Shake Shack Inc. (SHAK) Q3 2026 Earnings Call Transcript

Welcome to the call. Good morning. Welcome to Shake Shack's third quarter earnings call. At this time, all participants have been placed in a listen-only mode. The floor will be open to questions following management's prepared remarks. It is now my pleasure to turn the floor over to Allison. Please go ahead.

Thank you, Operator, and good morning, everyone. Joining me for Shake Shack's conference call is our CEO, Rob Lynch, and our CFO, Michelle Hook. 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 26, 2026, our other quarterly reports on Form 10-Q, 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 third quarter 2026 shareholder letter and our Q3 quarterly report on Form 10-Q, which can be found at investor.shakeshack.com in the quarterly results section and as an exhibit to our 8K for the quarter. I will now turn the call over to Rob.

Thanks, Allison, and good morning, everyone. I want to start by thanking our team members around the world. We bring enlightened hospitality to life in our shacks every single day. Your care for our guests is what makes this company special, and I am grateful for it. This week, we had the opportunity to host over 20 new restaurant GMs in our Atlanta offices for training and development. Their enthusiasm to be a part of Shake Shack was infectious, and I am so thankful to everyone in our organization for creating the type of company and culture that makes Shake Shack a great place to build a career. On to our third quarter results. In a tough environment, our team stayed focused on what matters most, taking care of each other and our guests. And I am incredibly proud of how our 15,000 team members and our licensed partners showed up over the last few months and for the results they produced. The company-operated same-shack sales grew 2.5%, including 0.8% traffic growth, which marks our fifth consecutive quarter of positive traffic and our 23rd consecutive quarter of positive comparable sales. These results were delivered against our toughest prior year comparison of the year, which included the debut of the Dubai Chocolate Shake and our initial significant investment in paid media. We lapped those investments with less marketing spend this quarter as we continue to improve our marketing productivity. Our continued comp sales and traffic growth, while opening a large number of new shacks, gives us confidence in our ability to reach our long-term guidance of 1,500 company-operated shacks. Our shack-level margins remained healthy at 22.5%, and we grew adjusted EBITDA at 16% versus the prior year. We delivered these results while absorbing elevated input costs across multiple line items, underscoring our disciplined cost management across the company and the excellence of execution throughout our company-run operations. The consumer backdrop remained challenging throughout the quarter. While higher-income guests continue to spend, lower-income guests remain under pressure. Our data tells a similar story, with traffic growth from higher-income guests offsetting softness among lower-income guests, particularly in our urban markets. As I have mentioned before, we have less exposure to the low-income segment due to our real estate portfolio and our premium positioning. However, we aspire to serve all guests. And while we continue to see pressure on the consumer, we remain focused on delivering a compelling value proposition while maintaining our premium positioning in the marketplace. In a highly competitive industry environment where every brand is competing for declining traffic, we know we have to earn every visit. Three primary components of our strategy continue to drive our consistent same-shack sales growth. Strong restaurant operations, distinctive culinary excellence that differentiates our brand, and targeted media and digital investments that productively drive awareness and engagement. First, our improvements in restaurant operations continue to elevate the guest experience while delivering strong margins. Our focus on using the highest quality ingredients, delivered with operational excellence and enlightened hospitality, continues to deliver a strong value proposition while supporting our premium positioning. Our labor attainment levels have continued to exceed our expectations, reducing our overtime and helping to maintain our strong margins. Our shacks are clean, comfortable, and cared for, bringing pride to our teams and the communities that we serve. Second, culinary innovation continues to differentiate Shake Shack and drive guest excitement. Shake Shack is grounded in a history of culinary innovation. Our core menu of burgers, fries, and shakes is the foundation of everything we do, and we will continue to deliver excellence every day with abundant portions and the highest quality ingredients. We complement our core menu with premium innovation on a select number of LTOs. This strategy balances our core menu, which is what attracts most new guests, with premium LTOs that build the brand and aim to drive frequency and check among our current, highest lifetime value guests. This approach allows us to reach more guests without compromising the soul of the brand or significantly discounting our core menus. Starting in Q2 and continuing into Q3, our barbecue platform drove strong trial, frequency, and check. This platform was anchored by the Baby Back Rib Sandwich, which has been recognized as one of 2026's Best New Culinary Innovations. In July, we introduced our West Coast-inspired platform. The West Coast platform delivered strong guest satisfaction while generating a surprisingly strong organic social media response. Positive creator and guest reviews highlighted the quality of our ingredients and distinctive flavors, helping sustain momentum beyond the initial launch. This excitement and the brand buzz around new flavors and limited-time culinary experiences is why we offer them. This is not new at Shake Shack. We have always brought culinary innovation, beginning when we started as a hot dog stand and proceeded to then launch burgers and shakes. Innovation is in our DNA, as long as it improves our guest experience without materially disrupting our operations or supply chain. In September, we complemented the West Coast Sandwich platform with the launch of our premium Reese's Peanut Butter Cup Shake. Similar to our Dubai Chocolate Pistachio Shake from 2025, this shake featured our signature chocolate crackable shell and was premium positioned in our lineup, which helped support comp and traffic growth. We are excited about our premium shake innovation and will continue to bring new culinary forward shake offerings. As we closed out Q3, we welcomed back our black truffle menu, our number one requested LTO, and are very excited about the continued positive response that we see from our guests when we feature this unique, high-quality ingredient. Looking ahead, our innovation pipeline is strong, and we'll continue to include premium shakes, new burger and sandwich offerings, and delicious side items that combine distinctive flavors with memorable culinary experiences. The continued quality of our core menu with the best ingredients possible, coupled