Shake Shack Inc. Q1 FY2022 Earnings Call

Greetings, and welcome to the Shake Shack First Quarter 2022 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, Senior Manager of Investor Relations and FP&A. Thank you. 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 18th, 2022. 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 2022 shareholder letter, which can be found at investor.shakeshack.com in the quarterly results section or as an exhibit to our 8-K for the quarter. This shareholder letter is a new, more in-depth format replacing our prior supplemental presentation. I will now turn the call over to Randy.

Thanks, Annalee. Good evening, everyone. You'll notice our remarks tonight are going to be a bit shorter than prior calls as the team has provided a new shareholder letter format, which dives much deeper into the numbers, visuals, and strategic plan. We hope you'll spend some time with this excellent new report. Before I get into the results of the first quarter, I want to highlight our team members now more than 10,000 people strong in the United States, with many more working through our licensing partnerships abroad. We recently hosted our Board of Directors meeting at our newest Drive-thru Shack in Orlando, and it gave us a chance to tour the market and reconnect with our leaders and team members across the six Shacks in the region who are driving our recovery every day. I'm continually amazed at how many of those leaders have been with us for so many years and how many have graduated up through the Shack development experience to become General Managers, Area Directors, and more. Shake Shack is led every day by an extraordinary culture, and it's these people who continue to lead our recovery in the thriving business we're building ahead. After being significantly impacted by COVID waves in January and February, Shake Shack's performance rebounded in March. We experienced meaningful improvement in sales and traffic trends that have continued through April. This highlights the momentum Shake Shack creates as offices, travel, events, tourism, and consumer mobility trends improve. Total revenue grew 31% year-over-year as we generated over $203 million in total revenue and over $309 million in system-wide sales, with average weekly sales improving through the quarter and in April as traffic has rebounded in both urban and suburban markets to more seasonal patterns. Our same-Shack sales grew 10.3% even after the significant Omicron waves early in the quarter, with our urban same-Shack sales posting 19% growth over last year. We expect these overall trends to improve further into Q2. Our licensed Shacks in the US and in select global markets performed well, offsetting significant ongoing COVID impacts in Asia. We generated Shack-level operating profit of 15.2%, driven by sales levels amidst ongoing and volatile inflationary headwinds. Given the persistent inflation we've experienced and expect to continue, we took a menu price increase in March, in addition to raising our premium on third-party delivery orders. We're currently running about a 6% to 7% increase to menu prices over last year, excluding the impact of delivery premiums, and we'll remain patient as we monitor pricing closely through this bumpy period of cost inflation. I will provide a brief update on the four pillars of our strategic plan. First, our focus on elevating our people. In just a few weeks, our Shake leaders, home office, suppliers, and licensing partners are coming together for our leadership retreat, focused on development and building our team member bench that is so critical to achieving our accelerated growth goals. I hosted our first-ever retreat in 2009 with just nine attendees. This upcoming retreat will bring together more than 1,200 leaders. I'm thrilled that our culture and the growth we've created can now provide this opportunity for learning across the Shack Globe. This remains a challenging time for hiring, retaining, and developing our people, which is why this is where we are focusing investments and where you can count on us to continuously strive to be better employers, providing solid wages, benefits, and, most importantly, opportunities to make Shake Shack a career choice for the long term. Second, we remain committed to our digital transformation, and we're ramping up investment in every digital channel through the Shack Track digital experience, whether you want your Shack in our app, web, kiosk, curbside delivery, or now drive-thru. We're building tools to add even greater convenience to the omnichannel Shack experience. Even as in-Shack sales rose significantly year-over-year in the first quarter, we continue to drive digital engagement, retention, average check, and higher frequency through these channels. All this takes time. And with every click, we're getting to know our guests better, connecting with them more directly and building touchpoints that can set the foundation for long-term growth. Third, we continue to evolve our Shacks, focused on format evolution and developmental expansion. We opened seven company-operated Shacks in the first quarter and two more in April. We also opened six licensed Shacks in the first quarter, including a strong market opening in Nanjing, China, and two more in April, including another market opening in Guangzhou, China, bringing our total system count to 386 Shacks as of fiscal April end. Since December, we've opened five company-operated drive-thrus, which are an exciting and transformational step in providing even greater convenience than ever before. The experience that our drive-thrus deliver feels fantastic. And we know we have much to learn and evolve with at least five more drive-thrus set to open this year, as we are optimizing for fast learning. We see this as a major piece of our growth strategy ahead, and while we're excited about our pipeline, COVID and supply chain-related delays in permitting, construction, landlord readiness, and equipment availability remain intense and in many instances are impacting our planned opening timelines. Since the beginning of this year, we have pushed several openings into 2023. As we stand today, we expect to open 40 to 45 company-operated Shacks, with a back-loaded schedule to the fourth quarter. In our licensed business, we are actually running ahead of our initial development plans and expect to open between 23 and 27 licensed Shacks this year. In our licensed business, we continue to experience recovery around the globe in our airport and stadium Shacks here in the US, yet our business in China remains significantly impacted today. The COVID lockdowns and intermittent market interruptions across China are impacting near-term licensing revenue, creating uncertainty for this important market for the foreseeable future. As we look towards growth in our licensed business, we see this as a massive white space opportunity. Our brand resonates around the world, and we're taking this time to expand partnerships and open up new markets. This week, we announced that we'll be expanding to Thailand with a target of 15 Shacks over the next decade. We also recently announced our expansion to Malaysia and have our sights set on more licensed growth opportunities with strong partners in key international markets. Finally, we are relentlessly focused on our guest experience through our Shacks and our products. We just wrapped up our Buffalo Chicken and Fry limited-time offers. This week, we've launched our newest limited-time offers, featuring our Bourbon Bacon Jam Burger and chicken sandwich. We partnered with Makers Mark to create a delicious summer menu, and don't miss out on our slate of summer lemonades and shakes. As always, our food raises the bar. I'll now pass over to Katie to discuss our financial performance in more detail.

