own native web and app channels have tripled compared to the same period last year, and when combined have continued to be the fastest-growing and largest ordering channels for us throughout Q2 and into July. For fiscal July, digital sales represented 62% of total sales, retaining over 90% of the digital sales that we achieved during fiscal May, even as in-Shack sales have gradually returned. In addition, we welcomed over 800,000 first-time purchases via our app and web channels since early March. This is nearly four times higher than the same period last year. We're delighted with these results, and we're planning for digital sales to remain a significant component of our business and ongoing growth. As a result, we're doubling down on our digital investments that will continue to fuel the guest experience. We've launched a number of new features and functionality in response to COVID-19, and we're now extending much of that learning into broader initiatives. I just spoke about the opportunity we believe curbside pickup can create now and long-term, and I'm proud of the quick work the team did to launch this product. We're also fully rebuilding our broader web and app functionality over the next year with new and enhanced options that will allow additional personalization and feedback, as well as functionality to give guests real-time order status among many other features. But the most important new feature will be the ability to offer delivery directly through our own channels for the first time, targeting to keep guests within our native infrastructure and deepening our ability to connect with them over time. In addition, throughout the next year, we'll be leveraging our improving data and insights capabilities along with further guest-facing features such as expanded payment options, gift cards, and much more. Our teams and leaders have used this moment to accelerate the pace of learning and innovation in our company. We're committed to tackling those areas of greatest opportunity as we see them and take this time to set ourselves up for a strong future. With that, I'll turn it over to Tara.

