Shake Shack Inc. Q3 FY2020 Earnings Call

Greetings and welcome to the Shake Shack Third Quarter 2020 Earnings Call. It is now my pleasure to introduce your host, Senior Vice President of Finance and Investor Relations, Rik Powell. Thank you, Rik. You may begin.

Thank you, Paul, and good evening, everybody. Joining me for 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 as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release and the appendix of our supplemental materials. So much 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 the Form 10-K filed on February 24, 2020 and form filed on July 31, 2020. 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 third quarter 2020 earnings release, which can be found at investor.shakeshack.com in the News section. Additionally, our third quarter 2020 supplemental earnings material, 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 will turn the call over to Randy.

Thanks, Rik, and good evening, everyone. I hope you and your families, and our entire Shake Shack community are staying healthy and safe through these challenging times. Quarter by quarter, Shake Shack continues to come back. Our business during this most recent quarter showed steady recovery, thanks to the hard work and dedication of our team, their agility in adapting to new Shack protocols and models, and an increasingly strong suite of digital capabilities. As a result, guests have been able to enjoy their Shack the way they want it, with a choice of convenient and safe ordering and pickup options as we continue to expand and elevate the Shake Shack experience. Since our last update at the end of July, forward momentum has continued, and we're encouraged to see a strong recovery in both sales and profitability, with many Shacks returning to or even exceeding last year's results. Total year-over-year company-operated Shack sales declined 17% in the third quarter compared to a decline of 39% during the second quarter and further improved to a decline of just 5% in fiscal October. Same-Shack sales have also improved sequentially in every single one of the last six months. This is an encouraging path to recovery, considering the drag that our high-traffic urban locations continue to have on the business. While suburban Shacks are collectively getting close to full recovery. Importantly, we're almost back to a steady-state development schedule, and we are ramping up the opening of new locations through the remainder of the year and into 2021 and beyond. As of the end of fiscal October, we've opened 33 Shacks during this challenging year, including 15 domestic company-operated, of which 4 were opened in the third quarter. The consistency with which our sales have continued to recover gives us added confidence in the gradual return to a more normal operating environment. As expected, with urban locations still acutely impacted by the pandemic, our suburban Shacks continue to recover more quickly, but both have shown strong improvement in recent months, particularly due to increases in Shack ordering and higher levels of retention of our digital sales. From a regional perspective, we continue to experience a broad range of performance regarding the speed and level of sales recovery. At times, this is based on the extent to which dining rooms are open and also the relative concentration of urban Shacks, which are understandably more impacted by office workers, tourists, and high traffic. New York City, particularly Manhattan, continues to lag other regions, and we expect this to be an ongoing headwind for the business until the city fully recovers. Throughout this pandemic, New York City has been hit especially hard. But despite that, we are pleased to see that our hometown is beginning to make real progress, showing sequential improvements in same-Shack sales from being down 64% in the second quarter, to down 49% in the third, to down 40% in fiscal October. Manhattan specifically is slightly improving, with a year-on-year decline of 60% in same-Shack sales during the third quarter from 69% in the second quarter and showing further gradual improvement to down 51% in October. It's particularly challenging for Manhattan with some of our historically highest volume locations like Penn Station, the theater district, Herald Square, and others remaining deeply impacted at this time. Following similar trends to our company-operated Shacks, our international Shacks are also recovering. Total licensed sales sequentially increased throughout the third quarter, averaging $5.3 million per week, nearly double the $2.7 million in the second quarter. The speed and scale of our licensing sales recovery have differed across the globe. In countries such as China and Korea, which are