Shake Shack Inc. Q1 FY2025 Earnings Call

Good morning. Welcome to Shake Shack's First Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Melissa Calandruccio from Investor Relations. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Joining me for Shake Shack's conference call is our CEO, Rob Lynch; 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 21, 2025. Any forward-looking statements represent our views only as of today and we assume no obligation to update any forward-looking statements if our views change. By now, you should have access to our first quarter 2025 shareholder letter, which can be found on 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 Rob.

Thanks, Melissa, and good morning, everyone. 2025 is positioned to be a year of transformation for Shake Shack. We are making significant progress against our strategic priorities, which will fuel our growth to at least 1,500 company-operated Shacks. While we recognize that many macro headwinds impacted transaction growth across the industry in the first quarter, we are using the current business environment as an opportunity to identify ways to improve our guest experience, grow total revenue, and continue to reduce both our operating and build costs. Over the past year, I've had the privilege to learn about this great business and collaborate with our leadership team to evolve our culture to support our lofty aspirations. We are in a significant growth phase aiming to more than quadruple the number of company-operated Shacks. To achieve this, it will take innovative thinking, hard work, and a continued commitment to delivering enlightened hospitality. Through our efforts, we will create lasting value for all of our stakeholders. Our team has worked to evolve into a performance-based organization that can leverage the scale that we are building with each new Shack, while continuing to put our team members and guests first. This evolution has resulted in better guest service, operational improvements and productivity, culinary innovation and menu strategy, and the foundation of a brand marketing model. We are swiftly implementing these improvements and have increased our restaurant-level profit margin guidance for this year and going forward. We now expect to deliver at least 50 basis points of improvement in our restaurant-level profit margins annually over the next three years and are confident in our ability to continue to become better for years to come. Consider that in the first quarter, despite significant weather headwinds, coupled with industry and macroeconomic challenges, our teams grew restaurant-level profit margins by 120 basis points year-over-year to 20.7%. This marks the highest first quarter restaurant-level profit margin since 2019, which shows the underlying strength of our operational improvements and solidifies our confidence in Shake Shack's long-term margin outlook. It's remarkable performance from our team, especially considering the traffic headwinds, elevated beef costs that were up mid-single-digits and 3% to 4% wage inflation. We also exited the quarter with low-single-digit menu price. Our operational agility helped us become more productive, mitigating the need for us to take more price in this competitive, value-oriented macro environment. This makes me especially excited about what this business can look like when macro tailwinds are once again at our backs. We're remaining focused on excelling in all the areas that we can control, executing against our six 2025 strategic priorities designed to grow our business and drive long-term profitable growth for our stakeholders. As I have stated previously, our first strategic priority is building a culture of leaders. As a domestic company-operated business with ambitions to meaningfully grow our footprint, it's crucial to have a strong bench of managers ready to open new Shacks. We are investing in training and development for our future Shack level leaders and are excited about the opportunity that we are providing for our team members to reach their full potential. Our second priority is improving restaurant operations. And as we stated earlier, our increased productivity helped us deliver 120 basis points of margin improvement in the first quarter. Our new systems and processes have made us operationally agile and allowed us to be in better control of our staffing and food management as weather and macro pressures persisted throughout the quarter. Our third priority is driving comp sales with a specific focus on increasing frequency. In this highly competitive environment, it is imperative that Shake Shack continues to reinforce the significant value that we deliver relative to the competitive set. We will do this through a mix of operational, culinary, and marketing strategies. Our focus on hospitality and how we operate in our Shacks is having a direct impact on driving higher guest satisfaction scores. This was the fifth consecutive quarter in which we improved both speed of service and order accuracy year-over-year. We've also significantly improved our labor attainment and waste levels. Leveraging our standardized scorecard across our