Thanks, Randy, and good evening, everyone. Firstly, I'd like to reiterate Randy's thanks and appreciation to all our teams right now, particularly those in the Shacks, but also our home office working remotely. Everyone has stepped up to such incredible new heights over recent months in support of each other and our company as a whole. We're looking forward to being in person together again soon. And in the meantime, thank you for all you continue to do. Moving on to the results, as previously shared, total revenue for the second quarter was $91.8 million, including Shack sales of $89.5 million and license revenue of $2.3 million. We estimate that Shack sales were negatively impacted by approximately $3.2 million due to nationwide protests and resulting curfews causing temporary Shack closures and reduced operating hours during the two-week period from May 28 to June 10. Same-Shack sales declined approximately 49% in the second quarter compared to the prior year, driven by a decline in traffic of 60.1% and an increase in price/mix of 11.1%. The increase in price/mix was driven by a 28% increase in our average Shack check as a result of the significant shift into digital channels we've seen over the last few months, which historically have carried a higher average check than in Shack. In terms of sequential progression of same-Shack sales throughout the quarter, we were encouraged with the continued improvement with year-on-year declines of 64% and 42% for fiscal April and May, respectively, and 39% in fiscal June when adjusting for the impact of the protest. Including the impact of the protest, same-Shack sales reflect a decline of 42% in fiscal June. Same-Shack sales in fiscal July were down 39%, while delivering a further sequential increase in average weekly sales in the period, all of which can be seen on Page 7 of our supplemental materials. I'll talk about some of the underlying dynamics of our sales performance on our comp base in a moment. At the end of the second quarter, our trailing 12-month average unit volume was $3.4 million. The more relevant data point, however, as we gradually rebuild sales within this COVID-19 environment, is average weekly sales, which for the second quarter were $45,000, with a clearly improving trend throughout the quarter. Average weekly sales in fiscal July were $56,000, representing an increase of almost 2.5 times average weekly sales at the low point of the COVID-19 outbreak. The speed at which our business is recovering differs generally depending on the location, whether that be in relation to the broader state reopening progress or the extent to which our Shacks are located in a typically dense urban or high-traffic neighborhood, which many are. Our urban Shacks, which make up half the units in our comp base, accounted for approximately 60% of our company sales pre-COVID-19. These Shacks were and continue to be highly impacted by COVID-19 and were down 57% in the second quarter, improving to down approximately 50% for fiscal July. From a regional perspective, it's also worth noting that New York City, a fully urban footprint, saw same-Shack sales in fiscal July decline by 56%, with Manhattan Shacks, specifically, down 65%. This quarter, we've included a regional breakdown of comp-based performance in our supplemental materials, and you can see the disparity between regions and the outlier that is New York, on Pages 10 and 11. The other half of our comp-based Shacks are our suburban Shacks, whether freestanding or in suburban malls or shopping centers, which represented approximately 40% of our same-Shack sales pre-COVID-19. These Shacks were down 38% in the second quarter, improving to down approximately 24% for fiscal July. This stark difference in sales performance is something we expect to continue to some degree for as long as COVID-19 continues to impact our cities, our offices, and our travel, recreation, and entertainment habits. This is likely to be particularly true in some of our larger footprints like New York City, Chicago, Los Angeles, or Washington, D.C., where some of our previously highest volume Shacks are located. We've been encouraged by the initial performance of our 2020 class. Average weekly sales in fiscal July for our five most recent Shack openings were nearly 40% above the company average in that period. Even in a COVID-19 world, new Shacks are opening with strong levels of sales, and we believe the return on capital of this 2020 class remains healthy. We have a huge sales opportunity ahead of us, and we're committed to capitalizing on that, albeit short-term sales predictability remains unclear. With states opening up and then regressing as cases spike, we're focused on remaining flexible in our operations and decision-making. With week-to-week volatility still a reality, we will not be providing specific sales guidance at this time. Moving onto Shack-level operating profit margin, which in the second quarter was 2.2%, severely impacted by reduced sales levels and a number of exceptional and incremental costs across the business. In particular, for a large part of the second quarter, we experienced significant inflation in beef, with costs nearly double last year for most of June. Beef prices have since returned to more normalized levels, but we estimate the spike in beef costs negatively impacted our Shack-level operating profit by approximately $2.5 million or 280 basis points during the quarter. We'll also continue to have significantly higher paper and packaging costs as a percentage of sales, with all orders packaged to-go in filled bags with additional internal packaging for security. We estimate this increased level of packaging impacted Shack-level margin by approximately $1.4 million or 160 basis points in the quarter, which will continue for such time as we remain in a heightened COVID-19 risk environment. In terms of labor, our priority remains safety for our teams and our guests. As we adhere to social distancing and other safety protocols as well as limited capacity dining, our labor costs will continue to show some inefficiency compared to prior levels. In addition, as recognition and gratitude to our teams in the field, we chose to pay a 10% premium to hourly team members on top of their existing hourly rates and also guaranteed bonuses for Shack managers in the second quarter. Currently, in the third quarter, we've extended this premium pay and guaranteed manager bonuses, and we'll be continually evaluating this during this time. Also incurred in the second quarter were heightened levels of payments, primarily due to the fair work week in relation to scheduling changes for hourly team members. In taking all these incremental payroll items together, they represented additional costs of $2.4 million in the quarter, with an impact of 270 basis points in Shack-level margin. In addition, we also continued to pay 100% of all health benefits premiums for furloughed employees. We greatly appreciate the sacrifice that our teams are making throughout this whole pandemic and are committed to continuing to support them in any way possible. Finally, our other operating expenses in the second quarter were 16% of Shack sales, driven by higher delivery commissions due to mix, but also due to a step-up in blended commission rates and our expanded multi-partner arrangements. We continue to operate with consistent menu pricing on our own channels and third-party marketplaces and may revisit that at some point going forward in order to improve the profitability of this delivery channel. We also plan to offer delivery through our own channels in the future. While this will still come with a cost, it will provide us with greater flexibility in our overall pricing and marketing strategies for delivery. Outside of the delivery impact in the quarter, other operating expenses deleveraged compared to the same period last year due to lower levels of sales. Despite these increased costs, we were pleased with underlying improvements in Shack-level operating profit margin as the quarter progressed. The low point in Shack-level operating margin was in fiscal April at negative 11%. This improved to positive 7% and positive 5% in fiscal May and June, respectively. However, June was the period in which we saw the most acute impact from beef inflation, additional labor costs, and the impact of protest activity on sales. Taking these into consideration, we would have seen further sequential improvement in Shack-level operating profit exiting the quarter. Moving on to G&A. Total G&A for the second quarter was $14 million and included $1.6 million related to noncash items. In addition, we incurred higher professional fees of approximately $250,000 related to the April equity offering and the implementation of the CARES Act, which we expect to continue in the third quarter. At the beginning of the quarter, given the significant impact of COVID-19, we quickly cut back spend in many areas, including furloughing home office employees, cutting discretionary spends, and pausing investment in the majority of our strategic growth initiatives. Our sales performance has continued to improve, and with a strong balance sheet, we recommenced investment spend during the second quarter across several key areas. These predominantly center around our digital innovation initiatives, but also include critical growth areas in design and development, among others. While we maintain high levels of cost diligence across the business, we do expect our G&A to sequentially increase in the second half of the year and reach more normalized levels by the end of the year in support of our continued recovery. On an adjusted pro forma basis, we had a net loss of $18.3 million or $0.45 per fully exchanged and diluted share. We estimate an approximate $0.11 impact on EPS in the quarter due to the exceptional costs related to beef, packaging, and labor mentioned earlier. In addition, there was an additional $0.02 unfavorable tax impact from stock compensation-related adjustments. Our underlying effective tax rate was 27.8%. A reconciliation of our tax rate is included in the appendix of our supplemental materials. Finally, we're continuing to evaluate tax and other regulatory changes that were recently enacted related to the CARES Act. These retroactively changed the recovery period for qualified investment property, enabling the cost of our leasehold improvements to be 100% eligible for bonus depreciation, rather than the typical 39-year period in effect before the tax reform. Moving on to cash. Our cash and marketable securities balance at the end of the quarter was $190.8 million. We repaid the $50 million we had previously drawn down from our revolving credit facility, and this facility remains fully available to us if needed. In terms of cash burn, at current sales levels, cash flow is positive at the Shack level and continues to improve as sales grow and our business recovers. At the enterprise level, weekly cash burn has also improved to approximately $100,000 per week, excluding the temporary pay increase and guaranteed bonuses for Shack teams and new Shack capital expenditure. This cash burn includes G&A at current levels. As we look at our financial results, the sequential sales and profitability improvements, our strong digital performance, our investment priorities, and accompanying robust balance sheet, we feel confident in our future and what lies ahead. We believe that as we fully exit COVID-19, whenever that may ultimately be, the return metrics of our Shacks will remain robust and compelling. In the meantime, we will continue to proactively invest in both safety protocols and the support and recognition of our teams as we navigate the journey through and out to the other side of COVID-19. Randy, back to you.