faster to contain the COVID-19 outbreak, are recovering more quickly than those experiencing prolonged lockdowns or resurgence of cases. In China, for example, is showing a strong return on sales, now back to above pre-COVID levels. While just 3 of our international Shacks were closed as of the end of fiscal October due to COVID, the operating environment is changing on a regular basis. In August, we were excited to report the opening of our first Shack in Beijing, which has outperformed all expectations, with sales in the opening month among the highest of any international Shack opening—amazing when you consider the environment we're operating in and a testament to the continued strength of the Shake Shack brand across the globe. The most deeply impacted part of our entire company does remain our licensed airport and stadium business. With travel still severely depressed and stadiums closed, only 9 of our 22 domestic licensed Shacks are open as of the end of fiscal October, and we expect that to continue to be the case for the foreseeable future. This will hold back recovery in this highly profitable piece of our business. However, we continue to take a long view here. In normal times, these are some of the best Shack locations in the world, providing both high traffic and high brand visibility. We're excited for the day they will eventually reopen. In the meantime, we'll be working with our domestic license operating partners to support new opportunities as they arise. Such as Salt Lake Airport, for example, which opened in September. As we look to the future of licensed Shacks, we expect to open 12 to 14 net licensed Shacks for the full year 2020, with 5 to 6 new licensed Shacks expected to open in the fourth quarter, as well as looking ahead to 15 to 20 new licensed Shacks for 2021. Moving on to company-operated new development. Despite the necessary pause earlier in the year, we're back to growth, and we've been regaining momentum in recent months. We opened 12 Shacks at the end of the third quarter, and we're anticipating reaching a total of 18 to 20 new company-operated Shacks by year-end. Both recent and upcoming Shacks are in fantastic locations, such as Valley Fair in Santa Clara, University Village in Seattle, a freestanding Shack in Pasadena, in locations that continue our penetration of key markets across Texas, Salt Lake City, and Colorado. We're pleased with the operating results of those opened so far, with the 2020 class average continuing to outperform the company average weekly sales during the third quarter. Make no mistake: before and after COVID, our strategy is to win—market by market—with a focus on top-tier real estate across the United States. Our evolving multi-Shack format model positions us to take advantage of current real estate opportunities emerging across the country, particularly as we look at openings in the next year and beyond. We're aggressively pursuing and developing sites where we can launch our new drive-through, Shack Track, drive-up, and walk-up models, as well as the continuation of core Shack formats that generated compelling returns for years. I do want to provide an update on the direction for each of these new Shack models. First, on the recent launch of our curbside pickup now in place at nearly 70 Shacks nationally. This model was created to solve a need for safe, contactless pickup, and we executed this quickly in less than 3 months at the peak of COVID. Since launch, Shacks offering curbside have been experiencing about 1/3 of all eligible app orders in that format, with limited marketing. Given this level of adoption, we feel good that this is meeting a real guest need. We're excited to continue to evolve and improve this as we learn more and more, adding this option to future Shacks wherever they play out. Second, on our rollout of other versions of Shack Track, with the objective of adding convenience and preordering, combined with a fast and frictionless experience for pickup. As we look ahead, most Shacks in the pipeline will have some version of a Shack Track, either through an enhanced interior pickup model, an exterior walk-up window, or a drive-up option, such as our upcoming retrofit in Hills, Illinois. Not only do these models instill confidence, but we believe they'll be a favorite option for guests looking for convenience on the go in a post-COVID environment. Throughout the end of this year, we'll complete 7 to 9 Shack Track retrofits in existing Shacks. Next year, most new Shacks will have some version of Shack Track. We expect roughly half the class to have either an exterior walk-up window or drive-up window as they open. It's too early to talk about results, but our goal will be to drive convenience, frequency, and