Shake Shack Inc. Q4 FY2023 Earnings Call

Greetings, and welcome to Shake Shack's Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Oriolo, Senior Financial Planning and Analysis, Investor Relations. Thank you, sir. 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 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 23, 2023, and our other filings with the SEC, including our Form 8-K filed this morning. 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 fourth quarter 2023 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. We filed an 8-K this morning related to a correction the company identified and brought to its auditors, primarily regarding how the company has accounted for elements of tax depreciation. These errors led to overstatements of income tax expense and understatement of deferred tax assets during the impact of periods. The unaudited amount of the overstatement of prior year non-cash GAAP income tax expense for fiscal 2021 and 2022, as well as an opening adjustment to the retained earnings balance in fiscal 2021, that is related to prior periods to 2021, can be found in the 8-K. We will provide additional details in our upcoming 10-K filing, which we expect to be filed on time. I will now turn the call over to Randy.

Thanks, Mike, and good morning, everyone. I want to congratulate our teams on an exceptional 2023. This year marked transformative milestones and substantial profitable growth, building upon our already solid foundation for the long-term opportunity ahead. We grew system-wide sales by 24% year-over-year to a record $1.7 billion. We opened 85 total restaurants, the most ever in a single year, ending 2023 with 518 Shake Shacks across the world. We grew Shack sales by 20% to over $1 billion with 4.4% same Shack sales growth and a strong class of 41 domestic company operated restaurants. In just the past four years, we've nearly doubled our footprint, system-wide sales, and total revenue and we have a robust pipeline of opportunities going forward. Importantly, we grew our Shack-level operating profit even faster than our total revenue, expanding restaurant margin by 240 basis points year-over-year to nearly 20%, growing Shack-level operating profit by 37% year-over-year. With this and 110 basis points of leverage in our G&A, excluding one-time adjustments, we delivered over 80% improvement in our adjusted EBITDA to $131.8 million. We ended 2023 with strong momentum in the fourth quarter with our marketing strategies delivering positive traffic and our operational focus achieving further margin expansion. We executed our five strategic priorities for 2023, and I want to wrap up how we performed for the year across each of these priorities. First, recruiting, rewarding, and retaining a winning team. At the beginning of 2023, staffing pressures were material. We’re negatively impacting sales, profit, guest experience, but throughout the year, we improved staffing retention to the best levels we've seen in years, which had a direct tie to our stronger labor and restaurant level margin performance. Second, we focused on the guest experience. We rolled out kiosks nearly all our domestic company-operated Shacks, a full quarter ahead of expectations. We're seeing a high-single digit check lift on kiosk channel versus the traditional cashier experience. We also made material improvements to how our guests can order through this channel. We advanced our commitment to culinary innovation, a competitive strength of Shake Shack, with improvements to our core menu, as well as exciting LTOs, including White Truffle Burgers, top-selling Spicy Fries, and a return of Bourbon Bacon jam. We also forwarded learnings towards future strategies as we are testing combo meals for the first time at drive-throughs and looking to increase dessert occasion through Mini Shake and Sundae Tests. Number three, with a targeted development strategy this year, we opened 85 Shacks across the globe in 2023, including 18 domestic drive-throughs and our first international licensed drive-throughs in Mexico and Dubai. We launched in two new markets in the Bahamas and Bangkok. The Bahamas also being a new format, our first-ever hotel resort Shack with a full bar. We built a solid foundation in development with prototype site design that will help us reduce our build costs in coming years, and we know we have a lot more work to do here, especially on build costs and preopening, where we believe 2023 was the high watermark. Last year, we demonstrated meaningful improvement in restaurant profit margins. We showed leverage across every Shack level operating expense line item and drove 240 basis points of expansion for the year to nearly 20%. Importantly, we have line of sight to further margin expansion this year in 2024. And finally, number five, our commitment to investing with discipline. We leveraged G&A excluding one-time adjustments of 110 basis points and we grew adjusted EBITDA by over 80% to nearly $132 million. I'm pleased with our progress in 2023 and our teams are energized and building for what's ahead. Our leadership team has developed our 2024 strategic priorities to drive further profitable growth at Shake Shack with a clear line of sight to generating free cash flow even while investing for a robust pipeline of growth. Our entire leadership team and the Board are fully engaged, committed, and incentivized to continue execution in 2024. So today, I want to go a bit deeper on our new strategic priorities for this year. First, we're committing to delivering a consistent guest experience. Shake Shack has always been differentiated from traditional fast food and fast casual in our food quality, in the look and feel of our Shacks, and in the enlightened hospitality we provide our guests. In 2024, we're committed to delivering a great guest experience consistently across all channels. We have core KPIs for our ops leadership. For the first time, we're targeting throughput improvement by reducing guest order times by roughly 30 seconds and even more in our drive-through locations. We'll achieve this through new kitchen flows that will roll-out through the year, increased real-time reporting, new training, urgency, and goal focus, while continuing to cook to order at the highest level quality in the burger industry. We believe this can grow sales, energize our teams, and improve guest sentiment. Second, our plan this year is to grow sales and strengthen our brand awareness. Shake Shack continues to build upon our global brand appeal. We've nearly doubled our footprint since '19, but we believe we're still early in our growth journey at just a small fraction of the scale that our competitors have, and yet we know that we still have a massive opportunity to increase our brand awareness. As we scale, we're leading into new and expanded marketing, brand partnerships, and additional spending opportunities that are demonstrating success. Our advertising spend at roughly 1% of sales is a fraction of many of our peers. We know we can and will invest with success here moving forward. As we've improved our overall profitability and increased our scale, we are able to unlock additional funds for advertising this year and will do so with data-driven discipline. On development, plan to open approximately 40 company operated Shacks and approximately 40 licensed Shacks this year in '24. Expanding our footprint is key to driving sales and strengthening our brand awareness. In 2024, the majority of our company operated openings will be in existing markets across a variety of formats. We'll also be continuing our license Shack development by going deeper in domestic airports, roadsides, and deepening international expansion into new and existing markets. Third, we're going to make Shake Shack more profitable. In 2023, we improved restaurant level margins by 240 basis points to approximately 20%. We plan to further margin expansion in 2024, with our next goal of reaching 20% to 21% Shack level operating profit margin, continuing our work to close the gap to our pre-COVID profitability levels. Katie will share more, but our main strategies on improving forward margins and lowering total cost to serve involve work on supply chain and operational efficiencies. Many of these initiatives are things that we identified in prior years, such as increasing the number of suppliers as we scale, optimizing our freight, and improvements in labor scheduling and deployment. We've also engaged in external consultants to help find additional opportunities and we will also look to leverage G&A while continuing to invest more in advertising and for the future growth of our business. Fourth, we're going to continue to improve how we build and open Shacks. We believe '23 was the high watermark for our build and preopening costs as we dealt with inflation, supply challenges, and a higher mix of more capital intensive drive-throughs. This year, we've prioritized our commitment to reducing average net build and preopening costs by about 10%. The team has begun to employ early prototype improvements to future Shacks as a Phase 1 approach and will be doubling down further this year to capture additional savings over time. Some of this work necessarily caused us to slow down timing of the 2024 pipeline and that will cause a back weighted opening schedule this year. But as that work takes hold, we'll begin to see more impact in 2025 as we rollout improved prototypes and a strong pipeline of Shacks in the years ahead. And lastly, we will continue to develop and reward our high performing teams. Our people have always been and will always be a core focus. High performing teams helped fuel the success we drove this year and we expect to drive in 2024. Looking ahead, we'll continue to invest in our teams through increased wages, training, opportunities, enhanced recruitment with AI-enabled recruiting tools, and retention practices to optimize their experience and ultimately drive the business. Now, I'll turn the call over to Katie to recap more of '23 and provide our initial outlook for 2024.