Thanks, Tara. Despite this being one of the most challenging environments any of us could have ever imagined, we're moving forward with confidence. The team is looking out for each other. Our business is gradually working through its recovery, along with the rest of our country, and we're excited about the progress being made across the key strategic areas of our company. We entered this crisis with tremendous momentum and a position of strength. Our balance sheet today is now stronger than it's ever been, and we will come out of this moment with unmatched resolve and determination to grow again and improve the lives of our team along the way. As cities recover and people ultimately gather again, we're well positioned to capitalize on the many opportunities that lie ahead. In the meantime, we'll continue to use this moment as one for learning. We're testing and innovating, ensuring that we come out of this crisis even stronger than how we entered it. Until then, I hope you all stay safe and stay healthy. With that, operator, please open up the call for questions. Thanks.

Our first question comes from Sharon Zackfia with William Blair. You may proceed with your question.

Thanks for all the detail, and congratulations on pivoting a lot in the current environment. I guess I'm sure a lot of the other questions are going to be asked. I'm going to ask about cloud kitchens. I was actually pretty curious about what led to that decision in the UK. I know they have a very different delivery architecture there, but are there applicable elements there that might make sense as well as you think about the U.S.?

Yes, Sharon, it's not something we're focused on. Our primary attention is on Shack Track rather than our existing Shacks. Currently, we're prioritizing maximizing capacity and ensuring accessibility across all channels at our current Shacks. The situation in the U.K. was noteworthy as it experienced a complete shutdown. We support our partners and the experiments they wish to pursue, as long as we believe they are beneficial for the overall business. Our test in London has been interesting, and it’s important to note that the U.K. regulations regarding landlords and rent payments require careful consideration for recovery to justify opening new locations. This prompted our team to become more proactive in exploring ways to recover lost sales. Consequently, the four locations we have were assigned to different neighborhoods. This served both as a means of preserving sales and experimenting in new areas. This type of learning is crucial, especially in urban environments, as we look to expand our reach over time. We currently own only 172 Shake Shacks in the U.S., and there's significant potential for growth, particularly in London. So, while it's not our main focus today, we value our collaboration with partners to extract learning, and we’ll see how it evolves. Thank you.

Thank you.

Our next question comes from the line of Joshua Long with Piper Sandler. You may proceed with your question.

Great. Thanks for taking the question. I wanted to see if you could dive into some of the items you alluded to in terms of helping out those Shacks that have been most impacted. I'm curious on how that's evolved from the first quarter going to the second quarter and now as some of the markets have started to close back down again, just what you've been able to do and what you found most impactful?