long-term sales growth through this model. Finally, we're getting really excited to launch our first-ever drive-through location late next year. The Shake Shack drive-through will be a modern version of the traditional drive-line experience supported by technology-enabled hospitality and innovative design, all while maintaining our core tradition of building community gathering places. We view this model for us as an important step towards increasing our addressable market opportunity, and we're making a big commitment to this learning, targeting between 5 and 8 drive-throughs over the next 24 months. Looking ahead to 2021, we intend to return to the full development schedule that was in place before COVID, targeting between 35 and 40 new company-operated Shacks for next year. We'll be launching in new cities like Portland and Indianapolis while going deeper in California, the Midwest, and some of our other strong markets on the East Coast. Our approach will be to build a balanced set of formats across our portfolio and to continue to diversify across markets as we look to ramp up Shack unit development in 2022 and beyond. With this opportunity ahead, we're also investing in the future of the Shack digital experience. The influx of new and returning guests to our digital channels over the course of this year has given us a real opportunity to update and enhance our tools, enabling new ways to provide hospitality at the core of the Shack experience. We're confident in our continued focus on our app and web channels as these allow us to connect with our guests more frequently, and they continue to perform with a higher average Shack sale. As we mentioned on our last call, we're looking forward to offering delivery via our own channels. We're currently targeting limited testing of this functionality towards the end of this year, with broader testing and rollout over the first half of next year. This will be hugely positive for our digital strategy for a host of reasons, including the ability to create consistent and personal experiences with our guests across our own channels combined with the additional data and insights that allow us to better understand those guests and connect with them more directly as part of our broader digital strategy. Turning to the menu, the return of Hot Chicken has received a fiery welcome from our fans. New this year, guests were able to order hot spicy fries and hot chicken bites, each with our new flavors. We've been offering 3 levels of spice: mild, medium, and hot, the latter only available through our digital channels. Since launching this hot menu offering in September, we've seen a significant step-up in our overall chicken sales, with 40% more chicken items sold compared to the previous 2 months. During the third quarter, we also launched our Pumpkin Shake for the third year in a row, made with the highest quality ingredients, using real pumpkins, cinnamon, nutmeg, and topped off with delicious pumpkin seeds. As winter approaches, we're looking forward to returning another fan favorite, our Trio of holiday shakes, bringing back Christmas cookie and 2 new flavors: Chocolate Spice and Vanilla. In 2021, the team is excited to bring a regional favorite from our Korean Shacks to the U.S.: a spicy Korean-style fried chicken sandwich, featuring a gochujang-glazed chicken breast topped with roasted sesame seeds served with coleslaw. A version of this is running as an LTO right now in our South Korean Shacks, and it's a great example of the way our international presence can enhance and elevate our brand as we share exciting and innovative menu items across the world. COVID has resulted in more focus and simplification in the short term, but we're excited to be getting back to a more regular cadence in our limited-time offerings in '21 with a culinary calendar that raises the bar with bold flavors, expanded testing of our exciting new Veggie Shack, and innovations around our beverage and customer program. Wrapping up, our progress in recent months is encouraging in nearly every corner of our business. We are certainly not out of the woods when it comes to the impacts of the pandemic, but each day brings us new momentum and confidence we're moving forward. With innovation and work taking place across the entire company, we remain squarely focused on the safety of our operations, the ongoing enhancement and expansion of access across formats and channels, and the significant white space for growth globally that remains ahead of us. We're incredibly grateful to each and every team member, both in the Shacks and our home office, who make this company the very special place that it is each and every day. With that, Tara will take you through the financials.

