Shake Shack Inc. Q1 FY2021 Earnings Call

Greetings, and welcome to the Shake Shack First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rik Powell, Senior Vice President of Finance and Investor Relations. 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 the results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release and the Appendix to our supplemental materials. Some of today's statements may be forward-looking. And actual results may differ materially due to a number of risks and uncertainties, including those discussed in our annual report on Form 10-K filed on February 26, 2021. Any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change. By now, you should have access to our first quarter 2021 earnings release, which can be found at investor.shakeshack.com in the News section. Additionally, we have posted our first quarter 2021 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. And with that, I'll turn the call over to Randy.

Thanks, Rik, and good evening, everyone. We're really happy today to share the continued comeback and forward momentum here at Shake Shack. Spring is effervescing a great energy around the country and our hometown of New York City too. With COVID cases stabilizing and more regions steadily loosening restrictions, we're optimistic that improving trends can continue for our industry. As always, I want to start with a shout out to our team members, who've worked through so much hardship, and now with a full year of the pandemic behind us, they're still leading the way back to our resuming growth. We move forward today with confidence, the opportunity we see ahead. In the first quarter of 2021, and so far through April, our financial performance continues on an upward trend. Total revenue was at $155.3 million in the first quarter, up 8.5% from last year, with average weekly sales improving to $64,000 compared to $62,000 in the fourth quarter. We exited the first quarter with March average weekly sales of $68,000, improving again to $69,000 in fiscal April. Same-Shack sales were up 5.7% in the first quarter, and up 86% in fiscal April versus 2020. We'll also be sharing sales comparisons for the current comp base versus 2019. This was down 14% and 15% in fiscal March and April, respectively. Suburban Shacks continues to lead our recovery, with April nearly flat and down just 1% versus 2019. In terms of profitability, Shack level margin was 15% for the first quarter, exiting with March at just under 19%. Let's move now to talk about our strategic focus and priorities. Because we've moved through this period of continued sales and profit recovery, and to the significant opportunity ahead, our team is focused on opening and operating great Shacks. We're executing on the evolution of our physical Shack formats and digital transformation, while maintaining a critical focus on the creation of great products and an elevated guest experience, all culminating in enhanced convenience and access for our guests, and an expanding addressable market for Shake Shack. Highlighted growth during the first quarter, we opened 10 domestic company-operated Shacks, and have opened another five so far in Q2. We expect to open between one and three more through the end of this quarter, for a total of 16 to 18 new Shacks by the mid-year point, an incredible accomplishment by the team, in what has continued to be a challenging operating environment. As we look to the back-half of the year, and the various states are permitting the construction of our '21 class, we expect the remaining Shack openings to be more weighted to the fourth quarter. Assuming no unforeseen COVID-related delays, we're on target to open between 35 and 40 new company-operated Shacks this year, across both urban and suburban markets. Although, more weighted to suburban as we continue our market penetration strategy. We continue to guide to an accelerated development plan of 45 to 50 Shacks next year in '22. Turning to the performance of the Shacks we've opened so far this year, we're really encouraged. Average weekly sales for our '21 Class was over $79,000 in the first quarter, more than 20% higher than the system average. Some of our most recent openings in new markets, such as Boulder, Indianapolis and Portland resembled the excitement previously seen before the pandemic that lies around the block and strong sales out of the gate, encouraging indicators for the robust and accelerated development plan we've laid out. Our newest Shack in Fishers, Indiana just outside Indianapolis features our second Shack track drive-up window. And we've also opened new Shacks in Santa Monica, LA, Hoboken, New Jersey, and more. Shack Track digital convenience leads, with about a third of the class featuring walk-up windows, about 10% with a drive-up window and many other Shacks featuring curbside and/or an enhanced interior pickup experiences. Additionally, we're making a big commitment to testing drive-throughs, now with the potential for up to eight of these plans through 2022. We expect to open our first at the end of this year. Turning to the recovery and growth of our license business. We currently have 16 Shacks temporarily closed due to COVID impacts. However, during the first quarter, we opened two new international Shacks in the Middle East, with six additional openings in the second quarter through fiscal April, mostly in Asia. We saw improvement in total weekly sales performance throughout the first quarter, increasing from $5.6 million in January to $6.3 million in March, and $6.6 million in April. The recent increases have been driven by both our international and domestic license Shacks, especially in airports, that are experiencing increases in TSA traffic. We're also thrilled that all of our baseball stadium Shacks have now reopened, including our newest, again, the World Series Champions, LA Dodgers Stadium. With limited fans allowed at games, we don't expect to have a normal sales season, but we're delighted to be bringing Shack burgers back to the ballpark. So far in the second quarter, our UK Shacks are gradually reopening as the country finally ended most of its lockdown restrictions for the first time in over three months. Our Shacks in China have seen strong sales throughout the second quarter so far, and our recent openings in Macau, Beijing and Singapore, continue to expand our footprint in these key strategic regions. As we look to the future, and the importance of the Asia Pacific region, we will soon be expanding within China's southern region, with our first Shack planned to open in Shenzhen later this quarter. We're targeting to open between 15 to 20 new license Shacks in '21, increasing to between 20 to 25, in '22. Our license operations are a critical component in how we'll scale our business and our brand. And we expect them to grow substantially over the coming years. Moving on to pivotal transformation of our digital business, which continues to perform well. We're intensely focused on investment that we believe have been and will be critical to our growth, driving frequency, marketing opportunities, all leading towards greater, convenience and accessibility to and for our guests. During the first quarter, we fully launched delivery from our own app, and we'll be adding later this year. Offering delivery within our own channel is a key step in our ongoing digital and sales growth strategy, and allows us to build strong relationships with our guests and enable more personal and direct communication. We're also working to improve in-app communications, particularly to enhance the pickup notifications experience. And within our Shacks, we're testing screens that communicate order readiness to our guests. We've already seen guest experience scores move higher, where these initiatives have been rolled out. As in-person dining restrictions ease, we're excited to see our in-Shack guests return, all while we continue to strengthen, build upon, and amplify the digital gains we've already made. And finally, is that time to call where we start to get a little bit hungry. In Q1, we began the limited run of our Korean-style chicken menu, and this launch with really high guest demand and a large amount of buzz, so much so that many of our Shacks actually sold out. And while this led to curtailed menu availability in February, we ended the promotion strong in March, having learned a lot that will help us prepare for more chicken limited time offers later this year. Currently, we're running a new avocado bacon burger and our chicken Shack, topped with freshly sliced avocado and Niman Ranch applewood smoked bacon. This will be available for a limited time nationwide and for the first time ever in addition to these items, guests can also have freshly sliced avocado added to any of their favorite burgers. Over the past few months, we've increased focus on our shakes and cold beverage categories as well. As our limited-time offers here are proven to be increasingly popular, our spring lemonade trio for example, featuring strawberry salted lime, blackberry, lychee, and mango passion aid, contributing to an increase in beverage items per check, since launching in early March. These are made up over a third of total cold beverage sales, nearly doubling the sales contribution of previous beverage limited time offers. We've got some fun additions to these categories coming in the coming months, and we'll continue to deliver an inspired limited time offer calendar, featuring bold flavors and modern fun versions of the classics, in an effort to continue to elevate every video. Finally, on the culinary front, during the first quarter we launched a new chef collaborations series, and now serving, which features a diverse group of local chefs and restaurateurs from across the United States to help us cook up exclusive limited-time menu items. We've had lots of fun running successful culinary clubs in the past. And this year, coming out of the pandemic, we're using these events as an opportunity to feature and give back to our local restaurants, strengthen our brand and we're deeply engaged with our communities. A portion of the net proceeds from each collaboration will go to nonprofit organizations, helping local restaurant communities. Finally, I want to highlight our recently published annual Stand For Something Good report, which highlights many of our ESG priorities in 2020 and beyond, and includes for the first time, our five-year diversity goals for our company. We embody our mission of Stand For Something Good by prioritizing the well-being of our team, sourcing premium ingredients from like-minded producers, committed to responsible craft and design of our Shacks, and actively engaging in community support through donations, events, and volunteering. We know we can and must continue to do so much more to offset our impact on the world, and make Shake Shack a leader in creating opportunities to drive positive change. I encourage you all to read the report, which can be found in the Investor section of our website. Now, I'll pass the call over to Tara, for more details on our financial performance.