network of Shacks, we are closely measuring our performance and driving continuous improvements across our system. On the culinary front, we are reinforcing the quality of our food and our fine casual positioning. In a short period of time, we have developed a robust calendar that is planned 12 months in advance, ensuring that we have compelling innovation in limited-time offerings across our burgers and sandwiches, side items, shakes and drinks. Culinary innovation is the heartbeat of Shake Shack and developing ideas that QSR and even fast casual competitors are unable and unwilling to offer is one of the things that drives our competitive advantage. In mid-April, we introduced the Dubai Chocolate Pistachio Shake to 30 Shacks in New York City, LA and Miami. This Shake inspired by the viral Dubai chocolate trend and first introduced in our Middle East Shacks, features real pistachio frozen custard, toasted kataifi shredded phyllo and a crackable dark chocolate shell. While quantities were limited, the response was phenomenal, with lines out the doors of participating Shacks in multiple locations selling out within minutes. This innovation is attracting guests, improving that our culinary strategy is critical to driving traffic and mix. There's a lot more improvements to come like the summer barbecue chicken and burger limited-time offering with four sandwiches that feature some of our best ingredients such as applewood smoked bacon and fried pickles. Beyond limited-time offerings, we are committed to evolving our core menu strategy across all of our channels. One channel that we have been very focused on is the drive-thru. In particular, we have seen an opportunity to improve our value perception and our operational performance with Shake Shack combos. Over the past month, we tested new digital menu boards that feature clear and simple combo options for our guests, which reduce the time it takes to order. We are pleased with the results and are on track to offer the new Shack combos across our more than 40 drive-thrus by the end of this month. I'm also excited about the potential to drive incremental traffic with our new guest recognition platforms in our app and web channels where we have recently launched a targeted multi-visit challenge designed to drive frequency and deepen guest engagement. We look forward to evaluating the impact and optimizing the way that we drive increased loyalty. Our fourth strategic priority is building and operating Shacks with best-in-class returns. Our new Shacks continue to deliver industry-leading cash-on-cash returns and despite a challenging global procurement environment, we're still on track to reduce our cost to build by at least 10% in 2025. Our consistent ability to open new restaurants with excellence has positioned us uniquely to deliver above industry total revenue growth of 10.5% in the quarter, despite weather and macro pressures. We are confident in our ability to open our largest class on record this year and we'll continue to open even more Shacks in 2026. The strength of our current pipeline is only exceeded by the opportunity of our white space. Our fifth priority is to grow our licensed business and we had an outstanding first quarter with sales growing 10.4% year-over-year and seven new Shacks opened. We launched our first ever fish sandwich in Hong Kong, which quickly became our second bestselling protein and it is now coming to Mainland China. The Dubai Chocolate Shake success in the Middle East led to its limited introduction in New York, Miami, and LA. We expanded our Delta partnership to four new cities where qualifying domestic flights offer a Shake Shack cheeseburger as a meal option for first-class passengers. In March, Tom Brady, a Delta brand ambassador, handed out ShackBurgers at Boston's Logan Airport to celebrate our partnership expansion in the city where it all started. Our licensed business continues to be a strong, profitable part of our P&L and we have amazing partners that want to continue to grow with us. We also have a significant amount of white space. We're just starting to realize our full potential and are excited about more opportunities on the horizon. Lastly, we're committed to investing in our long-term strategic capabilities. We're a growth company and we need to continue to invest our capital in high ROI projects that can support our desired growth. This year, we're accelerating our pace of innovation across development, operations, guest recognition and our new kitchen innovation lab. We've already made progress on a number of our projects including smaller formats, improved layouts and new processes that further optimize our labor. We're excited to share future updates on our transformational initiatives to drive sales, guest frequency, operational improvements and enhanced returns. I'm going to now turn the call over to Katie for more color on the quarter and our outlook for the next quarter and the full year. But before I do that, I want to thank all of our team members at Shake Shack for all the focus, effort and hospitality that they exhibited to overcome what might otherwise have been a tough quarter. Katie?

