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

Hi, everyone. This is John Ivankoe with JPMorgan. We're kicking off what was actually intended to be an in person Vegas conference on September 14 and 15. And just before we started, Randy and I were discussing if the country perhaps would have opened on July 4 as opposed to Memorial Day, maybe we could have, in fact, had that event in person. But with a number of states like California shutting back down, Texas partially, Miami, Bay County, where I live, shutting back down and obviously kind of interrupted, I think not just a lot of people's travel plans and willingness to gather as a group, but also, in some cases, restaurant sales as well. And we're very honored to have Shake Shack open with us today, right, always like to either begin or end any conference that I do or form, if you will that I do, Shake Shack for the amount of energy and enthusiasm that this team brings even in times, which I don't think anyone even could have contemplated. With the company today is Randy Garutti, their -- the company's Chief Executive Officer; Tara Comonte, who is their President and Chief Financial Officer. Thank you so much, and welcome.

I will just kind of open up a little bit, then we're going to get a lot more specifically. I mean, I think everyone has the sales data that you've been very generously reporting from March all the way through July. We have urban sales and suburban sales. But it is interesting to see, even on a regional basis, Shake Shack performance, not just underperforming quick service, which I think would be very expected, but even underperforming casual dining. So I wanted to kind of get your sense of kind of the state of the industry that you participate in. Obviously, you're neither quick service nor casual dining and then some of the self-help, if you will, types of initiatives that you have in the near term that can allow you to perhaps improve it at accelerated rate relative to your peers.

Well, thanks, John. I'll start at a high level and then Rik and Tara can really jump in a little bit more on some of the data we share. We're not going to get into the third quarter yet, although we're coming to a close. Look, we've shared that the gradual recovery for Shake Shack continues. But it's very clear when you talk about some of your comments there, our -- we will have a longer tail, given New York specific and urban specific, right? There's just no doubt about it. I'm really encouraged by what I've seen just being in New York this week and seeing it -- it appears to really be springing back to life so far post-Labor Day. I know my own kids are heading back to school, and we're excited to see. We've obviously -- the governor and the mayor have announced that we can open up 25% dining rooms. We can talk about that. But broadly, New York suffered the most. We've shared that [indiscernible] 65% in Manhattan in the second quarter. I mean that right there and answers your biggest question that why are we lagging peers. We are much more concentrated in dense environments like that. But it's not just New York, right? We shared the urban story, and we can talk about that in more in detail. But when you look at downtown Chicago, when you look at some of the other urban areas. And outside of urban, places like Las Vegas, places that have been on the strip in Las Vegas that rely on either businesses to be having conferences or showing up at the office, tourism, people just moving about. Shake Shack is a community gathering place, and we have no doubt [indiscernible] harder hit because of that. But look, a lot of recovery continues. We are encouraged by the continued signs of where we're headed. And our team has just done such great work to keep rebuilding. And we'll talk about the strategies that we're employing now to change that. Massive digital evolution, incredible format evolution in the Shacks and to be building in the way we're going to convert. And all the learning we've had this year that I believe will make us a better company on the other end of it. We're not out of the woods. This is still a very real challenge in our country and in our company, and I believe we're navigating incredibly well. We'll get back, we'll get back, it's going to take some time.

Let me -- let's focus on the second point. So I assume you're talking about Shack Track and you mentioned for new units but also remodeling or reconfiguration opportunities for existing units. So let's dive in more of that and how you think those various elements can be additive to your longer-term brand and also can make -- what can make a difference over the next, let's say, say, 12 to 18 months?

Yes. A few things. I mean, look, the radical shift that we saw in digital engagement and sales in our company, right? Where that lands, we will see. But we basically went from 20% in digital, 80% in person. We flipped that on its head, and it was, for a moment, 80% digital. That begins to level off. We don't know where it lands yet. But we certainly expect a lot of that digital growth will be sticky, and we're super excited about that. New ways to engage. Our leading channels continue to be our own app and web channels. And obviously, we're [indiscernible] fair amount of delivery. But for instance, one thing we launched, John, that we talked on the last call, we've got more than 50 Shacks going today is curbside. That's something Shake Shack never did. And now we've got more than 50 Shacks where there's a drive-up type of opportunity to do a curbside option within our app, really exciting, and people are using it. So that's just one nod. Shack Track, we have converted our first one in Downtown LA, and it's not -- it's early stages. But basically, this allows you to come get your Shack preorder and not have to enter if you don't want it. We've got a screen up there that tells you, hey, John, yours is ready, you roll up, grab your bag, and we're really excited about that. We're going to be looking at about half the class next year that will either be a walk up window Shack Track outside or a drive-up Shack Track, where you can roll up an order. What's the goal? And additional -- obviously, we've announced we're going to do our first drive-through. All of that is to continue to grow the addressable market for Shake Shack. And it's exciting. It's showing us -- our strategy will be to really go after that in this coming years and improve that convenience. So when we are gathering again, which will happen and we hope soon, you'll have an option to have the best burger experience you can possibly have. But if you want to take it to go or just keep it easy, we'll have that option for you as well.