At the beginning, we discussed our teams and the incredible pivot we've made. It feels like both yesterday and a long time ago since March, when we quickly adapted to state home orders, moved orders outside, and set up pop-up drive-throughs. We have since improved our approach to make it more contactless. Initially, we weren't ready for that, but now we have made sure our outdoor patios are optimized, with over 80% of our locations offering some form of outdoor seating. Our real estate strategy has worked in our favor, placing us next to parks and gathering spots even in the hardest-hit areas. We've focused on improving access and convenience while also engaging in fun brand marketing. For instance, we launched Shake Shack Camp for families at home this summer, which has been enjoyable for us. We had 800,000 new users on our app, a significant achievement for a company of our size with just 172 restaurants. We see substantial potential in digital initiatives and driving engagement. Moving forward, we're looking to expand our product offerings, starting with Hot Chick'n, as we head into the fall. However, we're aware that some neighborhoods have been severely impacted. For example, 44th Street and 8th Avenue have been overwhelmingly affected by Broadway's shutdown, resulting in diminished performance for one of our top restaurants in New York City. It's hard to imagine that situation occurring. All we can do is ensure each guest has a great experience, and we expect recovery as conditions improve. The challenges we face are tied to the urban-suburban divide, impacting our performance. The locations we've established in the past have been successful for our brand, and while the recovery may be slow, we are committed to learning and improving our operations.

Our next question comes from the line of Jared Garber with Goldman Sachs. You may proceed with your question.

Hi. Thanks for taking my question today. Really cool renderings of the new drive-thru locations, potentially working through. I just wanted to get a sense of how you think about that long-term. Is this something that is going to be a major focus for the brand as we continue to see new units go up? And then I also wanted to get a little bit of an understanding of how you're thinking about the unit-level economics of these locations versus your typical sort of $3 million, $2 million, 20% margin figures?

Look, our goal – I'll start with the second part of your question. As I said in my notes, our goal, as always, is to increase the addressable market for Shake Shack, as well as drive those long-term AUVs and profits and returns on capital that this company has been known for since day one. It's too early to comment on what those numbers are going to look like. We'll let you know as we perform. Our hope is that we create access in places where we may not have had access before, and we create opportunities in real estate that we may not have had before. And we're really excited about it. If you look at that rendering – these are evolving things. We've got our sights on a few locations that we think we can execute, but we'll see. One of the things that we've learned over time, and you see it certainly now. Look, in the moment of safety, people want to stay in their cars. That's not going to last forever. But obviously, this country has proven that the drive-through in its old form works. We want to do it in this new form. We want to do it better than ever with an experience that you stay you drive-through whichever you want. It's everything Shake Shack has always been, that modern version of that old roadside community gathering place.

Our next question comes from the line of Lauren Silberman with Credit Suisse. You may proceed with your question.

Just a quick follow-up on the other – the prior question. Are you rethinking your unit development pipeline at all just over the next two to three years in terms of where you'll look to grow? And then my actual question is, you've talked a lot about your holistic approach to digital across the business. We've seen a large number of restaurant companies launch loyalty programs recently to complement their digital strategies. So how are you thinking about loyalty? And has your thoughts evolved as you've attracted more customers into the digital ecosystem?

I'll take the first part and let Tara take the loyalty and digital part. Lauren, we've always had a multi-format approach. I think what this does is accelerates and amplifies our desire to get as many sites as we can that meet all those goals that also have accessibility. Look, we still have a number of fantastic sites even in urban Manhattan that we hope to do in the near future. So we're going to keep doing those. There are many great cities in this country that we've not even been to yet, and many that are – we can go a lot deeper in, in both urban and suburban. We fundamentally believe that great real estate is great real estate. There's no question that this hurts us today and it hurts us more than others that are just drive-through in suburban atmospheres, and you're seeing that. But that will come back, right? That will come back, and it's important for us to continue to build a diverse portfolio that can sustain all of those.

Yeah. And then, hey Lauren. So we have no plans today to launch any sort of formal loyalty program. But I would say, what underpins a loyalty program in terms of its objectives, whether that be around new guest acquisition or more typically around driving increased retention and frequency, sometimes average spend referral, all these different types of components that typically a loyalty program is trying to achieve are absolutely part of our broader digital strategy and marketing and tech development plan, and we're just in it. We're in a position today where we're really in the ground scheme of things, although digital has been a priority for us for a couple of years now. We're still actually relatively early in that journey. And I think as you can see from some of the things that we're just launching. So behind the scenes, behind things like curbside or ultimately delivery through the app or as we expand our payment options, behind the scenes, we're also working really hard to further build out and in some cases, upgrade our digital infrastructure so that we can build a more holistic view of that guest. And as we've talked about before, ultimately go on the kind of data and insights from that holistic view and that single view of the guest but also more importantly, we build a more engaging dynamic personal relationship with them. So I think no to the formal loyalty program. But absolutely yes in terms of the types of functionality that we're putting into these products to drive the same type of outcomes that the loyalty program ultimately would.

