Conference Transcript - SHAK 2026-06-04

Sharon Zackfia, Analyst — William Blair

All right. I'm Sharon Zachfield with William Blair. That feels very loud. Thank you for joining us today. I'm really happy to have with us from Shake Shack Rob Lynch, CEO, Michelle Hook, who just joined as CFO. You know, Shake Shack is one of the most proven emerging growth concepts in the publicly traded restaurant space. So we're excited to have them today. We think the real story here is the runway of expansion, which I'm sure we'll talk about. We do have to tell you, I'm sure you've already checked it out, but there's a complete list of research disclosures. and potential conflicts of interest at williamblair.com. This will be a fireside chat format, and we're probably going to have to start out talking about some news the company had earlier this week. So there was a pre-announcement on sales and profit earlier this week. And I guess the obvious question would be, since the time you gave that guidance, particularly for the second quarter, which was maybe about a month ago at this point, What did you see change in the business that gave you that updated outlook?

Rob Lynch, CEO

Yeah, so thanks for the question. You know, what I would say is we have a lot of confidence in this quarter. We have a lot of confidence in the year in delivering the annual guidance that we gave and the updated margin guidance that we shared yesterday. Jay? The thing that has changed is simply that beef prices have, you know, we're going to see the highest beef prices that we've ever seen in June. So we had a decision. We had a decision on whether or not we wanted to take pricing to mitigate that or take the margin implications. And we are building our company for the long term. We do not see beef prices above 590 in perpetuity. We have had, for the last two years, we've been in a, as we mentioned in the release, we've been in a competitive environment that is very driven by value and price. And so we have done an amazing job of mitigating the beef inflation that we've been experiencing for the last 18 months. And it's not just beef, but, you know, all the inflationary components of the P&L. And so, you know, last year we saw a lot of inflation. We delivered 120 basis points of margin expansion without taking as much pricing as we had taken in the past. This year, we have held on pricing. We've taken some pricing, but not as much as we have in the past. And so we saw this cost come into the P&L. We determined that we weren't going to take as much pricing because once you take the pricing, you don't roll it back. And then when the costs come down, you're sitting out there exposed with high margin but high prices. So we are very focused on delivering great value for the money for our guests. We have the highest quality ingredients. We have the best products in the industry. And so we decided we weren't going to take as much pricing as we needed to mitigate all that cost because we anticipate those costs coming down. We don't know exactly when. We thought that they would have abated a bit by now, but some of the dynamics that happened this year and the conflicts, the macroeconomic environment, I think have put pressure on that. So we decided it was the right decision to hold, and when we flowed that through the P&L, we saw some margin degradation, and that's why we wanted to make sure that we were sharing that, fully disclosing that to our investment community. I want to make it really clear. I mean, we delivered 4.6 comp in Q1 with positive traffic, our 21st straight quarter of same-store sales, our third straight quarter of traffic growth, which is consistent with our third straight quarter of paid media for the first time in the company's history. So we are guiding this quarter to 2.5% to 3.5% comp. It'll be another positive 22 straight quarters of positive same-store sales growth. I also want to provide the context that we disclosed a month ago that our April comps were minus 0.6. So if we hit the midpoint of our guide at 3% on the comp side, you know, you can see that that's an acceleration in business, right? Just it's math is math. So we see a very strong business in front of us. We see a great year, another year of comp sales growth. We've guided the low single digits, which does imply some deceleration in the past. But everybody knew that prior to yesterday when we reiterated that, because we know that our comp situation in the back half of the year is very different than our comp situation was in the front half of the year. So on the whole year, we're going to deliver positive comps. And we took our margins down. we were guiding to 22.7 to 23.2 is that the right for the full year for the quarter we were guiding

Michelle Hook, CFO

24 24 and a half and for the full year we were at 23 to 23 and a half so taking that down a bit to 22 to 23 to Rob's point reflects the environment that we're in today and so that's still to Rob's point extremely healthy margins when you look at growing a business low single digits you look at for the full year, we're going to open 60 to 65 new shacks and get a margin that's within that 22 to 23 percent range. That's a healthy business. I mean, we're taking share in the marketplace.