Thanks, Rob. Good morning, everyone. In the first quarter, as we have done in each quarter over the past four years, we grew same Shack sales while also increasing total revenue, restaurant-level profit and adjusted EBITDA by double-digits. In fact, this quarter we grew total revenue by 10.5% compared to last year, expanded restaurant-level profit margin by 120 basis points and grew our restaurant profit by 17.3% to $64.2 million marking our highest first quarter on record. Additionally, we achieved record high first quarter total revenue and system-wide sales levels as well as the highest restaurant and adjusted EBITDA margin since 2019. Now for the details of our first quarter results. We achieved total revenue of $320.9 million and system-wide sales of $489.4 million with 11 new Shack openings system-wide. In our licensed business, we grew revenue by 11.1% year-over-year to $11.1 million and sales by 10.4% year-over-year to $179.6 million with seven new licensed Shack openings. In our company-operated business, we grew Shack sales 10.4% year-over-year to $309.8 million with four Shack openings including two drive-thrus. Our average weekly sales were $72,000 with 20 basis points of same Shack sales growth. Nearly two-thirds of our markets grew same Shack sales in the quarter. However, weather and macro impacts had an outsized pressure in some of our major markets such as Los Angeles and New York City. Traffic was down 4.6% in the quarter due to unfavorable weather and broader industry pressures. We estimate that these industry impacts plus the long duration of our burger limited-time offer accounted for more than 400 basis points of traffic pressure in the quarter. Shack grew 4.8% with approximately 4% in Shack menu price and 5% price blended across all of our channels. We exited the quarter with less than 2% year-over-year menu price in Shack. Our Black Truffle limited-time offer drove positive mix. Items per Shack trends improved sequentially and were impacted year-over-year later in the quarter by the timing of the Easter holiday. Regionally, our Southern markets outperformed with Houston, Miami, and Orlando achieving at least high-single-digit same Shack sales growth. These are the markets where we had some of the least amounts of weather pressures. However, we did face comp pressures in New York City, Washington DC, and Los Angeles due to the weather and macro pressures. Our same Shack sales declined by approximately 1% in April while headwinds persisted in April and we rolled off 3.5% menu price in March. We saw material improvements in our trends as the month progressed. The success of our marketing activations around March Madness and Tax Day as well as our new Dubai Shake limited-time offering have been encouraging. In the last two weeks of April with new menu news and improving weather and a strong spring break and Easter week, we had positive low-single-digit comp. Our operators were nimble and did an outstanding job managing through these challenges in the quarter. We generated $64.2 million in restaurant-level profit or 20.7% of Shack sales, a 120 basis point improvement year-over-year. Food and paper costs were $86 million or 27.8% of Shack sales, down 80 basis points versus last year. Menu price as well as our broader supply chain and process improvements helped offset mid-single-digit increase in feed costs. Labor and related expenses were $86.7 million or 28% of Shack sales down 110 basis points versus last year. Our new hourly labor model performed well and our operators quickly adjusted to the challenging weather trends. We delivered stronger throughput year-over-year while also improving speed of service, order accuracy, and guest scores. Other operating expenses were $48.3 million or 15.6% of Shack sales, up 70 basis points year-over-year driven by our marketing initiatives. Our digital mix increased to 38% in the quarter, up 130 basis points versus last year resulting in additional expense. Occupancy and related expenses were $24.6 million or 7.9% of Shack sales in line with last year's levels. We are very pleased with the margin improvement delivered in the quarter and expect to build upon this momentum throughout this year and over the next several years. G&A was $40.6 million excluding $1.2 million in one-time adjustments; G&A was $39.4 million with a year-over-year increase led by higher investments in advertising to grow revenue in a tough competitive environment. Equity-based compensation was $4.5 million in the quarter, up 24.7% year-over-year of which $4.1 million was in G&A. Preopening costs were $3.2 million in the quarter, up 16.9% year-over-year as we opened four new Shacks and prepare to open 14 to 16 in the second quarter. We grew adjusted EBITDA by approximately 13.5% year-over-year to $40.7 million or 12.7% of total revenue. We realized net income attributable to Shake Shack, Inc. of $4.2 million or earnings of $0.10 per diluted share. We reported an adjusted pro forma net income of $6.4 million or $0.14 per fully exchanged and diluted share. Our GAAP tax rate was 14% and our adjusted pro forma tax rate excluding the tax impact of equity-based compensation was 24.6%. And finally, our balance sheet remains solid with $312.9 million in cash and cash equivalents at the end of the quarter. Now on to guidance. Our guidance assumes no material changes in the macroeconomic or geopolitical landscape and the potential impact on system-wide sales or costs including any outsized impacts from tariffs. The guidance that we are providing today assumes that the current environment holds. However, we acknowledge a wider range of uncertainty around the macro backdrop and consumer spending. For the second quarter of 2025, we guide total revenue of $346 million to $353 million with $11.9 to $12.3 million of licensing revenue, 14 to 16 company-operated Shack openings, 5 to 7 license openings, and for same Shack sales to be up low-single-digits year-over-year. We guide restaurant-level profit margin of 23% to 23.5% representing 100 basis points to 150 basis points of improvement year-over-year led by the strong execution against our initiatives to reduce the total cost to serve. We are planning for low-single-digit year-over-year inflation in food and paper costs after baking in the positive benefits from our supply chain strategies with pressures led by uncertainty in beef pricing that represents 30% to 35% of our blended food and paper basket. Our marketing plan for this year is more evenly split over the quarters versus last year. This is resulting in a higher year-over-year step-up in both other operating expense and G&A continuing in the second quarter but then tapering off in the back half of the year. On to our full year 2025 outlook, given the wider range of macroeconomic uncertainty and the impacts that we've seen in the first quarter, we expect 2025 same Shack sales to grow by low-single-digits year-over-year. Our pricing plans for this year remain modest with in-Shack prices up approximately 2% year-over-year and overall prices across all channels up approximately 3%. Our 2025 pipeline for new Shack openings is tracking ahead of plan and we now expect to open 45 to 50 company-operated Shacks this year marking the largest class on record. We expect to open 35 to 40 license Shacks and our guidance reflects growing system-wide Shack count by 14% to 16% year-over-year. We expect total revenue of approximately $1.4 billion to $1.5 billion, reflecting both a wider range of macro outcomes as well as the increased confidence in our 2025 company-operated new Shack opening class and continued strength in our license business. We expect the great momentum we are showing in our operational improvements to deliver restaurant-level profit margins of approximately 22.5%, an increase from our prior guidance of approximately 22%. Our commodity outlook reflects expectations for flat to low-single-digit inflation led by beef up low to mid-single-digits and does not contemplate any potential outsized impacts related to tariffs, which we expect to be minimal at this time. We are planning for labor inflation to be in the low-single-digit range with pressures easing throughout the year. We are continuing to manage our G&A investments in light of the challenging macro backdrop and reiterate our plans to invest approximately 11.5% of total revenue in growing the business this year. Despite the macro-driven sales pressures, with the strength of our operational improvement and execution on cost opportunities, we are reiterating our guidance for adjusted EBITDA of $205 million to $215 million representing 17% to 22% growth year-over-year. When we provided our three-year financial targets in January, we had shared that this was based on our views of the business operational potential at the end of last year. However, as Rob stated, with the operational improvements that we have identified and continue to produce, we now expect to grow our restaurant profit margins by at least 50 basis points each year over the next three years. We're tracking ahead of this plan for 2025 with our guidance today. With this confidence in our trajectory of our margins, we now expect to grow adjusted EBITDA by low to high-teens percentage over that period.