Thanks, Randy, and thank you all for joining us this evening. With all the momentum you just heard, we continue to be encouraged by our ongoing recovery and resulting performance. First quarter total revenue was $155.3 million, representing year-on-year growth of 8.5%, of which Shack sales were $150.7 million, delivering year-on-year growth of 9.1%, with trends continuing to be positive on all fronts. When we look at the monthly breakdown of our sales performance so far this year, we saw a strong start in January. Fiscal February was heavily impacted by severe winter weather, then followed by a rebound in March, exiting the quarter with average weekly sales of $68,000. Sales continued to hold strong through April, increasing to $69,000, supported by the continued rebuild of in-Shack sales. As of the end of fiscal April, the vast majority of our Shacks were operating both in dining rooms, albeit many under varying levels of capacity restrictions, particularly the urban Shacks. Looking at same-Shack sales, we delivered 5.7% year-on-year growth from the first quarter, and 86% in April. An additional comparison that's helpful to gauge our recovery is to our 2019 sales level. When we compare the first quarter 2021 sales of our current comp base to their respective sales in the first quarter 2019, they were down 14.8%. When we do the same for fiscal April, we have similar results, down 15% compared to 2019. When looking at our comp base, it's important to remember that it includes some of our previously highest volume Shacks in the country, and is disproportionately impacted by that performance, and the extent to which they've yet to recover, with many deeply impacted urban centers. This is particularly true for certain Shacks in cities such as New York, Las Vegas, Chicago, or LA, where current performance is having a material impact on a still relatively small comp base. In fact, let me take 126 Shacks in our comp base today and remove the bottom 25 performing Shacks, nearly all urban; our April comp versus 2019 improved from down 15% to just under 3%. Within the first quarter, same-Shack sales results, traffic declined 12.3% and was offset by exclusive 18% price mix, a combination of our year-end price increase taken in December, increased pricing on third-party delivery channels, which all took place over the early parts of the year, and a higher number of items per check, particularly in our digital channel. A quick note before we move on as it relates to same-Shack sales, as outlined in our earnings supplemental materials last quarter, in order to normalize to the 53rd week in 2020, our compare periods for both 2020 and 2019 has been shifted forward a week from the fiscal calendar, in order to show a more like-for-like comparison. We've included some detail around this in our supplemental materials posted earlier this afternoon to further clarify. We continue to experience recovery across both our urban and suburban markets. However, many major urban markets, such as Manhattan remain materially below pre-COVID levels, which office events and tourism traffic return. The split between urban and suburban Shacks, as well as by region can be found on Pages 7 and 8 of our supplemental materials, where you will see suburban Shacks nearly flat 2019 levels in fiscal March and April, and a slight increase in recent speed of recovery in New York City. When compared to 2019, our urban Shacks were down 25% in fiscal March, and 27% in April, with some of our highest volume Shacks in the most dense urban tourism-related areas, such as Las Vegas, New York, DC, Chicago, and LA, each of which will take some time to fully recover. Despite the positive momentum in the business, it remains challenging to provide an accurate outlook on sales. However, based on the current operating environment, we believe total revenue in the second quarter is likely to be in the range of $174 million and $183 million, with Shack sales between $170 million and $178 million. This assumes a continued general recovery across the country, together with the benefit from new Shack openings. We expect our same-Shack sales to increase in the mid-40s to 50% range for the same period. We're anticipating licensed revenue to be between $4 million and $5 million, based on recent trends and continued volatility across an uncertain international recovery climate. As is evident in the strength of our digital sales over the last year, our digital transformation has been and will continue to be critical to our growth. Digital sales mix remained strong in the first quarter, 60% of sales, decreasing to 51% in April, as in-Shack sales increased. Even with this increase in in-Shack sales, the retention of our digital sales levels has been impressive, with 90% retained when we compare fiscal April to our digital sales period of fiscal January. In addition, when we annualize our first quarter digital sales, they equate to a digital-only average unit volume of $2 million, a clear measure of the strength and impact of digital across our business. Although, we expect our digital sales mix to come down as in-Shack sales return, we feel confident in our ability to retain and acquire new guests through these digital channels. We've welcomed almost 2.5 million new purchases through these channels since mid-March last year, and whether through our new digitally-enabled order ahead options, such as curbside or delivery now available through our own app, these channels are proving to be effective as both acquisition and retention vehicles, with digital guests continuing to demonstrate higher levels of both loyalty and spend. We'll continue to build on this strong foundation with further enhancements to the digital guest experience, evolving and improving marketing tools and new product launches, such as the