Rob Lynch, CEO

So, you know, 60 units use the bottom of the guide, 60 units on top of 400, less than 400 units to start this year. Talk about 15 percent unit growth. We have cash on cash returns over 30 percent with restaurant margins at the midpoint of our guide at 23 percent or 22 and a half percent positive comp positive traffic so i would add like i don't know many brands out there doing that right now one two three maybe so we although we felt we wanted to make sure we fully disclose fully transparent on the cost structure of the operating business right now still feel great about both the delivery this year and moving forward. So, you know, that's kind of the gist of it. You know, and I think the other piece that happens is you get the headline of, like, you know, Shake Shack takes down its guidance. That's in part because we deliver so much guidance so often. It really puts pressure on us to make sure that we are updating that guidance because we're giving all this quarterly guidance. And so, you know, Michelle's come on. She has a different point of view on guidance. I don't know if you want to share that.

Michelle Hook, CFO

Yeah, when we look at the restaurant industry as a whole, and my past practice has been annual guidance. And the amount of annual guidance that we provide is pretty extensive. So the rest of the industry, as I look at what's best in class, restaurant companies provide annual guidance. You can give quarterly updates and talk about things that go on in the quarter, but that's something, Sharon, that we're assessing. And so what that looks and feels like for us moving forward, we'll talk more about that likely on our August call. But my past practice, and again, when I look at the industry, that's annual guidance. And Shake Shack, we are an anomaly by giving the amount of quarterly the guidance that we get. And so, you know, as Rob and I and the rest of the team look at the business, we're growing this business for the long term. And, you know, delivering on that annual low single digit, you know, comp, when you're growing your new restaurants, you know, call it low teens, that leads to revenue growth, you know, in the low to mid teens, and then you're growing your adjusted EBITDA, you know, in that mid teens range, that's a really healthy business. And so those are the things that we talk about that we're working towards. And when you look at the other component to our business, when you look at the restaurants or the shacks that we're opening, they're performing at our expectations. And so when you look at the return profile of the new shacks that we're opening, we're getting the returns that we expect. And so how we rate and pace openings and new shack openings into our portfolio, those are things we're going to continue to iterate on as we look at capital allocation in the business. But we're getting the returns, which I think, you know, for us, we're a growth story, right? Yes, we want to have low single-digit comps, but we also want to, you know, put out more Shake Shacks into the world, and that's what we're going to work towards. Yeah. I think the other element, so you talked

Sharon Zackfia, Analyst — William Blair

about the cost structure, and I'm going to come back to you on beef inflation, Michelle, was the comp guidance for the quarter originally was three to five, and you kind of brought that to the low end. And there was a comment in the press release about competitive impact. And it feels like it's been a very promotional environment for a while. So I'm wondering if you saw something change since May, or if there was an element of maybe optimism towards the 5% that you just

Rob Lynch, CEO

decided to kind of take off the table. Yeah, the competitive impact has nothing to do with our comp revision. The competitive impact is simply in there to highlight why we're not taking pricing as much to cover the margin. The whole decline in the comp, and we communicated this yesterday, the whole revision on the comp is a function of us removing any impact from World Cup. You know, we looked at it and we said, look, you know, we're seeing some tourist numbers that that have slowed down over the last three or four weeks, particularly in some of the big cities that we're in. And so, you know, we still believe that there is a big upside opportunity for us with World Cup. Shake Shack is a destinational restaurant. So when you have people traveling into, pick a city, say Atlanta, to go to World Cup games, you have people from Chattanooga, you have people from Augusta, You have people from Savannah. You have people from Birmingham. You have people from not you have people from everywhere. And a lot of those folks don't have Shake Shack. When they come to Atlanta, they're not looking to try the fast food restaurant. They're looking for Shake Shack. So we believe that we are going to be a destinational restaurant opportunity for thousands and thousands of people that are coming into these cities domestically. And we believe that, you know, the international tourism is also, you know, for the size of our business domestically, we're disproportionately developed internationally in 23 countries. So we believe that we're going to see some benefit, but we weren't able to forecast that appropriately, you know, accurately, given the tourism, the lodging, all the numbers that we look at to understand the tourism component of our business, which is way more than some of the other brands. And so we felt like it was responsible to say, hey, look, this is the baseline. You know, this is the baseline for if we don't see any benefit from World Cup, these are the comps we're going to see. so and even if that came to fruition i guess once again my point being even if that came to fruition with a minus 0.6 in april and two and a half to three and a half guide so take the midpoint at three percent like what what comp does that say we're doing in may and june better than almost everybody else so um that's where i'm like okay i know we took the guide down because we want, you know, Michelle has been here three weeks now. She came in, she looked at the business. She and I had a lot of discussions with the team. And we're like, okay, look, here's the things that we know now that we didn't know four weeks ago. We didn't know the tourism trend over the last four weeks. We didn't know the beef prices were going to escalate to the point we didn't have that in our financial forecast. So she's come in, we've done the diligence. We have what we believe is going to happen this quarter. And we felt like it was a responsible thing to disclose all of that for our investment community.

