Shake Shack Inc. (SHAK) Earnings Call Transcript & Summary

Thank you, everybody on the line for joining us today. I'm Katherine Fogertey, and I cover the restaurant sector here at Goldman Sachs. We're really happy to have with us from Shake Shack, Randy Garutti, CEO; Tara Comonte, President and CFO, as well as Rik Powell, SVP of Finance and Investor Relations. So thank you, guys.

Good to see you, Katie. Thank you.

So for the format of today's call, we have some prepared questions. I also have a set of 4 questions that all the analysts are asking company management teams that we'll awkwardly get to at the end of the session today. I'd love to get your inputs or at least color on how you're thinking about these items. And if anybody has questions during the presentation, please feel free to submit through the webcast, and we will get to them. But first of all, to start, very exciting news about the Spicy Chicken. Had it yesterday for lunch, which had all the flavors, all the nuggets, the feeling was great and that fire is hot.

You got the fire level, which is available only on the app. So that is really hot. Yes. Good to hear.

It was really hot. So congratulations on some food news. It's been one highlight in a very tumultuous time here.

Maybe Randy and Tara, if you guys could start off and kind of giving a state of the business and where things stand today?

Yes. Let me start off broadly. First of all, thanks. It's good to be here with you and with everyone today. Look, we continue our gradual recovery. I think as I sit here in New York, and we -- here we all are on Zoom looking at each other on a screen rather than being together in-person in a hotel somewhere. That very fact is the lead indicator of the challenges of our business, right? We talked a lot about it in the last call. And look, there's some good encouraging news for New York City and for cities in general now. We have the opportunity to open some of our dining rooms in the next few weeks in New York. That's pretty exciting. But we know that will have a longer tail for us. And in a company like ours, that will have a greater impact over time. But as we talked about at the last call, our gradual recovery continues. Teams have been working incredibly hard. And I think there's just a lot more learning to live with it happening. A lot more, I would say, amplification and acceleration of the good things that we were working on before that have been brought to light and helped us speed up, frankly, and really prioritize and focus on it. We'll talk about that today, I'm sure. And that really is leading with the way the guest experiences Shake Shack; the type of real estate, the way you access it, the expansion of formats like drive-thru, like Shack Track, and what we believe can ultimately expand our total addressable market for Shake Shack, along with all the digital tools in the ways that we will operate these restaurants so that our guests can get it however, whenever they want in the more convenient, more connected way than ever. So I think -- look, it's been a hard time for our team. We've all -- everyone in the world has had a rough go of it, no matter who you are. And I'm just so proud of the work, the optimism and the hope that this company has led with this whole time. We've got a long way to go. We're not out of the woods yet, but we're encouraged by the continued signs that we've been seeing around the country and around the globe and even in our international business. So lots to talk about there. But generally, we're -- the right track continues.

Great. On 1 hand, you've been evolving and focusing the business on the digital side and kind of operating in a world where you don't have a dining room. And on the other hand, we're starting to -- we got news that we're going to be reopening dining rooms at a limited capacity in New York City, which is a key market of yours. And we've seen dining rooms reopen across the country over the past couple of months. How do those 2 priorities sit with you? And when you wake up to news that we're going to be able to have in New York in-room dining, are you very excited about that? Is that necessary for Shake Shack? Or can you exist in an off-premise world?

Well, we are always going to lead with how is our team going to be able to work through this. And I think that -- we've been cautious in that regard in order to do our best to take care of our team, keep them safe, do things like premium pay throughout this experience, including we've just announced that we're going to give a bonus to every hourly team member through the end of the year, who works and has been working so hard through this tough time. So we always do it with that lens. So I think we're always excited when the COVID numbers continue to trend down, when New York City and other big cities continue to hold the line on a low number. But we're also very cautious with my kids returning to school next week and all of us trying to navigate this next phase. It's important that we take it slow, we do it right. So could we exist as a digital company? Sure. We have, and we just did that, and I think that's been really cool to prove to us how we can immediately flip-flop our in-Shack and digital sales. And now let's see how do we engineer where we want that to be. It will likely never go back to how it was. But that doesn't mean that the Shake Shack experience won't quickly go back to how it was. So we're going to lean into every bit of experience. But force now, I think some of the growth and investment in those great digital tools that can amplify that experience for people and make sure that no matter how you want your Shack, you are getting it on your terms. And even if you want to stay and bring the little league team or bring all the community gathering that Shake Shack has been known for. Now just preorder, and it will be ready when you get there, you don't have any of that friction. And we're really excited about the work that's happened to eliminate so much of that friction and make Shake Shack a just a better and better guest experience.

