Earnings Call Transcript - SHAK Q1 2024

Operator, Operator

Greetings. Welcome to Shake Shack's First Quarter 2024 Earnings Call. Please note that this conference is being recorded. I will now turn the conference over to Michael Oriolo, Vice President of FP&A and Investor Relations. Thank you. You may begin.

Michael Oriolo, Vice President of FP&A and Investor Relations

Thank you, and good morning, everyone. Joining me for Shake Shack's conference call is our CEO, Randy Garutti; and CFO, Katie Fogertey. During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release and the financial details section of our shareholder letter. Some of today's statements may be forward-looking, and actual results may differ materially due to a number of risks and uncertainties, including those discussed in our annual report on Form 10-K filed on February 29, 2024. Any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change. By now, you should have access to our first quarter 2024 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 Randy.

Randall Garutti, CEO

Thanks, Mike, and good morning, everyone. As I wind down my time as CEO of Shake Shack, I want to begin by thanking our team for another solid quarter, sustained execution of our strategic plan, and for building the strong foundation of momentum for what's ahead. This was the 13th consecutive quarter of positive Same-Shack sales, the seventh straight quarter of year-over-year restaurant level margin expansion, and our highest first quarter restaurant margin since 2019. We achieved a record level of Q1 adjusted EBITDA overall at $35.9 million, grew total revenue by 14.7% to $290.5 million with 1.6% growth in Same-Shack sales and average weekly sales of $73,000, the trailing 12-month AUV across our Shacks at $3.9 million. We grew system-wide sales by 12.3% year-over-year to $443 million as we build Shacks across new and existing markets. And while we faced weather headwinds in January and throughout the quarter, our trends steadily improved with each month and into the second quarter, ending fiscal April at 4.9% Same-Shack sales with approximately flat traffic and further showing strong ongoing momentum into fiscal May to date as our sales and profitability initiatives take hold. In the quarter, we continued to improve profitability, increasing restaurant level profit margins to 19.5%, with expansion of 120 basis points year-over-year. We grew first quarter adjusted EBITDA by more than 30% year-over-year and improved our adjusted EBITDA margin by 150 basis points, growing from 10.9% last year to now 12.4%. We also continue to grow our footprint around the globe, opening 8 new Shacks in the first quarter for company-operated and four for license, and we continue to expect approximately 80 Shack openings this year system-wide, roughly 15% unit growth, and we are building a robust pipeline of growth for the coming years. Our license business grew sales by 8.1% year-over-year despite ongoing challenges in the Middle East and some of the macro pressures in China. This is an area of our business that is asset light and highly accretive to our bottom line and one where we're confident in the long-term opportunity to go deeper in existing markets as well as open new markets. And with our license partners, we opened 4 new Shacks so far in the second quarter and 8 year-to-date. In our company-operated business, we opened 4 new Shacks in the quarter, including two new drive-throughs, adding our first in the Greater Chicago area and our first in the Metro New York area in North Brunswick, New Jersey. These two sites represent the continued goal of unlocking our TAM as we utilize our multi-format strategy with drive-thru. Today, we have the majority of the class open or under construction as we look to open roughly 40 Shacks this year at an average build cost that's approximately 10% lower than last year's level. That said, it's important to remind you that this class of '24 will be heavily back-weighted with Q3 and Q4 openings. And for next year, we're setting ourselves up well with a solid pipeline into 2025 to grow openings and further lower build costs versus 2024. I'd like to give an update now on how we're tracking on our 2024 strategic priorities. Our first priority this year is delivering a consistently great guest experience with improved speed of service and standardization across all of our channels being paramount to hospitality this year. We're making solid progress on our goal to reduce wait times in our Shacks with more than half of our restaurants improving their ticket times by at least 15 seconds in the first quarter as compared to last year. We're showing progress across all formats, including drive-thru with strong operational focus, Shack visits and assessments, and enhanced training. In the coming months, we're rolling out new key tools to help us improve not just wait times, but also the total guest experience, including how we take orders and flow food through our kitchen. We've also shown some early improvements on our guest satisfaction scores, both in Shack and in our digital channels, and we know that there's still ample opportunity to advance all these metrics, including order accuracy, which we believe will layer up to an even better guest perception and long-term frequency opportunity. Our second priority is growing sales and strengthening our brand awareness. We're living in a competitive and often discount-based restaurant environment right now. We're also growing in new markets where we have lesser brand awareness upon entering than we do in our core markets. We are materially stepping up our investments in marketing this year in our Shacks and G&A to help drive brand awareness and frequency, and it's working. We have opportunities to continue to share our brand story to amplify the quality of our ingredients and to communicate what makes Shake Shack so special to so many audiences. We'll continue to do this actively in a thoughtful way that focuses on strong returns. You'll see this play out in all of our channels, including an upcoming packaging evolution, in Shack designs, and throughout our brand marketing. With steady increase in aided brand awareness in the quarter, we saw continued strong returns on our advertising spend and performance marketing. These marketing initiatives have shown success in driving both new and existing guests to our omnichannel ecosystem. Through creative brand campaigns, timely offers, promotions, and a focus on our best-in-class core menu as well as LTO launches, the team is deploying a lot of new tactics to maximize impressions, trial, and frequency across initiatives, all with an eye towards profitable sales growth. We're also investing this year in building on the data and guest recognition capabilities to allow for more personalized marketing opportunities in the coming years and to drive more conversion and consideration. We know we're just getting started on these increased marketing initiatives, and we're excited to ramp spending here looking ahead. We continue to drive excitement around our menu offerings with our limited time-only menu featuring the Korean Barbecue Burger, Korean Chicken Sandwich, and our Korean Fries. The Korean Chicken Sandwich was brought back after being a fan favorite in early '21, and we're excited to expand the menu to our burger offering this year, which has had strong performance and guest reception. We look forward to our next round of summer LTOs as well. Our third priority is to continue building on our wins from the last 2 years and make our restaurants even more profitable with a goal now to get to between 20.2% and 21% restaurant margins for this year. Katie will walk through more of this. We're showing clear continued progress on improving the operations of our restaurant, and our flow-through today is among the highest levels we've delivered since 2019 despite high inflationary pressure. Additionally, our teams are working on additional operational, supply chain, and costs to build opportunities to both build and protect our profitability while focusing on improving the guest experience. Our fourth priority this year is making improvements on how we build and open our Shacks. We're pleased with the sales levels in our recent openings and believe last year's class was a high watermark in terms of cost to build as we make progress against our goal to bring down the build cost for the class of '24 by approximately 20%. We've opened 8 Shacks year-to-date and have 19 currently under construction as we aim for approximately 40 new company-operated Shack openings this year. We've generated solid wins here on lowering our build costs with structural redesigns, including steel-to-wood construction, improving the cost profile on exterior finishes and exhaust systems, as well as making meaningful improvements to interior furniture, kitchen equipment optimization, and signage among other opportunities. In total, we continue to improve the look and feel of our Shacks while being more efficient with our level of investment, and we're building a strong pipeline for 2025 to grow unit openings at an even lower build cost than we expect to achieve in '24. We're also showing strong progress on lowering our preopening costs by at least 10% this year and opening restaurants in a more reliable manner as we've seen fewer impacts from unanticipated delays and stronger coordination across the company. Finally, as you know, Shake Shack is a people-first business, and our people must always be our focus. We've made great strides to improve our turnover and increase retention. This year, we're building on that strong foundation with strategies to support our great teams. Our team members are at the core of how we execute our '24 strategic priorities, and we'll continue to benefit as team members stay with Shake Shack longer. We're one of the fastest-growing publicly traded restaurant companies, and we offer our team members meaningful opportunities for career growth, including providing equity to our general managers and above. We're constantly working on strategies to elevate our people with greater training, development, communication, and collaboration. I'm really excited to see our strategic plan continue to drive the evolution of Shake Shack. With a string of continued improvements shining the light on our long-term opportunity for our team members and our stakeholders, I'm pleased to transition to my adviser role and hand the baton to our new CEO, Rob Lynch. I'll now hand it off to Katie to share more about the details of the quarter and expectations for the second quarter.