Thanks, Randy, and good morning, everyone. The past year was a year of solid profitable growth as we drove 240 basis points of Shack level operating profit margin expansion in the year, building up to approximately 20%, further closing the gap to pre-COVID profitability levels, and growing Shack level operating profit by nearly 40% year-over-year to a record of $208.2 million. We did this by successfully implementing our profitability improvement programs in our restaurants and home office, including better forecasting and labor scheduling, and other operational and total cost to serve initiatives, and with our commitment to investing with discipline, we levered our G&A, excluding one-time adjustments by 110 basis points, while still prioritizing advertising and marketing investments and we grew adjusted EBITDA by more than 80% year-over-year to a record of $131.8 million. We ended the year on an optimistic note for the fourth quarter with solid execution against marketing and operational strategies that drove strong sales growth with positive traffic and solid flow through, and as a result, we were more profitable despite continued inflationary pressures. Fourth quarter total revenue was $286.2 million, up 20% year-over-year as we opened 24 company operated and licensed units and grew system-wide sales approximately 21%. Licensing revenue was $10.5 million in the fourth quarter and licensing sales were $166.4 million, up 24% year-over-year, and with particular strength in our airport and domestic locations and nine openings. We face geopolitical pressures in the Middle East and continue to see macroeconomic pressures in China, and in both markets, we expect to experience further volatility in our sales for the foreseeable future. Shack sales in the fourth quarter were $275.8 million, growing nearly 20% year-over-year, supported by opening 15 domestic company operated Shacks and driving strong Same Shack sales with positive traffic through our marketing strategies. Our sales outperformed historical seasonality throughout the whole quarter and all of our regions saw sequential traffic improvement since the third quarter. We grew Same Shack sales by 2.8% versus 2022 with traffic up 1.4%, which accelerated through the quarter, driven by success of our strategic marketing initiatives as well as approximately 1.4% price mix. We generated 76,000 in average weekly sales, up from 74,000 in the third quarter with mid-single digit price and positive traffic across both in Shack and digital channels. Fourth quarter Shack level operating profit was $54.6 million or 19.8% of Shack sales, 80 basis points higher versus last year despite continued inflationary pressures across our Shack P&L, and we achieved this with our strong sales performance and strategic initiatives around food cost, labor, and other OpEx driving strong flow through. In the fourth quarter, food and paper costs were $80.3 million or 29.1% of Shack sales, flat quarter-over-quarter and down 40 basis points year-over-year. Food and paper inflation was up mid-single digits year-over-year, led by beef up mid-teens and fries up high-single digits with pressures broadly across our basket. Labor and related expenses were at $78.6 million or 28.5% of Shack sales, down from 28.9% in the fourth quarter of 2022 and down 30 basis points quarter-over-quarter. With increased sales and positive traffic, the benefits from our strategic initiatives including improved forecasting and labor scheduling drove strong flow through on our better sales. Late in the fourth quarter, we implemented the first round of tests of our new labor modules. Now, as a reminder, this new scheduling standard leverages the unique characteristics of a Shack in terms of channel and menu mix to enhance deployment. While takeaways are still early, we are pleased with the initial results from this test and expect to expand it to additional Shacks in the first quarter with the potential to rollout broadly later this year. Other operating expenses were $41.1 million or 14.9% of Shack sales, up 30 basis points from the fourth quarter of 2022, as we faced increased repairs and maintenance expenses, a higher delivery sales mix, and continued inflationary pressures in energy and utilities. Occupancy and related expenses were $21.2 million or 7.7% of Shack sales, down 20 basis points from the fourth quarter of '22 driven by sales leverage. G&A was $35.8 million or 12.5% of total revenue. Excluding $900 million in one-time adjustments, G&A was $34.9 million or 12.2% of total revenue, down 130 basis points from 13.5% of total revenue in the prior year, despite continued investments needed to support our growth across technology, marketing, and operations. We ended 2023 with $125.1 million in G&A, adjusted for legal settlements, professional fees, and other one-time expenses. Pre-opening costs were $5.1 million in the quarter as we opened 15 new company operated Shacks and depreciation was $24.5 million. On a GAAP basis in the quarter, we reported a pretax income of $1.5 million and a tax benefit of $5.3 million. On an adjusted pro forma basis, we reported a pretax income of $2.4 million and a tax expense of $1.4 