Great. Thank you, Randy, and good evening, everyone. I want to begin by taking a moment to thank our incredible team members for their continued perseverance and dedication over these past few years. Navigating through ongoing COVID pressures has not been easy, but I speak for all of us here when I say we are so excited for what's in store for Shake Shack in the coming years, and I'm looking forward to spending time with many of our amazing team members at our leadership retreat in just a few short weeks. By now, I hope everyone has had the opportunity to view our new quarterly shareholder letter. This replaces our past supplemental presentation and is available on our website in our Investor Relations section. As I approach my one-year anniversary here at Shake Shack, I wanted to provide a greater level of detail into the trends that are driving our results today as well as articulate our ongoing and upcoming strategic initiatives and their impact on our long-term growth potential. Now, on to our financial results. Omicron impacted our early first quarter results, and we are especially proud of our recovery and current trajectory. Our first quarter total revenue grew 31% year-over-year to $203.4 million, while Shack sales grew 30.6% to $196.8 million. Licensing revenue grew 43% to $6.6 million. System-wide sales grew by 36% year-over-year to $309.5 million, and we generated Shack-level operating profit margin of 15.2%. We raised menu price in March by approximately 3.5% and a premium on third-party delivery to 15% from 10% as we remain focused on building back our profitability in light of labor, cost of goods sold inflation, as well as delivery costs. We have the ability to raise prices further if necessary and if the inflationary environment warrants. Sales declined early in the quarter from fourth quarter levels as consumers avoided travel, gatherings, and returns to the office, particularly in our urban markets. Omicron and weather drove more than 160 days of closures, 87 of which were in January. Sales were further impacted during certain shifts as some operators needed to throttle channels and reduce hours to provide a great guest experience during these impacted times. We generated $68,000 in average weekly sales, down from $74,000 in the last quarter, but up over 6% year-over-year. Average weekly sales trends increased throughout the quarter from $63,000 in January to $74,000 by March and most recently, $76,000 in April with higher traffic and the benefit of our price increase. First quarter same-Shack sales grew 10.3% year-over-year, supported by traffic growth of 11.6%. As a reminder, we exclude closures that are two days or more from our same-Shack sales calculation. The increase in one-day closures and reduced operating hours, however, was an incremental headwind to our same-Shack sales in both urban and suburban markets. April same-Shack sales rose 13%, and we are pleased with the continued traffic growth we are seeing, particularly in our urban Shacks. Urban same-Shack sales grew 19% versus 2021 and were heavily impacted by Omicron sales pressures in January and February. However, recent trends have been positive. Despite these headwinds early in the quarter, Manhattan same-Shack sales still rose 35% year-over-year. Our New York City teams executed the largest sales volume since COVID, and we're seeing similar patterns in other heavily impacted urban markets like Las Vegas and Washington, D.C., where same-Shack sales grew by more than 20% in the first quarter. Suburban same-Shack sales grew 4% year-over-year, lapsing a positive 20% comp in the first quarter of 2021, even as we realized strong recovery in our urban Shacks. The operational pressures we faced during Omicron had a larger negative impact on our suburban same-Shack sales compared to urban. While traffic trends were positive year-over-year in our suburban Shacks, a greater portion of our sales are coming through in-Shack channels, which skew to more single orders than batch delivery orders. We remain encouraged by our opportunity in suburban markets as we expand development and evolve formats like drive, curbside, and now drive-thru. Our digital transformation is evident, and we continue to invest in marketing and technology to grow our own digital channels. In the first quarter, 43% of Shack sales came through digital channels, even as our in-Shack sales grew significantly year-over-year. Once a guest moves into our own digital channels, meaning our own Shake Shack app or orders from our website, we find that they end up coming to Shake Shack more often, and they spend more. Since this time last year, driven by our own digital investments, more than 60% additional guests have made a first-time purchase in our own digital channels, and we're excited about the positive trends that we are seeing with these new guests. Licensing sales of $112.8 million rose 45% year-over-year. While COVID restrictions in Mainland China and Hong Kong pressured sales, we realized strong performance across our domestic and other international markets. Total Shack-level operating profit was $29.9 million or 15.2% of Shack sales, including a 50 basis point positive impact from a benefit related to gift card breakage. Our Shack-level operating profit margin improved throughout the quarter, and we realized strong flow-through on the higher sales in March, especially in our urban markets. In the first quarter, our food and paper costs were $59.9 million or 30.4% of Shack sales, down 60 basis points quarter-over-quarter as our March price increase helped offset some inflationary pressures. Overall, many of our key costs remain highly elevated, specifically beef, but also chicken, dairy, and packaging. We outline more details on Page 12 of our first quarter shareholder letter. The inflationary environment remains uncertain, and we continue to target opportunities for improvement wherever possible. In the first quarter, we realized low-teens percent year-over-year food and paper inflation, and we expect this to persist into the second quarter, moderating to high single-digit to low double-digit year-over-year inflation for fiscal 2022. We