Thanks, Randy. As you've just heard, we're pleased with the steady and consistent progress in our top and bottom line recovery as well as the great work going on across the entire company. We're getting stronger every day, and we'll continue to diligently execute against our key strategic initiatives while focusing on the significant growth that lies ahead. In terms of third quarter results, total revenue was $130.4 million, including $4.1 million in licensing revenue. This represented a total Shack sales decline of 17%, and licensing revenue decline of 24% versus the same period last year. However, when compared to the second quarter, total Shack sales and licensing revenue increased by 41% and 81%, respectively. At the end of the third quarter, our trailing 12-month average unit volume was $3 million as a significant portion of this trailing 12-month time period includes COVID-impacted months. Average weekly sales, the key top-line metric to monitor as we move through this recovery was $58,000 in the third quarter and increased sequentially throughout that period, ending with fiscal September at $61,000. We saw this improvement continue through our most recent fiscal period of October with average weekly sales of $62,000, and we've included this data in more detail on Page 6 of our supplemental materials. Same-Shack sales continued to show solid signs of recovery, declining 31.7% during the third quarter compared to the same period last year, improving from a decline of 49% in Q2. Consistent with our total sales trends, comparable-based sales also improved in every fiscal month since April, with fiscal September same-Shack sales down 28% in fiscal October, further improving to down 21% year-over-year. Traffic declined 42% in the third quarter, offset partially by positive price/mix of 10.3%. This year-on-year price/mix growth was driven by a significant increase in average check, primarily from a higher digital sales mix, combined with an overall increase in total items per order since the start of the pandemic. As Randy mentioned, we're encouraged by the improvement in performance of both our suburban and urban Shacks. As a reminder, our comp base today consists of roughly 50-50 urban-suburban Shacks. Although urban Shacks had a higher revenue contribution pre-COVID of approximately 60% of comp base sales compared to approximately 50% in the third quarter. Same-Shack sales of our suburban comp base Shacks were down 16% in the third quarter compared to the prior year, an improvement from the decline of 38% during the second quarter, and they again improved in fiscal October to down just 4%. Urban markets are also showing steady improvement; however, they are still impacted to a much greater degree by COVID. Urban comp-based Shacks declined 43% in the third quarter compared to last year versus a decline of 57% in the second quarter, but also showed continued improvement in fiscal October to a 33% year-on-year decline. Same-Shack sales improved across all regions on a sequential basis, with performance driven by increases in Shack dining in both urban and suburban Shacks, combined with the continued strength of our digital channels. We do, however, continue to see levels of regional performance improvement differ based primarily upon the relative proportion of Shacks in the region. The comp-based Shacks in our southeastern, for example, of which over 80% are suburban, were down 25% year-over-year in the third quarter, a significant rebound from being down 41% in the second quarter and subsequently improving further to down 13% in fiscal October. Regions which are more urban locations continue to be the hardest hit, with New York City being the most acute example of this, as you heard some of the numbers from Randy a moment ago. All of our regional performance is clearly laid out on Pages 8 and 9 of our supplemental deck. We're happy to answer additional questions after the call. Digital channels remain the leading order method, representing 60% of total Shack sales during the third quarter, in line with the 62% we last reported for fiscal July. As you can see on Page 12 of our supplemental, this held relatively constant throughout the third quarter and into our most recent fiscal month October, where the digital sales mix was 58%. As in-Shack sales improve, we've maintained a high level of digital retention, with 90% of digital sales retained in fiscal October compared to the higher point in fiscal May. During the third quarter, and similar to second quarter trends, our native web and app channels when combined continue to be the fastest channel on a year-on-year basis, with sales more than 3x that of the prior year. In our last call, we shared that we'd added over 800,000 first-line purchases to our app and web channels between early March and the end of July. We're pleased that this trend has continued through October, increasing to over 1.4 million first-time purchases on those channels since early March. Looking forward, and now a month into the fourth quarter, we're pleased with our ongoing progress, but closely watching the performance of in-Shack sales, particularly in light of evolving city and state dining regulations. At the end of fiscal October, nearly all domestic company-operated Shacks were open, with approximately 80% of those with open dining rooms to varying capacity restrictions, and the majority of Shacks also utilizing patio space. While we're confident in a full long-term recovery, we know the timing of that return to pre-COVID levels is highly dependent upon the return of the high-traffic areas that contributed to many of our strongest Shack sales—those most reliant on travel, schools, office workers, and major gatherings as well as ultimately fully open dining rooms. The timing of that recovery remains unknown today. With colder weather and the increasing number of reported COVID cases, we expect sales over the coming months to be pressured. We do have the benefit of a 53rd week in this fiscal year, which will be accretive on an absolute dollar basis, so the underlying business continues to face a very challenging and volatile operating environment, certainly through the end of this year. Considering all of this continued uncertainty, we’ll only be providing the earlier mentioned unit guidance at this time. Moving to the strong recovery of Shack-level operating profit for the third quarter. We’re very pleased with the significant improvement here. As Shacks mentioned in our last earnings call, we exited the second quarter with approximately 5% Shack-level operating profit in fiscal June and just above 2% for the second quarter. Since that time, the combination of sales improvement, the normalization of costs and