Greetings, and welcome to the Shake Shack Fourth Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Annalee Leggett. You may begin.

Thank you, and good evening, everyone. Joining me for Shake Shack's conference call is our CEO, Randy Garutti; and CFO, Katie Fogertey. 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 in the final details section of 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. As a reminder, 2020 included a 53rd fiscal week and to normalize for consistent like-for-like comparison when discussing 2021 year-over-year sales and revenue metrics tonight, we've excluded the impact of the 53rd week in 2020. We've included metrics, including the 53rd week in our press release and a slide detailing the impact to the same Shake Shack sales calculation in the financial details section of our earnings supplemental. By now, you should have access to our fourth quarter 2021 earnings release, which can be found at investor.shakeshack.com in the News section. Additionally, we have posted our fourth quarter 2021 supplemental earnings materials, which can be found in the Events & Presentations section on our site or as an exhibit to our 8-K for the quarter. I will now turn the call over to Randy.

Thanks, Annalee. Good evening, everyone. Tonight, we'll highlight the strong fourth quarter recovery and full-year 2021 performance, following up from our prerelease of initial revenue and profitability results earlier in January. Katie and I will also be giving color on the current quarter's performance, especially in light of Omicron impacts. As always, I want to take a moment to thank our team. This recent Omicron wave amidst an already challenging staffing environment has been a tough hurdle for our teams. The way to get out there day after day to take care of each other and their communities amazes us, and they deserve our thanks. More than ever, it's important we maintain our commitment to stand for something good by elevating our people. This is Shake Shack. The fourth quarter represented a strong improvement in sales and profitability and highlighted what recovery can start to look like when urban centers travel and return to pre-COVID movement patterns take hold. In 2021, we had a record system-wide sales of over $1.1 billion, growing over 47%, marking the highest sales in the company's history. Average weekly sales outpaced historical seasonality at $74,000. Same-Shack sales were up nearly 21% versus 2020 and for the first time, showed positive versus 2019, up 2.2% due to the strength in both urban and suburban markets. Our licensed Shacks in the U.S. and around the globe also performed well, contributing to record license revenue. Our Shack-level operating profit in the fourth quarter was 16.4%, benefiting from strong sales, offset by continued labor and cost of goods inflation. The environment of commodity and labor wage inflation is still taking a material impact on our restaurant margins. We expect this dynamic for the foreseeable future. But in order to offset some inflationary pressures, we took a price increase of 3% to 3.5% in October of last year. Given the continued outlook, we've decided to take another 3% to 3.5% in March, resulting in an inflation-based price increase of 6% to 7% heading into Q2. We'll also be raising our price premium on third-party delivery services from 10% to 15% higher than our in-Shack pricing. This gives us the opportunity for better profitability on those channels and even more reasons to drive people to our own digital channels for the best value. Shake Shack has historically taken roughly 2% price increase per year, and that's given us a strong value proposition for our premium products. We believe these current price increases are necessary to protect margins. We'll be keeping a close eye towards the cost of our business, and we'll consider whether additional price may be necessary later this year. We're committed to delivering a high-quality restaurant experience at a reasonable price and believe this value proposition is key as we expand in new and existing markets across the country. While the fourth-quarter results represented a lot of optimism around our recovery, we started this year with much more volatility on the business due to Omicron. The first quarter typically experiences a seasonal decline in sales versus the fourth quarter. But in January, a sharp increase in COVID cases limited our ability to staff and keep all of our restaurants fully open. Additionally, we saw many of the drivers of our business such as office returns, events, travelers, and the general gathering of people that contributes to Shake Shack's best results turn downward. The combination of lower than average sales per hour, reduced operating hours, and outright closures due to COVID resulted in materially lower sales versus our seasonal expectations. We expect these trends may continue to impact sales in our company-owned Shacks and our license business through the first quarter. However, we're happy to report a steady uptick in sales over the last few weeks with February month-to-date Same-Shack sales of approximately 13% as of Tuesday of this week. With Omicron rates now plummeting, we'll look back at the fourth quarter as an indicator of the kind of momentum we know can occur as a more normalized consumer environment returns. No one quite knows the timing of how people will move about following this recent Omicron wave, but we're bullish on what spring and our recovery can look like later this year. So let's check in on each of our strategic pillars for 2022. First, elevating our people. We're not alone in the challenges of staffing and increased turnover amongst our teams. Omicron exacerbated this over the last couple of months. And our teams work diligently to hire, train, and develop leaders at every level. We'll remain an employer of choice through our competitive pay, benefits, and commitment to our team in the way we take care of them during tough times like these and through their tenure as they rise up through the ladder of opportunity here at Shake Shack. Heading into 2022, we have raised hourly starting wages more than 13% and over where they were at the end of 2020. This year, for the fourth year in a row, the Human Rights Campaign Corporate Equality Index gave us a 100% score and named us as the best place to work for our LGBTQ team. Yet another way our team is recognized as we stand for something good. This year, we'll also host our biennial leadership retreat, where we'll gather all of our managers, partners, and key suppliers for a week of inspiration, learning, and connection as we prepare for the incredible growth ahead. In 2021, we filled nearly 60% of operations