Greetings, and welcome to Shake Shack Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Annalee Leggett, Senior Manager of Investor Relations and FP&A. Thank you, ma'am. You may begin.

Thank you, and good morning, 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 and the financial details section of our quarterly shareholder letter. 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 18, 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 third 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. I will now turn the call over to Randy.

Thanks, Annalee. Good morning everyone. We are pleased today with our third quarter results, especially noting stronger-than-expected sales exiting September, a trend that's continued into October. We delivered total revenue growth of over 17% year-over-year to nearly $228 million, with system-wide sales up more than 18% to over $353 million. Average weekly sales outperformed seasonality at $73,000, as we've maintained a trailing month AUV of $3.8 million. Same-Shack sales grew 6.3% year-over-year, driven by both traffic and price mix. And October's comp has accelerated more than 8%. We generated Shack-level operating profit of $35.8 million at a 16.3% margin, up year-over-year, even with a material pickup in inflationary pressures. Our urban markets performed well in the quarter. We saw strong momentum coming out of Labor Day, as mobility and back-to-office trends broadly improved. It's clear that in our hometown of New York and other urban centers, things are improving, with more and more people moving about, and we remain cautiously optimistic about urban trends long term, as new patterns emerge, but it's good to see the momentum in the right direction. I recently visited our Shacks on the West Coast, and you can feel the energy even in downtown San Francisco and the South Bay continuing to emerge. On the development side of the business, we've opened some great Shacks recently in places like Beverly Hills, the Meatpacking District in Jamaica Queens in New York City, and in suburban Massachusetts and Florida. It's been a frustrating year with extended timelines to opening new Shacks, and delayed openings have probably been our biggest headwind to overall sales growth. In the third quarter, we opened two company-operated Shacks, with four more so far in the fourth quarter, as we continue to face challenges from permitting and landlord construction delays, to the availability of kitchen, electrical, and HVAC equipment. However, I'm happy to report that the tide is slowly turning, and we currently have 35 new Shacks under construction with more to come. We still expect to open 35 to 40 new Shacks in fiscal '22, but looking more likely to come in at the low end of this range, with many of these opening towards the very end of the year. Unfortunately, we and many other retail and restaurant companies are seeing this trend, but it's one we've been preparing for and believe we can execute. That growth, while behind our initial expectations, still represents over 15% company-operated unit growth year-over-year. You can expect some additional Shack-level costs in the coming quarters, as we work through this high growth and the extra support needed, given the compacted schedule. Despite these pressures, we remain focused on our long-term pipeline and building Shacks to stand the test of time. For 2023, we now expect to open approximately 40 domestic company-operated Shacks, which will represent 16% unit growth year-over-year. We think that's a solid number heading into an uncertain economic environment and still bumpy supply chain and staffing backdrop, allowing us to grow significantly while also focusing on our current Shack performance. I want to take a moment to talk about our bigger, total development opportunity. We're not updating any long-term guidance today, but we know we have much more white space potential than our existing targets and have been doing the work to quantitatively and qualitatively discuss that opportunity, as we assess over time. The high inflationary environment has impacted our historically high returns, with near-term profitability pressure, increased costs to build Shacks, as well as disrupted sales patterns experienced in the recent years. Historically, we've targeted our blended AUV for new openings to be approximately $3 million. Clearly, we've outperformed that over the years and expect to continue to do so. We believe our plan to balance urban and suburban growth through a multi-format strategy, including drive-thru, has the potential to generate strong long-term AUVs. With the continued strength of our brand and the number of new formats we can target in a market, we believe our total addressable market continues to increase. On the profitability side, before the COVID inflationary impact of the last few years, we outperformed our long-term targets of 18% to 22% operating profit at the Shack level. While many of our current Shacks beat these targets, on average this is a number we're not consistently hitting today. But we continue to believe it's the right long-term target and one we can return to. We have much to accomplish in this area and we'll be highlighting some of that work as we move forward. When we look at overall returns in our Shacks, even against double-digit inflationary pressures and COVID recovery impacts our business has navigated in the past several years, our recent classes continue to show strong returns, but we aim to do better than our long-term guidance. Historically, as a company, we have done just that. We expect this will take a mix of targeting Shack-level operating profit margin improvement, including an intense focus on our operations, cost pressures in our