This notion of broadening and expanding access and convenience is really sort of what underpins everything that we're talking about here, whether it be in the digital product side of the discussion or in how it kind of manifests itself in the physical design of the Shacks. And seeing those come together now really in some of the examples Randy gives, and there will be more as we continue to go, is really exciting. But important to note that also not new. So you've heard us talk about expanding access to Shake Shack and incorporating convenience into the experience of Shake Shack for a while now. So many of these plans were already at different stages of the kind of evolution pre-COVID. And now something obviously as extreme as COVID, if there's a positive to it, which is -- it's hard to find one, but it would be the validation, actually, and then the resulting acceleration of some of these strategies that we already had in place and that we're already pretty committed to.

Okay. Could you talk about the obstacles of why not having more pickup windows? I think you targeted 8 in 2020. I mean 50 units can have curbside. Why can't 50 units, for example, have pickup windows? There were potentially much more than that.

It's really about the architecture of the unit, John. And some will be more obvious than others. We -- and we're also just not going to jump too fast, right? We want to learn how best to do this. We want to make sure we do it with some Shacks where it really lends itself towards that being possible in a way without adding labor, without complicating the model. So let's start there. Let's see how we go. We'll look at more conversions as we learn a lot more about how this can work best. So we'll see. We've got a lot of learning to go. And opening new Shacks, getting those going, is -- will teach us. There's also some tech that we're working on. We have improvements coming in the app, in the web experience for Shake Shack. And those need to coincide with the physical infrastructure, right? We've got to make sure that you can, in your app, choose how you want to pick it up. In the meantime, through COVID, we've continued to just get better and better about that pickup experience so that we can spread people out, give them space and make it work better.

There's something that was kind of tucked into your conference call comments. I don't think they got enough focus or really any focus at all. It was about self-delivery. Yes, I kind of forget, at least that's what I interpreted kind of reviewing my notes last night. I mean how -- obviously, everyone knows that you're now a multi-platform as opposed to exclusive on third-party delivery. But how big of an idea is self-delivery? And when would that be rolled out? And how would it be executed?

Yes. I'm not sure what exactly do you mean by self-delivery, but we talked about bringing the delivery functionality into our own products as opposed to one of the existing on the third-party marketplaces. So whether...

Yes. I understand.

Yes. We ultimately deliver it ourselves. I mean do you -- again you wanted us to talk about delivery before. Our approach with delivery is it's a landscape that continues to change pretty quickly that we expect will continue to do so. And therefore, we maintain very strong relationships with all the players have -- we're obviously in relationships with many of them right now, piloted with many of them. I think we'll continue to take a kind of nimble and flexible attitude, including whether or not at some point in the future, we do deliver food ourselves. But I don't think with all the other strategy -- growth strategies and opportunities that we've got to deliver strong returns on capital in the next few years, delivering our own food probably doesn't make it high up that list, but we never say never, honestly. And -- but for us right now, it's more important just to make sure that, that kind of a native ecosystem of how you experience Shake Shack, we can control as much of it as possible. And we can control that relationship with the consumer. We can -- it's our data, it's our transaction, and just making sure that -- and then all those -- how those -- to Randy's point, how those channels will then work together with their own physical design. So third-party marketplace representation will continue and be one of those channels. But that is an important channel to us to some degree than the ones that are owned.

Understood. I will -- again, just kind of within the existing format and opportunities to maybe rethink urban in general, the penetration within urban. It includes -- at least as of the last update, I think half of the U.K. units were closed, and you're testing for cloud kitchens, is that an idea that could work in the United States? What are you seeing out of that? Obviously, I understand those are not your stores, those are your franchisee or your partner stores. How does cloud kitchens kind of fit into Shake Shack over time? Could that be an opportunity for recovery for you, if not from a sales perspective, a profit perspective?