Katherine Fogertey, CFO

Great. Thank you, and good morning. We're off to a solid start to 2024 with another quarter of continued profitable growth. Relative to the first quarter of last year, we grew total revenue by 14.7%, expanded restaurant margins by 120 basis points, and grew adjusted EBITDA by 30.2% to 12.4% of total revenue, that's up 150 basis points versus last year. Our 2024 strategic priorities are built on the tremendous success we showed last year and are designed to bring us continued improvements in our profitability and cash flow even against macro pressures, and we are showing solid signs of strength so far this year. Each month, we have improved sales. April got even better as we grew Same-Shack sales by 4.9% with approximately flat traffic, and we carried our momentum into fiscal May. Now on to first quarter results. Total revenue was $290.5 million, up 14.7% versus last year, driven by strong performance in new Shack openings system-wide and positive Same-Shack sales despite weather impacts in the quarter. We grew system-wide sales by 12.3% to a record high of $443.3 million with a line of sight to approximately $2 billion of system-wide sales in 2024. In licensing, we are pleased with our strong domestic performance and continue to face macroeconomic headwinds in the Middle East and China. We grew licensing sales by 8.1% year-over-year to $162.7 million and had a low single-digit sales headwind from foreign exchange in the quarter. We opened 4 licensed Shacks, growing the global licensed Shack count to 226. We grew company-operated Shack sales by 14.9% year-over-year to $280.6 million, with 4 Shack openings and 1.6% year-over-year growth in Same-Shack sales. Weather pressured our sales and comp in the quarter, and our trends improved as weather pressures eased. We estimate that weather alone contributed to a sales loss of about $3 million, that's due to impacted mobility, closures, and reduced hours. Traffic was down 2.1%, and excluding weather, we estimate traffic would have been approximately flat. Even with the weather pressures, though, we saw strong Same-Shack sales and traffic trends across most of our Shacks in the quarter. We generated mid-single-digit positive traffic in the Southeast. In Florida, specifically, we grew traffic by 9% year-over-year with mid-teens Same-Shack sales growth. Same-Shack sales in our Northeast Shacks were also strong, up 4% year-over-year with high single-digit comps seen in Long Island and Boston. New York City sales, however, were pressured by weather and infill. We are encouraged by the building momentum in our business year-to-date as we've worked past these heavier headwinds earlier in the year and saw broader impacts from successful marketing initiatives that carried us into April with 4.9% Same-Shack sales growth and approximately flat traffic. First quarter check rose low single digits, supported by mid-single-digit menu price partially offset by marketing strategies that drove a negative low single-digit mix, our IPC was flat. On pricing, to address food and wage inflationary pressures, which were in particular in California with the move to $20 per hour in minimum wage, we took the following steps. In January, we raised the menu price on our own delivery by 5% and maintained the 15% premium on third-party channels as compared to our own delivery. In mid-March, we raised menu prices by about 3% in total. However, this was comprised of about 7% menu price in California to address the wage pressures and about 2% to 2.5% price in all other regions. That level of pricing is very consistent with historical pricing practices. This netted to a mid-single-digit price in the quarter. We have no current plans to further increase price this year. We're going to be lapping about 2% price in mid-May and 1% in October. Importantly, while we expect the inflationary pressures in wages and food and paper to persist, we continue to leverage our operational efficiencies as a powerful tool to help protect our profitability and our value proposition for our guests. We moved the needle more on kiosk in the quarter, which is now our largest order channel and our most profitable and an important tool for our operators to manage the order journey and focus on delivering a great guest experience. Average order values on kiosk are at least now a high teens percentage over traditional in check with recent digital enhancements to the user experience driving even stronger upsell. Later this year, we're launching new wayfinding and other optimization work to build on our success with this strategy. Restaurant level profit was $54.7 million or 19.5% of Shack sales. That's 120 basis points better versus last year as we benefited from higher sales from marketing strategies and improved operations in our Shacks. We had strong flow-through in our restaurants, which once again exceeded 2019 trends, a testament to the success of our initiatives across both sales and operating costs in our Shacks. As we continue to build on our operational performance, we were able to look at sales-driving initiatives with a wider lens than before. Food and paper costs were $80.3 million or 28.6% of Shack sales, down 80 basis points versus last year and down 50 basis points versus last quarter as menu price and supply chain strategies helped to offset inflation, weather, and other pressures. Net of our strategic actions, blended food and paper inflation rose low single digits year-over-year. Beef was up high single digits, and we continued to see pricing pressures in fries and buns. Paper and packaging costs decreased low single digits year-over-year. Labor and related expenses were $81.5 million or 29.1% of Shack sales, down 130 basis points versus last year despite making greater investments in our team members, as we had the benefit of price