continued disciplined expense management across the business have led to a significant recovery, with Shack-level operating profit margin in the third quarter improving to 14.8%. Performance improved sequentially throughout the quarter, with fiscal July, August, and a 5-week fiscal September, delivering Shack-level profitability of 12%, 14%, and 17%, respectively. In addition to the bet on recovering sales throughout the quarter, we also saw a number of improvements across various Shack-level expenses. Food and paper costs in the quarter were 30% of Shack sales, higher than the same period last year by 100 basis points due to increased packaging costs with all orders needing to be packaged for takeout. On a sequential quarterly basis, we saw an improvement of 350 basis points compared to the second quarter, primarily due to the stabilization of beef costs. Although we don't anticipate any major food cost shifts in the fourth quarter, paper costs will remain elevated due to the continuation of those increased levels of packaging. Labor and other related costs in the third quarter were 30% of Shack sales, an improvement of 460 basis points compared to the second quarter and an increase of 270 basis points compared to the prior year, due primarily to the loss of sales leverage across fixed labor expenses. The sequential quarterly improvement was significant and due to improved sales performance as well as somewhat lessened COVID-specific headwinds on this line, such as paid leave during closure. We're pleased with the improvement here, but we'll continue to bear some level of labor inefficiency as we manage social distancing and safety protocols, together with open but limited capacity dining in. We remain incredibly grateful for the resilience and the commitment shown by our teams in the Shack. In recognition of their hard work, we extended premium pay for our hourly team members through the end of fiscal August and also guaranteed manager bonuses in the third quarter. In September, we further extended this support for our Shack teams through the fourth quarter by introducing a year-end bonus for all our hourly team members, and we're pleased to be able to show our continued appreciation in this way. This investment in our team had a $2.1 million impact during the third quarter on the labor line, in addition to the $2.4 million already paid in the second quarter. Other operating expenses in the quarter were 14.8%, an improvement of 120 basis points compared to the second quarter and an increase of 240 basis points year-over-year, due primarily to increased delivery commissions, combined with the loss of sales leverage on fixed expenses. Compared to the prior year, the increase in delivery commissions during the third quarter was partially offset by savings and reduced maintenance expenses within the Shacks, which we do not expect to continue as we enter the fourth quarter. As we look back at the fourth quarter, as I mentioned, our expectation is that sales will face pressure due to challenges posed by the ongoing COVID environment, as well as the onset of colder weather across a significant number of our regions. With the continued recovery of Shack-level operating profit being highly correlated to sales performance in terms of leverage on fixed costs, combined with the continuation of certain elevated costs in the P&L specific to the pandemic, we also expect any ongoing improvement in Shack-level operating margin in the fourth quarter to face pressure. Strong cost management will continue while keeping the safety of our teams and guests as our first priority. Moving on to G&A, which in the third quarter was $15 million, including $1.7 million related to non-cash items. With our continued recovery through the third quarter and a strong balance sheet, we’ve gradually increased investments in key areas across the business while slowly bringing back our team in preparation for the growth ahead. In particular, on digital initiatives, but also in marketing, recruiting, and development, as we focus on that significant long-term growth opportunity. We remain bullish on the size of the opportunity we have ahead, and we’re committed to investing in order to reap those benefits quickly and meaningfully. Looking out through the remainder of this year, we expect our fourth quarter total G&A spend to approach the same level of spend as the fourth quarter of 2019. Preopening expense for the third quarter was $1.8 million, with $500,000 in non-cash deferred rent expense related to Shack locations we were in possession of but have not yet opened. Now that development is back to a full opening schedule, this spending will increase meaningfully and is expected to more than double sequentially through the fourth quarter as we complete this year's opening schedule and ramp back up to those 35 to 40 units we mentioned for 2021, a number of which should open in the first half of the year. Finally, despite the challenges of operating within a global pandemic, work has continued to complete the successful final phase of Project Concrete, which centers around our Shack-level supply, inventory, and invoice management system with a focus on automation and time savings for our Shack team. We’re pleased to confirm that this is now fully rolled out, and I’d like to thank the entire Project Concrete team for their incredible achievement in such challenging conditions. On an adjusted pro forma basis, we had a net loss of $4.4 million, or $0.11 per fully exchanged and diluted share. Excluding the tax impact of stock-based compensation, our adjusted pro forma tax rate in the third quarter was 29.3%, slightly higher than guidance given earlier in the year due primarily to a combination of state mix and lower tax credits. Year-to-date, that rate is approximately 28% and is in line with our full year expectations at this time. Similar to prior quarters, a full reconciliation of our tax rate is included in the appendix of our supplemental materials. Our comfortable securities balance at the end of the quarter was $191.8 million. We are pleased to have generated positive free cash flow for the quarter. We do expect an increase in cash used during the fourth quarter as our capital expenditure for new Shack construction ramps back up with a robust 2021 development schedule ahead of us. We’re very pleased with the significant improvements in performance across the company from our recovering sales and profitability to the strong performance of our digital business. We do, however, remain in challenging and volatile times, but our foundation is strong, as is our balance sheet, and we are focused on that clear roadmap for growth ahead of us. With that, I’ll turn you back to Randy.