Sharon Zackfia, Analyst — William Blair

On beef, can you give us an update on where inflation is right now for your commodity basket? And I think when I look at the seasonality of margins, typically we're kind of like at the high point in the second quarter and it tapers off a little bit. I think the implied guidance would, for the back half, be a little bit less tapering than is normal. So if you could help us understand what you're expecting.

Michelle Hook, CFO

Yeah, so if we roll the clock back, right, Four weeks ago, I think when you look at beef, we would probably be closer to mid-teens, Sharon. When we look today, beef's going to be high teens, right? And so that's what's changed, to Rob's point, over the course of the last four weeks and why, you know, we're talking about the updated guides. So what that means for our overall basket of goods, and beef is about 30%, right, of our commodity basket is, you know, if we believe that this is the high watermark for beef, then Q2, obviously, you know, from the standpoint of a margin impact, you know that would be you know where we would see the basket being a little bit more pressured

Rob Lynch, CEO

in q2 and hence why we didn't want to take the pricing we don't want to take the pricing and

Michelle Hook, CFO

look we don't hedge or forward buy beef and so the world could change like it did in four weeks which is why we updated but the way we see the back half of the year is yeah we do see that you know tapering down a bit and you know but still being elevated and then how that the rest of the commodities play into the basket is you know the guide that you saw us give for the full year and why you know we felt compelled to bring the margins down even for the full year but to your point of it tapering off in the back half of the year you know that is you know we do see that that start to uh that pressure valve relieves a little bit on the beef in the back half of the year uh which is what you're seeing and and what we put and how we view when we gave the guide for

Sharon Zackfia, Analyst — William Blair

the full year from a margin standpoint and you've certainly seen a lot of unit level margin expansion over the past 18 to 24 months, even with beef going up, the expectation had been continued margin expansion going forward at the unit level. Right now, it looks like it might be more flattish this year as you eat some of that inflation. Pardon the pun. What are your thought processes just coming into the business, Michelle, and looking at it on the opportunity for further margin expansion at the unit level and out years? Or do you think there's more likelihood of reinvesting back into the business as beef normalizes at some point? Yeah, I think, you

Michelle Hook, CFO

know, we're continuing to assess, right, the long range outlook and what that means. I know our current long range algo says, you know, 50 basis points of margin expansion. That's something that Rob and I are assessing. Because to your point, we have to look at, you know, what are all those input costs? Where do we want to put that reinvestment? The other thing we do have to consider is the rate and pace of growth, right? And just for avoidance of doubt, you know, when we're opening our new shacks, they are returning at expectations. However, right, how they mix into the portfolio, right, there could be, you know, as we look at that, and then as we assess the growth in the core base, you know, that's something that Rob and I will assess and we'll update on as we see where this is going over the next, you know, couple years. But for now, you know, we understand the cost pressures, but we have to also look at, you know, what the business is going to do over the long term. And, you know, when Rob and I talk, it's, look, to have a 22 to 23 percent margin for this business over the long term, and you're opening new shacks that are returning at a 30 to 33% call that low 30% cash on cash returns. That's a really healthy business. And you're growing your comp low single digits. So how all that mixes in again, you know, whether it's a range of margin, right, that you're targeting in a given year, those are the things we're going to