digital business, and further rationalization of our build costs over the long term. We're focusing on improving our design and construction to optimize sales, throughput, and build costs, while streamlining Shack models that look and feel better than ever. These are early days, but we're excited for the near and long-term impacts this will have on our development plans in the coming years. Before I move on, just a quick update on our drive-thru initiative. We now have six drive-thrus operating today and expect to open three to four more by the end of the year, with another 10 to 15 in the pipeline for 2023 and more identified for 2024 and beyond. Drive-thrus are a key step in the evolution of our company. We're encouraged by the early operational flow and performance to date. We're optimizing for learning and building on our long-term goals. Initial drive-thru investments will be high, as these new units have larger footprints, more tech elements, and continue to provide a great in-Shack dining experience. This is the right place to focus additional capital right now, with the goal of unlocking a larger total addressable market. I believe in the next year, as we get a strong class of drive-thrus and learn more about the real estate, design, and operational decisions we've made, we'll have a much clearer view on the size of the prize. On our licensing business, where revenue grew over 20% year-over-year, even as we lapped a heavy opening schedule in 2021, faced COVID disruptions in China, and have a new headwind from the strong US dollar. We opened six new Shacks in the quarter, including a roadside location on the New Jersey Turnpike and our first-ever museum location at the Smithsonian Air and Space Museum in Virginia. We also opened our eighth Shack in Shanghai this quarter, which is our 28th Shack in the Greater China market. After a pause during COVID, we're happy to see our partners in Japan return to growth, with our newest Shack opening at Universal Studios in Osaka last week. We're leaning into this important part of our revenue and profitability plans long term and are excited to deepen relationships in current and future markets. In Korea, after recently opening our 23rd Shack and nearing the early completion of our development schedule, we've extended and expanded our operating agreement to go even deeper in the market. We're looking ahead towards new markets of Thailand and Malaysia in 2023 and 2024, and we just announced that a Shack will open in a premier location at Atlantis in the Bahamas. Lastly, we've just opened our first-ever roadside Shack on the New York Thruway as we look to unlock new format opportunities, both here and abroad. We have a robust pipeline worldwide next year and expect to open 25 to 30 new licensed Shacks in 2023. A few more updates on the rest of our strategic plan. Above all else, we remain committed to elevating our people. A relentless focus on standing for something good with our people and our guests is a key pillar of our culture and how we intend to grow our workforce. Staffing and retention have improved slightly, but remain challenging. There's no question, we have an opportunity to optimize throughput and total opening hours as staffing patterns improve over time. We're heavily focused on recruiting, retaining, and developing our people, and just graduated our sixth class of team members, looking to grow in management through our new Shift Up program. It's a key pipeline for our hourly team members who receive the training required to elevate to a manager position. We're also proud to offer our teams competitive wages. In some of our Shacks, with our new tipping availability, team members can earn more than $20 an hour in pay on top of generous benefits and development opportunities. Current and potential team members can see Shake Shack as a long-term career path. These are just a few examples of how we strive to be an industry-leading employer. When it comes to the all-important guest experience, we're focused on the Shacks where most of our gains are happening. While we're committing more than ever to our digital evolution and the continued strength of those channels, we're also working with a persistent attitude towards clean, welcoming, and well-operating restaurants. In menu innovation, we continue to lead the way with dynamic and fun products, providing our guests with elevated premium high-quality ingredients that they can't find at traditional fast food, other fast casual concepts, or even casual dining. Currently, we're running a great limited-time offering, partnering up with YouTube sensation Hot Ones on a collaboration of a spicy bacon burger, bacon chicken, and bacon cheese for us. We even offered the option for our bravest guests to buy the extra spicy Last Dab hot sauce packet on digital channels only. The Last Dab was the Hot Ones menu's hottest sauce made from the Apollo Pepper, California Reaper, and Pepper X hybrid landing at 2.5 million on this Scoville scale. This menu also had strong guest reception and satisfaction results and is particularly successful on our own digital channels. On beverage, we continue to see increasing demand and contribution to average check through our latest seasonal lemonades. We also just launched our Holiday Shake trio, which has historically been a fan favorite. This year we're offering Christmas cookie, chocolate milk and cookies, and chocolate peppermint shakes. Lastly, as we look to attract even more frequency long-term, we continue to test a new non-dairy chocolate shake, and we'll be testing a new version of our Veggie Shack at about 30 Shacks towards the end of this year. I'll now pass over to Katie to discuss our financial performance in more detail.