website and the new Android app. Moving on to profitability, Shack-level operating margin was 15% in the first quarter, a 100 basis point decrease versus the fourth quarter, which has benefited from a one-time occupancy credit, as well as the impact of the 53rd week. First quarter Shack-level operating profit margin strengthened into fiscal March, ending the quarter at just under 19%, albeit positively impacted by the 13th week, but a strong sign for our long-term ability to continue our recovery towards pre-COVID levels of profitability. However, the timing and scale of our margin recovery remains highly dependent on those previously highest volume Shacks fully recovering to prior sales levels. Food and paper costs in the first quarter were 29.6% of Shack sales, a decrease from 30.1% in the fourth quarter, driven primarily by both our year-end and third-party delivery marketplace price increases, partially offset by some beef inflation in the second-half of the quarter, which we expect to continue through Q2. Overall, we expect our total food and paper cost line to slightly increase in Q2, as these dynamics continue. Labor cost in the first quarter was 30.8% of Shack sales, compared to 30.3% in the fourth quarter, driven by annual wage increases, higher payroll taxes at the state level, and the building back of our team to support a continued sales recovery. As previously shared, we expect 2021 wage inflation to be in the mid-single digit range and do not expect to see leverage in this area in the short term. Other operating expenses remain elevated at 15.4% of Shack sales in the first quarter, an increase from 14.7% in the fourth quarter, due to additional costs associated with operating during COVID and the return of in-Shack sales, with the fourth quarter also having the benefit of a 53rd week. Occupancy costs in the first quarter were 9.2% of Shack sales, a slight increase from the fourth quarter, which benefited from a one-time adjustment due to the closure of our Penn Station Shack in addition to the 53rd fiscal week in the fourth quarter. The occupancy line continues to be impacted by sales deleverage, particularly in our previously high volume urban Shacks. Given recent trends and the outlook across those various Shack-level cost lines, with Shack sales of between $170 million and $178 million in the second quarter, we would expect our Shack-level operating margin to improve to between 15% and 17%. G&A expense in the first quarter was $19.6 million, including $1.9 million of equity-based compensation and other non-cash items. As we invest across the business and plan to open our largest classes of Shacks this year and into 2022, we expect full-year 2021 G&A to be between $83 million and $86 million, consistent with previously guided levels. Preopening expense in the first quarter was $3.6 million, an increase from $2.8 million in the fourth quarter, due to the increased 2021 development pipeline on those first-half 2021 new Shack openings. We continue to expect full-year 2021 preopening expense to be between $14 million and $15 million, consistent with prior guidance. On an adjusted pro forma basis, we reported a net gain of $1.8 million or $0.04 per fully exchanged and diluted share, which benefited from lower taxes related to option exercises and share vesting during the quarter, while we received a tax deduction for the value our employees received upon option exercises and share vesting. Excluding the tax impact of stock-based compensation, our adjusted pro forma tax rate during the first quarter was 29.4%. And as usual, a full reconciliation of our tax rates can be found in the Appendix of our supplemental material. Given the continued uncertainty around the outlook for the rest of this year, in particular the timing of full sales recovery and the resulting impact on our taxable income, we're not issuing specific 2021 tax rate guidance at this time. However, in a normal operating environment, our adjusted pro forma tax rate, excluding the impact of stock-based compensation is expected to be between 26% and 28%, in line with 2020 levels. Moving to balance sheet, with an incredible position of strength as we look forward to the growth opportunity ahead of us, with our cash and marketable securities balance at the end of the first quarter at $416 million, a significant increase following our $250 million convertible debt issuance that we completed in March. For the purposes of calculating diluted EPS, our share count assumes that this debt has been fully converted to equity, resulting in an immaterial, incremental addition of approximately 450,000 shares to our fully diluted share count. In March, we completed an amendment to our revolving credit facility in order to update term to reflect the convertible debt issuance and to extend the maturity of the credit facility, which remains undrawn. In connection with the amendment, we incurred a one-time interest expense in the first quarter of approximately $320,000, primarily related to the write-off of previously capitalized revolver cost. We also capitalized approximately $110,000 through the first financing cost, and will amortize these as we return through the revolver. And finally, as we shared previously, tomorrow is my last day at Shake Shack, and marks the end of a period of my career that I will look back on with extreme pride and sincere affection. I'd like to thank Randy, my friend and partner, and the entire Shake Shack family for an incredible four years. I am so proud of everything we've built together and excited for all that lies ahead, which Shake Shack continues to take the world home. This is a great company, full of amazing people, and one I will very much miss. Onwards, I'm looking forward to cheering on your every step. And on that, I will hand you back to Randy.