with our unique culinary initiatives, build the brand, drive trial, frequency, and check growth. We do this while minimizing operational and supply chain complexity. We are delivering proven guest favorites alongside bold new flavors, all supported by disciplined testing to identify the strongest opportunities to bring to market. Third, our targeted media and digital investments continue to strengthen guest engagement and drive traffic growth. As we build out our loyalty program and focus on expanding our guest database and targeting capabilities, we now define our digital mix as the channels where we control our communication and interaction with our guests. Our own digital channels now include InShack kiosks, app and web platforms, and represented approximately 60% of Shack sales in Q3. As we have communicated in the past, our digital guests visit more frequently and spend more over the course of a year. Delivery, which we now view independently from our own digital channels, continues to be a healthy part of our business with strong growth as we partner with third-party providers to reach new guests. Throughout the quarter, we continue testing personalized marketing across all channels to identify efficient ways to drive traffic and sales while maintaining healthy margins. These efforts are helping us attract and retain guests, increase lifetime value, and strengthen the foundation for loyalty and life cycle marketing, all while maintaining promotional and pricing discipline. Turning to margins, we delivered another quarter of healthy restaurant-level profitability despite a challenging operating environment. The work we have done over the past several years to strengthen our restaurant operations and supply chain have improved service levels and delivered productivity across the business. This allows us to balance margin expansion with investments that support traffic growth, strengthen our value proposition, and enhance the guest experience. We believe that this approach positions us to drive sustainable growth while continuing to build a strong, resilient business over time. This productivity also reduces our dependency on pricing to completely mitigate ongoing inflationary pressure. On the development front, this was our largest third quarter of unit growth ever. We opened 21 new company-operated shacks, including our first South Carolina shacks in Charleston and Greenville, bringing the year-to-date total to 54. We remain on track to open 60 to 65 this year, and will continue to grow with a disciplined approach to ensure that we open new shacks that will deliver on our expected returns over the long term. This planful pace of growth reflects our confidence in both the strength of our development pipeline and the significant white space opportunity we see ahead. As we continue to densify existing markets and enter new ones, we expect some near-term effects that naturally accompany this rate of expansion. Understandably, opening this number of new shacks this year has had some negative impact on our comp sales, which makes our consistent positive comp performance that much more exciting. However, what is most important is that our new class of shacks continue to perform well and are tracking in line with our three-year return expectations. This performance reinforces our confidence in the long-term opportunity to scale Shake Shack and create shareholder value through new Shack growth. We will remain focused on balancing the revenue and EBITDA growth contributed by new Shacks with the margin and comp headwinds that they create in the first couple years of their existence. Turning to our license business, our license partners delivered a solid quarter despite a challenging global backdrop. Licensing sales increased 8.3% to $236.8 million, while licensing revenue grew 4.7% to $15.3 million. While the conflict in the Middle East continued to impact results in the region, those pressures moderated relative to the first half of the year. At the same time, we saw strong performance from new shacks in U.S. airports, in Canada, and the United Kingdom. During the quarter, we opened 16 new license shacks, and we have now opened 32 new license shacks here to date. We continue to see attractive opportunities to expand the brand through our licensing model, partnering with experienced operators who share a commitment to quality, hospitality, and long-term brand stewardship. We're also excited about the recent announcement of our entry into Brazil, one of the world's largest restaurant markets in a country with a vibrant Finally, an update on Project Catalyst. We continue to make meaningful progress on the technology foundation that will support Shake Shack's next chapter of growth. The work underway across our restaurant systems, digital platforms, loyalty capabilities, data infrastructure, and AI tools is all focused on a simple goal, making it easier for guests to choose Shake Shack and easier for our teams to deliver great experiences. We're taking a thoughtful, phased approach as we can introduce these capabilities, but we're excited about the opportunity ahead. Over time, we believe these investments will help us strengthen guest relationships, increase efficiency, enhance personalization, and support our ability to scale the brand while delivering enlightened hospitality at every touchpoint. These investments in our technology infrastructure are designed to support improved restaurant operations and help us leverage G&A moving forward. Before I turn the call over to Michelle, I want to share how I'm thinking about the balance of the year. I recognize that we had a challenging start to 2026, as we opened more restaurants in Q1 than ever before and experienced an outsized drag on our margins. But I am proud of the progress we're making and the position we're in. We have learned a lot in 2026 about striking the right balance between new shack growth, comp growth, and margin maintenance. I couldn't be more thankful to our corporate and restaurant teams for staying focused, working hard, and believing in our future. The perseverance, leadership, and the care for our teams that our managers have shown in 2026 inspires me every day, and I'm humbled to be a part of the Shake Shack team. The actions that this team has taken to strengthen restaurant operations, Deliver culinary innovation. Expand our development pipeline and build scalable marketing and technology capabilities are the reasons that we delivered our 23rd consecutive quarter of Same Shack sales growth, fifth straight quarter of comp traffic growth, and continue to have strong operating margins and have confidence in our future. As we close out 2026, we will remain disciplined and focused on what we can control. Delivering the highest quality food, coupled with a commitment to enlightened hospitality that continues to drive consistent, dependable top- and bottom-line growth. We've built a resilient business with a differentiated brand, positive comp momentum, strong unit economics, and a significant runway for expansion. We remain committed to executing our strategies with excellence and creating sustainable, long-term value for our shareholders. With that, I'll turn the call over to Michelle.