as well as operational improvements such as better forecasting, labor scheduling, and kiosk adoption. Turnover rates remained much better than last year, which is also helping our teams to be more efficient in our restaurants. We're going to continue to lean on strategies to improve operations and support our profitability while keeping an eye on the value proposition to our guests. As an example, we've been testing a new labor model that allows us to be much more targeted in our staffing needs across our Shacks, adjusting for format, menu, and channel mix, including kiosks, to provide a great guest experience. The early test here has been encouraging, and we expect to roll it out to all of our Shacks by the end of the year. Other operating expenses were $41.9 million or 14.9% of Shack sales, up 60 basis points year-over-year as we invested more in Shack-level marketing and other expenses to support our sales strategies. Occupancy and related expenses were $22.2 million or 7.9% of Shack sales, up 30 basis points from last year's level. All in, we are very pleased with the level of margin improvement we delivered in the quarter as we continue to build back our profitability, which we know is vital for our long-term growth. G&A was $35.9 million. Excluding $3.1 million in one-time adjustments, G&A was $32.8 million or 11.3% of total revenue, that's 40 basis points favorable to last year and up 10.8% year-over-year compared to total revenue that grew 14.7% year-over-year. G&A, excluding advertising expenses and one-time adjustments, was up high single-digit percent year-over-year as we continue to be disciplined in run rate spend and open additional funds for sales-driving strategies and marketing. Preopening costs were $2.8 million in the quarter, down 22.6% year-over-year with non-cash rent making up over 40% of this line item. We opened 4 Shacks in the quarter versus 6 in the same quarter last year. We have targeted to reduce our preopening expenses per Shack by at least 10% this year, and we're on a strong path to achieve this goal with enhanced reporting and coordination with finance, development, operations, and people resources. We see the greatest opportunity to improve on our labor expense and preopening, and we're encouraged that our strategy is already showing material improvements on this line item. So all in, despite unfavorable weather in the quarter, continued macroeconomic pressures on the consumer, and inflation, our team's strong execution against our strategic plan was evident in the quarter as we grew adjusted EBITDA by more than 30% year-over-year to a first-quarter record high of $35.9 million or 12.4% of total revenue. That's up 150 basis points from the prior year and the best first-quarter adjusted EBITDA margin since 2019. Depreciation was $25.4 million, up 19.3% year-over-year. We realized net income attributable to Shake Shack, Inc. of $2 million or $0.05 per diluted share. We reported an adjusted pro forma net income of $5.6 million or $0.13 per fully exchanged and diluted share. Our GAAP tax rate was 19%, and our adjusted pro forma tax rate, excluding the tax impact of equity-based compensation, was 2.8%. Finally, our balance sheet remains solid, with $284.8 million in cash and cash equivalents and marketable securities at the end of the quarter. That's down $8.4 million versus the prior quarter as we grew operating cash flow by approximately 55% year-over-year and made investments in recent openings and the 27 Shacks that we've currently opened this year and that are under construction. We're well on our way to execute against our target to open approximately 40 Shacks this year on the company-operated side. Now on to guidance, which reflects the degree of uncertainty around the consumer spending outlook and inflationary headwinds. This range does not reflect any additional unknown delays to our development schedule or any changes to the macro landscape beyond what we're already experiencing today. For the second quarter, we guide total revenue of $308.9 million to $314.3 million. That's up 13.6% to 15.6% year-over-year with $10.9 million to $11.3 million of licensing revenue, approximately 10 company-operated openings, 8 to 9 license openings, Same-Shack sales to be up low single digits year-over-year with low single-digit price mix. We guide second quarter restaurant margins to be approximately 21.5% to 22%, with strength driven by operational improvements in menu price with blended food and paper expected to be flat to up low single digits. Beef, which is an area which we do not contract and have a higher degree of uncertainty, is expected to be up mid-single digits year-over-year. Our full year 2024 guidance calls for total revenue of approximately $1.22 billion to $1.25 billion, that's 12% to 15% year-over-year growth. Same-Shack sales to grow by low single digits year-over-year. We're expecting license revenue to reach $45 million to $47 million, restaurant margins of 20.2% to 21%, a 30 to 110 basis improvement from 2023. Reflecting the expense from the CEO transition, our 2024 G&A guidance is $142 million to $146 million, and equity-based compensation expense is approximately $20 million. The G&A guidance excludes the $3.1 million in nonrecurring costs that are excluded from adjusted EBITDA year-to-date. Preopening of $17 million, depreciation of $100 million to $105 million, and our adjusted pro forma tax rate, excluding the impact of equity-based compensation, we expect to be 20% to 23%. Our 2024 adjusted EBITDA guidance is $160 million to $170 million, representing approximately 21% to 29% growth year-over-year. That's nearly double our expected total revenue growth rate and representing a margin of 13.1% to 13.6%, at least 100 basis points higher than the prior year and the highest adjusted EBITDA margin since 2019.