Thanks so much, Tara. As Tara just mentioned, tomorrow is going to be her last day here at Shake Shack as she begins a new chapter as the CEO of a private life-science company. And I want to take this opportunity to just once again thank Tara for her huge contributions over these past four years. She leaves us in such a strong position. And I'm thrilled to see her take on a CEO role. And I'm going to be rooting for her every day. We will miss you, Tara. Know that you are always part of the Shack fam. Our search process is well underway, and we look forward to strengthening our executive team through this transition. In the interim, Tara's responsibilities will be well transitioned to other existing members of our Shake Shack leadership team. We still have a considerable way to go until we reach full recovery. And every day we're seeing positive signs and increased confidence in Shake Shack's opportunity moving forward. You and your families stay safe and stay healthy. And with that operator, please go ahead and open up the call for questions.

Thank you. We'll now be conducting a question-and-answer session. Thank you. Our first question comes from Nicole Miller with Piper Sandler. Please proceed with your question.

Thank you. Good afternoon. Appreciate the update. And certainly, a look at how things are going currently. I wanted to understand the pipeline in terms of how stores have opened. So want to reflect on pre-pandemic levels, I think you opened at just record revenues, they'd honeymoon and probably were a little disruptive or distorted the comp. And I wanted to understand how the stores have opened during this past year during the pandemic? And I'm wondering, if they open at more, maybe call it normalized, maybe you could share a percentage, or in AUV they open at or percentage of mature volume. Because I'm starting to think maybe they enter the comp base and produce a comp list. And while this is how it's been about dollar sales growth, it seems like this could turn into a comp story. Is there anything you can share on that thought?

Thanks, Nicole. In the first quarter, we reported that the 10 Shacks we've opened are generating an average of about $79,000 a week, which translates to over $4 million in annual revenue—it's a solid start. Reflecting on the last 18 months, especially considering the impact of the pandemic, our performance has been mixed. While our Shacks have generally opened strongly, they haven't reached the levels we saw before the pandemic. As we move forward, we expect all these Shacks, both new and existing, to perform well. We've seen our costs increase over 80% compared to last year, which was particularly tough. We're also comparing against 2019, where some of those new Shacks that were opened, especially in busy areas like Palo Alto, are now influencing our current numbers. While the comp base for Shake Shack has traditionally been small in relation to other company activities, it's something we monitor closely. Strolling around New York City today, I noticed a lot of activity, particularly at our Madison Square Park location, which was bustling due to a collaboration with a chef. However, some of our busiest locations, including the Theater District and Herald Square, have still not fully recovered, and our Grand Central Shack remains closed. We're confident these locations will bounce back, but it will take time. As we compare against 2019, the data can be quite variable, which is why we wanted to share those comparisons. Overall, we’re very excited about the new Shacks we’ve opened, particularly in Portland, Indianapolis, and Hoboken, which we believe will excel.

That's a lot to think about and digest and appreciate it. And of course, Tara congratulations to you. You'll be missed by our community as well. But good luck out there. Thanks.