Thank you, Rob, and good morning, everyone. Our third quarter results demonstrate the continued resilience of our business and the progress we're making across our strategic priorities. We are energized by our fifth consecutive quarter of positive traffic growth and extending our streak of positive same-check sales growth to 23 consecutive quarters. Against a dynamic consumer backdrop, we remain focused on disciplined execution, profitable growth, and creating long-term shareholder value. Now, let me walk you through the quarter in more detail. Third quarter total revenue was $423.3 million, up 15.2% year-over-year, driven primarily by our new Shack openings, as well as 2.5% St. Shack sales growth. Licensing revenue was $15.3 million in the quarter, with licensing sales of $236.8 million, up 8.3% year-over-year. The growth in our licensing revenue was the result of a steady pace of new license openings. Given our strong development pipeline, we now expect to land at the high end of our 40 to 45 license shack opening range in 2026, while also bringing Shake Shack to Panama, Vietnam, and U.S. regional casinos with Penn Entertainment in the fourth quarter. In our company-operated business, SAC sales grew 15.6% year-over-year to $408 million. We generated approximately $75,000 in average weekly sales compared to $78,000 last year. The decline in average weekly sales was primarily driven by the rapid expansion of our restaurant base as newer SACs continue to ramp toward a mature sales volume and represent a larger portion of the system. We delivered 2.5% same-shack sales growth, including 0.8% positive traffic and 1.7% price mix. Traffic growth continues to be driven by strength in our third-party delivery and own digital channels, which, as Rob mentioned earlier, we now define as kiosk, app, and web. We have been intentionally investing in our own channels to acquire valuable guest data, deepen our understanding of guest behavior, and drive higher lifetime value through more personalized engagement. Gross pricing across all channels was approximately 4% for the quarter. MIX was pressured as we deliberately invested in guest engagement through targeted offers, promotions, and channel-specific marketing initiatives designed to drive traffic and strengthen value perception. In October, we implemented an additional 1% menu price increase to help offset inflationary pressures. Together, with continued supply chain savings and productivity initiatives, we remain focused on balancing margin protection with thoughtful pricing and targeted investments to drive traffic. We now expect to exit the year with approximately 2% gross pricing. We continue to advance our development pipeline with a Q3 record of 21 new openings, bringing us to 54 openings year-to-date as of the end of the quarter versus 30 this time last year. We remain positioned to open 60 to 65 new company-operated shacks in 2026. Our confidence in the long-term opportunity to expand our footprint remains unchanged, and we are encouraged by the productivity of our newer class of shacks. As they track towards our expected cash-on-cash returns. Third quarter restaurant-level profit was $91.7 million, or 22.5% of shack sales. Margins declined at 30 basis points versus the prior year quarter, driven by increased operating expenses, primarily related to higher delivery commissions, and investments in labor, partially offset by lower food and paper costs. Supply chain optimization remains a key opportunity, and continued progress will be important to mitigating cost pressures and supporting sustainable profitability. In the third quarter, food and paper costs were $115.3 million, or 28.3% of SHAC sales, 100 basis points lower than last year. The percentage decrease year-over-year was mainly driven by menu pricing and lower commodity costs. Partially offset by promotional activity during the quarter. Blended food and paper costs declined by low single digits in the third quarter as lower costs across our buns, chicken, and dairy more than offset continued beef inflation. Beef costs increased by low single digits year over year but moderated sequentially while remaining elevated relative to historical levels. Our ongoing supply chain and procurement initiatives continue to help mitigate cost pressure. Labor and related expenses were $103.8 million, representing 25.4% of SHAC sales, 50 basis points higher versus last year, primarily due to investments made in our team members. Our priority continues to be team member engagement and guest satisfaction. We therefore take a disciplined approach to labor, ensuring our SHACs are staffed to deliver the level of hospitality and execution our guests expect while continuing to drive productivity and efficiency. We are also making investments in our restaurant manager development to help support our rate of new shack growth over the coming years. Other operating expenses were $65.8 million, or 16.1% of shack sales, 90 basis points higher versus last year. The increase was driven primarily by higher delivery commissions, reflecting the continued growth of our delivery business and the impact of the expanded number of new shack openings. Occupancy and related expenses were $31.4 million, or 7.7% of SHAC sales, flat year-over-year. Third quarter G&A totaled $45 million, 10.6% of total revenue, an increase of $0.6 million compared to the prior year. The year-over-year increase primarily reflects investments in our team members and technology capabilities, partially offset by efficiencies in our marketing spend. We remain disciplined in our approach to G&A while investing in technology capabilities that we will leverage as we scale the business. We continue to expect full-year G&A to trend toward the low end of our 12% to 13% target range as a percentage of total revenue. Equity-based compensation was $5 million versus $4.4 million in Q3 of 2025, with $4.4 million hitting G&A. For fiscal 2026, we now expect equity-based compensation of approximately $20 million. Pre-opening costs were $7 million, $2.4 million, or 51% higher than the prior year, driven by our Q3 record number of new SHAC openings in the quarter. Adjusted EBITDA of $62.8 million, or 14.8% of revenue, increased 16% year-over-year, resulting primarily from higher restaurant-level profit, partially offset by higher pre-opening expenses. We continue to expect full-year adjusted EBITDA to trend towards the low end of our $225 million to $235 million target range. Depreciation was $32.9 million. We continue to see an increase in depreciation year-over-year as a result of more company-operated shack openings and new technology investments. Net income attributable to Shake Shack Inc. was $16.5 million, an increase of $4 million, or 31.9 percent, versus prior year quarter. Our gap tax rate was 24%, and our adjusted pro forma tax rate, excluding the tax impact of equity-based compensation, was 24.2%. We ended the quarter with $319 million in cash and cash equivalents on our balance sheet, with $250 million in convertible notes outstanding. And we have full availability under a revolving credit facility, leaving us well-capitalized to fund our growth. We are encouraged by our results through the third quarter and the progress we continue to make across the business. We delivered positive traffic, our development pipeline is on track, and our operational and supply chain initiatives continue to create flexibility within the model. As we look to the fourth quarter, we remain mindful of the dynamic macro environment, including elevated fuel and other costs, and the lap of last year's successful value and media initiatives, including our 135 platform. We remain focused on disciplined execution, operational excellence, and sustainable long-term growth as we close out 2026 and in the years to come. Thank you for your time, and with that, I will turn it back to Rob.