It could be, John. But we've got -- look, in the U.K., we've got a few of those going. Good news is we've been able to mostly reopen our Shacks there, not entirely but mostly. Obviously, London is hit similarly to New York in its urbanicity and travel and tourism and all those things that benefit our business. But it's been good to see which kind of neighborhoods we can get some traction in London where we might not have built a Shack yet, and that may or may not be something we think about here. It is -- look, we've got late opportunity within our current Shacks. And with a company that's got less than 200 doors in this country, we have got a long way to go. We have incredible return on capital. And we're not just looking to just optimize every burger sale through cloud kitchen. I want to make sure we continue to build this brand in the great way that you can experience, and we're not raising towards that [indiscernible]

Understood. So let's shift on. I mean, the biggest way to kind of take the opportunity, you mentioned 200 stores obviously to grow new units. You're opening 6 to 11 stores. I think it's the last update I have in the second quarter of '20, which is actually a pretty high number. I mean, it's, all things considered and all the obvious challenges, 15% to 20%, I think, for the full year. So I mean, obviously, all those units in the second half of '20 were planned, gosh, probably in '19, if not even in '18. Just give us a sense of kind of where the pipeline is. I mean is the development largely over after the 6 to 11 of reopened? Or when could you actually imagine a reacceleration in your nominal unit growth?

Well, we haven't given guidance on that yet. We'll update you as best we can as that comes together. But we obviously [indiscernible] pause quite a bit during this year. We did not go chasing after new deals for that time where we really paused during COVID, but we're back at it now. We're back at it in full force. The team is looking for great Shack, looking for the type of Shacks, which you talked about with formats like drive-through, Shack Track and other opportunities. Obviously, like you said, we're not running towards a whole bunch of new urban Shacks today, but we think there'll be a lot of opportunity there, which you want to get at. I think -- so John, I think it's too early to say what next year's development schedule will look like. We will definitely keep you posted on that. But we're getting back at it. Team's back, and we're rebuilding [indiscernible] exciting [indiscernible] coming years can be. We think coming out of COVID, there's going to be a massive opportunity for Shake Shack. Retail will be changed forever. Our brand remains strong. We have the strongest balance sheet we've ever had in the history of the company, and that will allow us a lot of flexibility to grow and look at great opportunities [indiscernible].

Let's talk -- it certainly -- and that would be the assumption from the outside that, I mean, we've had conversations before of it was that A sites on A malls in A demographic areas are always in demand. And you have drive-throughs and other types of things like people aren't closing them. And we've now even more so kind of justified the value of that play of format. So let's talk about how the opportunity for Shake Shack does change in a real estate perspective, types of location, size, of locations, cost of locations, maybe some tenant allowances or other things that you weren't getting before? How kind of post-COVID looks different than pre-COVID?

Yes. You're exactly right. I mean, look, great sites are going to be great sites post-COVID. Drive-throughs are going to be -- everybody is going to want them, right, post-COVID. So it's not like all of a sudden those became free. Now we're not a company that goes after B and C real estate, which I do think will be great opportunities for some. What it does open up, though, is for us to go after those great sites in new formats. And I think that's how we're really looking at it. We're saying to ourselves, hey, we might not have gone in that area where we might be able to put a drive-through or a drive-up Shack Track. Yes, that -- maybe that would have been in the third hundred Shack or the fourth hundred Shack. But hey, let's try that right now. Let's do a few of those [indiscernible], and let's continue to build flagships. And let's consider a whole lot of really great feeling experience. And we're going to keep that with -- let's not forget pre-COVID, we had a lot of discussion about going deeper in the markets that we're currently in. And that strategy remains. And we really want to do that in this next phase. We'll do some new markets next year. But we're not going to be doing mostly new markets. We're going to be continuing to go deeper doing those things that we've proven out and learning about our new format. So I think, look, I think long term, there's no question that the opportunity for Shake Shack remains, and we're looking to grow it.

It's -- it would be easy to say that, that you're kind of chef-driven burger -- I need better language to kind of describe that. It was one of the hotter development segments over the next 3 or -- over the last 3 to 5 years. Talk about just -- and that includes chicken and some other things along with that as well. Talk about some of the competitive set, that in hindsight, you say, hey, maybe you didn't want to mention them by name, but maybe did, on the margin, take some sales away from you and what you're seeing about the survivability of some of your competition coming out of COVID? And I know you're not rooting for anyone to go out of business. I know that about you, but you want to see high-quality competition survive. But if we're to still look to be honest and look at the landscape as we kind of come into '21, the quality of competition you'll be facing then versus pre-COVID.

Yes. I think a few things. I mean people have leaned into convenience more than her in this last 6 months. You've obviously seen that and who has been strong and who hasn't, whether it's fast food drive-through, convenient type opportunities. There will be a shakeout in independents, in smaller companies and I want a root for all those restaurants to come back because I think what they do has only helped us. We certainly are not going to root for anybody to fail so that we can sell another burger. We want to make sure that everybody is winning. And I think in cities like New York and otherwise, if they do [indiscernible]. That said, there's going to be opportunity. There's going to be real estate, there's going to be opportunity [indiscernible]. And I remember this feeling in '08, when we just really started to build the company. Obviously, a little bit different. However, when people were struggling in a recessionary environment but still had elevated expectations for what they ate, but they needed a price they can afford. That's when Shake Shack really began its growth. And we're confident that to find a moment in here where those people who really do want the hormone, antibiotic-free opportunity, we're here. The [indiscernible], our chicken sandwich, our hot chicken that's going right now. I'm not sure there's another one on the market that's as good that is hormone, antibiotic-free and cook to order. And that kind of thing is what I think a lot of people are going to want, better quality, premium ingredients, trusted brand, even if we're struggling economically in this rebound.