Thank you, Nicole.

Thank you. Our next question comes from Jared Garber with Goldman Sachs. Please proceed with your question.

Hi, thanks so much for the question. I wanted to get a sense of, if you could give any color on the labor environment, what you're seeing there? Obviously, we've heard about the supply challenges on the hiring side. And I even noticed anecdotally some restaurant concepts in the area locally here kind of throttling, the in-store dining and going back and forth and having open restaurants and just doing digital-only orders. So, just wanted to get a sense of what you're seeing there and how you're viewing the market right now?

Thanks, Jared. I often walk around my neighborhood and notice some restaurants closing early because of staffing issues. This is something that was rarely seen in the past. It's evident that we are not unaffected by these pressures. The staffing challenges have always existed in the restaurant industry and will continue to do so. However, we are currently facing a particularly tough situation. Our teams have done an amazing job with hiring, retaining, and developing leaders, but it’s undeniably a difficult time. While we haven't seen any significant impact just yet, there are times when we wish we could bring on a few more staff members to ensure we are fully staffed. Last year, we implemented raises for the majority of our Shacks, which contributed to the pressures on our labor costs, but we are proud to invest in our team. There's certainly a high demand for skilled workers at the moment, so we will continue to focus on strengthening our teams, which will be a challenge.

Thanks. Appreciate that. And just one more quick one, is there anything that we should think about in terms of the urban Shacks decelerating on a two-year trend from March to April? That would seem that mobility data looks to be getting better in a lot of these urban environments. So just curious why maybe you're seeing a deceleration there?

Well, there's a couple of things. First of all, it's minor, right. I mean, if you look at the numbers, they're nearly the same. I mean, when you look March, April, but slight deceleration. This is Jared, why I'm going to keep saying how small the base is and how wildly impacted it is. So let me give you a great example. When you look versus 2019, you might have Las Vegas Strip, one of the busiest Shacks in the world, is actually not in the 2020 comp base, because at this time in 2020, it was closed, okay. So it's not helping us where it should be. And versus 2019 it's hurting us, because it was super busy in 2019. And that one Shack had the opportunity to bounce things around. And you got to understand, and this is where we ask our shareholders and you all to really understand how impacted it can be by just a few Shacks. There's also some spring break movement in those March numbers and versus '19 is another thing that impacts it. But look, I think as we look at it, we are excited by the year-over-year compares. We've got work to do. And it's very clear, I've said this a couple times, I'll use this language again, when we look at the Shacks that are down, we ask ourselves, does it make sense that they're down? And you say, yeah, I understand why the Theater District in New York is way down and impacting us. When you look at the Shacks that are up, you say it makes sense that they're up. And we say, yeah. For the most part it does, and that's where we are encouraged by the signs. And we know we've got a lot of work to do, and we need offices to fill back up. We need cities to fill back up. We need Broadway and other things like it, events, games, and all the things that will be energetic. We're on the right track. We'll continue to improve, I think and, we will be impacting a little bit versus '19 individuals from time to time.

And just to add what Randy just said, as he said the spring break fell in a different month between the two years, which is creating a bit of noise when you look at such a short time period of between just two single months.

Thanks. Really appreciate the color there.

Thank you. Our next question comes from Lauren Silberman with Credit Suisse. Please proceed with your question.

Thanks so much. And Tara, congrats on the role. You'll certainly be missed. On the 2Q just a quick one comp guide of mid-40% to 50%. Can you help us understand what that implies for average weekly sales and/or the recovery relative to 2019, just given all the noise in the comp base?

No. Lauren, we're not breaking it down any further at this point. I mean, I think suffice to say as we said in the prepared remarks, it's really hard honestly to give any kind of forward-looking guidance right now at all, with a high degree of confidence. So, not breaking it down any further than that range right now. And, we'll keep you up to date if we see any major changes in that, but not giving AWS guidance.

And Lauren, I want to add too. In addition to the examples I already gave, which are challenging. We went through in Q2 of last year, numerous and various closures from time to time, whether there were protests in a city, where a Shack had closed and then comes out of the comp base. And the bouncing back and forth of that just, very hard for you to model certainly. But, it's all baked into that 45% to 50% comp expectation that we have.

Okay, appreciate that. And then just on digital, retaining 90% of January digital sales, it looks like digital weekly sales seems to be running in line or above what you saw throughout most of 2020. So at this point, together with all the enhancements you've made to your digital ecosystem, is your expectation that you'll be able to hold on to or even grow digital weekly sales. Has on-premise continues to rebuild, understanding the mix might come down or is expected to?

Yeah, I think it's really hard to say, I'm sorry to kind of answer without an answer. But, right now, I think we know how important digital has been through the last 12 months, when you have digital how important digital is going to be to our business for the long term. And yes, we're really encouraged by some of these metrics that we're sharing. I think we do expect digital mix to continue to come down as in-Shack comes back. But, as I mentioned in the prepared remarks, we're also really bullish around digital as an acquisition tool, as a frequency tool, as an engagement tool. So I think, without being able to give specifics as to weekly sales levels or mixed numbers, digital is going to stay a very important part of our business and we will continue to be investing in the team and in marketing tools to continue to use what's really just a foundation at this point, in terms of some of these relatively new launched products.