And when you are talking on the digital side and the evolution of the digital platform, especially over the past couple of months, is it your sense that you're getting a new customer into Shake Shack? Or are really people just migrating from the analog to the digital?

Rik, do you want to take some of the data we were just talking about recently too and some of the stuff we shared.

Yes. Sorry, we're still sort of early in our digital journey in order to take questions on that. But one of the key stats that we communicated in our Q2 call was the fact that we actually added 800,000 new users to -- across our app and web channels basically since COVID outset up to the date of the earnings call compared to the prior year. So again, for a company that's where we are in our life stage in terms of digital and size, 800,000 is a huge step-up for us. And it's for us to build that critical mass of customers that we can start looking at their data, their frequency, how often they come back and what they purchase and all those things they want to do when we build up our customer data. And one of the real reasons that we're investing in that is because we get that information. So we've been really, really pleased with that so far and continue to be pleased as we move through this situation.

I think, Katie, it will continue to be both. Yes. I mean, we are -- there are lots of different ways in which you can grow the top line. And some to your point is acquisition of new customers, some is frequency, some is checks, some is -- some of those things are driven by menu, some are driven by convenience. And so we really are focused on using all of those levers and building on top of what is a very strong digital foundation and now just beginning to kind of scale it up to the next level in terms of kind of functionality, user experience and then to Rik's point, kind of data and insights and really how that can further fuel our continued kind of growth strategies.

And is there a certain -- is there a breaking point or a number of users, which you're looking for on the digital platform before you can start to actually mind the data bank had key insights? How should we think about the evolution of your digital platform?

No. I mean, there is -- of course, this could -- the more data you have, the more useful it is, of course. But we've had digital products for a couple of years now. So I think we're now at a stage where it's less about having enough data and now more about making sure that it's actually weaved together across a pretty quickly expanding kind of eco -- channel ecosystem and making sure that we can bring it together and actually drive useful insights to your point from it. So that these channels don't operate as silos. They really form one holistic informative lens for us and also a kind of holistic ability to communicate with the guests, right? This isn't just all about data. This is about personalized marketing and engagement and having a useful conversation with you. And understanding that where you might look like multiple different customer IDs across different channels they are actually the same person. So it really lends itself to lots of different use cases when it comes to the sort of broadest definition of marketing and how to market to guests on a go-forward basis. And it's iterative, right? It doesn't end, right? How these things will continue to evolve? It doesn't just -- it doesn't end with delivery in the app, or it doesn't end with some of these functionalities that we're building out or the next version of the app or whatever it might be.

And if you could also walk through the drivers of your business from both a geographic and maybe even a sub versus urban footprint? What that trajectory of the recovery has been tracking or looking like in the U.S.? And then we can talk about international.

I can talk about domestic. And then Randy, maybe you want to talk about the international piece. But yes, I mean, again, the last information technically we shared was basically July. We actually spare time in the July date on our Q2 earnings call. And at that time, we're pleased with the evolution, really of our same Shake Shack sales. Albeit, we need to remind, I think, a lot of people that we still are pretty small when it comes to our comp base. We have just over 170 domestic Shacks. We have less than 100 that are in our comp base, right? So 2 or 3 Shacks going either way, swing those numbers pretty significantly. But having said that, we were -- July at an overall level, we were at same-Shack sales comp about $0.39 versus the prior year. When we look at total sales, we had roughly about a 10% increase, I think, July over June. So we were pleased with the sequential trend that we've seen throughout that period at a top line level. And obviously, 39% is lagging some of our peers, right? So I think the story that we communicated for the first time in Q2 was really around the difference we're seeing between urban and suburban and that continues to hold. Again, you can just see being based in New York, the traffic levels, New York, Manhattan, particularly are still shadows of their former self at this point in time. So some of the data, again, we've shown was really that the suburban Shacks had recovered quicker, and we've got it to a greater degree than the urban Shacks. And that was about 50-50 in our comp base. So urban -- suburban about 50% in terms of volume of checks. And as of July, the urban checks were down 50%, and the suburban checks were down 24%. Within that urban footprint is all of Manhattan, and that was down in the mid-60s. So you can just see the drag that Manhattan and the urban checks are having compared to what was the sort of mid-20% comp on the suburban Shack. So I think that will continue to be a story that we will navigate, and we will communicate certainly during the Q3 earnings call and beyond. But those are the primary trends. Yes, region to region, we see bumps and peaks and troughs as restaurants open and the Shacks open and those types of things. But it's really the urban-suburban story, which I think is the one that is really driving the overall story of Shake Shack at this point in time.