million. Excluding the tax impact of equity based compensation, our adjusted pro forma tax rate in the fourth quarter was 55%. Adjustments can be found on Page 30 of the shareholder letter. We reported fourth quarter adjusted EBITDA of $31.4 million, up approximately 60% year-over-year, or 11% of total revenue, marking a significant improvement relative to 8% of total revenue in the fourth quarter of '22. And for the full year of 2023, we grew adjusted EBITDA by over 80% to $131.8 million or 12.1% of total revenue, 400 basis points higher than the prior year. We realized a net income attributable to Shake Shack Inc., of $6.8 million or $0.15 per diluted share. On an adjusted pro forma basis, we reported a net income attributable to Shake Shack Inc., of $1 million or $0.02 per fully exchanged and diluted share. And finally, our balance sheet is strong. As we enter the quarter with $293.2 million in cash and cash equivalents and marketable securities, up approximately $8 million from last quarter. Now on to guidance for the first quarter and full year of 2024. Our guidance assumes no material changes in the macroeconomic or geopolitical landscape and the potential impact of system-wide sales or costs. For the first quarter, we guide total revenue of $288.4 million to $292.8 million with $9.4 million to $9.8 million of licensing revenue, approximately four company operated openings, approximately two licensed Shack openings, and for Same Shack sales to be up low-single digits year-over-year. January Same Shack sales were flat with an approximate low-single digit headwind from unfavorable weather, as well as pressures from comparing over a particularly strong January 2023, average weekly sales that had a large benefit from a high number of Shacks that we opened in the fourth quarter of 2022. Outside of weather impacted weeks though, we saw that the underlying strength of our fourth quarter trends continued into January and while we're not providing specific numbers around February, our trends have improved from January levels and our guidance reflects this. As we execute on our 2024 strategic plan, we are guiding to first quarter Shack level operating profit margin of 19% to 19.5%, representing approximately 70 basis points to 120 basis points improvement year-over-year. In the first quarter, we are planning for low-single digit year-over-year inflation in food and paper costs, with pressures led by uncertainty in beef pricing, the largest part of our basket. For 2024, we are guiding total revenue of $1.21 billion to $1.25 billion, growing about 11% to 15% year-over-year with approximately 40 company operated and 40 license openings, both of which are back end weighted, and Same Shack sales to grow by low-single digits with low-single digit realized price. Our pricing plans for this year are modest and consistent with our pre-COVID pricing patterns of low-single digits. We recently increased price in our digital channels and plan to take additional menu price in areas with outsized labor inflation such as California. But for the majority of our Shacks, we plan to increase in-Shack menu prices by about 2.5% this year. We guide full year license revenue of $45 million to $47 million, up 11% to 15% year-over-year, as we factor in a degree of continued macroeconomic and geopolitical risks. The Middle East and China together were approximately 40% of our total license units and comprised a material amount of our 40 projected openings for 2024. We're targeting another year of restaurant margin expansion as we guide Shack level operating profit margins to 20% to 21%, as we focus on driving sales and delivering on continued operational improvements. The low end of this guidance range while nearly flat year-over-year contemplates a weaker sales backdrop, a worsening staffing backdrop, and the potential for even more elevated inflationary pressures in beef and other areas of the supply chain. We guide 2024 G&A to $139 million to $142 million, which is up 11% to 14% year-over-year, driven by a planned large increase in advertising spending to drive greater brand awareness and sales, while still having a disciplined approach to run rate G&A. We're increasing spend on areas of marketing where we have high visibility in our returns and will continue to closely monitor and adjust accordingly with changes to our business. We expect approximately $18 million of equity-based compensation expense with about $17 million in G&A. We guide full year depreciation of $100 million to $105 million and preopening of approximately $17 million, in-line with our commitment to reduce preopening cost per Shack by at least 10%. We guide adjusted EBITDA of $160 million to $170 million in fiscal 2024. This represents 21% to 29% growth year-over-year and solidly outpacing total revenue guidance growth for 11% to 15%. And finally, we guide for fiscal year '24 adjusted pro forma tax rate, excluding the impact of stock-based compensation to be 20% to 25%. Our overall tax rate will be impacted by a number of factors including our level of profitability, tax credit, state mix, and other impacts. So, thank you for your time, and with that, I'll turn it back to Randy.