leadership positions with internal candidates, 70% of those being people of color, and approximately half of those promotions being women. We still have much work to do, but we're incredibly proud of how the team is developing. Our second strategic pillar is our focus on digital transformation. Katie will go into more specifics here, but I'll begin by sharing that over the past two years, we've invested deeply in our digital transformation, shifting guest preferences over to our digital tools improving our products and guest experience, adding 3.5 million new app and web purchases since March 2020, enhancing all the ways our guests can more easily and more frequently come to the Shack on their terms. We are building a true omnichannel experience. And this year, we're investing in new brand marketing within our digital products to enhance personalization, drive frequency, and grow guest connection. We're also leveraging digital tools to improve operations by allowing teams to manage the digital business based on current traffic and wait times. We'll be focused on improving the Shack Track digital experience, upgrading and adding kiosks in Shacks, and developing more personalized ways to connect and reward our digital community. Looking ahead at growth and development of our third strategic pillar, to build a better Shack. In 2021, we opened 36 domestic company-operated Shacks currently with an average unit volume of $3.9 million. This year, we're targeting our largest ever development class of 45 to 50 company-operated Shacks with our development schedule heavily weighted to the back half, specifically to the first quarter of the year. So I want to level-set those targets, as we’ve been shooting for that schedule for a couple of years. We expect to open a total of 7 company-operated Shacks in Q1 and between 5 and 7 in Q2. As we're already feeling the impact of supply chain disruption, labor availability, construction, and extended permitting timelines pushing this year's opening schedule heavily into the fourth quarter. There's risk to these numbers as uncertainty and availability of timeline critical items have continued to grow even over the last quarter. We'll keep you posted on timing and final guidance, but we're really excited about this year and in the coming years as we transform our portfolio of Shacks around the country. The class of 2022 will feature a big commitment to new formats like drive-thru, while expanding proven formats in urban street retail and suburban freestanding. Now we expect 25% of the class to have a Shack Track walk-up or drive-up window. In December, we opened our first-ever drive-thru locations in Maple Grove, Minnesota; Lee’s Summit, Missouri. This past week, we opened our third drive-thru in Livonia, Michigan, outside Detroit and are preparing for upcoming openings in Vineland Pointe, Orlando, and Castle Rock, Colorado. Our strategy is to open this first group in busy traffic locations so we can optimize learning on the markets and our guests. We're building experiences that provide the elevated hospitality we're known for, including made-to-order burgers and hand-spun shakes, balanced with the convenience that guests expect from a drive-thru. And while our preliminary results have been impacted, we're really encouraged by what we're seeing and how the drive-thru is operating in all the use cases we can already imagine for how we'll build these in the future. We look forward to continuing to expand with up to a total of 10 drive-thrus operating by the end of 2022. Unlocking this potential can have a tremendous impact on our long-term addressable market, and we're focused on deepening our investments, resources, and learning about this critical new addition to the Shack family of experiences. We continue to anticipate build-out costs for the class of 2022 to increase 10% to 15% above historical levels due to sustained inflation on material costs and labor costs. We continue to be pleased with the growth of our licensed business. In 2021, this part of our business drove over $400 million of system-wide sales. Contributing to this was the opening of 26 new licensed Shacks, highlighted by new market launches in Monterrey, Mexico, Macau, Shenzhen, and Hangzhou, and the deepening of our commitment to growth in Korea, Mexico, and more. In the fourth quarter, we opened 6 new licensed Shacks, including our second in the city of Shenzhen. We're really excited to continue building on this momentum in China, and we see this region as a major potential growth focus with expansion this year into brand-new markets such as Guangzhou and Chengdu. We're also proud to announce that we'll be targeting an opening in Malaysia in 2023 through a new development agreement. Our international licensed business remains a key focus, asset-light strategy to grow our brand and profitability over the long term. On the domestic side, our business in Q4 benefited from increased air travel, especially serving holiday travelers. We'll be building on that momentum with a slate of new roadside Shacks in New Jersey and Upstate New York in a new development agreement we now have with Applegreen to grow this format. Finally, we're always working on improving our guest experience. In our kitchen, we are uplifting our culinary program with exciting limited-time offers and buzzworthy collaborations that drive engagement with new and existing guests. Recently, we ran our Truffle Burger and Fries, which were the strongest performing limited-time offers of 2021 in our digital channels after launching early exclusively on our app. Right now, we're highlighting our new Buffalo Chicken Sandwich, crispy hamburger chicken breast, covered in our Buffalo sauce, topped with our ranch sauce with pickles and shredded lettuce on a toasted potato bun. This pairs great with our Buffalo spice fries, classic crinkle cuts, dusted with our Buffalo seasoning, served with our ranch sauce. Our seasonal shakes in the first quarter incorporate delicious flavors with a connection to our communities. The Wake & Shake is a coffee shake, hand-spun with vanilla frozen custard, maple syrup, and orange zest, topped with whipped cream and orange candies. We've partnered with Red Bay Coffee, a Black-owned coffee maker out of Oakland, California, as yet another example of our commitment to gather communities and enrich our neighborhoods by supporting local businesses. We've got an exciting lineup of limited-time offers planned for this year, focusing on chicken, burgers, shakes, and lemonades, all aimed at driving frequency, check, and brand love. And with that, I'll hand it off to Katie to share more about the details of the quarter and our expectations moving forward.