use a unique beef blend that we do not contract. Our 100% all-natural, non-hormone Angus beef is about 25% to 30% of our food and paper costs. In the first quarter, our beef costs rose approximately 20% year-over-year. At this point, the beef market is uncertain, but we are hopeful that it could moderate as we lap challenging comparisons in the back half of the year, bringing the 2022 outlook for beef to low to mid-single digits. Chicken and dairy are also important parts of our basket, both of which are realizing higher than normal inflationary pressures, more so dairy than chicken. We expect this to persist throughout the year. Our paper and packaging costs rose high single-digit percent year-over-year in the first quarter, and we now expect this to increase by mid-teens percentage year-over-year for fiscal 2022. Labor expense was $60.5 million or 30.7% of total Shack sales, up from 29.6% in the prior quarter. Lower sales volumes in January and February were the primary pressure, partially offset by sales leverage in March. We increased our starting wages by high single-digit percent year-over-year for the quarter, and we'll continue to invest in our teams as we work towards optimal staffing levels, and we expect to raise our starting wages by mid to high single-digit percent in fiscal 2022. Operating expenses were $30.2 million or 15.4% of total Shack sales, up from 14.9% in the fourth quarter of 2021, driven by sales deleverage and higher delivery commissions due to an increase in our delivery mix. Occupancy was 16.3% or 8.3% of total Shack sales, up from 8.1% in the fourth quarter of 2021. General and administrative expenses were $31.3 million. Excluding a $6 million legal settlement, G&A was $25.3 million, up 37.5% year-over-year as we increased staffing to support the largest opening class on record and executed on key digital technology and marketing projects. Pre-opening expense was $2.7 million in the quarter as we opened seven new Shacks. Depreciation and amortization expense was 16.9%, up 23% year-over-year. We realized a net loss attributable to Shake Shack, Inc. of $10.2 million in the first quarter, or a negative $0.26 in earnings per share. On an adjusted pro forma basis, we reported a net loss of $8.2 million or negative $0.19 per fully exchanged and diluted share. Excluding the tax impact of stock-based compensation, our pro forma tax rate in the first quarter was 28.7%, resulting in a pro forma adjusted income tax benefit of $3.1 million. Our balance sheet remains in a strong position as we ended the quarter with $358.9 million in cash and marketable securities. We will continue to leverage our strong cash position in support of investing in new Shack openings in a variety of formats, including drive-thru, in addition to supporting our other company-wide initiatives. Now onto guidance for the second quarter of 2022 and full year. Our guidance assumes no new COVID-related disruptions or additional unknown inflationary pressures. For the second quarter, we are guiding total Shack sales of $227 million to $232 million, same Shack sales to grow low to mid-teens percent year-over-year, and six new company-operated Shack openings. Licensing revenue guidance of $6.8 million to $7.5 million reflects a degree of ongoing uncertainty around COVID pressures, specifically in China, which is a key market. We expect total revenue of $233.8 million to $239.5 million, growing 25% to 28% year-over-year. Our guidance calls for a sequential improvement in our Shack-level operating profit margin to 16% to 18% and reflects ongoing inflationary pressures and investments to support our in-Shack traffic growth. We are continuing our investments in G&A this year with an eye towards our long-term growth initiatives. Excluding the $6 million legal settlement in the quarter, we now expect to spend between $110 million and $114 million on a full-year basis, including approximately $12 million of our total $13 million in equity-based compensation for the company. We're not going to provide quarterly guidance for G&A. However, for your modeling purposes, we expect to recognize an approximate $3 million expense in the second quarter to support the biannual leadership conference, and this is included in our annual G&A guidance. We continue to expect full-year depreciation and amortization expense to be between $70 million and $75 million, pre-opening of $14 million to $17.5 million and adjusted pro forma tax rate, excluding the impact of stock-based compensation of 28% to 30%. This quarter, we also recognized two items I want to elaborate on. First, a $1.3 million gift card breakage income catch-up, which is included in our GAAP metrics, including Shack sales and total revenue as well as system-wide sales. This adjustment was a cumulative catch-up done in accordance with GAAP. Second, a $6 million legal settlement in G&A. Both are reflected in our consolidated statement of loss in the first quarter. Our GAAP results include this benefit from gift card breakage income and the expense from the legal settlement. Our calculation of Shack-level operating profit includes Shack sales, which includes gift card breakage. We've called out the adjustment in our remarks today and in our shareholder letter. Same Shack sales, average weekly sales and digital mix, however, are key metrics and not impacted by gift card breakage. We have made an adjustment to how we categorize regions to better align with how we analyze performance internally. You can read more detail about our regional performance on page 7 of our shareholder letter. So while we continue to navigate a challenging operating environment, our sales and profits are steadily improving. We are investing ahead of a robust global Shack pipeline and building more formats and offering more convenience than ever before. And we are also investing alongside our current Shacks with so many critical initiatives, such as proudly supporting our team members, our digital transformation, and delivering on that great guest experience. I'm just extremely proud to be part of this amazing team. So thank you for your time. And with that, I'll turn it back to Randy.