Randall Garutti, CEO

Thank you, Katie. Chewing off script there. But Katie, you've been an incredible CFO. She's been an amazing partner to me and everybody in this company. So thank you to everybody on our team. I believe this call represents my 38th earnings call as CEO since we went public more than 9 years ago. What this group of people has achieved is a rare and special accomplishment, and it has exceeded all of our wildest ambitions. Through it all, it's always been about our team. My greatest joy, and I hope our most significant impact has been to create a place where our people could get a start, could develop, could grow, and give them a chance to do their life's best work while taking care of each other and our communities. As I transition to an advisory role in the coming weeks, it's been a pleasure to get to know and welcome our new CEO, Rob Lynch. Rob has been spending a lot of time working with me to understand our history and how we've operated. He's been meeting with team members at every level, leaders across the company, and learning so much of what makes us tick. This company is built upon a strong foundation, and we're ready to benefit from the next generation of leadership, and I have no doubt Rob will work with this extraordinary team to build the next set of strategies to take us to even higher heights and continue to drive Shake Shack forward. Make no mistake, Shake Shack is something special, and this company's future is bright. I want to thank our guests, our communities, our suppliers, and all of our shareholders through the years for having the confidence in me and our team along every step of this journey. Lastly, and most importantly, thank you to every single member of this team who's ever worked here, whose hard work, creativity, and love for this company has made all the difference. It has been the honor of my career to lead you and to be led by you. Our people are the secret in the Shack sauce, and I trust that they always will be. With that, operator, we can go ahead and open the call for questions.

Operator, Operator

Our first question is from Sharon Zackfia with William Blair.

Sharon Zackfia, Analyst

Randy, I felt a bit emotional while that was being said. We are all going to miss you. I wanted to clarify something about the kiosk lift. Did I hear correctly that you're now seeing high teens compared to what was previously high single digits in the fourth quarter? If so, what is driving that improvement? I know you have many other initiatives underway at the kiosk. What are you observing as you pilot these initiatives? I'm curious about how much more people might be adding to their ticket with these kiosks.

Katherine Fogertey, CFO

Sharon, thanks for the question. So broadly with the kiosk strategy we have in place, we had talked about kind of at least a high single-digit lift and now we're seeing something kind of in the high teens. Really, it's been some exciting new interfaces that our digital marketing team has developed here to help guide the guests through that order experience and kind of focus more on the opportunity to trade up to a double, add bacon, some of the really great ways that our guests can customize their menu items that maybe are more intuitive at the cashier and we brought that over to the kiosk channel. I mean, it's now really kind of on par with where we are on our web offering as well. So then if I look at where the opportunities are going forward, we want to continue to push the envelope and learn and see what we can do from a digital merchandising standpoint to help our guests better understand our LTOs and more premium items continue to drive addition to the cart. But then at the same time, the work that the team is doing in development and in marketing is around making sure that we have exactly optimized wayfinding for how guests come into our Shacks, making sure that they very clearly see in every instance where that kiosk is as we want to continue to drive adoption. But just to bring it back, though, we are incredibly pleased with how the retrofit strategy on kiosk has helped not just us deliver a great guest experience, that's helped our team members manage their order journey within the Shacks, and I think it's helping our guests just to understand more about what our menu is and all of the great exciting offerings we have.

