Shake Shack Inc. Q2 FY2025 Earnings Call

Greetings. Welcome to Shake Shack's Second Quarter 2025 Earnings Call. 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 our CFO, Katie Fogertey. Additionally, I'm very pleased to announce that Alison Sternberg has joined us as Shake Shack's new Head of Investor Relations. Alison brings over 25 years of finance and investor relations expertise across multiple industries, including consumer. We're excited to have her on board and look forward to everyone getting to meet her. Alison?

Thank you, Melissa. I am delighted to be here today. Shake Shack has long been a brand and company that I've deeply admired and I'm excited to work alongside this talented team to capitalize on the significant opportunities ahead of us. Over the past few weeks, I've been immersing myself in the business and collaborating closely with Rob, Katie, and our finance team as we prepare for today's earnings call. I look forward to connecting with many of you in the coming months. Now back to business. 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, and our other SEC filings. 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 second quarter 2025 shareholder letter, which can be found at investor.shakeshack.com in the quarterly results section or as an exhibit to our 8-K for the quarter. I will now turn the call over to Rob.

Thanks, Alison. Good morning, everyone. Firstly, I want to thank all of our team members across the country who have been leading the efforts to assist their communities impacted by significant weather. I'm never surprised but always thankful for the way our Shake Shack team members contribute their time and resources when challenges arise. And I'm proud to announce that with their help, we have raised over $100,000 to support communities in Texas and North Carolina impacted by the devastating floods earlier this month. We are all hopeful that this support can help a lot of people in a significant time of need. On to our Q2 results. I'm very proud of the strong results from the second quarter despite a particularly challenging environment in the first quarter and April. Although there are still lingering headwinds facing the industry, these results are reflective of our continued execution against our strategic plan and long-term aspirations and are the foundation of our confidence in raising our adjusted EBITDA guide for the full year. Just a year ago, I stood here and outlined our areas of focus, and I am humbled by the progress that our entire team has made in such a short period of time. On my first earnings call, I shared three key priorities. The first was driving healthy Shake Shack sales while building brand awareness and affinity. The second was opening more Shacks globally with strong returns for us and our licensed partners. And the third was improving profitability in our Shacks and across the enterprise. Over the last year, we've made meaningful progress in all three areas. And we have a clear roadmap to continue scaling Shake Shack with discipline and purpose. Let me begin by reinforcing what we're building and why we know that we're positioned to win. Our team members and general managers are the heart of our brand. They deliver a differentiated guest experience anchored in premium ingredients and enlightened hospitality in beautiful restaurants. That is what sets us apart in the category. Team member and guest satisfaction remain our true north as we execute on a long-term strategy focused on revenue growth and margin expansion. One of my favorite quotes is from Simon Sinek, who says, 'Leadership is not about being in charge, it's about taking care of those in your charge.' At Shake Shack, we accomplish this through our culture of enlightened hospitality. We are laser-focused on taking care of our team members so that they can take care of our guests. Over the past year, we've evolved into a performance-based culture that empowers our teams to lead with clarity, accountability, and purpose. We've invested in leadership development programs that go beyond training to prepare our next generation of leaders to open up many Shacks ahead. From Shack-level managers to our support center teams, we're equipping our people with the tools, mentorship, and confidence they need to grow and thrive, and we're seeing the results from improved restaurant-level margins to our ability to open the largest class of new Shacks on record this year. Our wins are powered by leaders who are deeply engaged and committed to our success. As we scale, we will remain focused on our number one strategic priority of building this culture of leadership, and it will be our fuel, enabling us to grow with consistency, maintain the soul of our brand, and deliver long-term value for our shareholders. To further support our efforts, earlier this month, we welcomed Jamie Griffin as our new Chief People Officer, reporting directly to me. Jamie has held multiple roles across various business segments and multi-unit restaurants, always serving as the connective tissue between field teams and senior leadership in helping them to scale. We are very excited to have him on our team as we bring the world's best fine casual experience to as many guests, team members, and communities as possible. In his role, Jamie will oversee key areas of the company, including team member experience, talent acquisition, organizational design, and leadership development, among others. Additionally, he will lead the Shack Support Center HR team to support enterprise growth, build organizational capabilities, and shape our high-performance, people-first culture rooted in enlightened hospitality. Our second strategic priority is improving restaurant operations, and the results speak for themselves. In Q2, we expanded restaurant-level margin by nearly 200 basis points year-over-year to approximately 24%, our highest in the last 24 quarters. This reflects the strength of our operational foundation and the momentum that we are building. We've implemented a performance scorecard that's driving accountability and visibility across our Shacks, improving both guest experience and profitability versus last year. We're investing in tools that empower our teams to operate more efficiently, including smarter scheduling systems and targeted coaching. This past quarter, we achieved improved labor attainment, speed of service, and order accuracy. Our third strategic priority and a core focus of our long-term strategy is delivering positive same-Shack sales with a focus on traffic and culinary mix. In the second quarter, we achieved 1.8% same-Shack sales growth. Trends improved throughout the period and into July, where we delivered 3.2% same-Shack sales through a combination of culinary innovation, targeted marketing, operational improvements, and digital activations, all aimed at reaching new guests, increasing guest frequency, and reinforcing our value proposition. Culinary innovation is part of our DNA at Shake Shack. We take immense pride in our ability to serve unbelievable food with the finest quality