Thanks, Tara. I do want to end today's call noting a milestone that none of us could have ever dreamed back in the first Shack in Madison Square Park. We recently opened our 300th Shack in the world. Of all places, Madison is in Wisconsin. I could not be more proud of the hard work we've seen from our teams over the last 16 years leading up to this occasion. Throughout this journey, we've had our share of trials and challenges. It's the perseverance of this team that got us where we are today. I also want to thank our loyal Shack fans who have stuck with us and are coming back to enjoy their Shack in more ways than they ever could before. Above all, count on us to always lean into our purpose, stand for something good, while creating uplifting experiences, caring first for our team members, inspiring them to provide hospitality to our guests, community, suppliers, and investors. You and your families stay safe and stay healthy. And with that, operator, we can go ahead and open up the call for questions.

Our first question comes from Michael Tamas from Oppenheimer & Company.

I hope everyone as well. Obviously, you gave us the October numbers, but you sound pretty cautious on sales over the next several months. So can you just kind of talk about that in general? Is there anything you're seeing right now? Or is that just what you think is going to happen? And maybe can you parse that out between your urban locations and suburban locations, where clearly some of the off-premise strategies are driving a nice sales improvement for your suburban locations? So just trying to understand a couple of those differences?

Yes. Thanks, Michael. I'll start. I mean, first of all, we've given everything but the previous 7 days of sales. So you have basically everything mid-quarter, so you're seeing exactly where that stands. October has been our best month, obviously, throughout COVID, with tremendous improvement everywhere, right? If you look at every single region, it has gotten better through the quarter, sequentially and through October. So basically, quarter-to-date, year up to date, I think you have to be cautious. As you look out at COVID cases increasing amid a volatile situation, we have an election coming up. I think there's a lot of unknowns in our country right now and globally. You look at cases in Europe and how that may impact their economy. I think we just have to be cautious. We're really pleased with how the team has continued our recovery, and that momentum has moved us forward to— I mean, recapturing, as you've seen, nearly 3/4 of our profit at the Shack level, which I think is extraordinary work. So coming back, feeling really good about the momentum, but being cautious, being cautious as we head into a new season, witnessing spiking cases, and being prudent in our preparations. We're disciplined in our approach and our cost management, and we want to make sure we're set up for success, no matter what comes our way in these next few months.

Great. And then can you just talk about margins a little bit, the relationship between sales and margins? I mean, doing a 15% margin when your sales are down almost 30% seems pretty solid. So just trying to understand, is there anything in this quarter that's maybe unique as dining rooms continue to reopen and get back to full strength? Is that something that could potentially create a little bit of choppiness in the margins here? And just sort of longer term, as you get back to a full sales recovery, think some others in the industry have talked about their margins getting back above pre-COVID level. So is that something you think that you can achieve? Is there a path to that? Or how are you guys thinking about margins moving forward?

Yes, Michael. We're really pleased with the improvement in the third quarter up to that 14.8%. The teams are doing an incredible job in the Shacks and making obviously, good progress at getting back to those pre-COVID numbers, and improving performance line throughout the quarter. I mean I think we alluded to in the prepared remarks, and margin does follow sales. And you can see that with these patterns. And so that's why we're equally cautious on sort of further improvements of that line item as we head into winter in this kind of environment. There's nothing I would specifically call out in the quarter that made those margins what they are reported. It was great work across the company. If anything, we’ve still got some headwinds in those numbers, particularly concerning higher paper packaging in the food and paper line. Also in the labor line, as we extended that premium pay, as we've put in the year-end bonus, as we continue to focus on taking care of our teams. So to the extent that those start to trend outside of sales, those will help margins improve. And longer term, when it comes to margin expansion, we're not updating any of those target numbers at this time; we’re more focused on the path back to recovery. We're obviously still a pretty small company. In the long term, we're very focused on getting back to the healthy top and bottom-line growth that we were delivering before and continuing to expand opportunities to even improve those margins due to some of the formats we're looking at and are successful to date and growing the digital business. But right now, we’re not updating anything long-term.

Our next question comes from Jake Bartlett with Truist.

And congrats on all the hard work out there and the progress you're making. My question was really about the inflection in sales in September and October. I'm wondering if you can frame what you think the biggest drivers of that are, whether it's just increasing demand, whether it's increased indoor dining, or just being available maybe the curbside additions and then also the hot chicken sandwich. How would you frame which are the biggest drivers to the improvement from August to September and October?

Yes. Jake, I think they've all been really important. Obviously, we've had continued gradual recovery in the macro sense as the economy improves. More dining rooms are open; we had around 3/4 of our dining rooms open at this point. So that obviously helps. And you're just seeing improvements everywhere across the regions. Hot Chicken, obviously, helps that it was a fun one. People love that, and they come back for it. That's a really great menu item. But I think the biggest thing would be our continued commitment and work towards digital. If you really look at how people are using Shake Shacks, still roughly 60% of our sales are coming from digital. We’ve retained 90% of the sales as in Shack has continued to return. That's a really good sign of our business and something we'll continue to work towards. Both our channels keep getting better and better, and we’re making deep investments in that. We're excited to launch delivery through our app, hopefully, in a limited capacity towards the end of this year, and continue to partner with great third-party delivery service providers that are out there. So it's a combination of everything, including our teams really just the ability to keep pivoting. And we hope that continues, right? That trend has been a very clear trend for six straight months, and our goal is to keep that going. We'll see how it goes; there are a lot of moving parts, but there are a lot of positive reasons to feel forward-looking right now.