Operator, Operator

Our next question is from Lauren Silberman with Deutsche Bank.

Lauren Silberman, Analyst

And Randy, my congrats as well. It's been great to see what you've built. I wanted to ask about the comp, great momentum in April into May. The rest of the industry is slowing with negative traffic. What do you see as the most meaningful drivers of relative outperformance? And are you guys seeing any differences across regions?

Randall Garutti, CEO

Thank you, Lauren. I appreciate your remarks. Overall, there are a few key points to highlight. The industry is experiencing some traffic challenges, and we are not exempt from this trend, though we are observing it in specific areas. However, we have continued to implement various marketing initiatives, limited time offers, menu enhancements, and guest experience strategies that are yielding positive results. January marked our lowest performance, as we mentioned, and we’ve since improved month by month, with significant gains in April and continued success into May, which is encouraging. We’ve launched engaging brand campaigns, such as our Chicken Sundays initiative, which had a notable impact in April. We’ve also introduced exciting promotions and optimized our approach to different dining times to attract more customers. These strategies are helping us manage the industry's current challenges. I am proud of our team's efforts in adapting and driving growth, and we're reaping the benefits of that momentum. Additionally, we anticipate an easier comparison in the second and third quarters, as we had a challenging first quarter due to last year’s over 10% comparable performance. Overall, we feel positive about our current trajectory, and the momentum within the company is strong. There’s been a lot of great work done.

Operator, Operator

Our next question is from Brian Vaccaro with Raymond James.

Brian Vaccaro, Analyst

Congrats on all your success and what you've done to the business to, Randy, over the years. So on labor, can I just have some questions there? You saw some very strong leverage in that line. And I think you said you're rolling Phase 2 changes through the year. Could you just elaborate on the changes that you're making there? And maybe how the savings on Phase 2 compare to Phase 1, and did you embed? And I guess, how much did you embed on Phase 2 savings within your annual store margin guidance?

Katherine Fogertey, CFO

Great, Brian. Thanks for the question. So first of all, on labor, we did show some pretty good leverage on that line in the quarter. A lot of that, though, just to remind everybody, in 4Q 2022, we had about 22 new Shack openings. That really kind of carried into the first quarter of 2023. As you know, when we open up a new Shack, it takes a while for that Shack to work its way to full profitability levels. We just had a very heavy weighted opening schedule in the fourth quarter that kind of had a hangover in the first quarter. Last year, we talked about the rollout of improved forecasting and working closely with our operators and some strategies there to help bring in labor and optimize for the current model that we have in place. That really took hold at the very end of the first quarter into the second quarter and going forward last year. I think that's a lot of what you're seeing on that side. Now as far as the new labor model that we're running here and we're testing, just as a reminder, what this does is it really helps us to optimize for the different menu mix, the different channel mix, and the different daypart peaks across all of our restaurants in the system to provide a more bespoke tailored recommendation for deployment. We started testing that really at the end of last year into this year in a handful of Shacks. You're not really seeing it in the numbers. It didn't really move the needle on the first quarter just given the overall size of the base there. But we're really pleased with the results that we saw from the test. We're taking it a step further. We've committed to rolling it out to all of the Shacks, company-operated Shacks by the end of the year. We haven't embedded any of that in guidance at this point, and we'll continue to update you as that rolls out through the rest of the year.

Operator, Operator

Our next question is from Brian Mullan with Piper Sandler.

Brian Mullan, Analyst

I just want to echo, Randy, congrats on everything you've accomplished with the brand. It's an amazing story. I wish you the best. Just a question on the advertising opportunity. The letter references an idea you need to learn and grow into a larger marketing budget over time. I thought that was interesting. My question is just on the organizational side, do you feel like you have the full team in place to take advantage of the size of this opportunity over the long term? Or maybe are there some hires or talent additions you want to make from here? I know the incoming CEO has a marketing background that would be helpful. But I kind of mean once he gets there over the long term, any assessment?

Randall Garutti, CEO

I believe we have been focused on building a strong brand for the last 20 years with minimal advertising, and now we are excited to ramp up our marketing efforts. Our current marketing team is highly engaged across the company, driving innovative initiatives, and we've seen significant progress over the past year. We plan to keep investing in this area. Rob Lynch, our incoming CEO, has a solid marketing background, and we are eager to leverage his expertise. Our team approaches marketing with discipline, aiming for strong returns and improved margins. Recently, we've noticed an increase in brand awareness and health, which is part of our strategy, particularly in real estate where we've expanded our presence in Texas by over 30% in the last year. This expansion enhances our brand awareness and strengthens our marketing efforts in the regions we serve, and we are very optimistic about the opportunities ahead.

Operator, Operator

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

Michael Tamas, Analyst

Randy, congrats on your success with Shack, and I hope you get to enjoy some more free time going forward. One of the questions we've heard most often recently is about the margin path going forward. Obviously, I understand I'm asking to speak for Rob a little bit here, but his background is with much larger companies that have greater scale and bigger budgets than Shake Shack does. And obviously, that can be a benefit, as you just mentioned before. But how is the company, including the Board, thinking about the need for potential investments or different sales strategies beyond this year that might limit margins beyond '24? I know there's no formal guidance beyond this year, but just any qualitative commentary would be helpful.