Thank you guys very much.

Welcome.

Thank you. Our next question comes from Michael Tamas with Oppenheimer & Co. Please proceed with your question.

Hi, thanks. Hope you guys are doing well. Your average weekly sales in April are a little bit above what you saw in March. But, your guidance for margins for the second quarter of 15% to 17% is well below the 19% exit rate, you guys were talking about from March. So, can you maybe walk through what's changed between March and what you're expecting for the second quarter? And then, I know you're not providing guidance on the second quarter. But is that a good base to think about as we build through the rest of the year? And what are some of the things that we should be keeping in mind, either headwinds or tailwinds to those numbers? Thanks.

Hey, Michael, it's Rik here. I can take the margin question. As Tara mentioned, and I think Randy, in his prepared remarks too, we were in Q1 about 15% in terms of our Shack level margin. We exited pretty strongly at 19% of Shack level margin in mid-March. So, that gives us a bit of confidence on sort of going forward that we can get back to those sort of pre-COVID levels of margin. But, having said that, and this is where I think sort of the answer to your question lies, there's still a huge amount of moving parts within the various line items, Tara went through a bunch of them, but I'll cover a few of them on here. One, we've got line of sight to some beef inflation in the second-half of the first quarter. We're starting to staff up the ongoing sales recovery, particularly in-Shack, dining room, for example types of things. And the thing also, the headwinds around some of these large Shacks that we've got that have really sort of reduced levels of staff, but that would be really sort of rely on those to recover before we could return to margin. So, I think, there's a lot of good signs in terms of how we're sort of managing the costs of the business, as the sales recover, but there's a bit of a lag. We want to start up, we want to be prepared. We want to give that guest a great experience when they walk in the Shack. And so, we're staffing up slightly in advance at the sales levels. But I think, as I say that's really what's driving the 15% to 17%, which would still be an improvement on our Q1 levels, which is about the 15% range. So, I think we're comfortable with where the margins are lying right now. We were pleased with the exit of 19% in March. We'll continue to manage that and very, very closely as we move through the next quarter and the rest of the year. And then, if you remind me the second part of your question, Michael, that would be helpful, sorry.

No, that was it. You entered it during the second half of the year. So I appreciate it. Thank you very much.

Thank you. Our next question comes from John Glass with Morgan Stanley. Please proceed with your question.

Hi. Tara, congratulations and best of luck. We will miss you for sure. Randy or Tara, just reflecting on your suburban Shack performance in March and April, and I don't want to beat this. But, almost every restaurant has seen a pretty massive acceleration. And I would say most restaurants are seeing sales levels well above '19 levels. Your stimulus spending, there's pent-up demand, there's just a lot of reasons. Why do you think that's not the case for Shack then? Because, I would think that you would get those same benefits.

If you take a look, we're essentially flat. Given our recent performance, this indicates an improvement and a positive trend. I won't comment on other casual dining sectors, but I will mention that our comp base, which encompasses about half of our restaurants, is around or slightly above flat compared to 2019 for the suburban locations. We believe we've gained some advantage from stimulus measures, although it's challenging to determine the exact impact. Nonetheless, we're in various areas, suburban and otherwise, that don't behave like others in the industry. Our Shake Shack locations, particularly in suburbs, tend to be situated where people gather, and it’s taking time for that gathering to return to typical patterns. Overall, the positive trend continues, and we aim to advance further. We definitely need to monitor how people's movement patterns evolve to keep progressing. Additionally, our suburban average weekly sales are consistently increasing, which is encouraging.

I would like to add a couple of points. First, we have talked about the bottom 25 performing Shacks, which are primarily in urban areas, but there are also some suburban locations and large shopping malls affected just as severely. To your earlier point, we have observed really strong performances in the suburban areas, as Randy mentioned. This is reflected in the average weekly sales, but on a comparable basis, they are remaining relatively flat.

Okay. Thank you very much.

Thank you. Our next question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.

Great. Thank you very much. One question and just a quick follow-up. The question, Randy, just as you think about '21 and '22 year-end openings primarily I guess, U.S. company-operated, but ramping up next year to 45% to 50%. Now, you're approaching, I guess, one a week, which would still be I guess, 20% or more unit growth year-on-year. So I'm just wondering if you can offer some confidence in terms of the people, the real estate, people are talking about slowdown in terms of getting people to actually build these sites? I'm just wondering, your confidence in accelerating and the system being able to handle that level of growth on what is now becoming a larger and larger base? And then I had one follow-up.

That's a great question. We have a lot of confidence in our sites. We continue to be a top brand and preferred tenant for developers across various locations. We're very confident in the sites we have. As mentioned earlier, none of this is easy, and it won't be easy moving forward. However, we feel very positive about our company's capabilities and our team's ability to achieve our targets, which we have consistently met over the years. One aspect we will monitor is the cost of construction, particularly with rising lumber and steel prices. As we look ahead to contracts scheduled for later this year and into next year, we anticipate some inflation in those raw materials and overall building costs. It's difficult to predict if this will be a long-term trend, given the significant increases we've seen in lumber and steel prices. Building costs are substantial, and while we remain confident, we will keep an eye on investment expectations, which we anticipate will increase slightly. We'll provide more updates on this as those prices start to become more apparent. So far, we haven't been significantly affected, but we do expect it to impact us soon.