Thanks, Katie. Before we open up the call to Q&A, I do want to give a brief update on behalf of our Board of Directors on the CEO search. We are really fortunate that the role of CEO, Shake Shack is among the most exciting and biggest opportunities in the industry today. We've had enormous interest. The Board search committee is pleased with how the search is progressing and we're on target we believe with expectations to transition leadership in the coming months. I also want to announce that today the company is promoting long-tenured leader Michael Kark to President of our Global License Business. Michael has been leading our International and Domestic License Relationship since he joined the company 12 years ago. He's led one of the most nimble and innovative teams in the industry and will continue to chart the course for this exciting and critical part of our growth ahead. Congrats to Michael and to all of our partners around the globe. In the meantime, I remain deeply committed to executing against our strategic priorities to deliver profitable growth in the year ahead and ensure a seamless transition for my successor and the utmost confidence in our seasoned leadership team and never been more optimistic about Shake Shack's potential as we build upon this last year's success and enter 2024. With that, operator, thank you, and let's go ahead and 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 Brian Vaccaro with Raymond James. Please proceed with your question.

Thank you, and good morning. You noted that average weekly sales through the fourth quarter exceeded your normal seasonality, and you attributed some of that to your strategic advertising initiatives, can you elaborate on the levers that you're pulling there? Is that mainly focused on markets with lower awareness and kind of any way to frame what percentage of your units you would classify as lower awareness and the sales improvement you're seeing behind some of those initiatives?

Thanks, Brian. First of all, I want to emphasize that we have a significant opportunity to continue expanding as we grow. It's important to note that we are not large enough yet to achieve the kind of scale needed for a Super Bowl commercial, but that day will come. For now, we need to focus on testing and refining the strategies that are delivering strong returns. As we discussed last quarter, we've made progress in the third and fourth quarters, and we'll keep that momentum going. In some markets where brand awareness is lower, we’ve conducted various media tests. Our main focus is on enhancing our one-to-one performance marketing efforts, which are improving daily as we connect better with our guests. We've also engaged in some exciting brand partnerships, such as our collaboration with the movie Trolls in the fourth quarter, along with other culinary projects. Additionally, we’ve been active in our own promotional channels. For example, we ran a fun promotion involving a Chicken Dance; if any NFL player performed the Chicken Dance, we offered free Chicken Shacks through our app. Initiatives like these have driven significant traffic to our channels, which is encouraging. We also collaborate with third-party DSPs to promote our channels when we anticipate a good return. Currently, we are running Free Fridays over a six to seven week period this time of year. This campaign attracts guests, increases frequency, and re-engages lapsed customers in our app. Importantly, we are pleased to see that these initiatives are not only boosting sales but also profit. We are implementing these strategies with positive profit growth in mind. Moving forward, we aim to keep testing and learning in various markets to identify what works best. There is considerable opportunity ahead, and our marketing team is well-prepared to execute extensively this year.

Alright. That's great. And sorry if I missed it, but Katie, can you level set where was advertising spend in 2023 and what's embedded in your guidance, kind of ballparking what's in guidance in advertising for 2024?

You're going to find the 2023 number in the 10-K, so I won't get ahead of that. However, I will mention that our guidance includes a significant increase in our underlying general and administrative or advertising expenses. It's crucial to note that once we exclude the rise in advertising expenses, we continue to demonstrate discipline and efficiency in our underlying run rate for G&A. It's been rewarding to witness increased profitability and to unlock a strong source of funds that will support the company's future growth.