ingredients, made fresh to order for our guests. We are continuing to innovate across our core menu, along with a strong pipeline of limited-time offers. We look forward to the next 18 months during which we are going to introduce new innovations to our guests as only Shake Shack can. We are seeing it today with our limited-time summer barbecue platform, Dubai Chocolate Pistachio Shake, and new fried pickles side. These offerings are creating an exciting buzz bringing in new guests while also driving higher frequency. On the marketing front, we are focused on driving sustained engagement strategies. And with our increased scale, we are in the initial stages of testing a paid media component of our business model. We expect to realize the full potential of this brand by clearly defining how Shake Shack is different than fast food and bringing that to life in every market we compete in. As a company, we have historically under-invested in advertising versus many of our larger peers. And while same-Shack sales growth has been positive for many quarters now, this has been a limiting factor to achieving our true potential. In Q2, we delivered close to 2% same-Shack sales and approximately 3% of pricing year-over-year. Compare that to 2024, where we delivered 4% of same-Shack sales with approximately 7% pricing. We are building a different, more sustainable, value-enhancing model that still delivers the premium experience that sets us apart. Moving forward, we will support our amazing culinary offerings with traffic-driving media. This has never been the case for Shake Shack. We have historically relied on our word-of-mouth promotions and other bottom-of-the-funnel marketing initiatives to drive traffic. These tactics will continue to be components of our model where appropriate, but they will be enhanced and supplemented with advertising that brings our brand to life. Last week, we embarked on a paid media campaign around two exciting products and strategies: our Dubai Shake and our new Dollar Soda promotion to drive Shack app adoption and usage. Building this product marketing muscle is a cornerstone for us to drive long-term sustainable traffic, delivering incremental sales with great products and marketing will provide even more fuel for continued leverage and restaurant margin expansion. Another sales strategy we've been focused on is offering combos. We believe that combos or bundled meals are important for drive-through success. By reducing the friction for our guests and increasing our value perception, we see potential for combos to drive throughput and frequency. Our combo meals are now live in all 46 of our drive-throughs, and we're excited about the continued opportunity in this important format. Looking forward, we're confident that our holistic approach, combining culinary innovation, guest experience enhancements, and a 360-degree approach to marketing will continue to drive top growth and strengthen our brand. Turning to development, we continue to execute with discipline and momentum in Q2, opening new Shacks that reflect the strength of our brand and the scalability of our model. In the second quarter, we opened 13 new domestic company-operated Shacks, bringing our first half total to 17. We remain on track to open 45 to 50 company-operated Shacks in 2025, marking this as the largest class in company history. These openings are concentrated primarily in established markets outside of the Northeast, diversifying our portfolio and increasing the productivity of our supply chain and marketing investments. We are continuing to push the limits of what is possible and to think big with our new location at The Battery in Atlanta right next to the Braves stadium. It's our first company-operated Shack offering a great lineup of signature cocktails like the Frozen Around the Rocks Patron Shaquerita along with boozy shakes and many other premium cocktails, spirits, beer, and wine. This first-of-its-kind Shack came to life through a fast, cross-functional effort across our company and shows just how much progress we have made on transforming our pace of innovation. This location also features promising new equipment that is allowing us to deliver a high-quality experience with shorter wait times. Just a few weeks in, the team is already hitting it out of the park with strong volumes on both game days and non-game days. The wins we are seeing here reinforce the innovative work we have embarked on around kitchen equipment and layout operations and a broader culinary strategy. We're also making solid progress on reducing our build costs. Despite global supply chain uncertainty, we are on track to reduce our cost to build by at least 10% this year, and we're confident that the work our teams have done will allow us to continue to open many more beautifully designed, high-return Shacks. Turning to our licensed business, we had an exceptional quarter with 9 new openings and strong performance across regions. In China, we expanded our breakfast offering to more cities along with new menu items tailored to local tastes, helping us stabilize performance in a region that had been under pressure. We also announced 2 new licensing partnerships: one with PENN Entertainment to bring Shake Shack to 10 licensed domestic casinos and another with Grupo Attie-Multifood Enterprises to open 12 Shacks in Panama with the first opening next year. These new partnerships reflect our disciplined approach to global growth and our confidence in the long-term potential of the brand. I'm also thrilled to share that Shake Shack has now served on Delta flights across 13 domestic airports, and guest feedback has so far been amazing. Looking ahead to 2026, we plan to grow new units system-wide by at least a mid-teens percent, with a continued focus on delivering strong cash-on-cash returns for ourselves and our partners. We're building the infrastructure and capabilities to support this growth while maintaining the integrity of our guest experience and operational excellence. Lastly, as we scale Shake Shack for the future, we're making deliberate investments in our long-term strategic capabilities. A key milestone in this journey is the opening of our second domestic support center in Atlanta later this year. This space will serve as a hub for continued innovation, collaboration, and operational excellence, bringing together our teams from across the globe and enabling us to better support our growing Shack footprint. From culinary innovation, restaurant operations, digital transformation, to supply chain optimization and new kitchen prototypes, we're laying the foundation for a more agile, efficient, and guest-centric organization. One that is built to lead in the years ahead. New York will continue to be our home, and we will continue to invest in amazing talented team members there, but this new facility will significantly enhance our ability to build the team, pipeline, and future we aspire to. We look forward to hosting many of you there in the near future. And with that, I'll turn it to Katie for more details on the quarter.