Great. Thank you, Randy, and good morning. We are pleased with the strong sales momentum we realized in the business, led by our urban Shacks coming out of Labor Day. This coincided with a positive inflection in return-to-work trends, which remain a potential driver of continued recovery in our business. Our third quarter total revenue grew 17.5% year-over-year to $227.8 million. Shack sales grew 17.4% to $219.5 million. Licensing revenue grew 20.1% to $8.3 million, marking the highest quarterly revenue for the license business on record. System-wide sales grew by 18.3% year-over-year to $353.2 million, and we surpassed $1.3 billion in system-wide sales over the past 12 months. We generated Shack-level operating profit margin of 16.3%, up 50 basis points year-over-year in the face of meaningful inflationary headwinds. Food and paper costs rose by high-single-digits year-over-year, and we have made significant changes in wages and benefits for our team members, and even utility costs are nearly 25% higher than last year. In the third quarter, we generated $73,000 in average weekly sales. We over-indexed to high-income relative to traditional fast food and continue to see better sales performance from these guests. Consumer mobility trends were consistent throughout July and August, when average weekly sales trends were stable at $75,000. However, in September, which is historically a lower sales month, consumer mobility in urban centers improved after Labor Day, and we saw average weekly sales outperform traditional seasonality, falling just 5% month-over-month to $71,000. We grew same-Shack sales by 6.3% year-over-year, led by double-digit growth in urban same-Shack sales. Overall traffic grew 2.9%, and we had 6% price inclusive of the March price increase and our different pricing premiums across channels. Our performance in the quarter was led by our in-Shack channels that skew more towards single orders versus larger groups. And across all channels, more guests are ordering in smaller groups and single orders compared to 2020 and 2021. So, adjusting for this dynamic, items for check trends and cold beverage prices and shakes remained strong. Mix was positive in the quarter, and our guests are trading up to the premium limited-time offerings across burgers, shakes, and cold beverages, showing us that they really embrace and value our elevated and premium approach to menu innovation. Urban same-Shack sales grew 11% versus 2021, and urban traffic grew nearly 7%. Trends were notably positive coming out of Labor Day, with New York City, Chicago, and Washington D.C. all showing positive traffic inflections. We believe our recovery would have been stronger if mobility and, namely, return to office, urban transit, and urban tourism trends were stronger throughout the quarter. Manhattan same-Shack sales improved throughout the quarter and rose 23% year-over-year and stayed strong in October despite more challenging comparisons. Suburban same-Shack sales grew 2% year-over-year, lapping a positive 17% comp in the third quarter of 2021, even as we realized strong sales growth in our urban Shacks. In mid-October, we raised our menu prices by 2% to 10% across price tiers to address these consistent inflationary pressures. We expect to recognize 5% to 7% of this price increase and maintain a blended high single-digit price across channels into 2023. As a reminder, we raised our menu prices by approximately 3.5% in March 2022. Even with this price increase, a Shack burger, fries, and beverage is on average under $14, well within and often priced below the cost of other lunch or dinner options nearby. Our value perception among guests remains unchanged, and we continue to see strong demand for our premium limited-time offerings. October same-Shack sales accelerated from September levels and rose 8.3% year-over-year, led by menu price and mid-single-digit traffic growth year-over-year in our urban Shacks. Average weekly sales was $73,000, up 3% from September levels. This is even as we lap the 2021 launch of Black Truffle in the middle of October and a challenging comparison for our urban business. Black Truffle was one of our strongest performing limited-time offerings that had strong guest reception right out of the gate. Additionally, in-Shack trends remained strong consistent with what we saw in September. When we adjust for price, the September to October progression was better than historical seasonality. Development and delays continue to be a headwind to our sales in the quarter, as we opened two Shacks less than we had expected and later than we had expected. While our in-Shack business is showing strong signs of recovery, we retained a large portion of our digital business. Our digital tools expand our reach with more convenient channels and occasions, laying the groundwork for sustainable long-term growth. We continue to target acquiring new app users and driving more frequency within our expanding digital base. In the third quarter, we grew our digital app purchasers by 40% year-over-year. Since March of 2020, we have gathered more than 4.5 million unique first-time digital app purchasers. We are building our digital base with successful marketing initiatives, including offering our limited-time hotlines menu to our digital users first and other promotions focusing on digital-only dayparts. It's still early days for our digital journey, and we are encouraged by strong guest engagement and the new ways we are developing to reach and communicate with our guests. More of our guests are enjoying us through our omnichannel experience, finding us both digitally and in-shack. This is a good thing for the long-term growth of our business. Kiosks are an example of how we are bridging the in-Shack and the digital world, and we remain on track to roll out digital kiosks to nearly all Shacks by the end of next year. This is our most profitable channel, and when compared to our in-Shack channels, we see higher checks and better labor utilization. Now, on to our licensing business, where sales of $133.7 million rose about 20% year-over-year. Our domestic Shacks and select international markets performed well. We faced headwinds from COVID lockdowns and intermittent market disruptions that impacted Mainland China Shacks and currency headwinds from the stronger dollar. These pressures remain in the fourth quarter. Total Shack-level operating profit was $35.8 million, or 16.3% of Shack sales. Our Shack-level operating profit margin improved 50 basis points year-over-year despite inflationary pressures. As a reminder, the second quarter's Shack-level operating profit margin had a 38 basis point benefit from a one-time leadership retreat sponsorship credit in food and paper costs. Other operating expenses were impacted by an incremental 100 basis points from some near-term pressures to run our existing restaurants, including elevated utilities and repair and maintenance costs, as well as temporary support for some new openings. Food and paper costs were $67.8 million, or 30.9% of Shack sales. These costs declined by high-single-digit percentage over the year. This was slightly