Randall Garutti, CEO

Yes. To be fair to Rob and the team as we move forward, we are not looking to provide any guidance beyond what we've shared today. Everyone here has seen that this company has been strong for decades. We have consistently shown improvement in our margins, sales, and cash flow as a company, which all points in the right direction with strength. I fully expect Rob will determine his own approach. We have a fantastic team with a solid strategic plan for 2024 and are already looking ahead at a strong pipeline for 2025. Everything you've heard indicates that we are making progress and updating our guidance, and we still stand as one of the best and most profitable restaurant companies in the industry. We are very proud of our current position.

Operator, Operator

Our next question is from Peter Saleh with BTIG.

Peter Saleh, Analyst

Great. Thanks, Randy. It's been a pleasure working with you, and best of luck to you in the future. I did want to ask about the kiosk commentary real quick. The high-teens increase it has, and yes, it was pretty substantial versus last quarter. Do you think that is the endpoint, or do you think there's more upside to the check growth going forward? I guess, is there more growth within the kiosk here? And then also, can you put that in the context of the negative low single digit, if I heard that correct, menu mix? Just trying to understand how you can have such a large increase in the kiosk check and still see some of that menu mix decline?

Katherine Fogertey, CFO

So first of all, on kiosk, we still believe we're in the early stages of what kiosk can do to our business. The first step of retrofitting all of our Shack kiosks, making sure that they're available for our guests was a key foundational thing for last year. What we're doing is leveraging the talent on our digital merchandising team to optimize for how the guest goes through that order journey. A key thing here is what you're pointing out with mix trends, what we had in the quarter. Yes, we’re continuing to see great benefits from the kiosk upsell opportunity, and I can see, it was flat overall company. We took some targeted opportunities in marketing, which did have a little bit of a mix headwind but had a positive traffic benefit on the back of it and really grew sales, and we did this in a way that grew our profitability. When we talk about our guidance for a low single-digit check this year, we anticipate more of that going forward. But overall, both things, we're really excited about what we are producing here for both our top line and our profitability.

Operator, Operator

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

Sara Senatore, Analyst

I have a clarification and a question, and hopefully that counts as one. First, congratulations, Randy, on your next steps. I wanted to ask about April. I'm trying to understand the sequential acceleration. I know you mentioned easier comparisons, although April seems to have been a tough compare as of the second quarter. However, I believe you have more pricing than you did in the first quarter, and there’s less of a negative mix. I'm trying to determine where the change is coming from, since you mentioned traffic was relatively flat. Is the improvement due to less negative mix or the higher pricing in the quarter? That's my clarification. Regarding the margins, food and labor are obviously performing very well. I was curious about the third line item and any opportunities you see in other operating expenses. This hasn’t been discussed much, and while I understand there may be some drag from new stores, is there anything you can share about that?

Katherine Fogertey, CFO

Sure. So I'll take the other OpEx point first, and then we'll go back to your question on April. So on other OpEx, we've talked about this. We are investing more in marketing, both at our store level and also at the company G&A level, and that is kind of where the sales-driving strategies a lot of those costs are borne in a restaurant P&L. Our guidance reflects our expectations for that strategy going forward. While we're investing more in marketing right now to learn and grow and we're excited about the sales that we're driving on the back of it, we're also doing this in a margin-accretive way. You might see a little bit of a tick-up on that other OpEx line. On your question on April, overall, what I would say is we had some improvements in traffic. We were running at about kind of a 7% to 8% price. As you recall, we're going to be working off of about 2% price in May, so that will come down. And then we had a couple of really exciting marketing initiatives in April, particularly the Chicken Sunday, where we offered a free Chicken Shack with a $10 minimum spend every Sunday. That had a little bit of an impact on our mix but nothing too out of the ordinary versus what we've been seeing.

Operator, Operator

Our next question is from Jake Bartlett with Truist Securities.

Jake Bartlett, Analyst

Congratulations, Randy. It’s been a pleasure working with you. My question pertains to the margin guidance for '24. It’s encouraging to see improvement. However, I find the guidance a bit conservative. From my calculations, pricing will likely be around mid-single digits. Considering your comments on low single-digit labor inflation and flat to low single-digit food costs, that alone should bring us to the high end of your guidance. Additionally, there’s the impact of kiosks and the labor scheduling improvements implemented over the past year. Am I overlooking something, or is there an element of conservatism inherent in this guidance?

Katherine Fogertey, CFO

Yes. So I think you've outlined a lot of the key points there for the fiscal 2024 guide. On kind of the top and the bottom-end range there, look, we were very clear about this in our remarks and also in the shareholder letter. Beef remains a big uncertainty, and we are watching it through the rest of this year, and that's an area of the basket that we do not contract, and we're not locked in there. We're going to be subject to what the macro does on that side. Just depending on the degree of extend that we're having around our marketing strategies to offset what Randy had alluded to is clearly a softening of the overall backdrop. So those are the things that I would look at on that side. I will say that we're incredibly proud of the work that our teams have been doing to get after all of the improvements that we've been talking about across our total cost to serve, across our supply chain, all the things we've talked about in our restaurants with labor and other ways that we're still providing a great guest experience but doing it in a way that is translating to the strongest flow-through that we've had even pre-COVID. We're excited about where we're headed, and the guidance today is for 20.2% to 21%. That is a 30 to 110 basis point improvement versus last year.