Great. I have a quick follow-up regarding throughput. The time it takes to serve food and the average ticket times are crucial for enhancing the guest experience and maintaining consistency in that area. You mentioned targeting a 30-second improvement, especially in the drive-through. Could you clarify what your current average ticket time is? Additionally, any insight on how this metric has changed over time or its variability across different locations would help us understand the potential in this area. Thank you.

We haven't really released specific numbers on that. We've generally said over time that's been a sort of 6 to 8 minute ticket time as we cook fresh to order over time. It's really not a regional question; it's more of a volume question. Obviously, when you're busier, sometimes those times extend. Our goal for this year is consistency and continue to just improve and be relied upon better for what our guests can expect. So that's the goal we've set out there. Ambitious target for our teams to knock 30 seconds off the average order over the course of this year. This is going to take time, it's not tomorrow. This will be through the year, as we go and as we kind of exit the year that's really been our goal. Thank you.

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

I was actually really excited to hear about the initiatives on throughput. I'm one of those people who would love to get through the line faster, so I definitely appreciate that. I'm sure you have a lot of unmet demand, can you talk about the labor modules that you tested, I think at a few locations in the fourth quarter, and is that the same as what you're talking about with new kitchen flows and kind of the timing of real-time reporting and what that kind of looks like at the unit level? Thanks.

Sure. I'll hand this over to Randy, but regarding the labor module, there are two distinct aspects here. The way we manage food in our kitchens differs significantly from our approach to personalized deployment. Throughout Shake Shack's journey, as you may know, we've introduced more channels. Our menu has evolved, and as we've expanded nationwide, we've encountered Shacks with varying characteristics. Particularly with last year’s kiosk rollout, we believed it was an optimal time to reassess our staffing and deployment model for each Shack, utilizing time and motion studies and the valuable data gathered by our team. We conducted the initial round of testing late last year and were very pleased with the outcomes. We mentioned plans to extend this to additional Shacks this year. Importantly, none of this is currently included in our guidance for the improvement of Shack level operating profit margins in 2024. We're still in the process of implementing this. Additionally, it's not merely about reducing staff; it's about optimizing our deployment. There are certain times of day where we think it's beneficial to increase staffing. We believe this is crucial for providing a great guest experience and taking advantage of different formats. Randy, would you like to add anything?

On the kitchen flow, this is something that will continually evolve. Every restaurant is always trying to find the best way to move food while maintaining the quality of our cooking. Over the past year and a half, we have been testing various flows to help ensure that our great food moves through the kitchen in a more organized manner, saving time. Currently, only a small percentage of our restaurants are implementing this, but most of our new openings will feature a linear kitchen that alters this flow. Some existing restaurants will also adapt, but the focus is primarily on how we manage food movement rather than on major renovations or costly overhauls. There is still a lot of work to do on this and other initiatives, and we have plans in place.

Our next question comes from Brian Mullan with Piper Sandler. Please proceed.

Hey. Thank you. Just a question on the drive-throughs, could you speak to how those are doing in general? Understanding, there have been some learnings, maybe some locations you might have done differently in certain instances, just looking to understand your degree of optimism about drive-throughs overall, and if you think they have a solid long-term future at Shake Shack, any thoughts would be great.

Thank you for your question. We are very optimistic about the long-term future of drive-throughs. To capture market share and achieve our growth goals, it’s essential that we make our drive-throughs effective. We currently operate around 30 drive-throughs and opened 18 last year. While we'll have a smaller percentage of new locations in 2024, we remain committed to this initiative during this year and in the years to come. We continue to gain insights, as some locations exceed our targets while others fall short, with many performing in between. We're learning about optimal locations and operational efficiency, and this will help us refine our prototype for future drive-throughs, which will be slightly smaller and more cost-effective to build. Our focus is on driving stronger returns, and we are excited to open new drive-throughs in markets where our brand is well-known, including locations in California and New York/New Jersey, to better understand how customers engage with Shake Shack in a drive-through setting.

Our next question comes from Sara Senatore with Bank of America. Please proceed with your question.

Okay. Thank you very much. I just wanted to ask a little bit about how you're thinking about the margin outlook versus the same store sales. You've done a lot of work on restaurant level margins, but if I go back and look at the sort of initial guide for this year, restaurant level margins, I think was 19% to 20% and comp was kind of low-single to mid-single. So you came in at the high end of the range for both, but so is that sort of how we should be thinking about this, which is there are kind of puts and takes, so even though you have opportunities maybe on the margin side and if you could talk a little bit about what you think the biggest ones are, that would be helpful. But we should really be thinking about this as sort of you need a certain amount of comp to lever the expenses.

Our guidance for this year anticipates low-single digits Same Shack sales growth. We expect positive traffic and plan to maintain pricing more consistent with pre-COVID times at most of our locations. Simultaneously, we are increasing our advertising expenses and are confident that this will positively impact our comparable sales, based on historical performance trends. Regarding our restaurant margin guidance of 20% to 21%, we saw strong flow-through on incremental sales last year, particularly in the fourth quarter, and we're optimistic about future results. We also have several initiatives in our operational improvement plan aimed at managing total cost of service, including work from our supply chain team to mitigate inflationary pressures, which is partially reflected in our guidance, with additional opportunities still available. On the labor front, we have effectively managed the increased sales resulting from our marketing efforts and expect to continue to find efficiencies in that area.