favorable versus our expectations. Other food and paper inflationary pressures were higher and, in some instances, exceeded our expectations. Dairy costs were up nearly 30% year-over-year, driven by butter, cheese, and custard. Fryer oil costs rose materially, as did fries, and paper and packaging costs grew nearly 20% year-over-year. We have more details on this in our shareholder letter. Labor expense was $64.6 million, or 29.4% of total Shack sales, down from 31.1% in the third quarter of 2021 and down 10 basis points quarter-over-quarter. Other operating expenses were $34 million, or 15.5% of total Shack sales, up from 14.2% in the third quarter of 2021, as we are facing inflationary pressures in aspects needed to operate our in-Shack business, including energy, repair, and maintenance costs, as well as costs to maintain the dining room. Also, in certain markets where we are facing staffing pressures, or where we're bringing on a lot of new openings at the same time, we're having to bring in management and hourly teams from other Shacks to support some new openings and build up the local team. We are planning for elevated travel and entertainment expenses for the foreseeable future, as we support some new upcoming openings. But long-term, we are targeting more normalized travel costs to support openings and expect this expense line to reach more typical levels we have shown in prior years. Occupancy was $17.3 million or 7.9% of total Shack sales, up 10 basis points from the third quarter of 2021 and up 40 basis points quarter-over-quarter. G&A was $26.6 million, or 11.7% of total revenue, down from 12.6% of total revenue in the prior quarter. This reflects a more measured approach to G&A investments in light of a wide range of potential scenarios for our business and our development delays. Pre-opening expense was $3 million in the quarter as we opened two new Shacks and prepared for the busy fourth quarter opening schedule ahead. Depreciation was $18.6 million. We realized a net loss attributable to Shake Shack Inc. of $2 million, or a negative $0.05 in earnings per share. On an adjusted pro forma basis, we reported a net loss of $2.3 million, or a negative $0.06 per fully exchanged and diluted share. Excluding the impact of stock-based compensation, our pro forma tax rate in the third quarter was 40%. Our balance sheet is strong as we ended the quarter with $330 million in cash and marketable securities, and our primary usage of cash remains opening new Shacks and supporting our other company-wide initiatives. Now on to guidance for the fourth quarter and full year 2022, as well as some initial thoughts on 2023. Our guidance assumes no new COVID or supply chain-related disruptions, additional unknown inflationary pressures, or major shifts in consumer spending. We are assuming that urban and suburban consumer mobility trends remain consistent with what we realized for much of the third quarter, and we are factoring in that we recognize about 50% to 70% of our mid-October price increase. For the fourth quarter, we are guiding total Shack sales of $225 million to $230 million. We expect Shack sales to grow by mid-single-digit percent year-over-year to open, and we expect to open approximately 21 new company-operated Shacks. We have opened four so far this quarter, and we are planning for many openings to occur at the end of the quarter. As such, they will have a limited impact on fourth quarter revenue. While recent sales trends are encouraging, risks include a wide range of unknown impacts to the consumer amidst the uncertain macro backdrop. Uneven consumer mobility, operational disruptions as teams support many new openings, and unforeseen continued development delays. We are also mindful that our recovery trends in New York City were really strong in the fourth quarter of 2021. Licensing revenue guidance of $8.2 million to $8.7 million is supported by strong performance in certain domestic and international markets, as well as new Shack openings. We are anticipating macro pressures in certain markets, and broad-based currency headwinds to continue. This guidance range does not assume new COVID closures or pressures and reflects opening seven to ten new licensed Shacks in the fourth quarter of 2022 to reach our raised 2022 licensing opening guidance of 27 to 30. We expect total revenue of $233.2 million to $238.7 million, growing about 15% to 17% year-over-year, and Shack-level operating profit margin of 16% to 18%. As a reminder, pre-COVID, we had shown average weekly sales and margin compression in the fourth quarter versus the third quarter. This fourth quarter, we will have the benefit of nearly a full quarter of new menu pricing to help address some inflationary pressures we are facing. We are planning for high single-digit inflation in food and paper costs through the rest of the year, led by continued high inflation in dairy, accelerating cost pressures in fryer oil, fries, and ketchup, and low double-digit inflation in paper and packaging. While the inflationary backdrop remains uncertain, we expect the costs of the largest portion of our basket to decline by mid- to high single digits year-over-year. We expect other operating expenses as a percent of Shack sales in the fourth quarter to be at a similar level to the third quarter, given inflationary pressures on costs to run our restaurants, including higher utilities and repair and maintenance expenses and elevated travel and entertainment to support new openings. We are committed to improving our profitability, driving sales growth, and investing ahead of our robust pipeline across the world. The operating environment is likely to remain challenging for some time, and we believe we have the right plan in place to elevate our people and drive the long-term growth of Shake Shack as we navigate these uncertain waters. As it pertains to planning G&A and CapEx for the rest of 2022 and into 2023, we have a disciplined but growth-minded approach to our investments, taking into account a wide range of business scenarios. With consideration for development delays and the unknown macro impacts, we now expect to land towards the lower end of our tightened G&A guidance range of $111 million to $113 million, excluding the $6.8 million of legal expenses we incurred in the first half of 2022. We continue to expect full-year depreciation of $70 million to $75 million and are updating pre-opening to $15 million to $17.5 million. We are accruing more rent than normal and pre-opening expenses given the level of delays that we're experiencing. We expect our adjusted pro forma tax rate, excluding the impact of stock-based compensation to be 30% to 32%. Looking out to 2023, we expect to grow our system-wide Shack count by about 15% year-over-year as we plan to open 65 to 70 total Shacks across the entire system. We anticipate that around 40 will be company-operated Shacks and 25 to 30 will be operated by our licensed partners. We will provide more detail on our expectations for 2023 at the beginning of the year. Thank you for your continued interest in our business. And with that, I can turn it back to Randy.