Rob Lynch, CEO

continue to assess. Yeah. And we'll be better equipped. I mean, three weeks on the job. And I mean, she's doing very well. Oh my gosh. It's transformational. I mean, she's, she's come in and build credibility with every member of the executive team. She has come in and really build credibility with her finance team. So we couldn't be happier to have her here. And so when she, you know, brought her perspective last week and was like, well, Rob, here's where I'm at. Here's how I'm thinking about it. Here's the data that I have to substantiate this, you know, some of these recommendations. you know even after three weeks like there's enough credibility for for me to say okay look I know this isn't going to be the easiest thing um for the investment community to digest but it's the right thing to do yeah and that's you know it's one of our core tenets in everything we do you know always do the right thing so um and I just I just wish I was better at communicating indicating that even with these guidance changes, this is one of the best performing concepts in the industry. The revenue growth, the comp growth, the traffic growth, the margin growth over the last few years, despite inflation and despite taking less pricing so we can remain competitive in the marketplace. You know, the one place where I take accountability for, you know, our P&L and our EBITDA not showing up as much as I would hope and like for is the G&A. Yeah. And, you know, that's 100% on me. There's, you know, that's my watch. But I can justify it because we had to build a lot of capability at Shake Shack. Shake Shack is the best brand in the business, serving the best food in the business. But the whole reason why they brought me to Shake Shack was so that we could take the great, keep that best brand, keep that best food, and scale. And in order to scale, we needed to professionalize a lot of capabilities. We needed to improve our restaurant operations, which we have done in a dramatic fashion. We needed to build a supply chain and procurement capability. Our supply chain was amazing at getting the food to our shacks. We didn't have any procurement resources. And so, you know, we were growing and scaling and not deriving any of the benefit of that scale. We had to build a tech platform to support our app, to support loyalty, to support AI and the impact it's going to have on our business. which is unbelievable. I mean, we announced Project Catalyst last month. What Justin Menon, our CIO, has done is gonna transform our productivity both in our restaurants and in our administrative functions. And we had to build a development infrastructure to be able to go out and build 60 to 65 restaurants a year. So that all took headcount. That all took people. And at the same time, we increased our marketing investment, which falls into our G&A bucket to drive positive traffic growth. So I fully recognize that our G&A, when you look at that line item, you're like, man, you know, because G&A can tend to be kind of a judgment on like, you know, management's efficiency and decision making. And so, yeah, I don't take it lightly that I'm the CEO of a company with a 13 percent G&A line or 12 and a half percent G&A line. But I've already committed that we're going to start leveraging that next year. We already have work in place to potentially, you know, get those processes in this year so that we get the full year of leverage benefits. So that is the if you if you look at our business model, if you look at our P&L, the only thing that I am not incredibly proud of is our G&A line. But I know why it is the way it is and I know how to fix it. And we've committed to doing that next year.

Sharon Zackfia, Analyst — William Blair

Maybe we'll move off the P&L and I'll ask you some strategy questions. So it's been like a very interesting, to say the least, restaurant environment over the last 18 months. And you've taken a pretty unique approach, I think, to kind of barbelling value and innovation. Can you talk about what you're finding works for Shake Shack's brand and maybe, you know, some things you've tried that just didn't resonate as much with the consumer?