Thank you, Michelle. Before we open the call for questions, I want to thank our teams once again for their hard work, dedication, and passion for Shake Shack. Their commitment to our guests, to each other, and to our culture is what continues to power our progress and gives us confidence in our long-term growth opportunity. I also want to thank our investors. We appreciate everyone joining us today and for your continued interest in Shake Shack. With that, operator, please open up the call for questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit to one question and one follow-up question. Our first question is from Brian Vaccaro with Raymond James. Please proceed.

Hi, thanks, and good morning. I just wanted to ask about the new unit sales performance that you mentioned, Rob. I think you said you're densifying more markets. Could you just elaborate just on the impact you're seeing there, and are there any differences in the type of units or markets that you're opening that's also worth highlighting?

Hi, Brian. You know, it's pretty consistent with what we've seen in the past. You know, we obviously are In more markets at this point than we were a few years back. So a larger proportion of our new units are in existing markets versus kind of greenfield markets. So we are, you know, we, I think we've talked about it in the past, but our new units tend to open up, you know, somewhere, you know, in the. Three to three and a half million dollar range, and they obviously open up with lower margins than our run rate shacks because they require more training to get off the ground, and they have lower AUVs to start, so obviously they don't get the flow through and the leverage. So when you think about the path forward, and this isn't any different than the... Then how we have have operated the last couple years, but we just want to make it really clear on the path forward. You know, our AUVs have remained at four million, despite a larger number of new shacks coming in at lower initial sales volumes. And that's a function of our core shacks and our comp shacks growing comps, you know, in the low single digits. That growth on those higher-volume shacks mitigates. Kind of the entry point for the newer shacks, leaving our AUVs right in that. 4 million range. And then on the margin side, the new shacks come in, and like I mentioned, they come in in the high teens on margin because they require extra investment to open and launch. And so that's a little bit of a drag on our holistic margin, but it's encouraging because that means our comp shacks have margins higher than what our average that we reported is because that's blended across both comp and non-comp shacks. So that's kind of the big impact on kind of the run rate of the business. Our objective when we approve any project, regardless of which market or which format, is always to deliver 30% cash on cash in year three. And we've been able to continue to do that, you know, throughout this, you know, the development over the last, you know, decade, if you will. So that's our plan moving forward as well. But we are growing the number of shacks. Every year that we build. And so those headwinds are going to continue to be present. And we're going to continue to track them very closely to make sure they're delivering on our returns. And we feel great about the impact that it's having on our revenue growth and our EBITDA growth. And we've been able to mitigate some of the margin and comp headwinds that comes. And I just want to call it the comp headwind. You know, I've stated in the past. We have a lot of white space. So we're not building shacks in close proximity to each other. It's not, you know, outside of Manhattan, we're not building shacks a mile or two miles away. Most of our projects are 10 plus miles away from our existing shack. The cannibalization really comes from the delivery side of the business. We don't get to control the radius around each shack that, you know, the delivery providers control. So when we open a new shack that's 10 miles away and the radius around the prior shack was seven miles, you're going to see some cannibalization of that delivery business, and that's primarily where it shows up. So that's the model moving forward. We're going to open 60-plus units every year, and we're going to drive revenue and EBITDA growth with new shacks. But we're also going to have to continue to drive comps and be productive to mitigate the short-term margin and comp implications from those new shack openings. But that's not additive to what is already embedded in our business. You know, the numbers we just reported already reflect all of that happening. So we have high confidence that we can continue to deliver our guide of low single-digit comps. And, you know, 22 to 23 percent margins as we continue to grow.

All right. That's super helpful. Thanks, Rob. And just a quick follow-up, if I could, on G&A. Your third quarter dollars were flat year-on-year, driving pretty significant leverage. And then I think your guide embeds maybe a bump back into the low $50 million kind of plus range. Could you just unpack what we're seeing in both Q3 and within that 4Q guide, and maybe specifically what that reflects from a marketing perspective? Thank you.

Yeah, I mean, we're five quarters into this marketing journey, right? Q3 of last year was the first quarter where we materially upped our investment in marketing. And as I've stated in the sequential quarter since, You know, we continue to learn and optimize our marketing model. And I feel I give a lot of credit to our marketing team under our, you know, new leadership and marketing of really optimizing our media mix and being more effective at targeting the right guests at the right time. And we've also optimized kind of our own channel digital offers. So we're reaching, you know, the right people to drive trial and the right people to drive frequency, and we're doing it in a more efficient and effective way. So, you know, despite the investment in, you know, some of the promotions that are a bit of a drag on mix, we've still been able to maintain our margins. And I'm really proud of that in this environment, being able to go out and drive traffic while holding on to our margins where a lot of, you know, a lot of our competitors have had some margin degradation. So that's really a function of the effectiveness of our marketing, coupled with the operation. So marketing is a big part of our G&A, and the flow of that is really going to be driven by where we choose to invest our marketing, right? I mean, our S&B and our other investments in G&A kind of... stable throughout the year. So the fluctuations throughout the year in G&A are really driven by our decisions on marketing, and we're being very strategic in where we invest. And Q4 is one of our biggest quarters of the year. From a volume standpoint, we've got some big laps in Q4. Last year, we launched 135 in Q4, and we launched the Big Shack in Q4. And so we are making bigger investments in Q4 than we felt were needed in Q3. Q3 to deliver the results we just reported. So that's why the G&A changes quarter to quarter and why we're maintaining kind of our guide on EBITDA despite a lower spend on G&A and Q3. Michelle, would you like to add anything on G&A?

No, just to reiterate, Brian, that we do see it sequentially stepping up in Q4 to Rob's point because of the higher marketing spend and then our continued investments in our team members and our technology initiatives. So that's the only add I'd make.

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

Hi. Good morning. Thank you. You've driven five quarters in a row of positive traffic, and you lapped the positive traffic you started from the third quarter last year, which I think is a hurdle. The market was kind of looking for. So as we think about the path forward from here, your marketing is still going to grow with sales, but there won't be the big step up that you've had over the last year. So help us unpack how you're thinking about the same store sales of drivers into next year between maybe loyalty, its timing and impact, how you're going to get more dialed in on your targeted marketing, and then the innovation calendar that you talked about.