Thank you for that your time and with that, I'll turn it back to Rob. Thank you, Katie. I want to thank our teams again for their hard work and passion for Shake Shack, which is the driving force behind our ability to navigate this environment and evolve and grow this company to reach new heights. We are getting better every day and uncovering ways to continue to improve the guest experience, push the envelope on our culinary leadership, outperform what guests expect from us, and all while reducing our operating and build costs. I'm extremely excited about the potential that lies ahead. Thank you to everyone on the call today and for your interest in our company. And with that, operator, please open up the call for questions.

Thank you. We will now be conducting a question-and-answer session. Our first question is from Brian Vaccaro with Raymond James. Please proceed.

Hi, thanks and good morning. My question was just on the store margins. You raised your annual outlook as you said, and you also committed to margin expansion over the next three years. Could you elaborate on what some of the more significant near-term opportunities are that allowed you to boost your 2025 guide, but also some of the new learnings and thoughts on what levers you have at your disposal, giving you confidence in the multi-year outlook as well? Thank you.

Thanks, Brian. This quarter really showed us what we can do with operations and managing and controlling and flexing our labor model and how we support our teams and our guests in the restaurants. The new labor model that we put in Q4 is definitely having a positive material impact on our productivity. But even beyond that, just our leadership in the field and our ability to see the trends in the marketplace, to see where the business is going, to see where traffic is and be able to nimbly and with great agility be able to change our labor planning and manage through that. And it's not the easiest thing to do given our footprint where we have a lot of restrictions on how we can change our labor planning in the first two or three weeks. So we've just gotten really good. I give 100% credit to our operations leaders. They just are knocking it out of the park. They have built a lot of discipline and a lot of capability over the last six months and that's going to carry us in the near term. Over the long term, we have more operational improvements to make that won't necessarily be significantly reducing labor. We are focused on maintaining the high levels of guest service that we have delivered over the last six months. While we've gotten more productive, we've also increased our guest satisfaction. That is our number one priority. But we do have processes, we do have equipment opportunities to make us more efficient and in the restaurants. So that's going to contribute. But we're also seeing and exploring some big opportunities in our supply chain. We have uncovered a lot of great ways to get more productive in a lot of different ways, both from a procurement standpoint, a distribution standpoint, a sales forecasting standpoint. So those two things, both operations and supply chain, give us the confidence to evolve a guide that we put out there only four months ago. We know a lot more, we've learned a lot and we have a lot more confidence.

Our next question is from Christine Cho with Goldman Sachs. Please proceed.

Thank you for the opportunity to ask questions. So you have tested quite a few things this quarter. I think you've mentioned the rollout of the new digital menu boards, the $9.99 chicken combo promo for a limited time. Could you actually share some of your early learnings and observations so far and how this informs your drive-thru strategy going forward? Thank you.

Yes, absolutely. It's been a long time coming for this brand on drive-thru. We've tested a lot of different models to try and improve a unique drive-thru dynamic. I mean, the reality is it takes us longer to make our food than a lot of our competitors and our guests freak at those other competitors as well. And they've been conditioned to expect food that's been sitting there and delivered as soon as you get to the window. It's obviously not our model. We're making everything fresh when folks order it. And so we've had to evolve both our ordering processes as well as our make processes as well as our hospitality protocol. So we've been testing that really over the last 30 days with combos and eight of our drive-thrus, combo digital menu boards in eight of our drive-thrus and we've seen significant improvements in both ordering time, speed of service, accuracy and guest satisfaction. So we are all in and are going to deploy those combos, that combo strategy across all of our drive-thrus here with great efficiency over the next month. And we're also looking at potentially combos in our other channels, so potentially looking at kiosks and in-restaurant ordering as well. But we're going to start with the drive-thru, really understand all the implications, both positive and opportunities to improve before we look at the other channels. But we're really excited about what we've seen so far from our most recent testing.

Our next question is from Michael Tamas with Oppenheimer and Company. Please proceed.

Hi, good morning. Thank you. I think your previous same-store sales guidance had assumed a strong back half to the year just given the timing of some of your strategic initiatives. So it seems like you're sort of putting a stake in the ground now that the first quarter is going to be the low point for the year, implying healthier trends, even though your comparisons are actually a little bit tougher as we go forward here, which is a bit unique because I think comparisons for some other companies actually get a little bit tougher. So, or a little bit easier, excuse me. So can you talk about maybe any evolution you're thinking about your internal expectations into the back half of the year and can you unpack for us what some of those drivers are that you're most excited about that underpins your confidence to get to that low-single-digit same-store sales guidance for the year? Thanks.

Absolutely. That's a great question. As we mentioned in our last earnings call, we had a strong start to the year with over 5% growth in comparable sales during the first three weeks of the quarter. However, we faced significant challenges due to severe weather, including the fires in LA, where many of our restaurants are located. Additionally, the last two months of the quarter were affected by consumer sentiment along with various macroeconomic and geopolitical issues. We consider these to be some of the main challenges we encountered, but we believe they are temporary. We anticipate a return to normalcy in some areas. I also want to emphasize that despite the concerns around our premium positioning during these tough times, we have successfully outperformed some of our more value-focused competitors in both comparable sales and transactions. We are confident that our premium positioning and the value we provide to our guests will withstand fluctuations in consumer sentiment, which is reflected in our strong performance this quarter. Looking ahead, we are particularly optimistic about our menu strategy, which involves culinary innovation and limited-time offerings. One challenge we faced in the first quarter was the lack of new promotions. While our truffle offering was well received, it ran for an extended period and we struggled to drive traffic with new options towards the end of the quarter. We are addressing this by creating a diverse calendar of limited-time offerings that will feature innovation beyond just our burgers and sandwiches, including new sides, beverages, and shakes. This fresh approach to beverages represents a significant departure from our usual offerings. We are expanding our culinary innovation and integrating it into a comprehensive value proposition that includes our core strategy, limited-time offerings, combo strategies, promotions, and pricing. It's important to note that we exited the first quarter with only a 2% year-over-year increase in menu pricing, which is the lowest we've seen in years. We are committed to enhancing our operational and supply chain efficiency to avoid significant price increases while still achieving strong comparable sales. Our focus will remain on improving our margins without relying heavily on price adjustments, further enhancing our value proposition and helping us continue to outperform in the market.