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

Hi. Good morning. Thank you. You talked about some interesting sales drivers in the '24, including combo meals and desserts and increasing your marketing spend obviously, can you talk about some of the work you've done that suggests those are the right strategies, maybe why now? And then related to that, do you think those platforms are required to hit the positive traffic goal you're talking about for '24 or can the core existing strategies get you there? Thank you.

Michael, that's a great question. The strategies I mentioned, particularly regarding combo meals, Sundaes, and Mini Shakes, are not central to our current assumptions and will likely have minimal impact this year. We're exploring these options because Shake Shack has never offered combo meals in its history. Only time will tell if that aligns with our guests' preferences. Our drive-through goals emphasize speed, and we recognize that Shake Shack isn't currently the fastest. We're interested in how our customers respond to these changes. Preliminary feedback indicates that many people enjoy combo meals at drive-throughs, which shouldn't be surprising to anyone in the business. The key consideration is whether this approach will be sustainable for us in the long run. Therefore, we're testing different pricing strategies, visuals, and merchandising techniques that differentiate us from traditional fast food while still providing consistency for our guests. Regarding our dessert offerings, before the pandemic, Shake Shack offered concretes, or Frozen Custard Sundaes. We've consistently received feedback from guests wanting more options, which is why we're reintroducing Sundaes. We're expanding the Mini Shake tests at several locations, but we're not rolling them out across the board just yet. Our goal is to refine these offerings and possibly extend our reach into different day parts, looking to boost our afternoon sales and average Shack performance. We want to understand how these elements fit into our increasingly digital world. I'm passionate about menu innovation, and while we're proficient at it, we remain cautious. Ultimately, our guidance is rooted in our expected opportunities, increased marketing efforts, and optimism for a favorable economic environment. Some factors will be beyond our control, but we will continue to drive the business forward.

Our next question comes from Andrew Charles with TD Cowen. Please proceed.

Great. Thank you. Katie, I just want to better understand the components of the 2024 low-single digit same store sales guidance. This embeds expectations for 2.5% price and positive traffic, so inherently is mix expect to be negative. I would think with the kiosk efforts and the traction you're seeing there, the high-single digit boost in ticket that you're seeing theoretically that should be a good guy, but is delivery sales embedded to be a continued headwind through '24? Just looking for some more color within the components. Thanks.

Sure. So yeah, we talked about low-single digit price that we're expecting for the year, down traffic, we're goaling ourselves, we're targeting to have positive traffic. We've embedded some ranges, though, on that side in that guide. And kiosk overall, I have to say, we're really excited by what it continues to provide for us. Our sales on kiosk in the fourth quarter doubled year-over-year and we implemented some new technology upgrades in that channel to continue to drive increased attach rates and customization. But we'll have to see how that continues to play out through the rest of the year.

Our next question comes from Jake Bartlett with Truist Securities.

Great. Thanks for taking the question. On the margin expansion guidance for '24, great to see that, I'm wondering if you can just help us understand what's driving it. It looks like just COGS, or commodity cost inflation being flat to low-single digits and low-single digits price would be a contributor. So, if you could maybe disaggregate the drivers, including what you're proactively doing, some of the supply chain initiatives, labor initiatives, just trying to kind of understand more specifically what your actions are doing to your margin outlook.

We're really excited to have our strategies in place and to confidently project a Shack level operating profit margin of 20% to 21% for 2024, indicating another year of improving profitability. In reviewing our profit and loss statements, we anticipate that our food and paper inflation will remain flat to low-single digits year-over-year for the entire year. It's crucial to mention that our supply chain initiatives—such as increasing supplier numbers and optimizing freight—are keeping inflation in that flat to low-single-digit range. Without these operational improvements, our situation could have been much worse. However, beef remains a significant uncertainty within that category, and we're closely monitoring it. On the labor front, we are experiencing strong flow-through due to improved sales forecasting and better deployment, which is helping us leverage the increased sales and traffic across the company. We expect to see continued progress in these areas in 2024, though we face inflationary pressures on wages. We're anticipating a low-single-digit increase in labor costs, but we recognize that certain regions are experiencing much higher increases. With our current programs, we are confident in our ability to manage these ongoing inflationary challenges.

Our next question comes from Peter Saleh with BTIG. Please proceed.

Great. Thanks. Thanks for taking the question. I did want to come back to the advertising discussion. I think in 3Q, Shake Shack targeted more advertising in the West, can you just give us a sense on where you were spending the incremental dollars or where you were testing some more advertising in 4Q? And just, in terms of 2024, are you targeting specific regions or how do we think about your spending on advertising next year or this year rather?