Got you. And then just on the follow-up and it kind of ties in with my congratulations to Tara. But, as you think about the search to fill in the role, Tara obviously now was CFO and President, it seemed like you gave her the President role to give you more time to focus on the future growth and vision of the brands. So I'm just wondering whether you're thinking about hiring a CFO, and a separate President or whether there are other opportunities to expand in the C suite or whether you think one person might be able to fill that void. Thank you.

That's a great question. We're going to hire a great person, and that person is then going to fit their skill set into who we are as a company, as an executive team and the leadership team. We have some incredible candidates that want to be here. At this time, we're not assuming we will fill the President role that Tara grew into overtime. And she did amazing work in that role. And in the meantime, she also lifted her team. And she lifted the entire executive team to the point where we're really operating well, as a leadership team in this company right now. And we want to bring a CFO, who will be focused on those tasks mostly, and contribute to every bit of the strategy. So, we're excited to eventually find and hire the next right person. We'll keep you posted when that happens.

Great. Best of luck, Tara.

Thank you.

Thank you. Our next question comes from Andrew Charles with Cowen. Please proceed with your question.

Great. And Tara, best of luck to your next role. I'm sure it was a tough decision, but wish you the best and good luck. Two questions for me. I know, there's been a lot of questions around the underlying March to April performance. But, if I look at the overall 2Q guidance, it does imply underlying trends decelerate further in the combined May and June period. And I'm just trying to get a better sense of why that is? I know the reopening is something that we're all pretty excited about. But why does the guidance imply a bit more of deceleration looking forward?

Hey, Andrew, it’s Rik here. Yeah, can you hear me? Yeah. So, I think, look as we've guided forward through Q2 with some certainly a relatively flat seasonal period, when you take sort of the last part of the first quarter and the second quarter. We're pleased that we're focused on driving average weekly sales up into the right. But there's still a lot of uncertainty out there. And so I think we've taken what I think is, right approach which is a cautious approach to look at this point in time, even though as Randy stated springs initiatives to New York City. There is a lot of recovery that we need out of those urban Shacks. And so we want to be cautious to that fact at this point.

Okay, great. My final question is about the breakfast concept we tested three years ago. I understand it was quite popular in travel centers, but with a significant drop in transit and many high-volume locations currently closed, what are your thoughts on breakfast moving forward? With the reopening, are you considering revisiting breakfast options, especially for the Madison Square Park location, to capitalize on increased mobility during that daypart, which is likely the most sensitive to mobility changes?

It's not a focus today, Andrew, but one of the exciting things that we look at when we start talking about drive-through, drive-ups, Shack track with those in that curbside convenience is, it starts to open up that question a little bit, right. If you look traditionally Shack sites they are certainly ones that could certainly be great for breakfast opportunity. But we take that functionality as a format shift for the long-term, to create a better seasonality for moments like that. So, it's something we're looking at, not immediate focus. Our immediate focus is, most of the Shacks that serve breakfast are the airports and transit centers that are either closed or still trying to figure out their sales. So we'll get back to that for sure. We're actually going to be testing some new breakfast items not too far from now at some of those airport Shacks. We're learning a little bit and we'll see. But, it's definitely something we've got our eyes on for something down the road, not an immediate focus.

Thanks, Randy.

Thank you. Our next question comes from David Tarantino with Baird. Please proceed with your question.

Hi, good afternoon, and congratulations, Tara, on your new role. It's very exciting, and we'll miss you. I have a clarification question regarding your view on the sales trends. I want to use Q4 as a reference point. When I examine the performance in March and April, especially with the two-year comparison, it seems there hasn't been much progress in the recovery. Specifically, regarding some of the suburban locations, it appears there has even been a slight decline. So, my clarification question is whether this is related to underlying issues with the comp base, or if there's something else that you believe is causing this trend to stall.

Yeah, it's a little bit of a mix. I mean, it's again, it is sort of straightforward. But, if you look at some of these Shacks and these huge Shacks, it's hard to improve. We're going to keep using the Theater District as a perfect example of a large swing Shack versus '19. So yeah, I mean, we've got recovery to go. It is our numbers and the comp base are wildly swung by large urban restaurants. And that's why, we're looking at average weekly sales to focus on, that has continued to see an upward trend, not percentages. And, we know that that's part of it. We know, that's some of the noise there. And, we're looking forward to that continuing to improve over time.