Thanks, Katie. I wanted to end today's call with just some quick remarks on the macro landscape. The next economic phases remain uncertain. Here at Shake Shack, we're planning for a wide range of scenarios as we think about the business in the coming quarters, focusing on growing sales, Shack-level profitability, and overall adjusted EBITDA. We're also squarely focused on the bigger opportunity ahead with a strong pipeline of Shacks and varied formats that can increase our addressable market and drive solid returns. None of this would be possible without the continued strength and resilience of our team members around the globe. Over the last few weeks, I've spent a lot of time in our Shacks and have witnessed numerous real-time promotions of leaders who began as team members and have seen what can happen for people in this company when hard work meets preparation and opportunity. That's the opportunity we're building and plan to keep investing in as we build the road ahead. Hope to see you all soon for a Hot Ones chicken. And with that, operator, please open up the call for questions.

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from Nicole Miller with Piper Sandler. Please proceed with your question.

Thank you very much, and good morning. I would like to inquire about the pipeline for next year, specifically regarding the company-owned stores that are currently identified under letters of intent or signed leases, as well as the overall timeline. Additionally, could you provide further insight into the personnel aspect? If there are delays with the stores, what is the plan for the managers during that time? How do you retain them, and how significant is this in the current general and administrative expenses? Thank you again.

Thanks, Nicole. Let's start with the class for next year. We think it's about 40 Shacks roughly company-owned. Right now, the thing that we feel better about than last year at this time is we have nearly all of those 40 in signed leases, and a number of them are coming, and we feel like we're much further ahead. That said, we're still experiencing the same kind of challenges in permitting, construction, cost, and just the general timeline. So, that's part of why we're thinking 40 is a really good number for us for total next year. We hope they're better dispersed than this year. We don't have such a fourth-quarter crunch. But you know, that seems to be a challenge every year. As I said in my remarks, we have 35 Shacks under construction today. That's the largest number we've ever had being built at one time, and that bodes well for hopefully a stronger start to the first half of next year and we'll see how things go with that. Within that class, we've got 10 to 15 drive-thrus. We've got a number of different formats. So, you'll see some elevated costs in that build with the drive-thrus. You'll see some core Shacks that we know and love that built this company. You'll see some drive up models. You'll see a food court or two. You've got a really, really deliberate, intentional mix, and we think it's the right way to think about it. Now how the heck do we staff these Shacks? This is the hardest thing going on right now. Some of the costs that Katie and I called out in our remarks are actually hitting Shack-level operating profit right now, and that's part of the new pressure that we have. Now let me be clear, I don't think that's a pressure that exists forever. This is new to us. And what does that mean? Well, we've got a Shack opening in Baton Rouge coming up in the fourth quarter here. That's a new market for us. We're building out our brand there, building up our employee brand. We've got to fly people in and keep them there for a while. We've got some Shacks in the Bay Area where we need to build up our management bench. We have to bring some people in from other regions to help. That hits us in the Shack-level operating profit. That's part of our guide for what happened this quarter, it's part of our guide for Q4, and it's part of what will happen certainly in the early part of next year. With the challenges of staffing, it's just harder right now at all levels. We've got to move our talented teams around a little bit more. With all that, we have never been more innovative when it comes to our commitment to our people. We are thinking about all new ways starting at the recruiting application process, starting in the first 30 days of employment. In this moment they're in an industry that feels fully staffed, and certainly not in our industry. We know that's where we need to do better, and we're making really big improvements. By the way, there is some G&A that is going to increasing the size of our recruiting teams, our recruiting spending on advertising, and the way that we're going to build up those teams. So, we have a lot of work to do. None of it's been easy and it's been compounded by macro challenges. But we feel like this is what Shake Shack does. We're in a good place. We're going to execute this plan.