Yeah. Thanks. To answer your question, last year, yeah, we continued some of those tests on the West Coast that we saw some strong return for. We did some things in Texas, that's been a big growing market for us. We opened a lot of restaurants in Texas last year, so there was appointed tests and learned happening there. And for this year, we will keep you posted. I think the teams continue to learn on that. A lot of this is really directed at the markets where we think we can have the highest return, balanced with some spend, where we have lower brand awareness and we just want to make sure that we keep hitting those and having people know who we are, what we do, and driving the exciting opportunity we have. Sometimes it'll go along with openings, our new Shack openings, where those go where we choose to spend. But generally, it's really a lot of one-to-one performance marketing digital opportunities that we see where most of the ramping of spend will go. We think that's the best way to do it at this scale. So when we hear the word advertising, it's not going to be a whole lot of TV commercials and the things you might traditionally think. At this scale, most of the best way we can gain is on digital channels that we've seen strong returns on.

Our next question comes from Brian Harper with Morgan Stanley. Please proceed.

Yeah. Thank you and good morning. With kind of the improving traffic trend in the fourth quarter, what do you think was most impactful to that, maybe it was some of the advertising, but just curious for your thoughts there. And I know that there was a little bit of divergence between New York and the other regions and if you had any thoughts on kind of what drove that.

Well, I think these are the things that we've been pointing out through the call today. I think they're all of those things. We had a good LTO. We had strong and improving comp through the quarter. We had a lot of that advertising targeting, various different promos, and opportunities that we've shared both in our channels and in other channels. So I think it's been a really well played playbook by our marketing team. And again, a lot of that, as we keep saying on this call, increasing the overall spend to get us to a point where we can continue to test and confidently employ data-driven, disciplined spend across our marketing channel. So I think that was really a good part of the Q4 and just a solid lineup of operational execution across the company.

And then in New York specifically, we've been opening a number of restaurants, so we've kind of put some of those pressures there; it's more on the infill pressures, things that we've normally seen throughout the year.

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

Hi. Good morning. You made really impressive progress on improving the shop level profitability, so I was just wondering if you could maybe frame up where you think you are in your journey to improve profitability. And I think, Randy, you mentioned a reference to getting back to pre-COVID profitability, and I'm just wondering, if we should be reading that as your goal. I think you had 22% shop level margins or slightly higher than that in 2019, is that the right way to think about your goals or I guess, any way to frame up kind of the long term picture on profitability? Thanks.

Thanks, David. I think the goal is 20% to 21% this year in 2024. That's the clear guide. That's what we're working on. As we've said in the call, lots of initiatives that have been working and lots more that are coming, both to expand upon the current, as well as add new things and we're really clear in the notes today about what those look like. Look, we know we had a higher Shack-level ops profit overall pre-COVID, companies twice the size right now, changed a lot, and we're going to continue to drive that. Our goal will always be to continue to expand on that profitability. That's what we've shown this year, over 240 bps of leverage this year and targeting and guiding for more this year. Lots of opportunity left in the tank and we want to do it deliberately and in constant with the overall successful growth that we've had, so it's a profitable growth journey overall.

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

Great. Thank you very much. Just focusing on the cost side of things, actually, a two part question. The first, Randy, you mentioned the unit cost build reductions of 10%, which you've talked about before, just wondering if there are any concerns. I know you like to enter markets with the wow factor, so I'm just wondering, where the biggest opportunity in the front and the back of the house is to pull out that 10% plus. And then just to follow-up, Katie, you mentioned G&A leverage again in '24, which is clearly impressive considering your outsized growth, I'm just wondering if you could bucket the primary areas of opportunity relative to that revenue growth, so the leverage that you're expecting to achieve there. Thank you.

Thanks, Jeffrey. Yeah. We love to open with the wow as you said. We've had a history of doing that pretty well, want to continue to do that. We're going to build beautiful restaurants. These goals do not take away anything from the differentiating factor we believe is critical to Shake Shack, which is we just don't look and feel like fast food. We are serving a premium product and a premium experience, we're going to continue to do that. I think where the team's been targeting, obviously, we've dealt with a tough construction environment. Every company you talk to is dealing with the same thing, ours is no different. But we've also increased some of our more expensive formats and drive-throughs. So, as I've said, a lot of the work is nuts and bolts in the guts of the building that you won't ever see or appreciate that we are figuring out how to do more effectively and efficiently by carving out time. Some of the things, I still don't think you'll notice, but what we know we can do now after learning quite a bit in this last few years as we've ramped our growth, is taking down the overall size of some Shacks, taking down some of the complicated factors of some Shacks as we learn what our guests really want, how often, and provide for peak opportunity. There'll be a good mix this year of our core Shacks, which you kind of know and love, and what we do, as well as some of the drive-throughs, where we want to continue to expand. Again 2024, these restaurants were designed a year or two ago, and is not as much immediate opportunity. So we feel real good about what the team is delivering at this approximately 10% target goal, including, by the way, our pre-opening expenses, which we know we can save upon. But as we get into '25 and beyond, we think we'll start to harvest even more of that, and that's the goal. We think that it is just a lot of opportunity for us to continue to build the dynamic wow restaurants that differentiate while taking cost down. So that is the commitment and our team is working hard on it.