Yeah, I think Tara covered the numbers during the prepared remarks and I think we’ve touched on a few of them. But I think, for March we expected Q1 with a 15%, we exited the quarter with March of '19, albeit they had net benefit of 13th week. I'd say, some of the pressures are ones that we're taking, which are we want to be fully staffed and fully prepared for the sales recovery. So we're staffing up in advance of that. We want to make sure the Shacks are ready for people to come in and enjoy their food. So there's a bit of us sort of preempting the sales recovery and making sure that we're correctly staffed. I think, on the other side of things that we've had some headwinds that have been around pre-COVID, such as the delivery level, right. The delivery levels around the elevated sort of delivery located into that which, albeit any Shack is coming back, but retention in has been high. These transitions, we're really, really pleased about. From a commodity perspective, we've touched on beef, which we've seen in the second-half of really the first quarter. We've got line of sight, and expect that to be highly inflated through the second quarter. Again, I think, as we look at the bottom 25 Shacks, I mean, they tend to be in the higher cost than higher urban areas, right. And they are the Shacks that drive pretty high leverage across their cost base. So, the route to sales recovery is going to be dependent on those Shacks. And the route to our full margin recovery is also going to be dependent to a degree on those Shacks. Whilst, we're sort of maintaining and really managing costs around the remainder of the Shacks that are performing well. So, a number of things, a number of years, a lot of sort of moving parts across all of those line items, which we were managing on an individual basis to make sure we're making the right decisions. I mean, it's still tough operate in a restaurant right now, in terms of distancing, and those types of things. There's still some costs that are elevated around PPE that’s still a thing. So we're managing those and these costs are coming into the Shacks and moving out of the Shack, as we make those decisions very, very carefully each step of the way.

Understood. And just a quick follow-up question. As you've seen, your digital sales slightly slip, is there any noticeable change in mix? Meaning, our pickup orders slipping more rapidly, is it delivery, anything that would change that mix between what consumers picking up versus using the delivery service?

Yeah, we don't like to think of it as digital slipping. The mix is changing. But we're maintaining a lot of those digital sales. But we've not broken down that level. We know our customers move between all of our channels. Our guests move in a lot of our channels. So, we don't manage it sort of on a channel-by-channel basis. We want to make sure that all of our channels are sort of receptive to the customer, depending on their needs for that particular day.

Alright, thank you.

Thank you. Our next question comes from Chris O'Cull with Stifel. Please proceed with your question.

Thanks. Good evening. This is actually Alec Estrada on for Chris. Looking at the regional breakout of same-Shack sales, the southeast was the only region to comp positively in April relative to '19, presumably with dine-in still depressed? Should the off-premise volumes, they're kind of remained sticky. Do you have a sense for how much higher those AUVs could be in the region? And does that make it an increased focal point for future development plans?

I apologize for the delay. I'm analyzing the suburban opportunities. Every region has shown improvement as indicated on the chart. Compared to 2019, the Southeast stands out, and when we review our development plans, we see great potential in all regions, including those that were most affected, like Manhattan and New York City. Compared to 2020, every region has significantly improved and is on the right path, including those hardest hit. We believe we have opportunities across all major regions in the United States. While we are particularly focused on California and key areas in the Northeast where we have been successful, we will not let the pandemic solely dictate our growth strategies. We have learned a lot this year and will integrate those insights into our already strong development plan.

Thank you. Our next question comes from Brian Vaccaro with Raymond James. Please proceed with your question.

Hi, thanks. Good evening. I appreciate the AWS disclosures, it really helps cut through the comp noise, the one year, the two year, taking into account the relatively small base of the comp base. I guess, I was hoping to get beyond the comp base, and maybe think about the 192 company units in total? And could you give us a sense of average weekly sales in suburban versus urban markets sort of including all class years in the portfolio? And maybe comment on store margins cut across those same lines?

Yeah, that's something we haven't disclosed. And I think, there's reason for that. Those are going to change significantly over time, right, as our guests moving around the country. So around that sort of environment in between the cities, and then more suburban areas. So that's what information we've shared at this point.

Okay. And maybe we can take a step back sticking with Rik details, I guess I wanted to ask the question, what does a full recovery in average weekly sales look like in your view? I guess, I'm trying to level set expectations versus where you were pre-COVID. I think, by our math, you were doing something just under $80,000 a week in '19. But there's sort of this natural decline in average weekly sales as you layer in new units, as a reasonable recovery get back to maybe to low to mid-70s? Just curious given all the moving pieces pre and post-COVID.

It's not a number, Brian, that we've got into obviously. It's certainly going to continue to go up from here on average for weekly sales. As you said, we had about a $4 million AUV roughly pre-COVID, a little bit over that, I think in that $80,000 range, let's call it. And, as we've opened a lot of Shacks, as we've said, we expect that number to come down slightly as we add these classes in the $3 million Shack average range. So I think we all need to see COVID shakeout a little bit in the world, come back to a little bit more of a normal operating environment where more all of our Shacks sort of settle into where they belong. But it's not a number we've given, we expected to continue to go up over time, from where it is today though.

Alright. Fair enough. And last one if I could. Sorry, if I missed it. How many company unit openings do you expect in the third quarter and fourth quarter? Thank you.

Well, we have between 16 and 18 in the first-half about 35 to 40 for the year. We do think that'll be heavily fourth quarter weighted. So the third quarter would be a lighter development quarter as was the second quarter. So, most of the development this year is going to be the first and then the fourth quarter.

Great. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to, Randy, for any closing comments.

Thank you, everybody. We really appreciate everyone who got in tonight, and thanks for following us. I look forward to seeing you soon at a Shack. Thank you.

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