Our next question comes from the line of Jake Bartlett with SunTrust. You may proceed with your question.

I'll try to keep this brief. My first question is about the availability of dine-in services. You mentioned it accounts for less than 50% of the overall system. Can you provide the percentage of dine-in service availability in suburban locations compared to urban locations? Additionally, how are the sales at locations offering dine-in performing in comparison to your overall same-store sales? I'll ask my second question after your response.

Go ahead. Go ahead, Jake. Go ahead.

The second one is just on development going forward. And I'm wondering if it's fair to kind of assume that the stores that are slipping out of 2020, you’ve talked about being confident in the real estate pipeline. But should we assume that, that basically kind of layered what would have happened in 2020 into 2021? Or are there any constraints like labor or any other constraints that should kind of caution us away from assuming you kind of not double up but kind of make up for the lost development in 2021.

We haven't specifically determined whether suburban or urban dine-in performs better. It's really a discussion that varies from one Shack to another. Since we have a limited number of locations, decisions are more regionally driven. For instance, in New York City, our Shacks are currently only serving outside, which affects our business, especially on a hot July day. However, some of our suburban Shacks that have opened are doing well. Regarding your second question, reopening dining rooms generally boosts sales, and we've noticed that closures have hindered our recovery. This remains uncertain, and we aim to proceed cautiously. Looking ahead, we do not anticipate replicating the lost 2020 development plus a full class of 2021. We are focused on establishing what we think will be a suitable class for 2021. The main challenges we face stem from the unpredictability of COVID-19 and ensuring we can execute effectively. There is available real estate, but we need to prioritize rebuilding and staffing. With many people unemployed and rethinking their work preferences, it's crucial to move beyond this COVID period. Nonetheless, we are dedicated to opening new locations and continuing to hire while offering development opportunities for our team. We aren't providing guidance for 2021 just yet; we need to ensure that our plans align. We'll keep you updated as the situation evolves. As the COVID recovery progresses, we intend to take advantage of opportunities as they arise.

Our next question comes from the line of John Glass with Morgan Stanley. You may proceed with your question.

Thanks. Perhaps two unrelated questions. But one is, what is the percentage of your food that's actually consumed off-premise now? A lot of brands have now realized in hindsight, well, we've got a dining room, but really actually very few people are using it relative to the size of it. What is that off-premise mix in total people walking out as well as delivering all the other things? Do you think that on average, the Shack sizes could come down over time as a result? I know there are a lot of different formats, but is that a goal or not really? The unrelated part is you had some aggregators this quarter. I just wonder if that's gotten the result you hoped to did it expand delivery. Any comments on how delivery stood in your second quarter since that was such a heavy delivery quarter for the consumer?

Yes. So as a percentage of sales, John, the most recent data that we shared was 62% of orders happening digitally, okay? That includes our channels, the biggest growing channel as well as delivery channels. Now of the people who order, of the remaining 38%, a lot of them still take it to-go. So we haven't shared that exact number, but the vast majority are taking it to go. What I even noted in the notes is that just about half of our Shacks even have some kind of dining room continuing to be open, and we were well on that road to reopening dining rooms as many others were. But as harder hit states like California and Texas, Florida, we also pulled back. We're going to take our time on that. We're not going to put our teams in danger unnecessarily or our guests. We want to make sure that when we open it, we feel like it can be in a place that makes sense. So, vast majority of people happening off-site right now. We can't wait to get them back, and I know they can't wait to get back, too. To your second question on Shack size. I think it's going to be all of the above, John. There's going to be some that are the current larger Shack sizes. We do continue to target, especially as we think about some of these urban locations for the future. That can be smaller and can really lean into this new and improved digital architecture here where people are taking it to go, and so many of our urban Shacks always had a higher percentage to go than the suburban Shacks anyway. We think we can look at it that way and possibly benefit from that. That will be balanced out by the full experience Shacks that we will continue to build in the portfolio. On delivery, yes, I think the answer is yes. It certainly has had an impact. We have great relationships with all the major delivery carriers, really excited with the growth most recently of Uber Eats. But we're excited with what that’s going. I think as in Shack has come up, and our own channels continue to grow, delivery will likely settle in a very comfortable place, still much more elevated than it ever was, and we're excited about that. But I want to also note that we mentioned that we are working through delivery in our own app. We hope that we can continue to build that channel with great growth and keep people in our infrastructure over time. A lot of that will be interesting to see how the delivery world continues to evolve as this pandemic and beyond goes. Thanks, John.