Thanks, Katie. I want to close today by sharing the tremendous work of our team towards our focus on ESG. By now, I hope you've all had the opportunity to read our Stand For Something Good report released last Thursday. This third installment of our ESG report provides an update of where we are as a company and where we're heading for the future, with a focus on our overall business impact, diversity, inclusion initiatives, sustainability, and so much more. The work that went into creating the report engaged stakeholders in the entire Shack community. We've collected and audited our environmental, social, and governance data, aligned with our leadership team to envision and execute programs that live our vision, and we partnered with suppliers to highlight the good work we do together. Building on our previous reporting, we've now included our first Scope 1 and 2 emissions analysis and laid a foundation for the next stage of this journey. ESG is an evolving focus, and we recognize there is much for us to do. Our Stand For Something Good report solidifies our commitment to the initiatives that make us unique. Our Shack family, highest level quality ingredients, digital innovation, exciting new formats, and more. We're really excited to share this with the world. And we hope you'll take a look, have a read, and remind yourself yet again of the positive impact Shake Shack is working to have as we grow our business. As always, hope that you and your families stay safe and healthy. And with that, operator, you can go ahead and open up the call for questions.

Thank you. And at this time, we'll be conducting our question-and-answer session. Our first question comes from Michael Tamas with Oppenheimer. Please go ahead.

Hi, thanks. First, the new shareholder letter and the level of detail you provide is great. So thanks for putting that together. You gave some great color there on the margins you expect for the second quarter and obviously, the cost pressures that are impacting the business. And I think the obvious next question is how you're thinking about the rest of 2022 and potentially even beyond that. You're taking more pricing. And if there are any specific comments you want to make regarding specific numbers, that would be great, but I'm assuming you won't do that, and assuming the cost environment plays out the way you think. Is it fair for us to think about margins being better in the second half of the year versus the first half of the year and potentially even growing year-over-year? Thanks.

Yes. Thank you. Look, there are a few things at play there. We've given clear guidance for Q2, which shows what we expect to be increased margins. There's a wide range there because there is a lot happening. We're not going to comment on the back half other than to say, I think there's a lot of uncertainty. And look, we are all living every day in a continued inflated environment that continues to surprise us and everyone else in every company you see. That happens across our cost of goods. Katie and the team have given more detail than ever, and I'll let Katie talk about that a little bit. So look, we expect we're going to continue to be a company that can generate strong margins. I think we're in a near-term pressure point here where so many of our ingredients are up, and we expect them to continue to be up for this year. So, we don't know exactly where the beef market is going to go or where our key inputs are going to go. We've given the best guidance we possibly can on that, and we'll see how it goes. But we're encouraged by how the first quarter went and our expectations for where the second quarter we hope will go if we see continued urban and recovery trends that we've been experiencing.