Great. Thank you, Randy, and good afternoon, everyone. I want to thank our amazing teams in our Shacks and at our home office for the tireless work that they do as we continue to work together and navigate this challenging landscape. Our deep dedication, perseverance, and innovation are shining bright through the lingering pressures from COVID. We ended the year on an optimistic note with encouragement about what a recovery for our more urban and tourism-heavy restaurant footprint can start to look like. We saw notable green shoots across Shacks even as consumers were still not fully back to recovering behavior patterns in terms of international and domestic tourism, return to office, as well as dining in restaurants. Our fourth quarter revenue grew over 38% year-over-year to $203.3 million as our Same-Shack sales rose 20.8%, more than closing the gap to 2019 Same-Shack sales. This was a long-awaited milestone for the company. And this happened even as many of our Shacks that had the largest sales volumes prior to COVID were still far from recovered. We generated Shack-level operating profit margin of 16.4%, up 40 basis points year-over-year. Our licensed business had a record quarter, and we generated adjusted EBITDA of $12.4 million, up 36% year-over-year. System-wide sales were $314.3 million in the quarter and more than $1.1 billion for the full year, up over 47% year-over-year and by more than 25% relative to 2019 levels. We are learning more insights as we enter new countries, markets, and formats as there are now 379 Shake Shacks operating across 15 countries, and we have a strong digital presence in our company-owned business. We generated $74,000 in average weekly sales, up from $72,000 we reported last quarter, and each month of the quarter outperformed historical seasonality, driven by a function of higher menu prices and a building recovery in our urban Shacks as well as continued strength in our suburban Shacks. In the fourth quarter, our urban same-Shack sales were 4% below 2019 levels, a material improvement from down 15% in the prior quarter. Most urban markets outside of Manhattan were up relative to 2019, and New York City had the largest impact on the sequential improvement in total Same Shack sales. Our suburban same-Shack sales were 9% above 2019 levels, also a material acceleration quarter-over-quarter even as our urban business performed well. Towards the end of the quarter, our mall-based Shacks benefited from more of our guests out shopping for the holidays. Our traditional freestanding and outdoor shopping center Same-Shack sales also showed continued strength. We saw strong performance across all regions in the fourth quarter. Texas, Connecticut, and Georgia, Same-Shack sales were each up 20% or more relative to 2019 levels. Then with rising COVID case counts in the end of December and throughout January, we saw a swift reversal of the strong fourth quarter trends. Our average weekly sales fell to $63,000 in January, flat to last year, and our same-Shack sales momentum slowed to up 2% year-over-year. Rising case counts in addition to weather drove 87 full days of Shack closures and a high single-digit reduction in operating hours. We also throttled digital channels in some cases. These pressures, of course, are not new, but rather consistent with what we have experienced in prior COVID waves. While the timing of when our guests will return to pre-COVID momentum or movement patterns is uncertain, our sales in February are showing strong improvement from January levels, and our same-Shack sales are now up approximately 13% year-over-year as of Tuesday this week. We are cautiously optimistic on recent sales trends, but this uncertainty is understandably impacting our ability to guide first quarter and full-year 2022 with precision as it pertains to sales, cost, staffing, development, and other metrics. We are guiding first quarter Shack sales of $190 million to $195 million, supported by an assumption that our sales remain impacted by COVID, but that the impact will continue to lessen from January levels. However, this assumes no major new unanticipated disruptions throughout the quarter. We expect our same-Shack sales to grow high single digits to low double digits year-over-year. We are encouraged by the results of our October price increase and believe our brand has pricing power. The extent of inflation this year remains uncertain, and we may take additional price later this year to help rebuild margins, all while focusing on a tiered approach to pricing and ensuring that our guests still realize a great value in terms of superior food quality and guest service as well as a wide range of offerings across price points. With rising COVID case counts in January, we saw a significant sales impact and deleverage across our restaurant P&L. This, along with a higher delivery mix, ongoing inflationary pressures, and added expenses to support the recovery of in-Shack sales are likely to negatively impact our Shack-level operating profit margins for the first quarter. We are guiding Shack-level operating profit margins to be between 11% and 14%. We are taking price late in the first quarter. So we'll have a little benefit to this quarter's Shack-level operating profit margin. We generated nearly 40% of our system sales through our license partners in the quarter, with license sales reaching $118.4 million, up 50% year-over-year. This performance was driven by new openings, increased holiday air travel domestically, and relaxation of COVID-related restrictions in select international markets. Our partners are now operating more than 150 licensed restaurants worldwide, and we expect to see 20 to 25 new licensed Shack openings in 2022. Our license partners are seeing a wide range of impacts from the recent increase in COVID case counts and restrictions. And we expect this impact to continue throughout the year. As such, we are guiding for our license business revenue of $6 million to $6.4 million in the first quarter and note risks and uncertainties around rising restrictions, particularly in Asia. While our momentum in the fourth quarter was encouraging, the swift sales pressure we faced in January simply reinforced the importance of our strategic plan. In terms of our commitment to elevating our people, our digital transformation, evolving our formats, and ensuring that our guests experience rules in terms of quality and hospitality. We believe that we must continue to invest in the digital transformation of the company and are committed to building a true omnichannel guest experience for our digital platform, meaning our app and our web are the preferred channels. In the fourth quarter, we grew our first-time web and app customer base by nearly 10% versus the prior quarter and by more than 80% for the full year 2021, as we leaned into more personalized and digital marketing, as well as launching key limited-time offers through our app channels. Our digital retention remains strong. In December, we retained nearly 80% of the digital business that we had generated in January 2021, even as our in-Shack sales nearly doubled. Our digital sales mix was 42% in the quarter and nearly 60% when considering kiosks and our digital channels combined. The long-term and sustainable growth of our digital business is top of mind in our 2022 G&A guidance and overall investment plan. We believe our initiatives are important to lay the groundwork for improved digital frequency and lifetime value of these guests. Now on to the cost side of our Shacks. We are committed to working with best-in-class suppliers and our supply chain team has done a commendable job navigating macro-driven challenges and inflationary backdrops. In the fourth quarter, our food and paper costs were $60.8 million, flat. The price increase we implemented in the quarter helped offset low single-digit quarter-over-quarter and low double-digit year-over-year food and paper inflation. We realized cost pressures across many inputs, but particularly protein. We may take more price this year as the inflationary environment warrants. However, we currently anticipate mid- to high single-digit inflation across most of our non-protein inputs and double-digit inflation across our paper and packaging. The biggest part of our basket is our 100% all-natural Angus beef, where we expect continued inflation and are subject to weekly and monthly moving prices. Labor was $57.9 million or 29.6% of total Shack sales, down from 31.1% in the prior quarter and 30.3% in the fourth quarter of 2020, with the leverage driven primarily by higher sales. The staffing environment remains challenging, and we will continue to invest to build our teams for the growth ahead. Operating expenses were $29.2 million or 14.9% of total Shack sales, up from 14.2% in the third quarter of 2021 and 14.7% in the fourth quarter of 2020. Our in-Shack business doubled year-over-year in the quarter, and with that came additional expenses as it relates to maintaining our Shacks, including our dining rooms and in local marketing. We are committed to delivering a great guest experience, being a community gathering place, and enriching the neighborhoods we operate in. Occupancy was $15.8 million or 8.1% of total Shack sales, down from 8.9% in the fourth quarter of 2020, with leverage coming from stronger sales. Total Shack-level operating profit in the quarter was $32.2 million or 16.4% of Shack sales, up from 15.8% of Shack sales in the third quarter and up from 16% of sales in the fourth quarter of 2020. Sales pressures realized in January, plus the combination of inflationary pressures across a variety of restaurant P&L line items, and a higher delivery mix compared to pre-COVID times, are pressuring our restaurant margin recovery in the near term. We are taking some important steps to build back the profitability of our Shacks with an eye to the long-term health of the business. First, we believe we are a strong brand with pricing power. We are taking price as the inflationary environment today warrants on menu and through third-party delivery and may take additional price increases this year if needed. Also, as we saw in the fourth quarter, sales leverage can help offset some of the cost pressures we face. We are accelerating investments and going deeper into marketing and digital as we look forward to a more sustainable sales-driven recovery over time. Our G&A was $25.6 million, up 24.7% quarter-over-quarter bringing the full year 2021 G&A spend to $86 million, inclusive of $2.5 million in equity-based stock compensation expense for the fourth quarter and $7.9 million for the full year. The largest increase in G&A year-over-year came from our additional marketing and technology investments. We are investing in G&A this year with an eye on the long-term growth potential for the company and expect to spend between $108 million and $114 million, inclusive of approximately $12 million in equity-based stock compensation expense. The rise in equity-based stock compensation is a function of us making key investments this year in our teams, including our general managers. This level of investment is necessary to open the most Shacks on record and build out our digital and marketing strategies. Preopening expense was $4.5 million in the quarter as we opened 13 new Shacks, and we expect 2022 preopening expenses to be between $14 million and $17.5 million. Depreciation and amortization expense was $15.6 million, up 24% year-over-year. We expect 2022 depreciation and amortization expense to be between $70 million and $75 million. We realized a GAAP actual net loss of $9.7 million in the fourth quarter or a negative $0.25 earnings per share. On an adjusted pro forma basis, we reported a net loss of $4.8 million or a negative $0.11 per fully exchanged and diluted share. Excluding the tax impact of stock-based compensation, our pro forma tax rate in the fourth quarter was 30.9%. A full reconciliation between our GAAP and adjusted pro forma net income and earnings per share can be found in our earnings release and a reconciliation of our tax rates can be found in the financial details section of our supplemental materials. We expect our adjusted pro forma tax rate, excluding the impact of stock-based compensation to be between 28% to 30% for the full year. However, we could see variability from this range depending on the extent of our business recovery in higher tax jurisdictions and other factors. Our balance sheet remains in a strong position, and we ended the quarter with $382.4 million in cash and marketable securities. We will be using our healthy cash balance to support our strong growth in new Shack openings across a variety of formats, including drive-thru, as well as continue to make investments across our business. Thank you for your time. And with that, I'll turn it back to Randy.