Our next question comes from the line of Jake Bartlett with SunTrust. You may proceed with your question.

Thank you. Two related ones, if I may. Tara, in your prepared remarks, you kind of talked in the comment around you're looking at pricing for delivery. I do wonder if that potential pricing could be used to potentially fully offset the cost of delivery, making it more or less profit neutral to the in-store transaction. That's the first question. And then secondly, you did mention you expect some data and analytics to be rolled out in 2021. What are the benefits that you could see in the near term in 2021 from this new program or the functionality in that year that you haven't gotten either this year or in the past that could potentially change your trajectory? Thank you.

Hey, John. We're actually really pleased with our trajectory when it comes to digital. I mean, some of those stats that we gave you on the call serve as a reminder that we've retained 90% of the high point or the quadrupling of new users, for example, on a year-on-year basis. We're really excited about the fact that digital momentum continues as such force. As it relates to delivery pricing, yes, I mean we mentioned it. There are no plans today to increase our prices or change our prices in the delivery channel. But it remains something that we look at. It remains something that is an option to us on a go-forward basis, and it's something we may consider at some point in time. I believe we're in the minority in terms of restaurants who do not have some sort of pricing differential, but we'll see. It's good to have that optionality. We will look at it in totality and with a broader lens as we bring delivery into our own channels, for example, and think about it really within that context. So there's a lot of progress when it comes to delivery, all the digital initiatives really across the board outside of just delivery.

Yes. I don't think I mentioned it specifically in my prepared remarks, but you certainly heard me talk about data and insights many times before. I'm not sure that we've got a light switch that's about to be flipped at any point today or in 2021. But as we look at the vast amount of development and innovation that's going on across the company right now in the digital ecosystem, building the data and analytics infrastructure is absolutely a part of that roadmap. It's something that we started earlier in the year. It's something that is part of the investment that we have restarted. You're absolutely right that it's critical. It's just not guest-facing.

Our next question comes from the line of Alton Stump with Longbow Research. You may proceed with your question.

Yes, great. Thanks for taking my question. I just wanted to press on what I think I was asked earlier about I just kind of think about our next couple of years, kind of like devil's advocate, if we don't see the consumer go back to pre-COVID normal, could that have any impact on your decisions to maybe build more suburban versus urban locations? Or is it just too early now to really know for sure if it's going to have that impact or not?

Well, Alton, it's a good question. None of us – I'll leave that to the economists and the fortune tellers to figure that out for us. What we're going to do is make sure that our company is well-positioned for value, which it always has been. For experience, even if the economy – and we see a deeper and longer-lasting recession, that certainly could happen. There’s going to be some impact from that, and we will see. What we want to do is ensure our product, our pricing, and everything we do fit into a world that can work for people. That is who we have been. From the beginning, both in good economic times, entering the last great recession when we began the growth of our company in 2008, 2009, and today. Look, I think when we think about the portfolio, it is going to be balanced, as I've said a few times on this call. We absolutely think there will be a mix of suburban and the return to cities. It might look a little different for a while. But ultimately, we believe urban centers are going to continue their path that they began. It may take some time, and we're going to balance out our portfolio in the meantime to make sure we've got strength everywhere.

Our next question comes from the line of Chris O'Cull with Stifel. You may proceed with your question.

Great. Thanks. Good afternoon, guys. This is Patrick on for Chris. I was curious about when are you planning to start testing your own delivery channel? Is that something you see rolling out across the system? Or do you believe it’s just certain markets or location types that make more sense for that? Then secondly, on the Shack Track additions that you mentioned in the deck, what do you think the total opportunity is to potentially add a Shack Track to or retrofit Shack Track with existing units?

I mean on the delivery, I think we don't have a specific launch date for you. I think we expect that to be a capability that we can offer within the next sort of six to twelve months. Hopefully, the earlier part of that, but there's a lot going on in the digital and the development team right now. I suspect, like most new functionality, we will test it in different ways and different places. So all of that still needs to be worked out, and we'll update you once we've got a more formal launch plan. It's certainly not happening tomorrow. But it's very much on the roadmap.

When we look at Shack Track, not every Shack will be easily convertible concerning the exterior setup for delivery drivers and our pre-order channels. Shack Track will focus on our pre-order channels and the capability for exterior pickup that's convenient and straightforward whether you choose to dine in or take it to go. Some concepts might be a bit funkier than others, and we've included pictures of some potential executions in the supplemental deck for you to see. At the very least, we will continue to enhance the interior pickup experience. One of the biggest challenges for Shake Shack is that we operate high-volume restaurants with many customers. This was a challenge pre-COVID, and it's certainly still a challenge now, so we want to make sure we improve the ease of use and convenience for our guests to access their premium Shake Shack food more easily.