Our next question comes from Chris O'Cull of Stifel.

This is actually Alec on for Chris. Your resumption of a full development schedule next year seems to suggest you're pleased with recent opening performance. Can you help frame how these openings will perform relative to years past? Are we talking about sales volumes at 60%, 70% of prior levels? And have you seen any sort of shortening in the ramp?

Well, it’s different this time around, right? We're not doing the same kind of huge openings that we used to in terms of marketing. We actually barely market them at all by strategy. We really try to open pretty quietly right now. I think the class we've talked about it before has opened surprisingly well given COVID impact; right? We've got some great Shacks that we’ve opened this year. And as of late, some of the ones that I mentioned, when you look at University Village in Seattle, that's one of the country’s great outdoor shopping destinations. We’ve got this new freestanding Shack in Pasadena. Looking ahead, we’re going to be doing a real flagship Shack in Cherry Creek in Colorado. So we're excited about how we've been performing. The class, as I noted this year, is continuing to perform above the company average, which is exciting. I think we hope there will be a different kind of growth, right, without the usual craziness that we typically have. Many of these restaurants, by the way, when we open, will have limited dining or be pivoted to a limited digital mode. And as we look ahead at the 35 to 40 for next year and really just returning to the previous growth that we had seen, we’re super excited to get back to work. We had to pause, but we’ve called out that we’re going to get 18 to 20 Shacks in this country, while continuing to open internationally. We just opened a restaurant today in the Philippines. That’s really exciting, and we’ve got more to come. So we barely scratch the surface of our unit opportunity. All the models we’re looking towards the goal are to increase that opportunity and keep going. We're getting back at it for next year.

Our next question comes from Jeffrey Bernstein with Barclays.

This is actually Jeff Priester on for Jeff Bernstein. Just wanted to dig into the higher average Shack sales a little bit. Over the pandemic, how have the number of entrees per order trended? Just trying to dig into whether it is an increase in the number of customers per order, or if it's just each individual customer ordering more. If it's the latter, what parts of the menu are they maybe adding on or exploring, or any additional learnings from the digital side of things they may not have added on in the restaurant?

This is Tara. Yes, we haven’t broken down the average Shack by sort of items per order. But when we look back on digital averages, checks were always higher than our other channels. What we've seen through the pandemic is that continues to be the case and even more so. It was higher before and has increased significantly through the pandemic as well as representing a much higher percentage of total sales, as that mix has increased. So that’s the sort of shift that’s really impacted that 10.3% price/mix. It's always hard to tell what a true customer looks like when you're looking at these checks. However, we certainly see that when we look at the items per check and we consider consumer behavior over the last six months of the pandemic, that it’s generally more people per order. But that’s always going to be the case. The marketing team is doing a really nice job leveraging a host of tools during LTOs and so on. But generally speaking, we think it’s increased items per check through larger group orders.

Our next question comes from James Sanderson with Northcoast Research.

I wanted to dig into a little bit more detail about store margins. As I understand it, if your average weekly sales remain at October levels, can I assume that the store margin would remain around 17%, like we saw in September? And then I have a follow-up on the drive-through.

We're not giving any forward-looking statements today at all regarding margins. The best we can do in a world as volatile and fast-changing as this is just keep you up-to-date with the results as they are. You can look at each of our line items in that P&L through this pandemic, and each has had a fair degree of volatility. So it wouldn’t be helpful today to make forward-looking statements on that basis. However, we’re pleased that the base has stabilized somewhat. But paper and packaging will continue to be elevated. As I mentioned, the teams have done a great job on labor, but we’ve still got headwinds on that front, particularly relating to the broader environment with COVID. The other operating expenses will continue to be impacted by things like marketing coming back in, the delivery mix, and various other factors. So we hope the data we’ve given provides enough color, but nothing additional to discuss today.

And James, just one other thing is generally, you have to understand that the 13-week period in the third month can contribute to a higher Shack-level operating profit in that month, which you saw in September. So generally, it’s not comparable to compare a 12-week to a 13-week when you’re thinking about that.

Very good. Just a quick follow-up on the drive-through prototype. I'm not sure if you've described any of the digital technology that will link up to the drive-throughs you're looking at, whether you'll have digital menu boards, payment processing at the drive-through window, or other things like that that will accelerate throughput and other technology enhancements.