And then, Randy, do you want to give an international overview?

Yes. So -- not to get into the current quarter, but the way we've been talking about it, Katie, is that generally, how well a country has dealt with COVID is how well our sales have gone. It's a pretty clear correlation. And you can look at the continued success we've had in China and the recovery has happened quickest there, with our 5 Shacks in Shanghai. We were really excited, just a few weeks ago to open our first ever in Beijing. And if you went to that Shack today, you would see a massive lineup of people currently performing among the best Shacks in the world. And you wouldn't know that COVID had happened. It's kind of -- it's like an amazing difference from what we're living here. And then you take that down to every other country, right? Korea has generally held steady for us, Singapore as well. Japan has been more challenged. Some of our smaller markets and newer markets like Philippines and Mexico, they've been more challenged, more harder hit. While the Middle East, which is our biggest region still today internationally, has kind of slowly and gradually crept up. While U.K., really, it looks kind of like New York because London is kind of acting like New York is right now in its recovery, and you're seeing that across many brands. The biggest hardest hit in our license business remains the airport business. You can see every airport, every airline statistics, and you can know where we're going with that, too. Roughly half of our airport Shacks remain close, and the other half that are open are doing a fraction of their sales. And that's a tough one that will take longer to come back. We believe it will, but on what timeframe is hard to say. And then our stadiums are completely closed still. Nothing open. So that's been frustrating for us. There's nothing worse than watching a home run get hit in Citi Field or Nationals ballpark where we have Shake Shacks right in center field. And I look at that, and I'm just like, oh, what I would give to be selling a Shack burger right there right now. But those cardboard fan cutouts, they don't need much. So it's been hard. So anyway, we're at -- well, look, it's gradual. It's continuing. I think the trend that we talked about with international license, its slow trajectory upward is the way we continue to think about it. And we're encouraged by -- the thing we haven't talked a lot about today is the openings that we've had, right? We've had 9 openings here in this country. We've got -- we've shared, but somewhere between 6 and 11 more to happen this year domestically. And we've continued to slowly get our openings back on track for international, getting us to it, not certainly nowhere near the class in the operating weeks we thought we'd have, but encouraging signs from how those Shacks have opened and opened very strong.

And on the opening side, are there certain regions which you're having more success in opening up Shacks? Or is paperwork and permitting still a drag in certain areas?

Yes. Certain ones are just -- and it's hard to correlate why certain one is just harder than others. Other ones are harder to hire in, right? And that can pause the opening or push it back a week or 2. So we're working on that. But we've got some great ones that we intend to open later this year. University Village in Seattle. Seattle has been really resilient for us, and we're excited that we can get our third check, which is really kind of the flagship in Seattle that we expect to open soon and some others. So California has remained strong for us. It's a wild world. We're all watching California wildfires, right? We're all -- we're seeing that hit the Seattle area. It's tough. There's always something these days. And we're excited to get back to our opening schedule and to start to rebuild that for next year. We haven't given guidance on next year, but we're excited to continue to rebuild that pipeline so that we can hopefully get back to some solid growth ahead in our domestic company-operated business especially.

And it's probably a fair time to start talking about kind of the real estate, what you're seeing it now from a real estate perspective? You've had the balance sheet to grow. Are you seeing landlords offer concessions come to you to propose unit openings in certain locations? What are you seeing here?

It's mixed. Look, the best real estate remains the best real estate. As we think about our own format strategy, certain locations like premier drive-thru locations, they're still pretty premier, right? Those locations are doing pretty well. A mediocre site in a B mall is pretty affordable right now but those are not the sites we've ever gone after or intend to go after. So I would say that it's really a mixed landscape. Generally, our landlord has been really cooperative with us. We've been able to look out to landlords and say, "Hey, we've got this Shack that we looked at with you a year ago. We need to do better on that rent in order to get that Shack open or at least have some kind of ramp-up opportunity to build into what we expect the sales to ultimately be to get us going and get us a head start. And they've been pretty cooperative." I think, Katie, the landscape, we've said before, it will be forever changed. But the best of the best will still be the best. And those places, whether it's a mall or an urban location, we firmly believe they'll come back and they'll come back to every bit of what they were. We firmly believe our theater districts, Times Square area, will be one of the best Shacks we've ever had, again and so will Las Vegas on the strip. But for the moment, it's not going to be itself. So we're going to keep looking at those type of sites. And our new strategy of drive-thru and the Shack Tracks will allow us to really look at some new sites. And maybe that Shack might have been in the 400 Shack-level instead of the 200th Shack level. And we can start to insert a few of those with these new formats to accelerate our learning at an earlier time in our life cycle to say like, "Hey, can Shake Shack work in that kind of place that maybe we would have pushed that out, but now we can really rein in in and give it a shot." And then it's all about our converting our current Shacks, too. We've got 8 to 10 Shack Tracks that will be added to current Shacks as a test in this next few months. Excited about that and to learn and to say, does that convenience level? And does that way to operate, throughput and move food help us? And we believe it should. That's what we're going towards, and it's going to be exciting to see more of that.