Yes. I don't have a lot more to add on that, and thank you very much, and thanks to the team also who helped us put together this great report here. But I would point you to Page 12. It sounds like you've already kind of taken a look there, but we give a great dive on our basic composition as well as our outlook for Q2 and then the rest of the year. And as Randy hit on, this is our best look at this point in time. The inflationary environment is quite dynamic here, and we are working through as best as we can to manage the pressures that we're facing.

Yes, makes sense. Appreciate that. On the drive-thrus and drive-up units, specifically the drive-thrus, I know you're not giving specific financial metrics out yet or anything. But when you were doing the planning process, can you just describe to us some of the differences between those units and your legacy suburban units? Is it a higher cost labor model? Is the rent structure different? Just anything to help us think about what that model might look like, even qualitatively. Thanks.

It's still early in our drive-thru development. Currently, we have five locations open, and we expect to open one more this quarter, bringing our total to around ten by the end of the year. We've recently opened a Shack in Castle Rock, Colorado, and we've been actively working with our team in Orlando, as well as engaging in some cold weather openings. Our focus is on achieving higher average unit volumes, though we're cautious about making firm projections at this stage. Our operating margin goal is to maintain robust AUVs and margins while ensuring strong returns. construction costs for these locations are anticipated to be higher than our usual Shacks due to current market conditions and overall inflation, with costs expected to rise by about 10% to 15%. Some of the drive-thrus will also carry increased expenses, which is why we've strengthened our balance sheet over the past year. This preparation allows us to learn and optimize as we explore this format, which we believe has significant potential for Shake Shack. Our main objective is to expand our addressable market, and we feel drive-thrus will offer fresh perspectives on site selection and sales performance. If you visit one of these drive-thrus, you'll notice the team is dedicated to refining the operations, and the experience is quite impressive. We'll provide more updates as we progress.

Appreciate that. Thank you.

Our next question comes from Nicole Miller with Piper Sandler. Please go ahead.

Thank you. Good afternoon. Just two quick ones. The first was around the commentary about a customer coming into your digital ecosystem. When they do that, my question is who is that customer? Do they look a lot like your average customer or a certain cohort specifically? I'm wondering about tender and income. However, you compare and contrast that, what does that lead you to be encouraged about these first digital users in your own ecosystem?

Hi. Yes. So on that point, when we look at our digital guests, they vary across the board, but overall, they are very consistent with what we've been seeing with our traditional guest base. What we're really excited about and where we're investing is helping that guest really understand our menu. We see that they're spending more than our in-takes. What we've shared is that it's a 25% premium. We can see that when they come into our own channels, they come back more often. The personalized connection that we're building with the guest is delivering and legging hospitality through all of our channels, both digital and in-check. It's really a great audio channel experience that we are building, and it's awesome to see it resonate with our digital guests. We're also starting to see more and more guests come into the digital channels through various ways, whether it's in-check or maybe they're going to kiosks, and then we're getting them to download the app. It's a really exciting time.

Okay. I was thinking maybe younger or maybe more like value seekers or something like that. But if it's just kind of everybody coming, then I guess that's good, too.

Yes, Nicole. One thing to note is that the guests we're attracting are generally younger, which is also our target demographic, but we appeal to all age groups. We maintain a balanced mix of male and female guests consistently over time, even as we've expanded into suburban areas. However, guest demographics can vary by location. Our suburban locations often see higher average checks, and we also know that our digital guests tend to spend more. There are many new ways for us to connect with our guests as they visit us more frequently. I consider this a very positive indicator for our recovery. Although we're not fully back yet, Shack sales are significantly increasing, with like-for-like Shack sales up over 50% in this first quarter. Digital sales are maintaining their share of total sales even as in-Shack sales grow, which is a promising sign for the future of our business.

Thank you. Just a last quick one on unit development. More on a rest-of-world focus. I think we all understand there's a lot of moving pieces. I was starting to think more about the complexities that even if certain situations change, the complexities of just going abroad are likely to be any better for quite some time. So what's the reality of the international unit growth percentage tapering, maybe the number of units holds, but the acceleration there is on pause, not to say into perpetuity, but just for some pretty good chunk of time here? And maybe within that context, talk about the unit level economic model, in particular, if you can share anything in regards to China. Thank you.