Our next question comes from the line of Jeffrey Bernstein with Barclays. You may proceed with your question.

Great. Thank you very much. And again, thank you for the incremental color on the slide deck, the period and geography stuff is very helpful. Just as I think about the comp recovery you've seen, it seemed like you had a huge improvement in May, north of 20 percentage points off of the April troughs. But then in June, I guess it slowed down to 300 basis points after you adjusted. July seems like it's totally flat with June at the same down 39%. And then, I guess, despite some reopenings. I know when you look by region, it shows the Northeast saw a huge improvement in July. But yet, it was only single-digit improvements in non-core markets. So my question really, why do you think the recovery may be slowed or stalled out a little bit in the most recent month or two? And how do you gain confidence that the headwind is all COVID-related rather than perhaps the brand not resonating in certain new markets? Just wondering how you decipher that as a new growth company going into some of these markets, whether it’s the brand or whether it’s just the COVID headwinds. Thank you.

I wouldn't put a whole lot on the brand to try and establish that during COVID. I think the brand is stronger than ever and remains one of the great brands in our industry. So we're really confident in that. Look, the pop to May was coming off of massive lows. June, we're deeply hit by protests, again, as a result of our urban architecture that you see. As you look at July, we had reclosing of diners. That’s another kind of bump back as some of those regions like California, Texas, Florida, many others were hit. So if you really look at the regionality, you'll see – and this is – let's go back to the beginning of what we've said since we've gone public. Comp is not the only way to look at this business. We have about half of our restaurants in here and they are wildly swung. If you were to look at some of our top restaurants, okay, in this company and understand the impact they have, Grand Central terminal in New York City, Penn Station. These Shacks haven't gotten any better because of the summer came. They're some of our best restaurants and some of the best. I'm not sure there are a whole lot of $5 burger joints in the world that look like these. And there's a lot of those in the Shake Shacks system, not just in Manhattan. Those really drag it down. Those big impacts really drag it down. And that is part of the story we've told with these extra numbers today.

Our next question comes from the line of Andrew Charles with Cowen. You may proceed with your question.

Randy, I appreciate the commentary for 15 to 20 planned openings for 2020. But can you talk about the decision to resume development following same-Shack sales that have recovered at a similar level in the last three months? Given the cash positioning, is there an opportunity to secure leases that get you good sites for the future as opposed to actual construction development in order to concentrate efforts and increase the focus on the recovery rather than growth?

I think we can continue to focus on both, Andrew. This is not a cash issue. We have fortified our balance sheet to an incredible amount that gives us total flexibility as we look forward. I want to call out a note that Tara shared that our new Shacks in period 7, July, performed at 40% higher average weekly sales than our current system. If that gives you any indication of whether people are excited to find the new Shack in their neighborhood. I think that answers it for you. Now we'll see where that goes. It's very hard to measure what a new Shack looks like during COVID, but we tend in places like Sacramento, California for the first time to extraordinary starts. We've deepened our footprint in LA; we've given our footprint in St. Louis and North Carolina and many other places. So we're excited to keep growing, but we shouldn't do it at the same rate. That's why we're not going to hit our original guidance for a good reason. But it certainly is not taking the focus off recovery. Recovery for us – I believe our teams are working hard in doing so many of the right things. Recovery for us is a big part of COVID allowing for return, return to travel. We exist in some of the best, most high-traffic demand areas in the world. And we'll keep focusing on that with everything we can. We also need some tailwinds of the COVID world to start going our way a little bit to get back to full recovery.

Our next question comes from the line of David Tarantino with Baird. You may proceed with your question.

Hi. Good afternoon. My question's on the shape of the sales recovery you're seeing. And I fully appreciate the challenges you have in some of the urban markets. But I wanted to focus the question on the suburban Shacks. If I look at how that's trended, it does seem like the absolute level of the comps or the recovery has been shallower than what we're seeing elsewhere among concepts that are your peer group. So just wondering if you could comment on that and what you think might be the biggest impediment in the suburban Shacks specifically in terms of recovering the sales?

Let's start by noting that anyone in our peer group likely operates with thousands of restaurants, significantly more than we do. Currently, we have fewer than 100 Shake Shacks in the comparable base we're discussing. Our numbers can vary greatly based on just a few locations, making it difficult to draw meaningful comparisons with the broader industry. Some Shake Shacks are performing well, particularly in suburban areas, but keep in mind that many of these locations are in high-traffic spots like malls. However, malls aren't as busy as they used to be, which affects customer gathering in suburban business centers as well. The unique advantage of our locations also presents a challenge at this time. When compared to companies with thousands of restaurants that have a more consistent and diversified real estate portfolio, our locations are more distinct and thus more vulnerable to these market fluctuations. That’s the key point we’re highlighting with the additional data today.