Thank you, Rob, and good morning, everyone. As Rob shared, we're pleased with our second quarter performance and the continued momentum that we're building across the business. This quarter marks the 18th consecutive quarter of positive same-Shack sales growth as we also continue to deliver year-over-year expansion in restaurant level and adjusted EBITDA margins and delivered double-digit adjusted EBITDA growth. These results reflect the strength of our strategy and the discipline with which we're executing. Let's dive into the details. Total revenue for the second quarter was $356.5 million, ahead of our guidance range. System-wide sales grew 13.7% year-over-year to $549.9 million, supported by 22 new Shack openings system-wide and positive same-Shack sales growth. In our licensed business, we grew revenue by 20.2% year-over-year to $13.3 million, with sales up approximately 16% to $206.7 million. We opened 9 licensed Shacks in the quarter and saw strong performance across regions, including the U.S. and meaningful improvements in trends in China with positive impacts from new menu innovation and extended dayparts. In our company-operated business, we grew Shack sales 12.4% year-over-year to $343.2 million with 13 new Shack openings, including 2 drive-throughs, bringing our first half total openings to 17. We are on track to open 45 to 50 company-operated Shacks this year, our largest class on record and are already deep in the work to open even more Shacks next year. Average weekly sales were $78,000, with 1.8% same-Shack sales growth. Importantly, and as Rob just mentioned earlier, we grew comps year-over-year despite less incremental pricing. In-Shack menu price was up approximately 2% and blended across all channels about 3%. Traffic was down 70 basis points, and our trends improved in each month of the quarter with positive traffic exiting the quarter and into July, driven by successful marketing activations, operational improvements, compelling menu innovation, and further improving the guest experience. We are encouraged by the resilience of our Shacks and how we have grown this brand as well as our pipeline of all that's to come. Turning to culinary innovation. With our strategic culinary calendar, it's not only driving traffic, it's also benefiting mix. Mix in the quarter contributed approximately 1 percentage point of growth to our comp led by summer barbecue and merchandising improvements on our digital and kiosk channels. Items per check declined 1.5%, impacted by smaller party sizes. Trends continue to improve into July, with positive 3.2% same-Shack sales growth and positive traffic, led by our national Dubai Shake offering and additional marketing activations. Turning to restaurant-level profit. We once again had an exceptional strong quarter of growth. We generated $82.2 million of restaurant-level profit, reaching 23.9% of Shack sales; that's a 190 basis point improvement over last year and our highest second quarter margin since 2019. We're very proud of the great work our teams have done to improve the financial performance of our Shacks while at the same time delivering a better guest experience. Now, I'll go through the components. Food and paper costs were $96.6 million or 28.2% of Shack sales, up 40 basis points versus last year. This was led by a mid-single-digit increase in beef costs. Labor and related expenses were $88.1 million or 25.7% of Shack sales, down 270 basis points versus last year, reflecting the strong adherence to our new labor guides and model. Other operating expenses were $50.8 million or 14.8% of Shack sales, up 40 basis points year-over-year driven by an increase in marketing expenses and our digital mix, partially offset by improvements in utilities. Occupancy and related expenses were $25.6 million or 7.5% of Shack sales, down 10 basis points year-over-year, led by stronger sales. Taken together, the results our operators delivered in the quarter and the progress we continue to show against our strategic priorities underscore our momentum and commitment to delivering sustainable margin growth for this year and beyond. G&A was $40.7 million or $40.1 million, excluding one-time adjustments. The year-over-year increase reflects strategic investments in our people to support our growth and additional marketing investments. Equity-based compensation was $5.2 million, up 39.3% year-over-year with $4.7 million in G&A. Pre-opening costs were $5 million, up 23.4% year-over-year as we opened 13 new company-operated Shacks in the quarter and prepare for a strong opening schedule ahead. We grew adjusted EBITDA by 24.8% year-over-year to $58.9 million, representing 