Rob Lynch, CEO

Yeah. You know, we are a premium, fast, casual brand. And we have the highest, most expensive ingredients in the business. Right. And so our prices are always going to be higher. And what we need to assess is from a revenue management standpoint, like how do we allocate those prices across the total guest universe? universe, right? So our core guests who come to us all the time, they know how the quality of the food, they know the experience when you come to our shacks is different than a lot of the other restaurant brands. And so, you know, a lot of them, excuse me, are the folks that buy our premium burgers, our premium LTOs. They've kind of almost graduated out of Shack Burger and Fries, right? Well, new guests, particularly younger guests, 15 to 25, you know, high school, college that haven't tried Shake Shack, one of the things that is a barrier is, you know, they're just like, okay, I can go to fast food and get a cheeseburger for $3.50 or $4 and Shake Shack is $8. like that's that's you know that's a barrier two things one they don't recognize and I don't expect them to it's our job to help them but they don't recognize that the cheeseburgers and fast food are not the cheeseburgers at Shake Shack and you know every Shaq burger has a quarter pound of beef has cheese has lettuce tomato Shaq sauce like comparing our Shaq burger to a regular cheese cheeseburger and fast food is apples to oranges. If you want to compare our Shaq burger on a price standpoint, compare it to a quarter pounder with cheese, compare it to a Whopper with cheese. Like these are bigger sandwiches with more protein, more beef, but that's work that we have to do. We have to make sure that we create that reference set. But on the pricing standpoint, like we need to make sure that we're breaking down the barriers for our new guests to come into Shake Shack because we fundamentally believe that we have the best food. And once they come in, they're going to recognize why we charge a premium. So for that target audience, we launched this app and the app program 135. And that is a purely digital program from start to finish. We market it only in our digital and social channels. And we put it out there and we target people that haven't been to Shake Shack in the last year. And when you see our media show up in your social feed, it has a button to click on that takes you right into our, download our app. Download our app, you come in, you've got $1, $3, $5 CSD, $1 bet sodas, $3 fries, $5 shakes. Every one of those things are some of our highest margin items in our business. So even though we are discounting them in order to provide incentive and break down the barrier to trial, we're still making penny profit on those discounts. It is a profit driving margin dilutive traffic driver. You can kind of wrap your head around that. And that part of our business, our app is growing over 30% in traffic. Yes, there's check degradation in the teens, but I'll take 30% traffic growth for teens check degradation all day long. I wish I could have confidence to do that across my entire business, which is effectively what Chili's has done. And so we don't have enough media to give us confidence that we can drive the amount of traffic to mitigate the check decline. So we're working towards, but we want to surgically do that. We don't want to send 135 to the people that are buying our smoke shacks and bacon avocado cheeseburgers. So we're trying to make sure that we can drive traffic by bringing in new guests. And the other big thing that's happened with 135, once these folks come in, they're our highest frequency guests. So we have grown our frequency. It's not just bringing in new users. Once they're in, and even our current users that are in the app and recognize 135, our frequency is up dramatically. And as you know, Shake Shack has always been a little bit of a special occasion brand. If we can drive new users that come in and order more frequently, that's like low-hanging That's hugely accretive to margin. So that's kind of the strategy on the value side. On the premium side, I mean, right now we have a barbecue rib sandwich, first in the world, hand-deboned baby-backed barbecue rib sandwich. And in our lowest price tier markets, it's selling at $12.99. Our highest price tier markets, it's selling at $14.99. So there aren't a lot of other brands in fast casual or definitely not in fast food who are willing to stretch to price points like that. But we know because of our guest profile, because of the quality that we're delivering, that there's going to be demand for that. And we're selling a lot of barbecue rib sandwiches. In fact, when we reported on May 7th, the first week of sales, we're up 8%. We thought we were going to run out. We thought we were going to run out of barbecue ribs. And we almost did because a truckload of them got stolen in Mexico. I mean, you can't make this up. Literally, we are scrambling to get ribs from this DC to this shack to make sure we're, you know, because there's different demand in different shacks. And we have, like, the supply chain all hands on deck to make sure we have this stuff because it's selling like crazy. And I get a call, and they're like, Rob, you're not going to believe this. I said, what? I said, 3,000 pounds or something of 3,000 cases of barbecue ribs just got stolen in Mexico. I'm like, you know, like, that's kind of how this quarter's gone. um but you know so our innovation on our sandwiches sides we've got mac and cheese selling like mac and cheese i mean it is people love this stuff it's selling like crazy so our premium lto innovation is i mean think about like dubai shake first time we ever had a shake

Michelle Hook, CFO

at 9.99 um so we should probably bring that back i think you know it was a crowd pleaser so i think

Rob Lynch, CEO

we should do that um but you know so so we need to break down the value barrier on the trial new user acquisition frequency side and then we're going to drive our check and affinity and differentiation with our lto's and menu on the premium side last thing and then i know we're

Sharon Zackfia, Analyst — William Blair

running out of time the other i think barrier to frequency historically had been maybe friction in the consumer experience related to operations so can you just talk about in two minutes What have you done to help ops since you've joined the company?

Rob Lynch, CEO

Yeah, I mean, it's unbelievable. When I was at Taco Bell, we used to talk about every second off of service time was worth a million dollars in profit to the system. And in two years, we have taken over a minute off of our service times. And that's while optimizing our labor deployment and deriving a huge amount of savings from our labor line. we've improved our service times, increased our team member retention, and increased our guest satisfaction. So when you think about that, like that is the holy grail of operations. Decreased service times, improved guest satisfaction, improved team tenure, like that's what you're striving for every day. So major strides there. And, you know, Stephanie Santel, who's our COO, is responsible for all of that. She's unbelievable executive and leader. She's doing all of that in the supply chain right now. Like we're, we're seeing as much as we hated taking down the guide on margin because of this beef, you know, unique situation. Like we are doing amazing work to mitigate all of that inflation. We have addressed every input cost. We have RFP'd almost every input into our business. So our ingredients, as well as our packaging, as well as our distribution partners, the cleaning supplies, everything we do. So that scrutiny, that operational excellence

Sharon Zackfia, Analyst — William Blair

is permeating through operations and supply chain. Great. So we're out of time. The breakout will be in the Mara room, which is over the river and through the woods that way.