Thanks, Katie. I just want to end today by sharing the optimism that our team feels around what's ahead. There's no doubt the whipsaw of COVID-induced impact continues, and has been felt already in this first quarter, but the team is forging ahead. We're driving excitement around our products and our Shacks in each and every way our guests can experience Shake Shack. We've got a big year ahead, and we're thankful you're along for the ride with us. As always, I hope that you and your family stay safe and healthy. With that, operator, please go ahead and open the call for questions.

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

You said you're planning to take more price in March to protect your margins. And I think the comment to protect margin sounds like a little bit of a shift from the last few calls. And so how do you want us to think about that comment specifically on protecting margins? Is that meaning that 2022 should look similar to '21? Or what's the right way that we should all be interpreting the protecting margins comment?

Well, I think you interpret it as the price increase of 6% to 7% that we're going to have running through the system as we head into Q2. There's a lot of puts and takes. There's a lot of uncertainty in inflation, the cost of goods entering our business and our continued investments in our people. So we're not going to run this business to just hit some expected margin. We're going to run it with the long-term return of sales. The number one thing we'll do to protect margins is getting our sales fully back. And that's the number one focus. We will always be sales-focused on that. And we'll take price as appropriate. What we've shared today is it's clear that inflation and its impact on our business remains persistent and may remain persistent, and we will watch closely to see if it gets worse into this year. So we'll keep you posted on that, Michael, but that's the plan for right now. And as Katie said, a couple of times, we'll keep an eye on whether we need more price next year. But at this moment, we have no plan to do that, but we'll keep an eye on that as the business evolves.