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

Hi, good morning. Thanks for taking the question. I wanted to follow-up on that. What is kind of the ideal frequency for Shake Shack in terms of kind of new product innovation or limited-time offerings? And as you're thinking about building out operational muscle, sometimes that increased frequency of change in the menu can run counter to kind of improved throughput or speed of service. So how are you kind of balancing that?

Yes, I've focused on this throughout my career. I gained significant insights into this challenge at Taco Bell, where we created 450,000 items from just 14 ingredients. I applied that experience at Arby's, developing an LTO calendar that minimally impacted operations and the supply chain, which is our goal here as well. Our operators have done an incredible job over the past six months, truly transforming operations at Shake Shack. Our confidence in our future margins reflects their efforts. We want to ensure we don't hinder their efficiency and productivity by overwhelming them with complex tasks at the Shacks. Our innovation is aimed at making things easier for them, not more difficult. This can be achieved through investments in equipment, new processes, and better supply chain management. We are fully committed to this. For instance, we limited the release of the Dubai Chocolate Shake because we required our operators to grill kataifi, which was impractical during regular service hours. This limitation allowed us to prepare only 25 shakes across 30 Shacks. However, we found an alternative ingredient that streamlines the process, enabling us to implement this innovation in all Shacks and support our operators. These are the types of solutions and innovations we are focusing on for the latter half of the year.

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

Thank you. This is Zach Ogden on for Andrew Charles. Just curious if you could rank order what drove 1Q's 400 basis points of headwinds that you called out between weather, consumer headwinds and a longer Black Truffle limited-time offering.

Yes. Hi, so what we've called out is, we had a low-single-digit headwind from weather and the wildfires and the limited-time offer combined. And then heading into February, we faced an incremental pressure from industry shifts. And so that would be the pressures that we saw in February and March and continuing into April.

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

Thanks. Just clarification on the long-term targets. With the update to your restaurant-level margin expectations to expand at least 50 basis points per year for the next three years. Could you just remind us or talk about what kind of menu pricing assumption is actually embedded in there? And in the event that traffic proves to be a bit elusive for the industry or for Shake Shack for whatever reason, do you think you've left yourself flexibility to take less pricing if you think that's the right thing to do?

So on our conviction around our ability to and confidence around our ability to continue to expand margins, I'd say it's really bucketed into the two things that Rob talked about. It's about us getting better in our operations and then also exploring additional opportunities within our supply chain. I would say with what the team has uncovered over the past six months, there is a lot of opportunity for us to continue to dive in here. And as we showed in the first quarter, sticking to this strategy of really focusing on the controllables and getting better in our operations and our supply chain, that's helping us to deliver margin expansion in light of pressured traffic from macros and weather. And so we expect to continue on this trend. And I would just say too, when macros do change, we have built a very incredible efficient machine here that I expect to have a lot of leverage to the bottom line.

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

Great. Thanks for taking the question. Mine was about your innovation and kind of what you have planned for the rest of the year. You recently brought back the barbecue menu. That's something that you've run before. I'm wondering first part of the question is what is different this time? Should we expect this to have a greater impact than it's had in the past? Are you particularly excited about what's coming with this barbecue menu? And then the other question, we have seen some innovation I think kind of being tested. You've talked about the smoked brisket chili; we saw the French onion burger. Should we think about those as just kind of short-term spot innovation that you're putting in or were those tests that we might see in the future? This all kind of leads to the question of the cadence of your limited-time offering strategy going forward, really throughout maybe 2025, but really long-term whether there should be more consistent innovation or whether it's just these big kind of seasonal limited-time offerings that you've done historically. I know there's a lot there, but I appreciate it.

Jake, I really appreciate your perspective. As someone who prides themselves on introducing new innovations, I want to be clear that I'm not interested in rehashing old ideas. The barbecue platform worked well for us last year, but I need to be upfront about the fact that genuine strategic culinary innovation takes time. We are committed to a thorough process where we generate new ideas, test them, and prepare them for launch so that when they reach our Shacks, they're fully ready to enhance sales growth. We're currently developing these new concepts, and I acknowledge a few that you mentioned we are testing. While these burgers may not be entirely new, we will be introducing fried pickles for the first time. We’ll also roll out new beverage and shake options this summer to complement our platform. We have a strong passion for innovation, and Shake Shack has the expertise to execute it effectively. I want to assure you that we aim to introduce fresh ideas consistently. Regarding the timing of our offerings, I apologize for not addressing that earlier. We typically maintain a quarterly schedule, introducing three to four major sandwich platforms as limited-time offerings, alongside innovative beverages and sides. While we have this quarterly approach, it may vary based on the circumstance. We are also examining how the limited-time innovations can influence our core menu and contribute to ongoing value instead of relying solely on additional volume. We aim to accomplish all of this while keeping our operations seamless and maintaining the high standards that our team has established.