Thank you for the question and the recognition of the five straight quarters. Look, this was a big quarter for us. I think there was a lot of question marks on whether or not we could lap. The 5% comp we delivered last Q3 without a big infusion of marketing, and the team has just continued to improve our go-to-market model and our media purchasing and the way we implement our offers across our own digital channels and the way we work with our delivery partners. So, you know, not only did we comp positively, we did it with less marketing versus a year ago. And that is the biggest source of encouragement for me and our ability to continue to drive solid comp and traffic growth. So, you know, we are growing revenue almost as fast as anybody in the industry. So if we maintain the same rate of spend on marketing moving forward, that means our marketing budget is going to increase at the rate our revenue increases. So, you know, this quarter, we grew 15.2%. You know, and this year, you know, we're planning to grow mid-teens and guided to mid-teens growth. So every year, if we continue to deliver that type of revenue growth, we're going to get that amount of increased marketing. And that's not – a lot of brands aren't growing their revenues, and marketing is usually spent as a function of revenue. So with mid-teens revenue or marketing investment growth every year, coupled with the continued productivity that we see in every channel of our marketing mix, We have a lot of confidence in our ability to continue to drive traffic. And when we talk about traffic, you know, we all talk about comp traffic. And that's obviously the biggest KPI. So when you think about traffic as a whole, with the number of restaurants we're opening up every year, and you think about, you know, the revenue growth this quarter of 15% revenue growth with only 1.7% check growth. That revenue growth is coming from almost entirely from traffic as our company footprint in these markets. So our traffic growth as a company is in the low teens. So we continue to take share. Every time we go in and open up a shack and it does $3.5 million out of the gate, that's coming from somewhere. So we have been able to go in and build restaurants. And be very successful building new restaurants that make a lot of money right out of the gate while being able to maintain that comp growth. It's 23 straight quarters of comp sales growth. And, you know, I've been here two and a half years now, and it's always been a question of whether we can do that and can we do it with traffic. And now five straight quarters of traffic growth. So we're building the engine that can replicate that year in and year out without needing a big additional infusion of marketing.

Thanks. And then just on the margin side, you know, I know you're not giving guidance beyond 27 and you're reviewing, you know, the longer-term restaurant margin targets. You know, I think the implication was that the new unit growth was pressuring margins, which suggested that your comp-based units were growing margins. And, you know, this quarter we saw a slight shift. You know, I think labor de-levered for the first time in about four years as you made some investments. So can you just help us qualitatively think about margins after 26? You know, are your comp-based units going to be growing margins, and that pressure is really from the new units, or are you now in this investment cycle that started with labor here this quarter that we're going to see going into 27 as well? Thanks.

So qualitatively, strategically, you know, our number one priority is team member and guest satisfaction as a company, full stop. So, you know, we did a ton of work on the labor line over the last few years to get the operating procedures and the labor modeling and the scheduling and everything in place that we can run as effective as possible. Um, you know, We feel great about that accomplishment and where we are, but we are not going to continue to try to leverage the labor line. We are really focused on investing in our team members to support our rate of new unit growth, right? We are opening up more shacks than we have ever opened up, and those shacks, the number one limiting factor is having great people to go and open up those shacks. So we're investing in our team member development. We just had our GMs, our first GM capstone event here in Atlanta this week with over 20 new GMs, teaching them, coaching them on how to open up and run restaurants effectively. Those are investments we're making, and training and development, that's all going to affect the labor line. Now, we don't see a material increase in our labor rate, but it's definitely not a source for us to continue to drive increased productivity. We do not want to be a brand that has to make their EBITDA number by cutting labor. It negatively impacts our team member or guest satisfaction. So that's kind of the strategic component. Now, in terms of the financial piece, I'll let Michelle speak to kind of what our financial outlook on labor looks like.

Yeah, and I'll get back, Michael, to just the overall margins and your point on, you know, us assessing the 2020 or the long-range outlook. That's correct. You know, we currently have out there, you know, we're going to grow margins 50 basis points. But as Rob mentioned earlier, you know, our new shacks don't come out of the gate doing, you know, the 22 to 23 percent that we're targeting this year in 2026. And so generally, right, those first couple years, they're doing more high teens margins. And so that's the assessment we're making as we look forward and say, okay, how many new shacks are coming into the portfolio? What is that margin drag? Because there is a margin drag. There's a margin drag this year. There's going to be a margin drag next year. But how are we mitigating against that with other things going on in the business? Rob mentioned, you know, we're not going to compromise on labor in terms of investments and our team members and hospitality, but we've also talked about, you know, opportunities within supply chain and some of the initiatives, you know, that we're driving there to get efficiencies on that line item. So as all of that comes together, you know, there's puts and takes on both sides, and so that's the assessment that we're making, but for right now, all of that's embedded in our annual outlook of 22 to 23 percent, and so we feel good about that. More to come as we enter 2027 on what that long-term algo looks like as we continue to assess that.

Our next question is from Gregory Frankfort with Guggenheim Partners. Please proceed.

Hey, thanks. You know, on the new stores, I mean, there's been a lot of talk on the margin impact, but can you maybe just remind us what the comp trajectory looks like? Those stores, they open up, you know, maybe lower margin, but are you seeing a difference in Waterfall? And maybe what does that look like in, you know, year one, year two, year three on the comp side? Thanks.

Yeah, Greg. And so, as you know, we don't enter shacks into the comp base until after 24 months. So, the reason we do that is there is a honeymoon curve generally to new shacks. And so, right, they're going to start out at X level of sales. We're going to see a little bit of a dip in year two. And then the expectation is as they get into year three, right, they're comp and positive. And along that journey, as we mentioned, you know, we expect to see margin expansion over the course of those years. But there is a honeymoon curve to that, Greg.

Okay, and then just maybe on pricing and commodity inflation going forward. I mean, beef, it seems like it's rolling, but you obviously have diesel and a bunch of upward pressures. And I think you're going to carry 2% to the start of next year is what you said. What are your thoughts in terms of how much coverage you need to do and kind of what level of pricing you need to run? Thanks.