And on your question on G&A, what you probably have surmised from our conference call today and then also our materials is that, we really continue to put a priority on investments that drive sales and drive the future growth of our restaurants. And so we're continuing to take a very disciplined approach to that. You will see it in our G&A investments and in other parts of the P&L. So again, it's about taking a meaningful step up in advertising expense, but at the same, kind of on the run rate side of the business, being very prudent, very disciplined about the investments that we're making there so that we can prioritize the investments needed for the long-term growth of the company.

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

Yeah. Good morning, and thank you. Just another follow-up on menu pricing. Katie, I think you mentioned 2.5% pricing for the majority of the system in 2024, but inclusive of the pricing in the California restaurants, and I think you guys just mentioned the 3PD menu price increase, what would that equate to for total system pricing in 2024?

Yeah. So, what we're thinking about that 2.5%, so first of all, there are two numbers that are 2.5% here. So first of all, 2.5% is what we're kind of targeting for about realized price for 2024. There's going to be some areas where we're taking more than that to offset wage inflationary pressures. You talked about California scenario, where they're taking it up a lot in some of our markets, and we're going to be taking price there to help offset those pressures. We also increased the premium we were charging on our digital channels. We're still underpriced relative to kind of our peer average. I still think we have room on that side, but continue to test and learn in that channel. And then overall, the other 2.5% dimension is that's pretty much your average Shack outside of a big wage inflationary zone. That's about the overall price that we're looking to take this year, and that's very consistent with the pre-COVID pricing patterns that we've had. So most of our shacks will have kind of that lower-single digit menu price increase this year.

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

Yeah. Good morning. I guess for Randy, although this may change as you hand over the reins, is 40 company owned units kind of the right pace that the company is sort of settling into, just kind of looking at teams and retention and operational consistency and all those kind of things or is there something as bill costs, maybe come down that could accelerate that?

We're not providing guidance beyond this year. We feel positive about the number 40. This year, we adjusted our expectations and reached 41 for company-operated locations. For licensed locations, we advanced our targets and achieved 45, exceeding our guidance. We believe 40 is also a solid target in that aspect. If you consider the 85 restaurants from last year and about 80 this year, we're content with that figure. However, this doesn't indicate our plans for next year. We're focusing on building a pipeline that supports future growth while ensuring strong returns. As I mentioned earlier, we've used the past couple of years to regroup and assess what we’ve learned. Our restaurants have become more costly, so we're strategizing on how to reduce those costs and enhance our processes to open better restaurants over time with improved long-term returns. This approach may have led to a sales year that is skewed to the latter half. Consequently, most of the new Shack sales are expected in the second half of the year. Nonetheless, we believe this was a prudent decision, ensuring we invest wisely and allocate our capital expenditures effectively. Overall, we feel confident about the 40 this year.

Our next question comes from Jim Sanderson with Northcoast Research. Please proceed with your question.

Hey. Thanks for the question. Congratulations on a great quarter. I wanted to go back to the combo testing, just if you could provide some more insights on what metrics you're testing, whether this is looking at discounts to à la carte or if you're trying to build kids' meals, family bundles that might move average Shack up? Just any thoughts on the test and how this might impact average Shack going forward? And also why only through the drive-through? Thank you.

Yeah. Thanks, Jim. And again, this is not going to be, do not expect any material rollout of this strategy this year. This is something that we really want to learn into. This is not something you flip on and off easily in a company like ours, who's never done it. So what are we looking for? Number one, we're looking for do our guests want to order that way, right? That'll be the kind of first KPI we have. Then we're going to look at various pricing strategies. Do we need a discount or is it really just about ease of ordering? Testing various levels of a bundled discount and how that feels of that Shake Shack. Can we increase items per Shack, right? What happens to both beverage and shake attached? This is Shake Shack, right, and we're different. We sell a lot of shakes. What happens in the combo meal environment in shakes? These are things we're looking at. And ultimately, can it contribute to a better ticket time, right? Does it help our team in the back as well as the person ordering? And I think where you see the most pressure of ordering time is always at a drive-through window, right? In most of our other channels, especially now with kiosks, it's a lot more relaxed ordering process. You don't have to feel like you got to move forward, but in a drive-through, you inevitably feel that way, and so that's why we're testing it at drive-through. So it's only that kind of a couple handfuls of our restaurants I expect it'll kind of stay at that test level for some period of time and we'll look at it. And look, obviously, the industry figured out a long time ago that this is a good strategy, whether it's a good strategy for Shake Shack remains to be seen. We're excited about what we're seeing and learning, and we'll keep you posted if it goes forward.

We've reached the end of our question-and-answer session. I would now like to turn the floor back over to Randy Garutti.

Hey. Thanks, everybody. Appreciate all the time today. We'll look forward to seeing you in the Shack soon. Take care.

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