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

Hey, thanks for the question. Just wanted to follow-up on the discussion of promotions and marketing. I think you mentioned mix was slightly positive in the quarter. Going forward, do you expect that mix to be more of a headwind as you launch your marketing plan for the remainder of the year, putting a little bit of pressure on average check?

I mean, I think a lot of times mix gets wrapped up in price and as we build out our core menu strategy and complement that with our limited-time offerings, we're trying to drive both traffic and improvement in mix. So we have premium items that, that, that we believe we can bring at premium price points and allow consumers to self-select in and trade up too, right? So some of the things that Jake just mentioned, some of the things we're testing, some of the sandwiches we're looking at are very premium, premium ingredients, premium price points. And that will afford us the opportunity to drive mix growth without having to take pricing on our core items. I mean, I would be happy if we never had to take another price increase on our Shack Burger. Like can't promise that's going to happen, but that would be amazing. That would allow us to diversify our portfolio of offerings and allow us to open up our aperture to be more appealing to all income levels and all geographies. So that doesn't just happen by not taking pricing because we have margin growth objectives, we have sales growth objectives. So we have to find other ways combos and the increased attachment rate that we're going to drive on fries and beverages is one way to help that. Launching premium products as limited-time offerings or even on the core menu that allow customers to self-select into without having to take pricing is another way to do that. Increasing our attachment rate on shakes, beverages and sides by leveraging innovation is another way to do that. Increasing our party size by creating more reasons for larger parties to come to Shake Shack is another way to do that. So we're looking at all of that. And one of my favorite ways that we're going to increase mix is we're opening up a full bar at the battery in Atlanta at our new Shack this summer. And for all of you that can visit Atlanta, we're going to have the best cocktails at the best prices in the whole place. So like we're exploring all different ways to drive mix without having to take more pricing on the things we already serve every day.

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

Great. Thanks for taking the question. Maybe just two quick questions if I could. First, on just the margin, not sure if I missed this, but comps were well below, I guess guidance and our expectation, but margin was above. So can you just talk about what you were able to flex so quickly in a matter of call it weeks that helped sustain that margin or actually even grow it a little bit more than we expected? And then two, on the decision to accelerate unit growth, I think 45 to 50, I think prior was around 45. Just are you still expecting costs to come down this year build cost per unit? I think we're seeing a lot of this tariff conversation. Not sure if that's built into your outlook. Is that expected to increase construction costs? We're hearing that from several other operators that we could see construction costs rise. Thank you.

Great questions, Pete. It's truly exciting to consider what our margins might have looked like without these challenges. We have the best labor retention we've ever experienced and the lowest waste levels to date. We are actively managing the factors that influence our margin. By taking control of those aspects, we've managed to perform well despite the decline in sales affecting our restaurants. We are deliberate in our approach. We’ve created a scorecard to track every key performance indicator daily. Our discipline and processes ensure that our area directors are collaborating with their general managers each week to review all their KPIs, which is improving overall performance and operational discipline. This is what has enabled us to maintain our margins, and we anticipate further improvement as our revenues rise. Regarding new unit growth, I am genuinely excited about our culinary innovations, but what excites me most is our new unit expansion. We're set to open more locations this year than ever before while reducing costs by at least 10% despite concerns over tariffs and construction. Currently, we are exceeding our forecasts for the year. In the past two weeks alone, we achieved two record openings with the highest sales in the brand's history for drive-thrus in the Southwest. This clearly demonstrates our ability to enhance our brand's performance. We are not scaling back on construction or expanding our Shack locations; in fact, we are accelerating our efforts. I am enthusiastic about approving new sites as each one represents an opportunity to introduce Shake Shack to new communities. The strong performance of our openings is one of the most exciting aspects of our business.

Our next question is from Drew North with Baird. Please proceed.

Great. Thanks for taking my question. A lot of the topics I had on the list have been asked, but maybe I'll circle back on a clarification on the Q2 comp outlook. Thanks for the comments on April and the uptick in recent weeks, but I guess with all the movement in the calendar comparisons and seasonality, I was just hoping you could expand a bit on the underlying assumptions embedded in the outlook for the balance of Q2. I guess, does the low-single-digit guidance simply extrapolate the recent run rate on traffic or anything we should know about from a calendar comparisons perspective for the balance of Q2 would be helpful. Thank you.

In Q2, we anticipate achieving low-single-digit comparable sales. As mentioned earlier, we are influenced by the current macro environment, which informs our underlying trend. We recently launched our summer barbecue menu featuring four new sandwiches, an increase from last year's two, along with chicken options. There are also more exciting menu innovations slated for this quarter, which we believe will provide a significant positive impact beyond our first quarter results. It's essential to recognize the role menu innovation plays for Shake Shack; the absence of it has been detrimental. This isn't just about sales mix or IPC; it's fundamentally about traffic. Our compelling limited-time offers have historically driven customer frequency and attracted new guests across all our channels. While the Black Truffle was a success, having run for seven months, we are eager for fresh menu news that we expect will support our low-single-digit comp guidance this quarter. Additionally, we have some very exciting menu innovations planned for the latter half of the year.