16.5% of total revenue, a 160 basis point improvement compared to last year. This marks our highest adjusted EBITDA level on record and second quarter margin since 2018, underscoring the meaningful progress we've made in strengthening our business fundamentals despite navigating a challenging inflationary environment and persistent macro headwinds. We continue to invest responsibly in our long-term growth opportunities, which positions Shake Shack well for sustained growth in sales and margin, and that's reflective in our 3-year outlook. Depreciation and amortization expense was $26.5 million. Net income attributable to Shake Shack Inc. was $17.1 million or $0.41 per diluted share. Adjusted pro forma net income was $19.5 million, or $0.44, per fully exchanged and diluted share. Our GAAP tax rate was 25.1%. Our adjusted pro forma tax rate that excludes the tax impact of equity-based compensation was 24.6%. Our balance sheet remains strong with $336.8 million in cash and cash equivalents at the end of the quarter, that's up approximately $35 million year-over-year and $24 million sequentially. We grew operating cash flow by 21% year-over-year to a record $65 million. We invested $38 million in CapEx to support our strong opening calendar and are on track to deliver another approximate 10% reduction in our build costs this year. Now, on to guidance. Our guidance assumes no material change in the macroeconomic or geopolitical landscape. For the third quarter of 2025, we expect system-wide unit openings of 20 to 25, with 13 to 16 company-operated and 79 licensed. Same-Shack sales to grow positive low single digits year-over-year. Licensed revenue of $13.3 million to $13.6 million, total revenue of $358 million to $364 million, up nearly 13% to 15% year-over-year. Restaurant level profit margin of 22% to 22.5%, this represents 100 to 150 basis point improvement year-over-year, driven by our operational improvements and sales leverage. We expect low single-digit inflation in food and paper costs, with beef prices now up low teens. On to our full year 2025 outlook, where we expect system-wide unit openings of 80 to 90, with 45 to 50 company-operated and 35 to 40 licensed. Same-Shack sales to grow positive low single digits year-over-year, licensed revenue of $51.5 million to $52.5 million, total revenue of $1.4 billion to $1.5 billion, and we're currently tracking to approximately the midpoint of this range. Restaurant-level profit margin of approximately 22.5%. This is a 110 basis point improvement year-over-year. And with our strong margin performance year-to-date and plans for the quarters ahead, we're currently tracking very well against this guide. Food and paper inflation of positive low single digits, led by beef up mid- to high single digits. Labor inflation up low single digits. We expect G&A to be between 11.5% to 12% of total revenue. As Rob mentioned, with our profitability tracking ahead of plan and solid wins from some recent marketing activations, we're excited to invest a portion of these incremental profits into additional marketing strategies in our major markets, to support Dubai Shake and Dollar Soda. And while we haven't factored in a revenue or a profit lift yet from this incremental media into our 3Q and full year outlook, we're optimistic about its impact and look forward to updating you. For your modeling purposes, you should assume that G&A will be evenly split between third quarter and fourth quarter for the remainder of this year. Equity-based compensation expense is guided to $22 million, with approximately $20 million in G&A. Adjusted EBITDA of $210 million to $220 million, representing 20% to 25% growth year-over-year. Depreciation and amortization expense of $107 million to $109 million, pre-opening costs of $18 million to $19 million, adjusted pro forma tax rate of 24% to 25%, and net income of $50 million to $60 million. We remain confident in the trajectory of the business and in achieving our 3-year target of growing revenue by at least a low teens percent year-over-year, expanding our restaurant profit level margins by at least 50 basis points a year, and growing adjusted EBITDA by at least a low to high teens percent year-over-year. Embedded in these targets is a low single-digit comp expectation driven by 1% to 2% mix, 1% to 2% price, and flat to up 1% traffic. Thank you for 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 an engine behind our strong second quarter performance and the momentum we are seeing across the business as we continue to execute against our long-term strategic plan. 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.