Makes sense. And then obviously, you're still really early in the process of drive-thrus and drive-up; you have 10 planned, I think, by the end of '22. And so as you think about your unit growth beyond '22, I know you're not giving us numbers, but if you were to just say, grow 50 units, I mean, this is just such a transformation for your business. Is there a point where you might see 30% to 40% of those units being drive-thrus? And if that wouldn't be the case, why not?

I think we've got to get to those drive-thrus, right? So we're not going to give any of those numbers today. And you can see how excited we are about it, to have three open. And we've got less than two months of experience with our drive-thrus. We've got a lot to learn and a lot to do. We have various kitchen designs and different drive-up scenarios that we're practicing and learning from. There are places where drive-thrus, we believe, will be a critical part of Shake Shack's future, but we've got to prove that and figure out how to build that. So a lot ahead, a lot of optimism on that, and quite a few Shacks that are coming our way soon. So look forward to seeing a drive-thru near you.

Our next question comes from the line of Jared Garber with Goldman Sachs.

I want to circle back on the commentary on pricing. Obviously, encouraging to hear you guys kind of set out and increase prices there to help out the margin profile. But wondering how your studies would show on pricing elasticity. I think one of the things that we hear investors talk about a lot is the price of a Shake Shack burger. So just curious how you view that pricing power that you've talked about, Katie or Randy. And maybe what kind of research you've done to suggest that you have sort of 6% to possibly more than 8% price to take?

We do keep a careful eye on where we are relative to what we think our competitors are, and we still feel very good about what that price gap is. That's probably all I'll go into today. We do take a tiered approach to our pricing, and so we're very mindful of our guests' willingness to pay in various markets. The results of our price increase in October showed pretty good reception, and that gives us more confidence here, but it is a risk and something that we're very mindful of.

And Jared, I think, look, none of us have seen this kind of inflationary environment in a generation. Certainly, no one alive has ever seen it following a pandemic. So I think there's going to be a lot to watch and learn. But we have, as we said, like really feel good about where we sit. When you kind of look at your typical Shack meal, you compare a Shack burger, fries, and a drink, does that sit comfortably against other options that you might have for lunch or dinner? We think it does, and we feel like that gives us a strong platform to grow from.

That's great. And then just one sort of quick follow-up on the delivery pricing. You're taking that incrementally higher on the third-party channels. Does that drive sort of a channel-agnostic scenario in terms of margins? Or are those margins still lower than your direct channels?

I would say with that, this is an important step to improve our profitability in our delivery channels.

Our next question comes from the line of Sharon Zackfia with William Blair.

I guess a question on the pricing, sorry. I remember, Randy, we were sitting together in New York the week before the pandemic really started in the U.S., and you were doing pricing elasticity analysis at that point. And I recognize you don't want to get overly into where you can take price and where you can, but have you seen any noticeable consumer resistance over the past years, you've taken a bit more price? And then secondarily, Katie, the margin range for the quarter is a bit wider than normal. Is that just reflecting the uncertainty with sales given the pandemic volatility?

Okay. So on the pricing, we've just taken 3.5% in October, right, towards the end of October, and that is all new. We've had a wild consumer environment since then, so it's really hard to say. We continue to believe, Sharon, that we've got some really strong pricing power. That's what we referred to over two years ago. We continue to believe that and we've also become smarter about how we price, how we price for a fair value exchange and things like our delivery channels and market-by-market pure pricing. So we feel really good about becoming smarter with pricing while keeping it within a range that we think is reasonable. The company has a history of a roughly 2% price take every year, and to be at 7% is indicative of the time we're living in. I think we're probably on the conservative end if you look at us against the industry and against at-home costs of food. That would suggest we're in a pretty strong pricing position as we enter our next phase of things getting more expensive around us, which is why we'll keep an eye on things for the future.

And then, Sharon, on your question about the wide range of margins, I mean, it's something that we talked about in our prepared remarks. There is kind of growing uncertainty here about our ability to really nail down the true cost landscape here and the impact from Omicron, and so we've done our best to reflect that in the guidance today.

And also I want to make sure you catch that we clearly saw those driving factors for Shake Shack that we know can drive our business results in Q4 and we celebrated what that looked like. In January, it was really tough, but the last three weeks in February have been consistently better every week. You can see that wave. As we've talked about for two years, Shake Shack generally feels more impacted by these waves given our unique real estate proposition. We look forward to a return to more normal traffic patterns. We're hopeful, but we're going to be cautious in our operating profit and sales guidance for this quarter and beyond.

Our next question comes from the line of Nick Setyan with Wedbush Securities.

Q4, the average weekly sales were above the average weekly sales in Q4 '19 and even the best of times, pretty covered year-over-year, your average weekly sales tended to decline because of the new unit volumes. Can you maybe just take a step back and explain to us what was so favorable about Q4 '21 versus Q4 '19 average weekly sales. And as we go forward and sales do normalize post-Omicron, what should we expect there?

Yes. Nick, a couple of things on that. We booked the seasonal trend in Q4, and I think that's the optimism of what we're talking about here, right? You start to see that—you saw a little bit of that towards the end where we had some price, but most of that was that urban recovery to start to see what the Shake Shack we all know and love looks like. And some of that was some pretty strong openings that we had through 2021, as I noted, some above-average continued average weekly sales and AUVs for that class that kicked off. That gives us confidence. That's why nobody is excited about being slower than we expected AWS for January. But as we look ahead and we know, we can see the kind of things that Shake Shack has always been, it gives us the confidence and optimism for where this thing is headed. But we're not going to quote an average weekly sales number, but all of the strategies we just talked about, specifically around our people, digital, and our Shacks is what we're building towards to get that back and growing.