Yes, indulgence and feeling good when you eat isn't so bad either. There's obviously a lot of ways to feel good about eating but -- I mean you guys, I think, hit a lot of that. So let's talk about that. So I want to hot chicken in 2 examples. One, the importance of simplification within Shake Shack and your ability to basically simplify your way through greater profitability is the first point. And then secondly, the ability to market and communicate in a profoundly difficult environment. I mean, it's not just COVID. I mean we have protests. We have the elections. Your marketer breaking through in this environment is uniquely difficult. So just your ability to kind of communicate and break through on messaging where the obstacles are so challenging.

Well, I think the marketing team has done a great job really solidifying who we are and our brand and the strength of that during this tough time. And I think we'll exit this. What people really want today is trusted brands that are safe and that are doing a good job of communicating that. And I believe our team has done that in a great way. We've simplified some things in the menu really to operate better during COVID. This has been a tough operating environment and remains that. We want people to be distanced and safe. And we've taken off some of our more complicated sales items. However, there are certain things. Just remember, Shake Shack always has had a pretty tight focused menu. Not like we've ever had this menu that's so complicated. We've really kept it tight focused on just a few things, and we're going to keep doing that. There may be some of those favorites that come back. There may be some that don't. We're going to focus on doing the least amount of things that have the most amount of impact. We believe hot chicken is the first growth [indiscernible] that. Obviously, we wish the sales funnel was its full normal self. It's not going to be for a period of time. But in the meantime, we're excited about hot chicken. We're going to run that for a while, and we're looking at next year and other LTOs that we could possibly roll out to keep it exciting, drive frequency and remind everybody of who we are. We've even gotten back to doing some of our chef collabs and some of the [indiscernible] things that Shake Shack can do. So a lot of good stuff on the horizon for menu and focused operations.

And it was very difficult to see. I mean I understand you simplified menu to operate better under COVID. I'm sure you've seen a number of, not necessarily your direct peers, but industry participants that have seen major margin recoverability on sales that are even 10% less than where they previously were. In other words, getting store level operating income at AUVs 90% at previous. So there's really powerful margins that came out of simplification and when that simplification led to actually some significant change in the way that the restaurants themselves were run. Is that -- when I hear simplifications, like you want to do a better job of operating, but do you expect any outsized gains in margins based on that simplification as whether it's on the COG side, or less waste where you get foods faster to the customer or maybe doing the same job with fewer employees, some of the perhaps margin aspects of simplification.

Yes. I mean I think simplification definitely always helps on the margin side when it comes to labor and just ease of flow within our 4 walls. But I think over the long term, really, the greatest margin opportunity, the most significant margin opportunity, I think, will come from, as Randy talked about, expanding our addressable market. The faster we can grow sales, the more we can expand that convenience and continue to add ordering channels and different ways to engage with the brand and drive that sales number up, the faster we're going to be able to drop it to the bottom line. Now that said, of course, the teams have done, to your point, across many restaurant companies -- our teams have done an incredible job in terms of managing a very, very tight ship through a period like this whether it comes to, to your point, how we manage labor within the Shacks, how we manage discretionary spend and our other OpEx and the whole way down the P&L. Long term, when we look at our margins, again I get back to how young we are. And the fact that there's kind of tomorrow thing that we could fully expect to continue to gain economies of scale. And across the whole P&L, really, as we continue to grow COGs is certainly one, to your point, just as we continue to build out that distribution network and continue to gain pricing power just through share size. And again, just as we -- to Randy's point, as we go deeper in existing markets and build out that footprint, it's much easier to have multiple Shacks in the market than it is one. When it comes to managing training or effectiveness of marketing spend or all these different kind of cost items. So there's a lot that goes into it. And then, John, as you know, we're a company that's pretty obsessed with how quickly and effectively we can use technology across the business. And that's something that we will also continue to embrace fully when it comes to margin opportunity, making sure that as we grow those sales, that we're really being as efficient as we can in all possible areas by use of tech. You've seen some examples of that recently, and that continues to be kind of top of mind for us.

So let's talk about that. So just like your overall satisfaction with Project Concrete and what that's meant to the organization and perhaps profitability, and if there is a stage 2 and stage 3 that maybe COVID is encouraging you to accelerate.