Operator, Operator

Our next question is from Andrew Charles with Cowen and Company.

Andrew Charles, Analyst

Randy, congrats on building the Shake Shack brand to what it is today, and best wishes on your next chapter. It's no secret that we're going to see intensified burger value activity in the coming months. I'm curious if you believe your digital value tactics that you've utilized so far in 2024 around Chicken Sundays, Free Fry Fridays, the bubble shakes during the shorter periods, et cetera, are enough? Or do you believe more is needed to protect traffic amongst lower-income consumers?

Randall Garutti, CEO

Yes, it's a great question. There's no question we're living in, whether it's us or the largest online companies who are all seeing consumer who's seeking value, a consumer who's seeking discounts in a lot of cases, promotions. We've seen a lot in our industry. Shake Shack needs to continue to retain its premium brand position. This is what has set us apart from the beginning: our ingredients, our hospitality, our designs. Everything about the Shake Shack experience transcends the traditional fast-food burger experience. We're going to continue to do that. Everything we've done has hit those lines. So when you see us doing things, they're almost entirely added value. We want to give you something extra; we want you to feel the value; we want you to understand the quality of what we're doing. Everything you'll see, like our Chicken Sundays, hits our channels and is omnichannel, truly in Shack, in our kiosks in Shack, app, web, and delivery. I think the strategy the team is just beginning to employ has been so learning; it's just so fast, furious, and fun. I mean we're really enjoying the process of opening up these budgets a little bit, trying some more things to see what hits in our guests, see what hits regionally. Sometimes something hits very different in New York than it does in California or Texas, and we're learning all that. As we build an engine based on the data, we can take greater insights into our strategies, and that's really the foundation that the team has been working on to build. We're super excited and have a lot more arrows in our quiver as we move forward regardless of whatever the economic opportunities are going to be. You've seen that in the trend of continuing sales growth every month getting better so far this year.

Operator, Operator

Our next question is from David Tarantino with Baird.

David Tarantino, Analyst

Randy, congrats from me as well on a fantastic career at Shake Shack. I wanted to kind of follow up on your commentary, Randy, since you've been sort of the inventor of this very premium brand and successful brand. I wanted to ask, a lot of the advertising has been focused on promotional activity, and that's certainly understandable in this environment. But I wanted to get your perspective on how you're balancing the offers that you're making with the need to protect the premium nature of the brand positioning. Specifically, how you're monitoring whether some of the things you're doing are having an influence on consumer perceptions and that related to the brand.

Randall Garutti, CEO

Yes. Those are great questions. It's something we think a lot about. I think the strength of the Shack brand and its ability to bring us to a very special place has been a strength for us. But as I’ve mentioned previously, what's also fascinating, as we've grown pretty far, pretty fast globally and around this country, is there's still a lot of people who don’t really know Shake Shack. We start everything with the education of who we are. Our brand pillars are really about helping people understand the quality of our ingredients that we're cooking to order, that we're spinning our shakes fresh by hand. These things are paramount. What we do when we think about whether it's a promo or afternoon shake opportunity, sometimes we’ll do free Fridays, whatever these things are, they're all based on added value. They're all about ensuring that we continue to maintain our brand position. I don't expect you're going to see us do a dollar menu type of promo. That's just never been Shake Shack's thing. We certainly understand there's a great place for traditional fast food, and we may not get those consumers as often as traditional fast food does at that price point. But we feel like our value is strong, and everything you're going to see and have seen from us is about helping people understand that when you choose to eat a burger, chicken sandwich, or have a shake, you should choose Shake Shack, and here's why.

Operator, Operator

Our next question is from Andy Barish with Jefferies.

Andrew Barish, Analyst

Yes. Randy, it's always nice to see a Jersey boy do well. So congrats. Just, Katie, quick clarification, and sorry if I missed it. Just on the 2Q same-store sales guide of low single digits, and you're starting out mid-single digits. Can you give us kind of a little color about sort of why it doesn't continue in that range?

Katherine Fogertey, CFO

Sure. So in May, we're going to be rolling off about 2% price. We're expecting our trends to be solid, but rolling off price and just normal seasonality, that's what gets us to our guidance for a low single-digit comp in the second quarter.

Operator, Operator

Our next question is from Jeff Farmer with Gordon Haskett.

Jeffrey Farmer, Analyst

Great. Congratulations to Randy. Definitely looking forward to seeing what you pursue next. What I did want to touch on was the consumer backdrop. So my question for you guys is, do you see the consumer demand headwinds stabilizing or sort of further building, further intensifying in coming quarters? That's the first part of it. And how has that demand backdrop impacted Shake Shack?

Randall Garutti, CEO

Yes. Look, it's hard to say where it's going to go from here. I think what we've said has been consistent with what we've said for probably about a year. You definitely see some of that consumer pressure. We've said and shared that we see some of our lower-income consumers probably trading down. From time to time, we may lose a little bit of that. We may lose some of the middle-distance consumer in some of our urban centers. We've talked about that a little bit. But generally, those trends have remained similar for about a year right now, and we kind of expect those to be where they're at for now. So how that impacts us is, as we've driven traffic through other strategies and by building great restaurants in great places and continuing to build our brand. That's what you've heard us consistently say, and that has been successful for us.