Yes. So let's start with China. The market is deeply impacted right now. Most of our restaurants in Shanghai are closed. Those that are open can only do self-delivery right now. In Beijing, where we have four Shacks, that market is largely closed doing just delivery pickup type of options. We just don't know what's going to happen in China in the near term. Long term, we are very bullish on China. I think the answer to your accelerated or potential unit growth will lie significantly in China as we continue to do that, how much can we grow there and how quickly do we want to? Part of increasing that development is adding new markets. We've added Thailand; we've added Malaysia. Even with the world travel being different, our international opportunities have not ceased to continue at a rapid pace. It's really about taking our time, not doing too much too fast. That's why we're doing these two new markets next year. Additionally, we often forget because we talk about licensing as the global business. Our domestic licensing business continues to grow. We've got new event spaces, new stadiums that we've opened up. We just opened in St. Louis for the Blues this last quarter, and we got a new deal with Applegreen where we're going to do New York's throughway and more in our New Jersey Parkway and Turnpike opportunities, and we love that piece of the business. It's too early to say because we need to unlock that model and really figure it out, but we're really bullish about that. Today, we increased our guidance on what we expected for units in licensing this year. So we were at 20% to 25%. We feel confident at least 23 and potentially up to 27%. This is going to be a nice add for us. We love the international business and think it's a smart part of the asset-light opportunity that we have in the future.

Thank you.

Our next question comes from Jake Bartlett with Truist Securities. Please go ahead.

Great. Thanks for taking the question. Mine is on the average weekly sales that you saw in March and April. If you could just help us understand the trajectory there, as well as what is the typical March to April change in average weekly sales? I'm just wondering about seasonality, just so we can see the underlying improvement that you're seeing. And then also, how does April compare for the rest of the year? Is that a reasonably low or high kind of seasonal month for Shake Shack?

Yes. So at this point, the bigger driver here of our trends is just the overall recovery that we're seeing, with what I'll call it consumer mobility, but let's break it down to what the parts are. It's a return to office, travel and tourism, people moving about in their normal routines. When we look at dayparts, we saw strength at urban weekday lunch. Those are all signs that our business is being driven much more by these macro currents of people emerging from Omicron and less by any kind of calendar shifts.

And Jake, referring to page 7 of the letter, as we consider the regional aspects, we've discussed this narrative throughout COVID. Some of the most encouraging observations we have made are that while suburban areas are maintaining their status, urban areas are continuing to grow, with Manhattan specifically seeing a 35% increase in the first quarter. That's a significant figure. However, it's important to note that while it's improving, it's not yet back to previous levels. Manhattan serves as a representative for our urban restaurants nationwide, which are still feeling the effects, but recovery is underway. This gives us confidence when we examine average weekly sales. The trend is definitely positive, and it's reassuring to see that $76,000, which is a robust average weekly sales number when considering the April average.

Got it. I was trying to understand whether April is typically below March, just so we can really understand the improvement that's going on. So if you could maybe share whether April is typically below March in years past?

Generally, it's not lower than March. Typically, it's higher. I don't have the exact figure in front of me. We haven't analyzed the differences in past years, but it is usually a better month. It also depends on holidays and how vacations during Easter affect it. It's more insightful to look at it on a quarter-over-quarter basis as we consider those average weekly sales figures.

And just one thing, it's kind of obvious, but if you look at pre-COVID, this company looks completely different than it did prior to COVID. Our exposures, our regions, our footprint is very different. So it is really hard to get a true read on what a normal seasonality would look like.

Got it. Great. And then one question, I think there's been an observation among investors weighing why Shake Shack's recovery hasn't been as strong as some of the peers, right versus pre-COVID? You have a big unlock with digital and really taking away a bottleneck at ordering and pick-up, which seems to be a powerful driver. I know I think the big answer there is the type of markets you're in and just the urban and also the type of suburban markets you have. Are there any stores or types of urban stores where you're seeing the same sort of lit versus 2019 compared to some of your fast-casual peers, and where you're seeing the benefit of that online?

Yes, sure. We're not breaking them out, but the similar story we've told this whole time. Your most impacted urban environments are your Midtown office event tourism related destinations. We have some restaurants that are some of our highest volume Shacks, not just in New York but in other urban areas that rely on those kind of traffic trends and are still not back to where they were in 2019, whereas there may be urban environments where we're well up in 2019. Again, we're not talking about 2019 anymore. We've moved on. We're talking about 2021 now when we look at comparisons. I've used the language for a while here, and I still feel this way when I look at every Shack every day, where we're up it makes sense where we're down, it makes sense. When you're comparing us to peers, any peer you're going to compare us to has multiples of thousands more restaurants than ours across a much wider geographic dispersion than we have. That's just part of our story today, with just over 200 Shacks in this country needing to be balanced out with roughly half of those still being urban environments. We still have some recovery to go, but the trajectory is definitely in the right direction.