Yeah, correct on what you stated, Greg, which is exiting the year, we'll be at about 2% pricing. We have some pricing that rolls off in December of this year, putting us at that 2%. Generally, we're not in the mindset that we want to take price to bolster margins, right? We're looking at pulling that lever in terms of how we offset inflationary cost pressures and not to, again, bolster margins. And so as we enter next year, you know, being mindful of that and also being mindful, right, of where we sit in terms of, you know, value perception in the marketplace. So all those play a role as we go into next year, as we think about the pricing lever. And so as we get into that time period, you know, we're going to look at all those input costs, whether it's on, to your point, on the commodities, you know, our operating expenses, labor, et cetera, and make the decisions on when and where we're going to take price. But we're definitely very mindful about where we sit and then also the consumer environment that we're heading into next year.

Our next question is from Margaret May Bischock with Wolf Research. Please proceed.

Good morning, guys. Thanks for taking my question. I know you guys talked a little bit about some of the softness with that lower income guest, especially in your urban markets. I just wanted to understand, you know, given a lot of your value sits in the app, how are you thinking about balancing, you know, value for that walking guest who isn't in the app? And then I just wanted to follow up to make sure the timeline of the loyalty launches, that's something that we should still be expecting towards the end of this year. Thank you.

Yeah, so the majority of our orders in Shack are on kiosk at this point, and for anybody that is in our, you know, Shack universe, has signed up for our app or our offers, they're able to, you know, execute those offers in our kiosk. So, you know, it's not app only where the value shows up. It's also in the kiosk, and that's why we changed the definition of our digital platforms, because we want to kind of reflect the work that we're doing to make sure that, you know, we're delivering value and we're delivering growth on our highest lifetime value guests. On a run rate basis. And so we pulled delivery out of digital and added our kiosk in because we are able to deploy offers and track purchase behavior on our kiosk. So that's the whole reason why we made that definition change. And we're very focused on driving our digital business, both in shack with our kiosk as well as our app and web business. Loyalty, you know, loyalty, we don't look at loyalty as like a short-term. You know, driver, huge driver of sales or profit out of the gate. You know, loyalty programs tend to, by definition, be leveraged by your current guests. And so sometimes there's even, you know, in other instances, a drag. When you launch a loyalty program, because you're launching it with your current guests, it's not necessarily a tool to go and attract new guests. So we're being very thoughtful about loyalty because we want it to be a long-term value creator. Like our vision for loyalty is being able to deliver enlightened hospitality in our digital footprint, right, in our digital, you know, universe. So we are really investing a lot of time and energy to make this more than just a points-based program. We want it to be an engagement tool, you know, hearkening back to, you know, Danny Meyer's Union Square Hospitality Group when someone walks in and they know your name and they know what you've ordered in the past and they know that it's your anniversary or your birthday. Like, that's our aspiration. So we are working very closely. You know, diligently and planfully to execute against that. And so we've talked about launching loyalty, you know, in some beta form in Q4 this year, Q1 next year. That may still happen, but only if we have confidence that it's going to be the representation of, you know, enlightened hospitality that we aspire to. And, you know, it's not really a financial implication because we don't expect loyalty to have an outsized. You know, comp or, you know, margin impact when we launch it. It's much more of a long-term investment to cultivate our highest lifetime value guests.

Thank you. Our next question is from Chris Correll with KeyBank Capital Markets. Please proceed.

Hi. Thanks for the question here. So, on the 4Q same check sales growth, is there anything else you can provide in terms of how we should think about the current quarter, just given the wide range implied by the guidance? Michelle, I know you mentioned some of the dynamics to consider, but any additional detail, including what you're seeing quarter to date, would be helpful.

Yeah, Chris, we're not going to comment on quarter to date trends. Obviously, we know there's a range of outcomes because there is a range of outcomes, right? And so, you know, I'll just refer you back to our annual guide, which is the low single digit comp for the full year. You know, but as Rob talked about, you know, we've had 23 straight quarters of positive comp growth and five straight quarters of positive traffic growth. And, you know, we want to continue that trend. And so, you know, our goal is, you know, obviously to continue that trend, but, you know, we feel we have the strategies in place based on everything that we've talked about today to continue that trend. And so, but, you know, commenting on the quarter date trends is something that we're not going to do at this point in time. And again, the low single digits for the full year is what we're guiding to.

Okay, great. Thank you. And then, Rob, I did want to ask you about just how you're feeling about LTO cadence, maybe both from a Shaq perspective, but then also what you're seeing across the industry. Do you feel like you have the right LTO cadence today, or do you think that there's opportunity to kind of review that? And then any other further thoughts on just kind of LTO cadence and operational impact would be helpful. Thank you.

Yeah, great question. So, you know, I mean, we launch four big LTO windows a year. So, it's, you know, it's a lot less than maybe some of the, you know, fast cycle innovation brands launch, but maybe more than some of the non kind of innovation driven brands launch. So, I feel like we're kind of like right in the middle. And the reason why we choose that kind of model is we believe that our food is, you know, differentiated in the space. We believe that we can deliver culinary that other folks can't. And it's so it's not just about. Bringing in traffic in, you know, one month to kind of juice the jam. Like, we bring in our LTOs, and they're in for three months, you know, sometimes four months or even longer if they're really performing and we want to extend them like we did Truffle last year. So, um... You know, it's not like a standard calendar. It really is a thoughtful approach about how we can, you know, build the brand through the news that is generated on the culinary experience and then driving repeat. With our most valuable guests. I mean, we are seeing a huge, you know, awesome response to bringing back Truffle. I mean, this is the third time we've had Truffle, and it's like it's a new LTO that we've never launched. So we're going to strike a good balance between new-to-the-world stuff like the baby back rib and stuff that's tried and true like truffle, and we're going to do it in a way that is the least impactful on operations and supply chain. We're trying to limit the number of unique ingredients in our LTOs, which can create some supply chain and operating issues. We also have an opportunity, I think, to get a little bit more refined on some of the ancillary items that we bring in some of these windows. You know, we come with three new shakes. We come with, you know, different flavors of some of our side items and chicken bites. So although we have one big LTO and that's what we focus on, there's other things there, too. So, we're exploring ways to kind of decrease some of the operating pressure, not by moving from four to three or two big LTOs, but also by optimizing kind of the portfolio of new items that we bring within the context of those four big windows. You know, I would call out, we're also doing some, like, not LTOs, but we're doing some collaborations right now that we're really excited about. In the news right now, there's a collaboration with Mama's 2, which is one of the best pizza restaurants in New York City. And, you know, this isn't going to generate a bunch of system-wide sales. But the social media discussions about it and the excitement and brand buzz of, you know, Shake Shack collaborating with this, you know, amazing cult-like following pizza restaurant, like those are the kind of stories we want out in the world to reinforce our culinary prowess and our connectivity into some of these great chefs and some of these great restaurants. So there's as much brand building and news and buzz that we're trying to drive with some of this culinary innovation as it is kind of a comp sales story.