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

Good morning. This is Ben on for Jared. You mentioned in your prepared remarks that you've been seeing new urban trends emerging. I was wondering if you could provide a bit more detail on these new trends? Is this related to the day of the week or day part? And then I guess to follow up what changes, if any, are you making operationally to adapt to these new trends? Thanks.

Yes. What we saw throughout the quarter was mobility trends were pretty consistent with what we saw in the second quarter in July and August. Then really when Labor Day hit, our urban market mobility and traffic inflected positively even more so than it was prior to Labor Day. It was mostly in the weekday lunch and dinner that we saw the greatest impact. But there's still a number of Shacks, in particular in Midtown Manhattan, and those more workplace-centric locations that still have a pretty big impact here pre-COVID. There's a great opportunity for us to continue to recover in lunch and dinner there as well. While the trends were encouraging, we saw particular strength in urban transit in New York City and Manhattan in particular. We're still on the road to recovery.

This is a good thing for Shake Shack, right? As we've talked about, we have this really nice mix now of urban and suburban. We've seen it. I spent last Friday going around to a bunch of Shacks and just trying to understand what Friday is going to look like in cities. I was pretty encouraged by what I saw, even in Midtown Manhattan on that day. It's just seeing people moving about. And look, we're going to adjust as new trends emerge daily, but it's clear that the momentum in an urban setting is going in the right direction for us.

Our next question comes from Michael Tamas with Oppenheimer. Please proceed with your question.

Hi. Thanks. Good morning. I'm one of those great customers. You mentioned getting the last dab, and I can confirm it lives up to its name.

Thank you, Michael. It's okay.

I'm getting better over the last couple of weeks. It was pretty hot. Randy, you talked about getting back to the historical 18% to 20% restaurant margins as a target you believe you can still achieve over time. Can you either bucket or like rank order where you think the most impactful opportunities are? What are maybe those nearer-term opportunities versus some of those things that might take a little bit longer to unfold? Thanks.

Thanks, Michael. Yes, look, we believe we're going to continue to increase this over time. There are a few things going to happen. Let's just start with macro factors impacting our company and our restaurants and our world. We need some of those to go our way, okay? We're not going to wait around for that, but it is a fact. When we have double-digit inflation in almost everything we buy, whether it's french fries, fryer oil, or paper packaging, it's tough to increase prices to offset that fully. First of all, that’s the numbers we guided, that would be the largest class of Shacks ever. So, we're not slowing anything down. When market conditions improve, we'll absolutely aim to take further positioning ourselves for growth. But, this year the opposite happened because of uncontrollable factors. We want to make sure that we are preparing and guiding appropriately for what the right amount of growth should be. That's a great class of 65 to 70 worldwide Shacks next year.

One more thing just to add on there is on kiosks. Kiosks is our highest margin channel. It also has our highest check. We're going to be rolling out kiosks to nearly all Shacks by the end of next year, and that's another way that we lean in here to help drive performance and margin performance and address some of the labor challenges that we've had.

By the end of this year, about 20 to 30 existing Shacks will convert to kiosks or add kiosks before the end of this year. We'll continue that rollout. There are about 60 or 70 left after that. That will extend into next year.

Our next question comes from Sharon Zackfia with William Blair. Please proceed with your question.

Sorry for my voice. It wasn't the hot sauce; I just think I have a cold. I want to delve a little bit more into the labor and the thoughts on streamlining and kiosks. I mean, you've had kiosks for a while at locations. I'm curious in locations where you have the kiosks, like, what percent of the business is going through those kiosks? How do you manage labor? Is it reallocating labor to more value-added tasks than taking orders, or do you see incremental labor leverage as throughput better because people are working more on that? Just help us think about that. And then are there other opportunities? I know other companies are looking at robotics and automation. I know your menu may not lend itself as much to that, but are those potential avenues?

Broadly speaking, kiosks are a really great lever for us to lean on here to help streamline labor in the Shacks. It's really about addressing that front-of-house opportunity. In the Shacks where we have kiosks right now, a good portion of the guests do prefer that channel. In many locations, we'll have five or six kiosks and maybe one or two cash registers, and you see a number of people gravitate towards that kiosk. If you haven't used one before, I highly encourage you to do so. It's a really great opportunity for our guests to sit with the menu within the Shack and be able to page through it, and we see that just translate through to their order as they're able to add on more premium items. So, from both a labor perspective and a check perspective, it's definitely accretive. We're able to run a little bit leaner, and also, we can take that extra labor and dedicate it to other more value-added tasks, like helping to expedite some orders or greeting guests in the dining room as well. We're really excited about what we've seen and looking forward to rolling out these kiosks in short order.