Just to tail on there, New York City, the recovery that New York City saw in the fourth quarter, while still many of our Shacks were below 2019 levels, that improvement was a very significant driver of our total same-Shack sales in the quarter. So we were very encouraged by what we saw as movement trends started to get back—not fully returned to pre-COVID levels, but more international tourism and return to office. Those things are just great benefits for us and have left us encouraged for what the recovery could look like once we move past Omicron.

Okay. And Katie, I think Q2 recovers to pre-Omicron levels of sales, what could the incremental price increase, assuming again pre-Omicron levels of sales, what could the margin look like in Q2?

Yes. We're not going to go into that at this point. There's a lot of uncertainties as we go throughout the quarter into Q2 as well.

Next question comes from the line of Lauren Silberman with Credit Suisse.

So I just wanted to ask about your longer-term outlook on restaurant margin, a little bit similar to the last question. But near-term, a lot of volatility across the P&L transitory headwinds, creating noise, high-volume Shacks pressing margins in outside degree. As we move towards a more normalized environment, which I guess means a return to pre-COVID average unit volumes across the base and no further acceleration in costs. What do you see as the right margin for the system? Is it 20%? Is that how we should be thinking about it?

Yes, Lauren, we haven't given that long-term official guidance yet. We know we have work to do to rebuild. You start to see that rebuild in Q4 and kind of finishing out the year. So we've got work to do. A lot of that is going to be watching the inflationary environment, how much things continue to increase, where our digital channels end up landing, and the cost of delivery and some of the other things that impact margins. But look, we fully believe in the long-term strength of the margins of this brand. We've proved that for every year prior to COVID and during COVID impacts for the last two years. I think given how volatile it's been and how many of our restaurants still have some ups and downs, the team has done a great job getting basically 3/4 of that profitability back. We've got a road ahead and a lot of work to do. That's our work ahead. That's every strategic pillar that you heard me say is what that is all based upon. This will always begin and end with driving sales, and that's the next part of the work we had.

Got it. Okay. Then I can transition to—I'll try it for a near-term question. Are you willing to give what January and February same-store sales were versus I guess, month-to-date versus 2020, which was normalized at the time, or I guess where average weekly sales are trending through February relative to $63,000 in January, just as we try to look at the one?

Yes, no, we are always going to be comparing to our year-over-year comparisons at this point. We're doing this for a very specific reason. We are growing so fast. Our comp base is so different today than it is versus 2019 or 2020. So we are reverting to a more normalized reporting pattern here.

Our next question comes from the line of Andrew Charles with Cowen.

Yes. Just my first question, maybe just a follow-up on that last one. The formal long-term guidance before for margins of 18% to 22%. And look, of course, there's a lot of things in the industry facing challenges right now, which makes it very challenging for that number. The industry is going to have challenges with margins for the foreseeable future. But I just want to make sure I mean is that still the number you guys are thinking about longer term? And if so, do you view that as some of the confidence or is that a bit more of a stretch from where we are today?

Well, I'm not sure anything different than I could say to that question, Andrew, than I just said. We are not changing our long-term guidance that we've given about the long-term opportunities for Shake Shack. We've got work to do to rebuild that, beyond the last 16% plus in Q4. So certainly, we have work to do. We believe in the strength of the operating profit of this brand and that AUVs will be strong moving forward. So we'll keep you posted and we're going to rebuild.

Got it. And then my other question is just on marketing for this year. I would love to know the brand historically has done some fun collaborations, things that have been a little bit outside the box, like with Game of Thrones, with Clay Thompson. Looking beyond menu innovation, are there plans to create some buzz for the brand in 2022 that we should be thinking about in terms of new marketing ideas?

Definitely. You can see we have been running with our Buffalo Chicken, and you'll see that in new digital channels. We ended Q4 with some out-of-home advertising and various localized things for our Black Truffle. The team is just having a ton of fun creating some unique collaborations. We'll run some great chef and brand collaborations this year. You'll see us doing more digital marketing specific even on channels like YouTube TV and Hulu where you might see our Buffalo Chicken pop up from time to time. So definitely, we're starting to dabble more and more into greater marketing spend as part of our G&A guide for this year.

Our next question comes from the line of Brian Mullan with Deutsche Bank.

Just a question on delivery, specifically around consumer demand. Just curious what you've seen over the last few months. Is that a channel that has transactions growing year-over-year across your system? And I'm asking because I imagine there are some tough compares from the year-ago period. So any color on what consumer demand for delivery looks like right now would be helpful.

Yes, so delivery—the business did a lot of delivery clearly in 2021. If you think about where the market was there versus now, with the rise in Omicron cases, we did see an increase in our delivery mix. However, we are comparing against a pretty severe time the year before.

I think it's going to be interesting to just watch. Look, it’s unknown. We have a strong continued demand for delivery. That's the punchline. We like to do that in our own channels, and we have great relationships with our third-party delivery partners. So we'll see that. I think it has proven to be a little more seasonal, right? When it's cold and when COVID spikes, we generally tend to do more delivery. When people are out and about, you really saw this even in the fourth quarter, our in-Shack sales rose. So that shows us as well that when our return to more normalized traffic patterns happens, we expect that to lean more towards in-Shack sales.