Thanks so much, and I definitely appreciate you bringing back the black truffle menu.

Thanks. It's amazing, the love for that product. And, you know, when you really think about it, you know, we get those truffles literally from Italy. Like, I mean, this is one of the big reasons why I'm here at Shake Shack. I mean, this brand and this company is committed to doing things the right way and getting the highest quality ingredients we can possibly deliver. And the more we can just bring news about that, it has a halo effect back on our core business. And so, once again, we've got to do it in a way that doesn't disrupt operations and supply chain and negatively impact accuracy or speed of service. But there's a huge amount of, like, halo benefit from launching things like Truffle and the Mamas 2 collaboration.

Our next question is from Sarah Senator with Bank of America. Please proceed.

Thank you very much. Just maybe a question on the margin and then a quick modeling question. Gross margin performance was better this quarter, even though I think the gap between pricing and input cost is roughly the same, maybe 200 basis points more price. Michelle, could you just talk about what the drivers were? Are you starting to see the benefits of some of the supply chain initiatives? Is this more to do with kind of a full quarter of 2, 4, 6 versus 1, 3, 5? You know, just as I think the articulated kind of view on margin has been more coming from cost of goods and maybe less from labor, I'm curious where you are in seeing that. And then the modeling question was just about royalty rates on licensing. I guess your licensing revenue grew more slowly than licensing sales. Is that just a difference between higher royalty rates outside the U.S.? Thanks.

Yeah, I'll take the margin question, Sarah. So to your point, yeah, we're definitely seeing a benefit from, you know, what I would characterize as price. You know, when you, we came in with the 4% gross price, but then to your point on going from 135 to 246, you know, obviously that is definitely going to provide a benefit to your point on the gross profit. And then when you look at our overall commodity basket in the third quarter, we were down low single digits. Beef was still up low single digits, but when you look at the rest of the basket, and I called out, you know, our buns, dairy, and chicken being down in the quarter, you know, definitely contributed. And, you know, that's, you know, in the form of, you know, what we've been talking about, which is our supply chain team going after, you know, certain categories and finding ways that we can buy more efficiently within our supply chain. So all those things contribute to what you saw on the gross profit side. And on the licensing side, you know, Rob, if you want to take that one, I'll turn it over to you.

I mean, you know, licensing, obviously, licensing sales were higher than revenue, and our revenue effectively is just, you know. The royalties minus, you know, G&A that we expend to derive those royalties. And, you know, there are instances where sometimes we make investments in some of the partnerships or in some of the other, you know, infrastructure that we're building around the licensing business. So, you know, that's really a reflection of just some investment that we made that flows through to that EBITDA line.

Yeah, and I would just add, Sarah, our royalty rates are generally in line, so there's nothing I'd call out there.

Yeah, it's more just the investments that we chose to make.

Our next question is from Chris O'Cole with Baird. Please proceed.

Yeah, I just had a follow-up on the supply chain questions or comments, Michelle. Can you help us understand the rough magnitude of supply chain initiatives that contributed to this quarter, and then how we should think about that dynamic over maybe the remainder of this year and into next year?

Yeah, Chris, I'll point to what I called out, which is we definitely saw some slight inflation on beef lower on the other categories. Paper and packaging was also down in the quarter. As we go into Q4, we do expect quarter over quarter beef to actually become deflationary. We've seen that come down into Q4, but we still expect generally our basket to still be down in that low single-digit range. When you look at all the categories combined, and so, you know, that's what I'd comment on in Q4. We don't expect to be materially different, but we do expect it to be down low single digits in Q4, similar to Q3.

No, I apologize. I'm talking about supply chain initiatives, like the efforts to kind of improve the supply chain.

Got it.

Not just the commodity inflation.

Got it. Okay. Yeah.

So, you know, I would say we're kind of in inning three or four of our supply chain journey. We've made a lot of progress. We're starting to derive some of those benefits. I mean, some of those savings that Michelle is talking about on dairy and buns and some of these other non-beef items, those aren't just. Macro prices, those are a result of some of the work that our team has done to RFP those businesses and optimize the way we make and distribute those ingredients. So it's not just commodity prices. There's definitely benefit from some of the things that we've done internally. And as we look forward, we have a lot of opportunity ahead, and we are actively working those opportunities. We've built an infrastructure, and that's where some of the GNA, you know, increases over the last year, year and a half have gone into our supply chain capabilities and the leadership there and the competencies there. So we're really excited about our ability to continue to find, you know, savings there. Now, that being said, you know, some of those savings are going to be mitigated by some of the margin pressure from our new shack openings, like we talked about. So, we're constantly working to strike that right balance on the margins while delivering, you know, the guides on top-line revenue and EBITDA growth. So, our margins, we feel really good about, 22.5. Obviously, for them to move materially higher, there's things that would have to happen that are kind of outside our control, but we feel confident that even with the rate of openings we're having and the drag that brings to margins, that we're going to be able to continue to deliver these types of strong margins because of supply chain and operations.