Our next question is from Jeff Bernstein with Barclays. Please proceed.

Good morning. This is Parekh on for Jeff. Thanks for the question. Rob, you pointed to macro headwinds and uncertainty in your prepared remarks. And it seems like in the last few weeks, if anything, things have become even more uncertain with just constant news headlines. But Shake Shack has been laser-focused on providing that predictable everyday value. Just can you share with us any learnings, early learnings you've seen from just the value combos, behavior and the drive-thru, any kind of shift in behavior or how consumers are using the menu, especially if all these QSRs are obviously just constantly pushing these $5 bundles? Thanks.

We truly believe we offer the best value in the industry. While we do not see ourselves as fast food, we certainly compete with it. It's essential for us to provide value to the frequent users of quick-service restaurants. That's why I am particularly focused on maintaining competitive pricing on our core menu items. When considering our fast food rivals, our Shack Burger, fries, and beverages are the most comparable. We are striving to keep those prices appealing, recognizing that consumers assess value in two ways: absolute price points and value for the money. Some customers base their decisions on price points alone, and we want to remain within their consideration. However, we can excel with those who focus on value for money, which is why we keep innovating with premium items. For instance, our Dubai Chocolate Shake has been incredibly popular, with long lines and sold out quickly, even though it is our most expensive shake at $8.49. There are many guests who appreciate our premium offerings. This strategy will help us attract customers even in a challenging competitive landscape. While discounts and promotions are important, we’ve been enhancing our targeted incentives. Last year, we built our guest recognition system, which allows us to track customer behavior across all channels and deliver tailored incentives, and we expect to optimize this system going forward. Additionally, our combos are mainly about simplifying ordering and ensuring operational accuracy in the drive-thru, but they also carry a value perception. As we roll out these combos in 40 drive-thrus this month, we believe our value proposition for guests will be even stronger, and exploring this in other channels will further enhance that perception. This is our approach to maintaining competitiveness despite ongoing challenges throughout the year.

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

Thanks. Just wanted to follow-up on that most recent line of questioning. So with that launch of your combo meal LTO in early March, how did customers respond? And what did you learn from that response that you can sort of carry forward?

Yes, we aren't disclosing specific mix numbers or details, but I can share that our order times, accuracy, and guest satisfaction have all improved. We focused on several key areas. While some improvements aren't entirely due to the combo meals, we've observed a shift from single orders to double combos since we decided to feature the double combo as the first option on the combo board. This change has positively impacted both revenue and margins. We're considering these elements comprehensively to drive mix and margin benefits without increasing prices on our core items. While there are operational improvements from the combos, there are also sales and profitability opportunities to utilize them effectively. Contrary to the belief that combos might hurt margins and mix, strategic menu placement and incentives can actually enhance guest spending. Our prominent display of shakes alongside combos could lead to higher sales of shakes in addition to beverages, fries, and sandwiches. We're actively analyzing this and our initial results have been very encouraging, and we intend to keep optimizing our approach.

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

Great. Thanks. Good morning, guys. Rob, I wanted to follow-up on your comments around guest recognition. And can you just talk a little bit more around the steps that you mentioned around optimization and learning? And if there's any additional rollouts left this year to get that underlying infrastructure that you need in place to fully utilize that platform? And I guess, more strategically, can you just flesh out what you hope to get out of it? And what you hope the data unlocks for you in terms of not just targeting existing customers, but does it open up other possibilities in terms of creating better avatars to go out and target maybe customers that aren't users of Shake Shack yet?

Thank you for the question, Chris. It helps us understand how our actions are influencing responses. When we release promotions, limited-time offers, or other initiatives, we can now clearly gauge the behaviors they generate across all channels. Previously, we lacked the ability to connect these insights. This capability will enable us to enhance frequency and loyalty among our existing guests by providing incentives and creating awareness around initiatives that drive engagement. It also allows us to better understand how to reach guests we haven't connected with yet. For instance, if a promotion attracts a guest who hasn't visited us in a year, it provides insight into what might appeal to less frequent or new guests. This knowledge enables us to develop marketing programs and strategies aimed at attracting new guests, both in our existing locations and as we expand into new markets. We'll have a better understanding of how different regions and markets respond to various approaches. When we open a new location, we will be equipped with this knowledge, allowing us to start off strong and improve our new store openings. In summary, this will help increase the frequency of our current guests while also providing insights that allow us to create programs to attract new customers.

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

Hi, good morning. Thank you for the question. Isaiah Austin on for Sara. We just wanted to ask, you guys reported your fourth quarter pretty far into the first quarter. So it just sounds like comps slowed pretty sharply going into March, while the industry was broadly starting to recover. Could you kind of talk about that dynamic? And then, just in the same vein of just macro pressures, why do you feel like in the first quarter you guys weren't insulated as much from your higher income consumer just as you've been in the past? Thank you.