Okay. And then just a question on the labor environment, high level. Maybe you could talk about what has gotten objectively better or easier of late, but what still remains really challenging. And then labor is always important, will always be important, but any thoughts on when the industry gets to a point where this is no longer what is being labeled as a crisis or at least such an acute challenge? Can that happen over the course of this year?

I wish I knew. I wish I knew. The reality is I don't think anyone knows there's labor challenges across every industry at every pay level. Look, that was really hardest in December and January when Omicron really hit because on top of a challenged environment, you just had a lot of COVID cases, and that just made it even harder to work in a restaurant. I'm a believer that people will continue to return to work in restaurants as a great career choice. That's what Shake Shack aims to do. We're going to work to keep building that back one great team member at a time. I just want to note, operator, we have limited time and a lot of questions, so I’m going to ask each person to limit to one question from here so that we can try to get to as many people as possible.

And our next question comes from the line of Jeffrey Bernstein with Barclays.

Randy, just one question. You've got an outsized U.S. company-operated pipeline in 2022, that 45 to 50 units, which equates to a low 20% unit growth. I think your long-term guide is for 20% plus. Obviously, your base is many multiples of the size that it was at the IPO. I'm just wondering if you still believe that, that 20% is appropriate, not necessarily changing it today, but whether or not it's just increasingly difficult either to find the right sites or the right people. Obviously, you want quality over quantity when I think you noted that building costs are up double digits. So kind of how do you think about that as you get to a larger base at some point presumably having to temper that unit growth algorithm?

Yes. Jeff, we haven't guided anything like long-term 20%. Just to clarify, the only guidance we have is this year’s 45 to 50. We think that's a great number. We have a lot of good growth in front of us, Jeff. We've got more opportunity, and a stronger, better team than ever, and more formats that can find more places for strong Shacks than ever. We are not at all dismayed by a higher cost of building environment. That is why we have $400 million roughly in our balance sheet. We're going to use that to grow restaurants at an appropriate pace. We're not going to go to build 100 restaurants next year, but we're working on that now, and we'll keep you posted for this year, 45 to 50 is the right one. We'll keep a cost on what that looks like in the coming years. However, I think the opportunity for strong growth for Shake Shack remains one of the most exciting parts of our story, and we believe we've barely gotten started.

Our next question comes from the line of John Glass with Morgan Stanley.

Randy, or Katie, I'm wondering how do you measure new store returns in this environment, right, just because you've got good sales, but margins are uncertain, and costs are going up. So how does the mechanics of it work? Is it a discounted cash flow? Do you have to plug some margin assumption in there? So how do you do that? And related to the increased building costs, are you thinking about ways to make Shacks cheaper, so you can start to offset some of that inflation? Or is that not part of how you think about building new stores right now?

Yes. John, it's a great question, and the math is really easy. When cost to build goes up and profits are down, payback takes a little longer. We look at it in a lot of different ways. Obviously, we have a strong cost of capital given our balance sheet situation. But we're going to keep building with confidence. We’re also going to keep building restaurants to optimize learning, specifically with drive-thrus that will cost us more for a while as we build those. We're not trying to cut anything out of that learning; we're trying to spend money to learn to open up the addressable market. As we look at core Shacks, we're constantly doing smarter things with our building materials, with the ways that we build, our designs and teams internal and our third-party design and construction teams to do that better and more efficiently. There’s going to be some period of time here in this different environment where we expect to keep building. The returns may not be what they've historically been while margins are depressed, but we believe we're going to get a lot of that back. As we've said on this call today, we have work to do, and in the meantime, we're taking this opportunity to continue to grow because Shake Shack is small compared to our opportunity, and we've got a long way to go.

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

This is actually Alec Estrada on for Chris. I know kiosks were slated to be a big part of the digital initiatives this year. So I was hoping to get a little more color on that. How many of those do you have in place today? And then with 75% of sales of those kiosk restaurants being digital, which obviously have lower labor requirements, how much of a benefit is that kiosk model for the labor line from here?

Yes, we're really excited about kiosks. About half of our Shacks today have kiosks. In some instances, we've taken out cash registers, and in other instances, we've taken out more. But we don't view kiosks at this point in time as merely a cost savings initiative. For us, it's more about the sales lift that we see on the back of it and the opportunity to drive deeper our digital strategy and really bring kiosks into that full digital ecosystem. We see higher attach rates with our limited-time offers through this channel. We can see that guests really understand the menu items and engage with us in an exciting way. We're investing this year to increase the number of Shacks that have kiosks. It's going to be a very exciting learning opportunity as we do that, along with digital menu boards and drive-thrus. There's a lot of point-of-sale technology that we're investing in today.

Our next question comes from the line of David Tarantino with Baird.

I have a clarification question on the sales that you're running today. And I just wanted to get a better sense of how much Omicron has taken out of the business. Could you give us some sense of what the typical seasonality would do to your sales from Q4 to Q1? And then as you look at your February trend, how far off of that are you in percentage terms?

Yes. As you probably appreciate, our business is growing incredibly fast, and it makes compares to prior years very challenging. But we typically tend to see sales or at least average weekly sales trends decline from Q4 to Q1. We're pleased with where our same-Shack sales are trending in February relative to typical seasonality. But it's hard to really talk about typical seasonality when our comp base has basically doubled over the past three years.

Understood. But I guess maybe said differently, is February still under the run rate you were in Q4, assuming you adjust it however you adjust it internally?