Okay, great. Thanks, guys.

Our next question is from Lauren Silberman with Deutsche Bank. Please proceed.

Hi, thanks. So, Rob, I know you mentioned high-income consumers continue to outperform the lower income. As you've moved through the year, have you seen any change in performance across low, middle, or high-income cohorts? Any signs of check management that you're seeing?

Not dramatically. In fact, I've been a little bit surprised recently that we're actually seeing higher items for check. I know there's been a lot of industry discussion around, you know, this whole idea of GLP-1s and, you know, people having to cut back and they're not cutting back occasions, but they're cutting back on the items per check. We've actually seen really some strength in our items per check recently. I think that's a testament to the culinary that we have launched and particularly some of the shakes. We're seeing, you know, people buy shakes. The Reese's Peanut Butter Cup Shake has been a big win for us. And, you know, similar to the way Dubai Chocolate Shake was. So I think as long as we can continue to bring offerings that are new and unique and different, we're going to get people to want to try those things. I mean, when you go to Shake Shack, it's a different dynamic than when you go to traditional fast food. And, you know, it's kind of an occasion, right? I mean, we have really high beverage attachment rates. We have very high fry attachment rates. Like, we don't have to do a lot of, like, in-check comboing and stuff to sell beverages and fries. People that come to Shake Shack want the full experience, so we just haven't seen as much pressure on items per check as maybe, you know, the QSR segment of the industry is seeing.

Great. Very helpful. And then on the comp side, any color you can provide on cadence moving through the quarter. And I know you guys don't want to talk about quarter date specifically, but just given like the volatility in the industry, a lot of companies talking about a slowdown in early October, like anything you could at least air qualitatively on the consumer environment or how you're thinking about it broadly.

Yeah, I would just build on what Michelle said. We are absolutely focused on continuing to deliver positive comps and positive traffic. And we are really happy, as we called out in the call, really happy with the performance of Truffle. It's doing really well, and we're getting really efficient and effective with our marketing and media. So we have a lot of confidence, not just for Q4, but, like, moving forward that, you know, we're going to continue this positive same shack sales and traffic story.

Great. Thank you so much.

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

Great. Thank you. I'm curious what drove the decision to take price in October. You guys have talked about, you know, macro pressures on the consumer. You know, it's obviously been a favorable 3Q and 4Q commodity backdrop, as well as the productivity efforts in the supply chain. So, what was the rationale for the price increase?

You know, look, we talked about the investments we want to make in our teams. You know, on the labor line. So we're making those investments. There's a cost to those investments. We also talked about some of the OPEX, you know, that we are, you know, incremental OPEX costs that we're incurring because of our growth of our delivery business. And, you know, we want to make sure that our shacks that are, you know, our legacy shacks that are now. You know, 20 years old and some of them doing, you know, eight to ten million dollars in sales that we continue to invest in those shacks through, you know, restaurant maintenance and make sure that they're a great experience for our guests because they're delivering, you know, huge returns for our business. So there's other costs outside of the commodities, and we try to take pricing to reflect. You know, take pricing that, that, that mitigates. Those costs and maintains the margins. And that's why you see, you know, in Q3 and Q2, Q3, and our guide for the year, like pretty consistent margins, right? You know, regardless of kind of just the commodity up and downs, we're seeing pretty consistent margins. And that's by design, right? We're making investments where we think we need to make investments. And some of those investments are funded through pricing, and some of those are funded through revenue growth. And some of those are funded through productivity.

Yeah, and I would just add to that, Andrew, that when you look at the 4% gross pricing in the quarter, and then you look at our net price mix at 1.7%, to Rob's point, we're making deliberate investments in those targeted offers, promotions, channel-specific marketing, right, that's, you know, netting down that pricing impact. And so even though you see 4% price, it's really that 1% or 1.7% net price mix. And so we do have pricing that's falling off in December as well. And so as we exit the quarter, being at that 2%, we feel at 2% gross is a good range to be at, knowing that when you look at food away from home inflation, in the most recent data, I think it was at like 3.5% price. So exiting the quarter at 2% gross with the October price action, we feel really good about that.

That's helpful. And then just a quick follow-up. You guys talked about the sales transfer from delivery as you saw our development. Obviously, we're still putting on positive traffic overall, but maybe just expand a bit on how much impact you saw in 3Q traffic from that intentional sales transfer, and how should we think about the magnitude they anticipate from this on 4Q relative to 3Q?

Yeah, I mean, I think it's been really consistent. I mean, we tend to see between 20 and 50 basis points of headwind to our traffic from our new shack openings. And that, once again, that's not a function of us going in and building shacks right next to each other. We have a ton of white space, so we can be really choiceful on where we're building our shacks. It really comes down to just kind of this delivery transfer that we have. You know, very little control over if we, you know, I'd love to be able to go and strategically build, like, the concentric circles around our shacks and make sure there's no overlap, but that's just the way the 3PD model works. So, we've been able to, you know, recognize that. We know that that happens, and we're building, you know, our strategic plans around optimizing for that and mitigating it.

That's helpful. Thank you. Got it.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Yeah, I just sincerely want to thank everybody for joining the call today. I know there's a lot of calls over these last couple days, and so your time's valuable, and we appreciate your participation. I would just say, reiterate what we talked about a lot here today. I couldn't be more thankful to our teams. We had a tough start to the year, and everyone in this organization has stayed focused on delivering the business model that we know we can deliver over the long term. And we've learned a lot about some of these growing pains that we incurred in Q1 with opening 16 shacks versus three the year before, and we're building that into our plan moving forward so we can have more consistent delivery of all the KPIs while still delivering the growth and the shareholder value creation that we aspire to. So, thank you for joining and really look forward to the follow-up calls and going into more detail about, you know, what's going on at Shake Shack. So, thanks.

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