Thanks. And then on robotics or automation, is that something you explore?

Nothing yet. I don’t think it's the best use of our time. I think we think about automation in terms of digital ordering and the way we just talked about kiosks and our other app and web channels. Today, I’m excited for it in the future. I don’t think it's the best use of our time to be frontrunners on that, and we're watching closely. We continue to meet with interesting companies who are doing that work and seeing how it could impact us. But, I think we're a little ways away from seeing something like that in a Shack right now.

Our next question is from Jake Bartlett with Truist Securities. Please proceed with your question.

Great. Thanks for taking the question. My first is on the October average weekly sales. I'm hoping you can just put into context the seasonality of October versus November and December. What typically happens in a pre-COVID world to average weekly sales from October into the coming months?

Well, part of us being a younger company, we don't have that much history to discuss, and our comparable base has changed dramatically. In 2019, we faced some headwinds in the fourth quarter, which makes seasonality a little bit more lumpy. Just broadly speaking, looking back, you tend to see a little bit softer fourth quarter than third quarter.

Got it. In terms of holiday traffic, does December tend to be stronger than October based on past years? I'm trying to understand the context of seasonality.

You just have a seasonal increase in December. However, November has kind of, depending on where holidays fall, it can be a little bit more flattish.

Great. I wanted to explore the development expectations for 2023, which are lower than what you initially anticipated for the end of 2022. I understand the macro challenges at play. Is this an adjustment in strategy? You mentioned prioritizing your existing base, which could explain a less aggressive approach to development. Or is this situation merely a response to the current environment and lower growth projections for 2023? I'm trying to clarify if this is a long-term shift towards more moderate growth or if it's just a temporary pause.

Thanks, Jake. There are a few things in that. First of all, that's the numbers we guided for the largest class of Shacks ever. So, we're not slowing anything down. I think when we think about how many is the right number for next year, we have to work with the environment that we're in. We got to make sure that we can open some really great Shacks. We're also committed to a lot of new formats with a significant approach to drive-thru. We're also spending more capital. These Shacks cost more to build. At an inflationary time here, we think there's no reason to race to spend a lot more capital when we hope that over a longer period some of those costs could come down. We’re certainly living next year in an increased cost environment. Within all that, we still got work to do on margin, on our current 250-ish Shacks that we own and operate in this country while still showing significant growth. I think I said a strong growth of 15% or 16% expectations for next year in our comparator. That's solid growth. As I’ve said for ten years on this subject, as we absorb each class, we'll continue to think about what the next class should look like, and we feel good about the class of restaurants we’re building. If circumstances change in our favor, we’ll look to capitalize on that. But this year, the opposite happened due to factors beyond our control, and we want to prepare and guide appropriately for the right amount of growth.

Our next question comes from Jeff Farmer with Gordon Haskett. Please proceed with your question.

Good morning. Just wanted to quickly follow up on staffing. It was interesting to hear others indicate that they recently raised the starting hourly wage by about $1 to $3 across roughly 20% of the system. Did you see a similar potential need in some of your markets, meaning a bump in the wage rate to ensure staffing levels are appropriately met?

Yes. That's absolutely happening, likely at a similar cadence to what you heard them talking about, right? We've already been doing that mid this year and even this quarter. There are some markets we continue to bump up certain Shacks where we need to bump up wages. So, yes, you can expect that. Our starting wages have continued to increase for our teams, and we expect that's going to continue into next year. There's no doubt about it. The inflationary pressure and finding great team members is going to cost more. Our guests have for a long time asked for the opportunity to tip our teams. With that added functionality, our teams are doing really well, making a few dollars more per hour depending on the Shack and boosting their total earnings opportunity to be competitive and above competitive in many ways. This approach will help turn the tide, but it's still a challenging environment out there. We must keep investing in new and different ways. Continued pressure on our payroll is expected as we look at that into next year.

That's helpful. Just one quick follow-up. Regarding your initial drive-thru openings, you've provided some color, but I'm curious what the key learnings are from those restaurants and how those learnings might influence future drive-thru development that you already have planned. It would be interesting to hear the surprises you've seen or good or bad after six months of operations from these restaurants.

Yes, I think it's going to take a while and a lot more drive-thrus to really hone in on the best format, and that's exactly why we're investing the way we are. Of the first six that are open, we have multiple different kitchen flows, external and internal design, and ways that we just move the food through. Not to mention very different real estate decisions. We're excited about it, as I keep using the term, we're optimized for learning. We're spending that capital to learn because there's a much, much bigger prize as we learn and get it right. What are we learning? We're learning how much space we need for cars, when it's best to take orders, when we don't need people outside. We’re honing how we think the kitchen flow should work so we can protect and maintain the premium ingredients. We're learning about menu boards, making them the right size, and how to adequately merchandise the menu.