I think February is still, as we said, improving every week from January, but still impacted by Omicron and still by the number of Shacks in our base that rely on traditional Shack traffic. Yes, there's some impact of February remaining down. It's all part of our guidance for Q1, and I think it's going to take some time to rebuild that through the year, as we've said today.

Our next question comes from the line of Peter Saleh with BTIG.

Just taking into consideration, you guys raised prices in October and again, planning for in March. Can you just give us a sense of how much of that pricing, how much of the inflation do you think that will offset based on your current forecast for both commodities and labor for the year?

Yes. We're not going to give that for the full year. This is a very dynamic environment. We've given you our expectations for how we expect certain parts of our basket to play out over the year. But there's going to be volatility potential in beef and other parts of our protein basket that we are subject to as well.

Our next question comes from the line of Brett Levy with MKM Partners.

Just with respect to labor, what are you seeing in terms of not just applications, but your ability to hire people with experience, people that really fit the mold for what you're looking for at Shake Shack? We've heard some others talking about applications are up, but they weren't necessarily getting that same flow through. What are you seeing in terms of just their level of experience?

Yes. We're coming off some pretty low lows given the Omicron environment in January, but we’ve certainly seen that tick back up. I think the answer to all of those parts of that question is slight improvement continuing, a little more encouraging every day. It's still going to be a region-by-region conversation. There are going to be cities where it's just not that hard to hire, and we have strong fully staffed teams right there. In the cities where it's really hard to hire, those challenges existed before COVID; they've been exacerbated by COVID. However, we're optimistic about the trend, but it's a long way from any normalized staffing environment, and we will have to see how this goes through the year. We're looking for great human beings. We're not overly worried about whether you know how to spin a milkshake. Our job is to teach you that and drive your opportunity for leadership development from there. We feel real good about our training, but we do a lot of training right now. There's a lot of new people, and there's a cost and an impact to that, which we will keep investing in.

Just on that last point. Could you give any guideposts in terms of what you're seeing in terms of overtime and training costs?

We haven't broken that out, but it's inherent in the current results, right? It's inherent in even the last year's results of that more challenging environment and definitely in the Q1 guidance. There is a labor cost impact to all that newness to getting people up to speed and to everything we've gone through in the first couple—initial tough period of Q1.

Our next question comes from the line of James Sanderson with Northcoast Research.

Just following up on the labor issue. I'm wondering if you're satisfied currently with the layer of supervisory management and the number of actual employees you have in stores on average? Or if your experience of COVID and the disruptions have made you rethink the need to bolster your team to start rethinking maybe increasing the number of employees per store or supervisory management to make sure that you can handle throughput, assuming that business improves in the next couple of quarters?

Yes, Jim, it's a really good question. We’ve always felt really strong about having significant management teams and paying them well, especially our general managers, which are critical to our success. We’ve never been trying to be efficient and tight on that; we’re trying to run great restaurants. And you tuned into it. I think it's more about the returns from seasonality. You’ve seen the seasonality of our business. We grow quite a bit in average weekly sales as we go through Q2 to Q3. Now is the time to begin to bulk up those teams a little more as sales hopefully begin to return. That’s the work. I don't think we'll have any changes other than we just want to be better at it. We want to be better at running our businesses, hiring great people, keeping them, and developing for the long term. I don't know if you caught my comments earlier, but of our promotions in 2021, 70% of them came from within, and of those; half were women of color. We feel incredibly good about that opportunity. We’ve got to do more of that. That's just a starting point, but that shows the culture we're continuing to build.

Our next question comes from the line of John Ivankoe with JPMorgan.

One question. How are we thinking about your different self-help initiatives to think about what you can do on the margin side, whether it's kind of shorter-term tactical changes or more medium-term changes to your business, whether to the stores that are already in existence, the stores of 2022, or maybe the future stores that will allow you to run a more efficient business model even in this high commodity and labor environment?

Yes. There’s a lot in there, John. The first focus is on driving sales. Let’s get to that point and then build new formats that allow us to drive strong AUVs for the future. That's what drive-thrus are about. That's what all these other formats we’re pursuing. The second part revolves around digitization. And again, don’t expect Shake Shack to have robotics anytime soon, right? But in what ways can we automate processes? As we think about that today, that work is happening in the ordering and pickup process. We’re bringing more and more technology into our digital channels, kiosks, our app, and the customer pickup experience, where we can provide real-time information to guests about when and how their food is ready. We’re making our communications with our guests more direct and engaged in real-time. All that is the goal of reducing administrative burdens and operational steps that our teams must go through every day. That’s a long-term goal, and we’re committed to that as part of our margin recovery strategy, and our plan. But first, we’ll always focus on the sales side.

And for our final question, we have the line of Brian Vaccaro with Raymond James.

Just a quick one on labor, if I could. What level of wage inflation did you see in the fourth quarter? And are you expecting in '22? And is there a way to ballpark the level of investment and what form or forms some of those investments could take that you alluded to earlier in the call?

The one number we gave that is clear is just our starting wage from the end of 2020 until roughly now; we are 13% higher in wage inflation on just our starting hourly wages. That doesn't include the continued raises we've given our ship managers, our exempt managers, the general managers, and the other support functions around here. So that gives you a little idea of what's running through the system now, and there will be continued investments there. There will be some Shacks in regions where we need to keep increasing. We're doing various things on that to keep learning and find the right competitive wages, and that will be a journey this year, I’m sure.

And we have reached the end of the question-and-answer session. I'll now turn the call back over to CEO, Randy Garutti for closing remarks.

Thanks, everybody, for being with us tonight. We look forward to grabbing a Buffalo Chicken Sandwich with you soon. Take care.

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