We haven't yet. I think for us, we're not going to make our KPI the fastest drive-through in the world, right? We still want to cook things to order. We're going to continue to do that, and the drive-through operations will take time. We will not be going for the fastest; we're going for the highest quality, most premium burger that we've always done. We'll likely have some good digital technology involved in that, but we’re going to keep it pretty simple. We want this to be someone's option if they prefer to order that way. If you like to preorder, we’ll have that option available for you through Shack Track to engage more and more customers in whichever way they want to experience their Shack. We’re excited about it—there are a lot of questions to be answered. We’ll be building this first drive-through this year. As I noted, we’re committed to several of them as we’re eager to see where this can go.

Our next question comes from Brian Vieten with Cowen & Co.

Okay, just another follow-up on the drive-throughs. I appreciate that it’s kind of a smaller mix of the next couple of years and that they will presumably build over time. But Tara, as you've talked to developers and landlords, are you finding the opportunity to secure some of these sites for what I believe was around $2 million in the past, for what these restaurants historically cost? I guess just in the context of the drive-thru, where one of your competitors has spoken to sort of a 10% higher development cost. Are the savings maybe offset there for the drive-thrus with the non-drive-thrus maybe a little bit lower than that $2 million?

I think all of this is learning that we have ahead of us. We haven’t built a drive-thru yet; as Randy mentioned, that is planned for late next year. We will reserve the right to come back to you once we have those data points. Some of these new formats, including drive-throughs, may result in a slightly higher CapEx spend to build them, but we will see. We're excited about them. Even if they do, as Randy mentioned in our prepared remarks, we are very focused on really expanding that addressable market and those average unit volume opportunities. But it’s early days, and one has not yet been built, so we will come back to you when we have some of those learnings.

Our next question comes from Drew North of Baird.

I think you mentioned earlier in the prepared remarks or on prior conference calls that you’ve been attracting a lot of new customers to the brand or first-time purchasers on your app. I was wondering if there's any perspective you can share on the demographics of that customer, maybe now that you've been collecting more data, how the newer customers are engaging with your brand relative to legacy customers?

Yes. We’re really pleased with the continued strong numbers we have for new purchases on those digital channels, as you rightly pointed out. There’s nothing to share specific today in terms of both demographics and behaviors of those customers. We're still in the very early stages of that. We've been pleased with those acquisition numbers and now we're continuing to build out the digital and marketing infrastructure to leverage those insights now that they’re on our channels. We’re focused on bringing delivery as a service into our own channels, which currently doesn’t exist. So that will be almost a final piece of the puzzle where we can really focus on offering everything anyone else could within the Shake Shack ecosystem. This will allow us to build on those relationships and to better segment those customers. To your question on demographics and behavior, we want to engage with them more holistically across those channels and start focusing on meaningful metrics like referrals and frequency. So we’re right at the beginning of that journey, but we feel good about our progress and are excited about the developments behind the scenes as we build out those tools, particularly the data infrastructure. But there’s a lot to learn, so it’s early days.

Our next question comes from Dan with Raymond James.

It's Dan Docherty on for Brian. Thinking about closing out the year, could you perhaps provide some color on average weekly sales volumes in the fourth quarter? How has that seasonality typically played out through the quarter, say, pre-COVID last year?

Yes. I mean, nothing really specific that we want to give you today regarding fourth quarter expectations. I think we’re waiting to see even whether seasonality is something that's relevant in such a volatile environment. We talked about the fact that we still have states and cities changing dining regulations due to COVID, and capacity restrictions change frequently. Additionally, a significant portion of our regions are entering a colder weather period where we have the majority of our Shacks using outdoor patios to help mitigate some of those capacity issues. So seasonality is something we think is less relevant in a volatile environment like this, hence why we're not providing a specific outlook or guidance for the fourth quarter.

Yes. And you can see if you just look at years past in our quarters. Generally, you do see the fourth quarter is slower seasonally, right? We have very strong third quarter average weekly sales generally. So that’s the trend. As Tara said, this is a different kind of year. We’ll see. We’re keeping an eye on that. As you can see, through October, it has increased sequentially every month since COVID began. So that’s really good news. We’ll see if that same seasonality plays out now.

At this time, there are no further questions. I would like to turn the floor back over to management for closing comments.

Thanks so much. I really appreciate everybody taking the time. I know it's a busy night and a busy time. Appreciate your support for the Shack and our team. Look forward to seeing you soon. Take care.

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