I mean, for those on the call, particularly who are not as familiar with what Shack Tracks are, Randy and Tara, please, again, fill in where you can fill in, but is the digital strategy to basically add work in being pickup points, whether it can be digital, drive-thru or pickup window? What -- where do you see that opportunity going?

Yes, you should work for our marketing team because you said it very well. I think that's right. I mean, it's basically the opportunity to preorder digitally and ease the transition of your pickup experience. In the past, if you had to enter a Shake Shack and either order or pick up, we're kind of -- Shake Shacks are busy there. People get pretty crammed in, and it takes time. This allows us to little bit separate the areas, make it so. If you want to stay, it's more convenient than ever to grab your food and sit down. But if you don't want to stay, it's really convenient to grab it and go. Sometimes that will happen in a walk-up function, sometimes it will happen in a drive-up function. And sometimes, it will be a traditional drive-thru that will -- you can and could order there. The other thing we've done, which is really -- we talked a little bit about in the last call, we can update a touch here is curbside pickup. We've never had curbside in our -- as an option at Shake Shack. That is now optional in about 50-plus Shacks by the end of this third quarter. And people are really using it. People are -- and again, super early, we don't have any real data to share other than to say that early indications are, when given the choice, I would like you to bring it to me in my car. And that has a lot of ramifications, even as an urban brand, so we'll never have that at 100%, but it leads to the opportunity of Shack Track for that pickup experience even in an urban location. So super excited about all that and what it can bring.

And when you are looking at Shack Tracks, are you contemplating the potential for that AUV in the Shack to get bigger? How should we think about that?

Too early to give any official guidance on that. We certainly hope so. I think you can look at other examples in the industry where convenience and/or drive-thru has been added and that can often lead to a higher AUV opportunity. We don't know yet, and it's too early to say on that. But we believe that convenience and ease of use, combined with the premium and brand that Shake Shack brings, it could be a really powerful combination. That's the goal.

And on the ones that you were going to be rolling out by the end of the year, how did you pick the site locations, which you're going to trial them?

The first group of renovations is really the easiest physical plant, right? So if you walked into a Shake Shack, and it just didn't make sense to have an exterior window, we'll likely not do that one now and maybe ever. But there are some that the kitchen was built in such a way that you can access it externally, never have to enter and make that work. So for instance, you've got downtown Los Angeles. That's a great market for us. We do a lot of delivery, a lot of digital order in there, even pre-COVID. And now you can just never come in, you can grab it outside and go. It also allows for things that we haven't been able to do before, such as the opportunity for maybe a certain location might be able to do late night better. Close the interior, but keep the window open, right? There are lots of locations in our portfolio in the future that we could consider for that. It also allows for a potential smaller format type of site. We're looking at potentially doing some of those where you don't have to have as many seats. It could be an urban or busy suburban location where it lends itself more towards grab and go. And we want to do that. And -- but we're never going to abandon the Shake Shack experience that's made us who we are. We want to lean into that even more so during all of this.

Real quick on the menu side. You want to talk a little bit about Spicy Chicken and the launch, I mean, it's very early, but...

Yes. It's only been -- it's been 9 days. This has been 1 of our favorite items ever, and we've amped it up this year. We've added Spicy Chicken Bites as part of our continued learning on what spicy and chicken bites in general could mean to this company. We've also done it on our fries. So we have hot spicy fries. Available in the app only is the fire level that you ordered, and that's pretty spicy. So watch out if you go there. But I think continuing to diversify our menu, selling more chicken has continued to be a good thing for this brand over the last few years since we even introduced chicken for the first time. So we like that. We like it for Spicy Chicken. And we want to be the premium option in that category. We want to be -- there's not a whole lot of companies who are serving hormone, antibiotic-free chicken cook to order in the way that we do it in a sandwich and in a bites option. So we're excited about that. We'll see where it goes and see where it takes us for LTOs next year. We've been quiet on the LTO front. We believe we'll ramp that back up, hopefully, as we can hopefully exit a more normalized operating environment next year and be able to add some things back to the menu and encourage things like veggie burgers that we're working on and other things.