I appreciate it. I have a quick question about beef. My understanding is that your hamburgers are made from whole-muscle steaks rather than the trimmings that fast food uses. When I look at whole-muscle steak cuts, it seems like most, if not all, are down year-over-year right now. So my question is about your pricing strategy. I know you price against a commodity index that you regularly reference. Could you help us understand how to interpret the commodity markets? I know I shouldn’t ask for the specific blend, but most costs appear to be down year-over-year. Still, you’ve projected low single-digit growth for beef in the second quarter. I'm trying to reconcile this information.

Well, I can't tell you which cuts they are. Jake, as you know. We can't officially answer that. Other than to say, look, there were moments last year where beef was really high. There have been moments this year where it's been high and a little bit lower. We've shared our outlook for the year at kind of low single digits. The answer is going to depend on those specific cuts that we have and the specific market conditions. There are so many variables playing into beef with the cost of moving things around, the cost of corn, feed, international markets and what that might do. We're doing our best to give as much of a guide as we can here, but we're telling everyone clearly, we're not exactly sure either, and we do ride at market price. We're not going to sacrifice the quality of what we put in our food. We'll continue to buy great meat and price accordingly. We've got about a 7% price increase going in through the system right now. We'll keep looking at that. If we feel that things are headed even higher and they may be, then we'll look at prices sooner rather than later as well, or we may look at it at the end of the year as we normally do, but we haven't made that decision yet, and we're looking at it closely every day.

Great. Thank you very much. I appreciate it.

Our next question comes from Brian Mullan with Deutsche Bank. Please go ahead.

Hey, thanks. Just wondering if you could offer any thoughts on any technology or automation efforts that are being worked on at the industry level? Are there any functions in the kitchen that, at least in theory, could be automated at a Shake Shack? Any pilots you're considering or products or tools you're evaluating? Just basically asking if anything could actually be viable in the next few years.

Hi, Brian. Thanks for your question. So where we have focused a lot of our technology investments in automation and streamlining processes has actually been on the payment side. You see us talk about kiosks a lot. That's a great example of something where we start to leverage technology to help make our team members' jobs easier and help them be more efficient in the restaurant. We're never saying never, but we're not currently testing any kind of robotic equipment right now in our kitchen.

Okay, thanks. And then just a follow-up on the drive-thrus. If you were forced to choose now, do you think you'd be opening more than 10 drive-thrus in 2023 or less? I guess when would that decision need to be made from a planning perspective? Any early thoughts on the development pipeline for drive-thrus beyond this year would be helpful.

Yes. It's a fair question. I mean, we're bullish on drive-thrus. We've not announced the number yet. They definitely had a longer build time than other formats, right? Drive-thrus generally take longer to get entitled, permitted, and built. So it's a longer timeline. We're not waiting to see on the first 10 what happens. We're obviously going to commit to more. The question will be how quickly, and we'll keep you posted on that as we go. I think the focus right now is building a potential pipeline that goes across our formats, which will include, in this next few years, we absolutely believe it will include some drive-thrus. We're excited about that and want to build more.

Thank you.

Thank you. Our next question comes from Lauren Silverman with Credit Suisse. Please go ahead.

Thanks for the question. A lot is happening in the consumer environment. Can you talk about how you see Shake Shack positioning in a more challenging environment? We don't have a history in 2008-2009. So any high-level thoughts would be helpful.

Yes, it's a topic we discuss frequently, Lauren. Nobody can predict exactly how consumer spending will evolve. If we continue to experience pressure as we do now, the key question is how Shake Shack will perform in that setting. We've never encountered a true recession before. We established the company during the 2008-2009 period, which was when we saw our initial growth surge. We’ve always viewed ourselves as offering an appealing upgrade from traditional fast food at a reasonable price point, despite the higher costs associated with our premium ingredients, while also being able to accommodate consumers looking to spend less when necessary. It's difficult to predict, but we have always been confident in our positioning across various economic conditions, and we hope that our current strategy will serve us well. However, it’s tough to make any firm predictions about our performance in an unpredictable consumer spending climate. Still, it reassures us that we can appeal to a wide range of consumers.

Great, thank you for that. I'm going to try one on restaurant margins. Obviously, a lot of noise. Is there any way you can contextualize where margins are running for restaurants that have fully regained sales versus those in urban markets? Just trying to understand the magnitude of what some of the outliers are weighing on the system.

Yes. So we saw tremendous flow-through on the added sales that we had in March and into April, and it was north of 50%. What we saw in our urban restaurants, in particular, those that have been hardest hit by COVID, that flow-through was especially strong. I think that kind of gives you a little bit of order of magnitude of where there is potential for margin recovery on that side.

Thank you very much.

Yes.

Our next question comes from Drew North with Robert W. Baird. Please go ahead.