February presented us with the most significant comp challenge. However, March showed improvement that aligned with the overall industry trend. January started off strong for us, but February was a challenging month. By March, we began to bounce back, and April continued this upward trend. We have observed this trend line for the industry and I believe that our premium positioning and focus on higher-income customers have helped protect us. Our comp performance has outperformed many of our competitors. Recently, reports from others have mainly shown negative comps, while we have managed to achieve positive comps with less pricing increase over the past three years. This indicates that we have been relatively sheltered. Additionally, we feel even more confident about our position considering our presence in markets like Los Angeles, New York, and D.C., which have faced various disruptions in the first quarter due to factors like tourism declines, weather conditions, the geopolitical climate, and macroeconomic issues. Despite these challenges in such saturated markets, we have managed to deliver strong results and have, in fact, exceeded our expectations considering the broader economic environment.

I'll just add that we mentioned this in the shareholder letter. If you look at New York City, Los Angeles, and the Mid-Atlantic region, which includes Washington, D.C., these areas experienced unique pressures from weather and tourism. These three locations accounted for about 75% of the challenges we faced this quarter. In contrast, our other markets, particularly those less affected by weather, saw comparable results increase in the mid to high single digits. Therefore, those three specific markets had a disproportionately negative impact, as Rob described.

Yes. I would like to add that as we plan to build between 45 and 50 Shacks this year, most of these locations are not in our current markets. We are diversifying our portfolio by establishing Shacks in areas experiencing significant population growth in the Southeast and Southwest. These regions are currently some of our top performers and yield our best new Shack openings. While Q1 posed challenges due to the impact in those heavily penetrated markets, as we continue to grow and maintain our model of excellence in opening these Shacks, we will be less vulnerable to fluctuations in specific geographies.

Our next question is from Daniel Guglielmo with Capital One Securities. Please proceed.

Hi everyone, thank you for taking my question. And kind of on a similar subject, as we just discussed. But around the long-term goal of 1,500 company-operated Shacks and then taking into consideration the macro impacts in February through April. Have there been any changes to the way that you identify or judge potential new U.S. locations? Is there anything from a quantitative or qualitative standpoint?

It's a great question. We've discussed our improved ability to identify and analyze markets for our new Shacks. This capability was established before the recent macroeconomic challenges in certain regions. As a New York-based company, we have many of our top-performing Shacks in New York and plan to continue developing in New York City. Despite the challenges in California regarding wages, we have highly successful Shacks there, generating strong volume and margins, supported by exceptional teams. I recently visited our Northern California teams, who have transformed that market and achieved impressive results over the past year. In our legacy markets, we will keep finding excellent real estate opportunities to open successful Shacks. We are also investing resources in regions like Arizona, Texas, and the Southeast, including Florida, where we see not only great Shack openings but also significant comparable growth. Much of this is driven by population growth and increasing buying power in these markets. Additionally, our drive-thru model has provided us access to real estate opportunities that we didn't historically have. Our strategy remains consistent, although the approach we had in place before February remains effective given the current macro trends and the characteristics of various geographies.

Our final question is from Rahul Krotthapalli with JPMorgan. Please proceed.

Good morning, guys. Thanks for all the color. I have a two-part question. The first, New York and California are over 30% of the store base and probably even more than 40% of sales. Can you discuss what percentage of this 110 stores or so across your system within company-operated have higher mix of tourism or over-indexed to that? There have been some reports on like lower bookings in the summer for hotels, slides, etc. Curious to hear if this is contemplated in your guide. And then, the second part, like some of the brands have been leveraging social media really well, both organic and paid content, can you discuss your plan to leverage the platform, either through regional or celebrated influences to drive some traffic as you open new Shacks and then also with the limited-time offerings.

I'll start with the second question. Social media is a core part of our strategy. Unlike some of our competitors who have large media budgets for TV campaigns, we focus on paid digital and particularly earned social media. A great example of this is our recent campaign for the Dubai Chocolate Shake. We invited around 12 to 15 influencers to our Innovation Kitchen the week before the launch, and they created content that generated significant impressions and positive social engagement, comparable to efforts from much bigger competitors over the past year. We utilize influencers in major markets like New York as well as in smaller markets when we open new locations. Social media is a fundamental way we connect with our customers.

And then on your question about tourism, yes, certainly, what we've called out in the macro headwinds that we had in New York City, in Los Angeles and Washington, D.C. was impacted by international tourism. And our guidance we have expectations that those pressures persist for the rest of the year. We also acknowledge a wider degree of uncertainty about how the macro environment will play out and that is also reflected in the wider range of guidance that we gave for this year on top-line.

Thank you. I just want to close by saying that our teams are 100% focused on the things we can control. We talk a lot about macro headwinds. We talk a lot about the challenges that we're all facing and the uncertainty that's out there. But we're mitigating that with staying focused on the foundation of Shake Shack. It's operations, it's supply chain, it's culinary innovation, it's development. And we've never performed at a higher level. This is a testament to the people that are out there working in our Shacks every day, the people that are out there working in our supply chains and the people that are building our Shacks. So I just want to thank them for everything they're doing. It's really amazing what's happening right now at Shake Shack, and we are excited about our future and thankful that all of you are interested in that future. So with that, I'll say thanks to everybody.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.