Our first question is from Brian Vaccaro with Raymond James.

I had a quick question. I guess we could start on the margin front. The labor productivity here in the second quarter seemed to take another step higher. If you will, could you just elaborate on some of the incremental efficiencies that you saw in the second quarter? And, Katie, maybe you could touch on the puts and takes embedded in your third quarter store margin guidance as well.

Hello, Brian. I’ll begin by discussing our operations. Katie will provide more detail on the impact this has had on margins. Since I joined, we've been focused on ensuring we deliver the performance necessary to invest in boosting comparable sales. Until recently, we had not heavily invested in marketing because we wanted to ensure that when guests visited our restaurants, they would receive excellent service. We’ve made improvements in all three areas we track: people, performance, and profits. Our recruiting and retention numbers have improved, and guest satisfaction metrics are trending positively in terms of performance. Our speed of service has greatly enhanced, and our profit growth is primarily driven by our new labor model and its effective implementation. This quarter, we achieved the highest labor attainment since we began closely monitoring it. Our teams have done an incredible job, supported by strong leadership and talent development to facilitate the opening of new locations, and the results reflect this progress. I’ll let Katie provide further details on the margins.

Yes. I just want to echo all that Rob said about the amazing job that our operators are doing and what an impact the scorecard is having on our labor and then just really a lot of other aspects of our restaurant margin line. We showed great progress in the quarter overall, expanding our restaurant-level margin by 190 basis points year-over-year. Some of that was due to kind of some nice sales leverage we had with our 1.8% comp, but we also did have a nice pickup on the labor line. As we look forward to the rest of the year, embedded in our guidance for the third quarter and then the approximate 22.5% for the full year, we expect to continue to see nice wins on a year-over-year basis on our labor line. The foundational things that our operators are putting into place and led by Stephanie Sentell and Damon Thomas have really helped to give us a stable foundation for which we can grow. And if you can see from the strong flow-through that we had in the quarter, as we look to invest more into marketing to drive sales, this will be a powerful engine for us to continue to grow margins over the long term. As we look to kind of some puts and takes for the third and fourth quarter, just remind everybody that we do have a heavier opening schedule planned in the third and then in the fourth quarter. We have a new opening team to help open our restaurants with excellence and get us to profitability sooner, which was a benefit in the second quarter. And we're hopeful that we'll continue to get a nice win on that side in the third and fourth quarter. That's not really reflected in our guidance.

Great. And if I could just ask a follow-up, just in terms of the kitchen innovation lab. I know it's still early days and maybe it's a couple of years away until we see some of these things roll, but are there any new learnings on the new kitchen prototypes or kitchen formats, or new equipment that might have improved quality, throughput, or other benefits to the business that you might be willing to touch on?

Yes, I can share that we opened the Battery Shack about a month ago. We've been working in Atlanta on several new equipment prototypes and implemented some of those in the back of the house at the Battery. It was a very high-volume Shack, especially during the week we opened, which coincided with the All-Star Game and numerous home games. We really experienced a significant volume and impressive service times. It's not overly complicated; it's simply about bringing our kitchens into the 21st century with existing equipment. We're optimizing processes, designs, and standard prototypes. This includes improvements in our fry station, make station, and cold station for shakes. As a result, we've significantly enhanced both speed and throughput, allowing us to meet the high demand at the Shack. I believe as we roll out this equipment to more Shacks, we'll be ready to share more details about the equipment and the opportunities we foresee moving forward.

Our next question is from Christine Cho with Goldman Sachs.

So could you discuss some of the major changes to your go-to-market strategy, with the new culinary calendar that includes four main platforms per year along with fries and beverage limited-time offers and what kind of implications that would have on your advertising and marketing? So I'm guessing the potential pay media investment that you talked about is one piece of that. Could you also elaborate on how you would approach that paid media investment and how you plan to track the returns and performance?