Thank you. Appreciate it.

Our next question comes from Andy Barish with Jefferies. Please proceed with your question.

Hey, good morning, guys. Just a couple of expense items, if you could. First on utilities, I mean, that's been fine this earnings season. Is there anything that can be done there? Is there differences between urban and suburban or regulated/unregulated markets? Could you quantify the new restaurant opening inefficiencies that you're expecting over the next few quarters? That would be helpful.

Utilities expenses do vary by market. Some of our Shacks are busier than others. Some of them have more utility demand based on where they're located and zoning requirements. But overall, I think, the theme that's been very consistent is just higher energy costs overall. We expect that will be cyclical, but that is hitting us, and it is a portion of the 100 basis points in added other operating expenses that we highlighted. Regarding the T&E to support new openings side, we're expecting several openings to require this added support level, but there's a wide range of uncertainty there. When thinking about other operating expenses, it's probably going to be about the same level as a percentage of total Shack sales that we realized in the third quarter.

Excellent. Thanks for the color team.

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

Thanks. Good morning, guys. Katie, suburban locations seem to be experiencing more normalized comp growth? I'm just wondering how does the average weekly sales at these stores compare to 2019? How do labor costs or other operating costs look as a percentage of sales compared to 2019 in those suburban locations?

It really depends on each of the markets and the locations. There's not always just a very consistent trend to call out. What I would say is that with the staffing pressures that we've discussed, we are seeing more of an impact in our suburban locations than our urban locations to help contextualize that a little bit.

It's interesting, right, because that may not be intuitive for you, but part of the challenge and the gift of the Shake Shack brand and real estate decisions we've made is we generally tend to be in more higher-income areas. We generally have a higher-income guest. That's been part of what we've shared, especially as we head into a more recessionary environment. That actually makes it harder to staff in many of the decisions we've made, especially in suburban areas. While some of our most acute hiring challenges occur in our so-called “best” locations when it comes to higher-income guests, that is different than some of our traditional urban environments. As Katie said, it's just a mix of volumes; just because it's suburban doesn't mean it always acts the same, and that's why we're building out these different formats, continuing to learn, which is the best for each type of site we can target.

That's helpful. I apologize if I missed this, but the company came in at the high end of the third quarter revenue guidance but at the low end of the Shack margin guidance. I'm curious what caused or what surprised you the most during the quarter?

Sure. It's the 100 basis points of added other operating expenses that we called out. Higher energy costs and repair and maintenance are running higher here due to equipment availability issues, which we think we'll be able to work through over time and then support for some of the new openings. We're expecting all of that to persist into the fourth quarter. And then on COGS, we had slightly more than we anticipated with beef deflation; however, several line items rose sharply, like dairy, which is up 30%, fryer oil, and fries. These are all rising quickly, and that’s why we took additional price in October.

Perfect. Thanks, guys.

Our next question comes from Andrew Charles with Cowen and Co. Please proceed with your question.

Hi. Thank you for the question. This is Zack on for Andrew. My question is also on kiosk. Can you talk about what the impact is to operating expenses and CapEx in 2023? Thank you.

We're not going to break it out to that level of granularity at this time. But I'll reiterate the comments I made on kiosks: we see a higher check with kiosk orders. Where we have kiosks, they represent a meaningful part of our in-Shack sales, and guests really do like to use them. Finally, we are able to utilize labor better; we are more efficient in the Shacks that have kiosks versus those that don't.

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

Hi. Good morning, and thanks for taking my question. I wanted to circle back on the topic of your relative value proposition. You noted the average price of burger, fries, and drink is below $14. I'm curious what that looks like if you break that out between urban and suburban markets. Could you also comment on how you view the brand's relative value proposition across different types of markets and consumers that you're reaching as you move into the suburbs?

I think we've gotten better at pricing tiers, understanding our guests in each market. We share our pricing strategy in this recent raise, from a 2% increase where we see good range, we don't need to raise much, to opportunities for a 10% hike. Some of these may be stronger urban and suburban, and we handle demand and opportunity accordingly. I believe a Shack burger, fries, and drink, averaging below $14, is a solid value deal. However, competing on that level with traditional fast food meals isn't our path as our brand emphasizes premium experience and ingredients that cost more. This will have us closely measuring how consumers perceive that value. That's our ongoing work.

While we talk about the average being below $14, there are a number of facts that are below that. We have taken a very clear approach here to menu pricing. We've seen a positive mix with price increase. Our guests seem to trade up and are adjusting their habits by returning to normal with single orders or smaller groups, and they’re also ordering more premium items.

Thank you for your participation.