Operator, Operator

Our next question is from Pratik Patel with Barclays.

Pratik Patel, Analyst

This is Pratik on for Jeff. I'd echo the same, congrats, Randy, on all you've achieved. It's been great partnering with you, and I wish you the best of luck. My question is on store-level margins. This year, you're going to get back to the low 20%, and that's relative to your long-term framework of 18% to 20%. Just do you see an opportunity to expand margins materially higher from here on out, especially with all the great work you're doing with operational efficiency and taking cost out of the model? Or is that really kind of offset by more muted AUV growth going forward and just a higher cost environment that makes return to former peak harder?

Katherine Fogertey, CFO

Great. Thanks for the question. We're not providing any outlook here beyond our guidance for 2024. But what I will say is that the team has continuously delivered profitable growth here. We have been steadily improving our margin every quarter, and certainly, our guidance for this year calls for another year of restaurant margin expansion. We have a number of pressures that are not too unique to us. We have wage inflationary pressures. Supply chain remains broadly inflationary if you take out kind of the benefits that we're seeing here from the work that our team is doing on strategic cost savings. So that's kind of how I would view the opportunities here. We're really proud and excited about the work that our team has been doing to address opportunities in total cost to serve. As we get denser in markets, as we grow our footprint, we're able to leverage more suppliers, we're able to optimize freight. We're able to do things that our guests really don't see the impact of, but it does help us to be more efficient in running our restaurants. On the labor side, too, it's been a combination of several things, both things that we've done internally to help improve turnover trends and keep our team members for longer; that helps them to be more efficient as well as all of the work that the finance team and operations have done to partner together and really be much tighter on how we're operating our restaurants. If I look forward to the next level with having even just a more bespoke and optimized scheduling tool for our operators, I think that continues to provide a great opportunity for us to navigate inflationary pressures while also maintaining the value for our guests. No long-term guidance, but that's the overall framework that we think about here at Shake Shack.

Operator, Operator

Our next question is from James Sanderson with Northcoast Research.

James Sanderson, Analyst

Randy, congratulations on all your accomplishments over the years at Shake Shack. I wanted to talk a little bit about unit growth and unit development. On the international front, I'm wondering how confident you are that the brand can sustain the 40 units that you've achieved this year, given the macroeconomic headwinds and geopolitical issues we're seeing overseas. In the U.S., are you leaning into any specific regions or states that you believe really are a much better fit for the Shake Shack brand than maybe in the past years?

Randall Garutti, CEO

Jim, thanks. Two great questions there. Internationally, we feel very strong about the 40 Shack guide. Look, it's a big world out there. Let's remember too, we've had amazing success in so many places that we've gone. Yes, we acknowledge a lot of conversations that there's pressures in certain parts of China right now. Generally, our Asia business has done quite well. We're also focused on our domestic license business here in the U.S. Our airports have a growing number of road sides, which have been a really good new model for us, stadiums, and other opportunities that we feel are nontraditional opportunities. We've done some museums, things like that, where we think there's really exciting opportunity. We haven't even hit Western Europe at all other than the U.K. We have not hit anything south of Mexico. The opportunities for us are strong, and that is a critical and important part of our business. I think it is undervalued, underappreciated. So it's something I definitely keep an eye on as we go. We really appreciate that part of the business. In terms of the domestic opportunities, we really want to balance it out. We want to go deeper in our current markets. You're going to continue to see us do things in the major markets that we're in, the Northeast, Texas, California, the Midwest. We're going to do a few new markets this year, but they're not too far afield; Pittsburgh is going to be our next big market opening. Just to jump back to international, we're opening in Canada later this year for our first one. That's a tremendous opportunity for us. At 300 roughly domestic company-operated locations and just over a couple of hundred internationally and licensed locations, there's a big opportunity for this company and our growth.

Operator, Operator

Our next question is from Rahul Krotthapalli with JPMorgan.

Rahul Krotthapalli, Analyst

Randy, wish you the best going forward, and I'll keep up with your social media updates here. Broader industry. Can you talk about the state and pace of competition growth out there? How do you think the landscape is changing? There are a lot of new upcoming concepts with national aspiration and also competing locally as well. I appreciate your thoughts here, however you would like to describe on a regional basis or urban versus suburban basis?

Randall Garutti, CEO

Listen, I think there's always going to be great competition. We didn't invent the cheeseburger, and we won't be the last people to create a great one. We've always fit ourselves into a very special place that sits well above traditional fast food in our quality and our experience and below casual dining. I think that's been a good home for us. I expect that's where we'll continue to go. That does require us to continually reinvent. We got to get better, we got to have better products, and have exciting LTOs, have exciting menu evolution over the years, and I think we've done that. We have many great restaurants out there that we compete with, and we think at our best when Shake Shack does what Shake Shack is built to do; we can be a winner in a lot of places. That's what we've shown for 20 years now.

Operator, Operator

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

Randall Garutti, CEO

I'll just close it out and if anyone's still listening. Just a lot of people said some very nice things to me, but I hope everybody goes into a Shake Shack and says those nice things to the employee who’s working hard day after day to be a key member of this restaurant and make it what it is, because it's certainly been them that has made this all happen. Thanks, everybody, and we look forward to seeing you for a Shack Burger soon.

Operator, Operator

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