Yes, Christine, we are incredibly excited right now. This quarter, we decided to move ahead of our expected profit targets to explore and invest in some paid media programs. This initiative has just been underway for the past two weeks, and we are thrilled with the results so far. Our brand has never previously launched top-of-funnel paid media at scale, which is surprising given that our marketing has historically relied on word-of-mouth and earned media, as well as bottom-of-the-funnel promotions. We committed to these investments, and the outcomes have been fantastic. Moving forward, we plan to raise awareness about our limited-time offers at the top-of-the-funnel level. We have prepared an 18-month culinary innovation calendar that is ready to go, and it's not merely my opinion; we are conducting guest testing on many of our major launches, and the feedback has been exceptional for some of the concepts and products we are developing. By generating awareness among millions of potential customers who wouldn't have learned about us through earned media or word-of-mouth, we believe there is significant benefit to be gained. It's also crucial to highlight the composition of our same-store sales growth. Last year, we recorded 4% growth with 7% price increases, while traffic decreased by nearly 300 basis points. In this quarter, we achieved almost 2% sales growth with 2% pricing. This indicates that we are shifting our model away from being overly reliant on pricing. We are consistently improving our traffic, which means we can compete across different economic conditions. Over the past year, the conversation has centered around the value-oriented customer and whether Shake Shack can thrive in that market. We are taking all necessary steps to ensure we can succeed in both strong and challenging times. Shake Shack is moving towards a model that won't be subject to fluctuations based on customer whims. We are focusing on creating a sustainable model that fosters consistent traffic growth, supported by our culinary innovations and marketing efforts, along with increased frequency due to improved guest satisfaction and operational performance.

That's really helpful color. Can I just clarify with you? So is it fair to understand that the introduction of the higher end of the range of G&A guidance was related to this advertising and marketing plans associated with the paid media, or was there something else?

Yes, if you look at the first part of this year, we've been seeing around 11.7% of total revenue impacted by industry and weather challenges in the first quarter, which created some pressure. We expect this trend to continue throughout the rest of the year, especially with our increased media investment. I want to clarify that we just launched this two weeks ago, and we have not factored any impact from these initiatives into our current top line or margin guidance. We are making these investments with the belief that they will lead to sales growth and margin improvement, but this is not reflected in our guidance at this time.

Our next question is from Michael Tamas with Oppenheimer & Company.

I just wanted to ask about the EBITDA guidance raised to $210 million to $220 million. As you just talked about, you have some higher G&A, you're making these investments, a little bit lower pre-opening, but you maintained the revenue and restaurant margin guidance from last quarter. So can you help us understand what's changed within that outlook that allowed you to increase your guidance?

Yes, absolutely. I mean as we've shown this year, we are tracking very well against our expectation to expand our restaurant margins to be approximately 22.5%, and that is a range. So we're expecting to have continued strength in our restaurant margin throughout the rest of this year. And the comments I kind of talked about, we're tracking very solidly, strongly against the guidance for the approximately 22.5%. And again, that is an implied range, not an exact target.

Got you. And then the follow-up is you're obviously stepping up the intensity of marketing, the promotions, and the limited-time offers. And, Rob, you mentioned in other calls that these actions are designed to be margin accretive, not dilutive. And so can you just help us maybe understand how are they margin accretive? And is anything about the elevated commodity environment that you're seeing right now change the way you're thinking about deploying any of these innovations that you're already planned for?

The majority of the elevated commodity situation is in beef, which we sell a lot of. However, we are managing that through enhancements in our operations and supply chain. We haven't discussed supply chain optimizations much in this call, but we are actively working on and delivering improvements across every aspect of it, including our suppliers for all ingredients and our logistics and distribution network. We are confident we can offset much of the beef inflation through operational productivity in the supply chain. Regarding how our marketing and culinary innovation will help margins, we are launching exciting new products at premium prices, and the sales mix from our burgers into this innovation will enhance margins. Additionally, we have the chance to achieve fixed cost leverage. Our sales for the first half of the year have been around 1.5% when you consider both quarters. To achieve low single digits, we'll need to perform better in the second half. As we boost sales, we'll gain leverage, especially as we improve labor efficiency. We have committed to ongoing margin enhancement in our long-range planning, and we are confident that this will be realized despite our marketing investments. We believe we will continue to increase productivity.

Our next question is from Sharon Zackfia with William Blair.

I wanted to ask more about the marketing plans and if there's kind of any thought about maybe bifurcating the messaging. It seems like kind of in the New York region, maybe it's more of a call to action and frequency dynamic whereas the rest of the country still might be more brand awareness? So how do you think about kind of maybe micro-targeting geographically some of the messaging to kind of yield the consumer behavior that you want?