Great. Thanks for taking the question. I wanted to ask about the revised unit opening guidance. On the company-operated side, it looks like the range came down by five units or so. Just due to some slippage into 2023. I guess, could you provide more color on what you're seeing out there? While recognizing you won't provide specific guidance for 2023, I think it still might be helpful to hear some high-level perspectives on how you're thinking about the development pipeline in the context of those delays and challenges? Thanks.

Yes, for sure. Yes, thanks for noting that. I think, look, we've got a few units that we had hoped to share for a really busy late fourth quarter. That’s still true, but there are a handful of those that have likely ended up in 2023 now. We're okay with that. They're great restaurants, and they didn’t disappear; they’re just taking longer to open. Again, we’ve got a strong pipeline for 2023. We're not going to name numbers today. We’re still working through it. There’s so much uncertainty in the market. What’s happening out there with permitting, construction timelines, availability of construction labor, and costs are all more challenging than they’ve ever been since I’ve been leading this company. That just takes time. Things are taking longer. Shacks that might have taken 12 months in the past are taking longer now. Those timelines are extended, and it’s all out of our control. Sometimes our landlords don’t even get us the building in the time that they are supposed to, which allows us to then take over construction and get open. It's hard. I don’t expect those things to get any easier this year. We’re looking forward to a strong class for 2023, but we’re not going to get into specifics of that just yet today.

Understood. Thanks for the perspective.

Our next question comes from Andrew Charles with Cowen. Please go ahead.

Great. Thanks, guys. We've seen in the last few months a lot of restaurant concepts raise their ultimate store potential. I recognize with you guys, the 450 plus that you've outlined leaves it a bit open-ended around how high you could go. I'm wondering, with your early days with drive-thrus, what do you guys need to see before you potentially raise this long-term range, recognizing that there's obviously a new format out there for you guys to capture a lot of share, especially at high volume.

Yes. We are considering the drive-thru format along with other models. We see potential in various markets, such as the recent example in Orlando, where we have a mix of tourist locations, traditional mall setups, and a strong food court, all alongside a drive-thru, all in one area. This is how we view our growth strategy. We're looking for sustained strong returns and have consistently exceeded our promises over the years. Although we are facing higher construction costs and currently lower margins, we believe we will maintain strong long-term returns. Our analysis is detailed and varies from market to market, involving extensive research and learning to move beyond the disruptions caused by COVID and recent sales trends to establish a steady understanding of each format's potential. We anticipate significant growth across all formats in the future and will update you if that projection changes. Our ongoing objective with these new formats is to expand our total addressable market.

Very good. That's super helpful. And then a question for you, Kate. Just obviously, we're pleased to see better-than-expected margins in the quarter. Obviously, you guys get your mojo back with our recovery, and expand throughout the country that should help with your scale as well. Do you guys have visibility for the return to kind of the long-term 18% to 22% margins, or is that still a TBD?

Yes. As we've guided to for next quarter, we're guiding to 16% to 18%, Shack-level operating profit margins. That gives you a sense of where we think we can build back to, even still not being fully recovered. There's a lot of unknowns out there that we've talked about inflationary pressures and how that will all play out. But we feel good about how the business is recovering and where we stand today.

Very good. Thanks, guys.

Thank you. Our next question comes from Jared Hludzinski with JPMorgan.

Hi, this is Jared on for John Ivankoe. Thanks for the question. Can you discuss the tipping for Shack employees that's being tested for the in-store pay to cashier transactions, as well as for the digital transactions on the Shack app? How are customers responding?

Absolutely. Yes, we'll see. It's still very early in the process. We have a test underway that we're committed to evaluating with our teams. Since Shake Shack opened, some guests have expressed interest in tipping, and we've never accepted those tips before. We're currently testing this to allow our team members the chance to earn a bit more. It's still in the early stages, so we aren't sharing any data yet, but it's currently available only during in-person transactions where payment is made with a credit card. We are also testing this in a limited number of locations through our web channels and Android app. As we move through the year, we'll start to expand this testing to more digital platforms, beginning with our app and eventually in kiosks. Whenever we can create opportunities for our team to earn more, we aim to do so. Participation is entirely voluntary; we never want our guests to feel pressured to tip. If you choose to do so, we appreciate it and thank you for supporting our team. Our goal is to provide more earning potential for our team, which should help with retention and overall pay.

Thank you.

Thank you. There are no further questions at this time. I'll turn the floor back to management for closing remarks.

Thanks, everybody. We appreciate all your time today, dig deep in the new reports, and we look forward to taking some time with you soon. Cheers.

Thank you. That concludes today's conference. All parties may disconnect. Have a good evening.