Our next question comes from the line of Brett Levy with MCM. You may proceed with your question.

Thank you for joining the call and for providing all the details. Tara, can you please recap what you mentioned about the cash burn rate? Additionally, your insights on sales segmentation were very helpful. Could you share any information regarding margin differences by suburban areas or regions, specifically how the best and worst quartiles compare? Thank you.

Hey, Brett, yes, I'm happy to just restate the cash flow piece. We said that we're pleased that we are now positive cash at the Shack level. We've improved at the enterprise level to achieve the $100,000. That $100,000 excludes the temporary premium pay and the guaranteed manager bonuses in the Shack and also excludes new Shack development CapEx. The number is also reflective of our current G&A spend, which I also mentioned in my prepared remarks. We're beginning to gradually increase as sales come back, and we've become more proactive on our strategic investment strategy. In terms of profitability, we obviously haven't reported and working down profitability in terms of any kind of segmentation. The biggest correlation to profitability, it wouldn't surprise you to know, is sales. You can look directionally at sales performance and assume that profitability to some degree will mirror that. Sales will be as sales recover, so will profitability. You can apply that rationale Shack-by-Shack or a region-by-region basis. It's fair to say the open Shacks are hurting a bit more right now, generally speaking.

Our next question comes from the line of Peter Saleh with BTIG. You may proceed with your question.

Great. Thanks for taking my question. I appreciate all the color that you guys provided today. I wanted to come back to the conversation on the development side and all the formats. Can you just give us a sense of the real estate strategy going forward with the new formats? Do you think the sites that you're going to be targeting will be available for lease? Or do you think you'll have to spend more to acquire some land and maybe change your strategy up a little bit going forward?

We don't intend to make purchases at this time; we plan to continue leasing as we have been. Currently, we don't own any real estate. While I didn't say we would never purchase, it’s not the best use of capital for Shake Shack right now. The market is changing, and landlords, both large and small, are becoming more aware of the situation. Many restaurants and retail businesses are facing difficulties, which will lead to significant changes in the landscape. Drive-through locations remain strong and there are opportunities for growth in that area. Many brands are struggling or are in bankruptcy, resulting in numerous available sites. We will focus on securing the best locations as we always have, ensuring they provide a solid return on capital, particularly in suburban areas suitable for drive-through or pickup formats. This is an opportune moment to be active in the market and to pursue valuable real estate opportunities. We've been receiving inquiries about great locations, and we intend to proceed strategically. The purpose of sharing our new formats today is to illustrate the potential for growth in our addressable market and the locations we aim to reach next year.

Our next question comes from the line of Brian Vaccaro with Raymond James. You may proceed with your question.

Thank you and good evening. I have a question and a quick clarification. Based on what I have seen from many of your peers, I'm curious about how consumers are using takeout compared to delivery during the COVID environment. Could you share what percentage of your digital sales were from delivery in the second quarter? Additionally, even though it's still early, can you provide more details on how the curbside pickup test performed in the 10 test locations?

We haven't provided a specific breakdown for delivery, which makes up part of our overall 62%. What we can confirm is that our channels are the strongest and are experiencing the highest growth. We're pleased with the volume of delivery we’re achieving and are keen to enhance this channel. Regarding curbside pickup, it's very new for us—just a couple of weeks in and limited to about 10 locations. The early signs are encouraging, with daily usage gradually increasing as more customers discover it. We haven't actively marketed this yet; it simply appears in the app, and savvy customers are trying it out. We're genuinely excited about this development, as we believe it can significantly enhance the guest experience, especially focusing on safety and comfort. Our aim is to expand curbside to 50 locations by the end of this quarter, and we'll keep you updated. This represents a substantial opportunity for Shake Shack to transform customer interactions and ease their experience.

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 for closing remarks.

I want to thank everyone on the call today. Look, the second quarter for us and our country for so many companies has been a hard one. It's been hard for our team, and I'm incredibly thankful for their resilience. We're all hopeful that was a trough moment and we will continue to see the gradual recovery coming out of it. And looking forward, we've got a lot of new ways and new exciting things we're going to be doing at Shake Shack to capture a great future. Thanks, everybody. We look forward to talking with you soon.

This concludes tonight's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.