That's a great question, and it's something we're actively working on. This has been our first test, where we launched our media in about 15 different markets, half of which focused on Dubai Shake, emphasizing it as a culinary brand and inviting people to try it. In the other eight markets, we promoted dollar drinks, aimed at increasing app downloads. Interestingly, we're seeing that customers are not just buying the dollar drink; they're also spending at about the same level as our average check total. This means we're generating significant revenue through the dollar drink promotion. We wanted to test both messaging strategies across different markets to see how they perform, as we haven't approached this brand in this way before. We're collecting data to understand how these messages affect both traffic and check averages. Moving forward, our media will align with our major limited-time offers, as neither of these messages represents the featured item of the quarter. We plan to start integrating a more focused brand and culinary product message that may include specific calls to action or price points. Essentially, we're entering a new phase of marketing, targeting specific guests mainly through digital channels with tailored messages. Thank you.

Our next question is from Jim Sanderson with Northcoast Research.

I wanted to ask about your traffic outlook. I believe you began the year with around a negative 4.6%, but have seen improvement since then. To achieve flat traffic for the year suggests we need to see 1% to 2% growth in traffic for the current and fourth quarters. Is that the correct perspective?

Yes. We haven't detailed the traffic guidance for the full year yet, Jim. However, I can say that our traffic has improved each month, particularly as we moved past the weather issues we faced in Period 2. Additionally, we experienced positive traffic in July with a 3.2% comparable growth. Considering the menu innovations we have included in our guidance and the potential boost from media that isn't accounted for yet, we feel optimistic about our traffic trends and the outlook for the remainder of this year.

Okay. And as a brief follow-up, you mentioned some marketing initiatives in the back half of July. Has that been a primary driver of the traffic improvement? Is there anything you can take away from your learnings that would help us to understand how that is moving traffic?

Yes. July is a great example when you take a step back and look at what we are doing overall. It's exactly what we've been discussing. It's about having compelling culinary offerings. Additionally, we started to amplify that message, although we didn't have much media impact in July. Most of the quarter was focused on launching our great culinary options. Towards the end of the month, we amplified our efforts in some of our major markets, particularly around Dubai Shake. Overall, we are really excited about what our culinary calendar and media plan can achieve.

I think maybe what we should call out is that the 3.2% is our Period 7 which runs through July 24. And so we turned the media on right at the end of that. So although we're still in July, the media wasn't baked into the 3.2% because our period ended; we haven't disclosed the results in the media.

Our next question is from Jake Bartlett with Truist Securities.

Mine is on the underlying same-store sales trends. And then I'm thinking about the Dubai Shake and what that might have contributed. You do the rough math. I think 50 shakes were offered a day. It would imply a pretty significant contribution to same-store sales. You saw a step up in July, but certainly not what that contribution might imply. So maybe just if you could talk about the impact of the Dubai Shake and then the underlying trends, whether there's some pressure that's offsetting the lift that you're getting from the Dubai Shake.

Yes. I mean I would tell you that the Dubai Shake has done exceptionally well. We're going to finish essentially selling as much as we forecasted to sell. But it was different in different markets and different Shacks. So it wasn't like every Shack did 50; some Shacks, some regions did a little bit less, some regions did more. In the end, right now, with the media turned on to Dubai Shake, we've seen a very significant lift in our consumption of Dubai Shake. So we are confident that when we have great culinary and we market it, we can sell it at the rate that you're describing. Up until the media, it probably wasn't 50 Dubai Shakes per Shack per day.

Okay. And as we think about the cadence throughout the quarter, you have the Dubai Shake benefiting July. You're doing some advertising in the Dubai Shake. How long is the Dubai Shake going to continue? Just I guess, as we look at the balance of the quarter feel comfortable with the guidance, it seems like you have a big driver that might be going away, but maybe not. I just want to kind of understand what your plans are for the rest of the quarter.

Yes, we need to ensure we're not just relying on one unique offering. It’s crucial for us to maintain consistent culinary innovation that attracts customers, supported by our marketing efforts. The Dubai Shake will be available throughout August, and we have more exciting innovations lined up right after that to keep driving traffic. I believe we were already seeing positive traffic trends prior to the Dubai Shake's launch, which gives us strong confidence in our culinary pipeline moving forward.

Our next question is from Jeffrey Bernstein with Barclays.

Great. Rob, you mentioned the product innovation pipeline, noting you have 18 months of well-tested advancements. That’s exciting and seems to be driving traffic. However, I'm curious about how you balance that with the inherent complexity in back-end operations to ensure you're maintaining speed of service and guest satisfaction scores. How do you manage this balance? I'm also interested in how marketing and operations intersect to ensure that one does not negatively impact the other. I have a follow-up question as well.

That's a great question. I've been managing that balance throughout my career, from Taco Bell to Arby's to Papa John's. One of our strengths at Shake Shack is that we prepare everything to order, which is different from the streamlined assembly line model. We have certainly improved our productivity and efficiency with our core menu operations, but our model also allows us the flexibility to adapt. We have not only tested this innovation pipeline with our guests, but we have also conducted operational tests and embedded it in our processes. Before launching anything, we ensure it goes through both supply chain and operational tests to avoid any potential issues that could undermine the productivity gains we've achieved in our operations.

Got it. My follow-up question is about the recent trends. It's encouraging to see the 3% growth in July, and this doesn't even account for what appears to have happened in the last week, which might have been even stronger. However, we've heard from a few others that after several months of improvement in the industry, July may have shown some volatility or slowdowns. So I'm curious about your perspective on the underlying business, excluding the Dubai benefit. Do you believe the consumer is still improving, suggesting we should expect broader industry growth in the coming months, or have you noticed any changes in behavior following the momentum gained since the weather challenges in February? I'm interested in your view on the underlying momentum for the broader industry as we progress through the third quarter.

I can only speak for Shake Shack and our guests. We have observed ongoing improvement in our traffic. There's been a notable willingness among customers to purchase a $10 shake, which is our priciest shake to date. This gives us confidence that our guests recognize significant value in our offerings, whether they are from our core menu or our limited-time promotions. Therefore, we believe we can continue to drive traffic in the latter half of the year and beyond.

Our next question is from Jeff Farmer with Gordon Haskett.

You guys did touch on it a little bit, but just following up on the standardized scorecard. Two questions. So when was that fully rolled out to the system? And what actions are taken for some of the lower-performing scorecard restaurants?

Yes, that was implemented late last year, and we also made some adjustments to the structure and leadership within the operations team at that time. The scorecard is a clear indicator of who is meeting the key performance indicators and where there are opportunities for improvement. Our operations team has established a disciplined model where Stephanie meets weekly with her four vice presidents to review the scorecard for their regions, identifying strengths and areas for growth. The vice presidents then relay this information to their regional directors, who do the same with their area directors. This structured approach helps us pinpoint where we can enhance our performance. We are dedicated to developing our leaders and fostering a culture of leadership. When challenges arise, we work with those leaders to understand the issues and address them. Our commitment to execution is strong, which contributes to the stability of our labor metrics. We have established a disciplined model that instills confidence in our path forward, as it serves as the foundation of our operations. This confidence in our team allows us to allocate resources to improve cost of goods sold in the supply chain, as we believe there are opportunities for reductions there. Our labor costs are around 26%, while our cost of goods sold is between 28% and 29%. Achieving those savings is possible because of our seamless operations. Additionally, investments in marketing to attract guests to our Shacks are justifiable as they lead to returns that positively affect our bottom line, making operations central to our success. Jamie Griffin, our new Chief People Officer, focuses on developing a leadership pipeline for our new Shacks and ensuring we have the necessary programs for managers and assistant managers to effectively operate our restaurants. We've made these investments and feel confident about our current position, which allows us to move forward with initiatives aimed at boosting sales.

And just as a quick follow-up. So again, from a regional perspective, New York City and the Northeast continue to underperform. So the question is to you guys, what's the opportunity to narrow that spread in coming quarters? Is there something structural that's holding that underperformance spread in place, or is there something you can do to bring up those two very important markets for you, the New York City area and the Northeast to improve or narrow that spread versus the rest of the system?

I think it's a great question, but we have to be careful about what we talk about when we say underperform, right? I mean, those regions, in particular, New York City are our highest-AUV restaurants with our highest margins. So they are great restaurants. They'd be the envy of a lot of systems: $10 million restaurants flowing through 35% plus. So they are performing; their comp contribution may not be as significant as in the other markets throughout the country. And so yes, we've got to work on that; we've got to understand what the challenges are there. But I think at least our assessment would say that some of those challenges are more macro around some of the things that are impacting those regions as opposed to maybe some of the other regions that are growing much faster. So we're trying to take all that into context and make the right decisions, but there are a lot of really good restaurants in New York and the Northeast that we want to make sure we don't cut off our nose to spite our face.

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

On the three-year financial targets, of the four, do any of them have serious momentum to come in above target? I only ask because when I model out to 2027, I do bump up against the targets, and I'm always hesitant to push higher than a team's communicated goals.

I mean that's a pretty good problem to have.

Yes, I would just say these are our targets. And we've shared our strategic priorities and our progress against them. We are committed to continuing to grow our new Shack openings and continuing to find additional areas, productivity as well as investing in marketing to drive traffic that will also generate additional productivity for our restaurants. And finally, we expect all of this to fall down nicely to pretty strong adjusted EBITDA growth.

We have reached the end of our question-and-answer session, and that will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.