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

I'm Peter Saleh, a restaurant and food distribution analyst at BTIG. Joining me this morning is the team from Shake Shack to tell us more about the brand's journey to bring their delicious burgers, fries, shakes to every corner of the globe. Following the initial debut in New York City in 2004, the company has expanded to over 430 locations system-wide, including 285 in the U.S. and over 145 international locations. Despite all the pandemic-related challenges, including labor, construction, permitting delays, higher costs, the brand is on pace to operate about 80% more units versus -- in 2023 versus prepandemic. Please join me in welcoming Randy Garutti, Chief Executive Officer; Katie Fogertey, Chief Financial Officer.

Thanks. Good morning, everybody. Welcome back in person at ICR. We're happy to be here with you. We just reported this morning a little prerelease of a really strong fourth quarter and a strong exit to the fourth quarter. You want to know everything you need to know about Shake Shack, it's the fact that we're all here together. And at this time last year, we weren't. And so much of our trends in our business, whether urban, suburban, everything we break up are based on that. So when we kicked off, we always like to give a little bit of a texture of what feels different about Shake Shack. So we're going to play a little video here, give you some of the highlights of the year, whether it's food shack openings around the world, which we continue to grow globally quite a bit, and we'll talk more about that. And just a feeling that is a special thing that is Shake Shack. So we'll watch this for a couple of minutes and get back at it. [Presentation]

Needless to say, we've got a lot going on in 2022, and we've got a lot coming. But I want to take a step back just real quick. As we think about what continues to differentiate Shake Shack from everybody else in what we're doing. We're trying to continue to do what other companies are unwilling and unable to do. Our brand has never been stronger, and you'll see this around the world. We'll share a little bit about what we're up to. We continue to feel like there's something about the Shake Shack brand that resonates globally in this country and everywhere we go. Our culture remains strong. Our people are what we focus on, and we'll talk more about that. This leadership team, I've been here 23 years, we've been able to combine an incredible team who's been with us for decades and some who have just joined and a strength around that leadership table has built what we believe is the right team to continue to move this forward. Our menu is dynamic. You saw there some of the tasty things that we're doing, we've got -- that we have done. We've got even more coming. And the growth ahead is robust. We just finished a year where we opened more Shacks than ever in total, and we expect this coming year will be really strong. So much growth ahead, so much to do. Before we get into more of that, I'm going to give it to Katie to give you some results of the strong fourth quarter and for the year.

Great. So we had a really strong close to the year. Fourth quarter Shack level operating profit margins exceeded our expectations, and we're really proud of the results that our teams put together here. We're going to be going through more details when we report earnings on February 16, but today, this morning, we updated our guidance for the fourth quarter. We expect Shack sales of $229.9 million, licensing revenue of $8.6 million for total revenue of $238.5 million. We opened 35 new Shacks across our system in the quarter. This is the most we've ever opened up in a quarter, 22 of which were company operated and 13 were licensed. Our average weekly sales were strong at $76,000 and same-Shack sales grew 5.1%. We expect to generate Shack-level operating profit margins of approximately 19% of Shack sales. This is one of the strongest margin results that we have had post COVID, and it's something that we're really excited about. For the year, we opened 69 Shacks last year across our entire system. We grew our base by 19% to 436 Shacks, 36 were company-operated, and we exceeded our expectations in licensed with 33 openings. The total impact of the year was muted due to the back-weighted nature of these openings, but these are really solid great additions to our portfolio and will be really accretive through 2023. We reached $900 million in total revenues and $1.4 billion in system-wide sales. We grew our same Shack sales by 7.8%, led by strong in-shack traffic growth, the benefit from recent menu price increases and recovery trends that we're seeing in urban markets. Our urban same-Shack sales grew 14% year-over-year. We expect 2022 Shack level operating profit margin to be about 17% sequentially above last year's level. We faced deep impacts earlier in the year from the impact of Omicron and we've been building up our recovery. We're really, really excited about the exit rate of the business here.

So where are we focused, how we're going to do it in '23 is really -- this is our strategic plan. These 5 things. First, nothing matters but our team. We spent yesterday in Orlando with our leadership team going to a bunch of Shacks. We've got to continue to invest in this team. We're going to focus more than ever on the guest experience in every way. Most of our gains this year came from people returning to the in-restaurant experience. Our digital is strong. We're going to keep investing there, but people are coming back to restaurants. That benefits Shake Shack. You'll hear more about our targeted development strategy and how we intend to grow. Also how we're going to keep working on improving Shack margins and continuing our momentum that you've seen and you saw in the fourth quarter, getting back to strength this year and investing with discipline more than ever. We have a fortress strong balance sheet, tons of opportunity and we're going to keep growing it. For our people, more than ever, we are working to improve the working experience. We know across the industry, across the world, it has never been harder to hire. I've been in this industry since I was 13 years old, never seen a harder environment. But it is getting better. With our operators yesterday, even in Orlando, they all are starting to peak up and say, it's a little bit better, starting to have a lot more job recs, starting to hang on in people, things are getting better. We see that momentum continuing into '23. As we look at the guest experience, there's so much that we've been doing. Hot Ones, some incredible LTOs coming forward. We're going to launch, in this quarter, kind of mid-first quarter, a new white truffle menu. These are the things only Shake Shack can do. You're not going to see this in any other fast casual or fast food restaurant. These are the things we can do. This is going to drive ticket, is going to drive price, and is going to drive frequency of getting people back in the restaurants. We've got a lot of fun lineups of food this year. We keep evolving on the digital side, testing new things, doing daypart expansion, different delivery fees, really leading into the digital expansion of our business, including continue to roll out kiosk. When you see that, we've talked a lot about this. We've got all but about 60 of our Shacks that need to convert. And those will get converted through this year. By the end of this year, nearly all Shacks will be on our kiosk strategy, which has the highest margins in our company, helps us optimize labor and continue to grow in the right way. And you're seeing us do exclusive events. You saw some in the video. This is where you got to continue to appreciate and understand what Shake Shack is doing. We're working with Michelin star chefs like Enrique Olvera. We're doing food events. We're starting at Pickleball League. We're having fun in every way in the way that Shake Shack can only do it. When we think about development, here's how we're going to grow. You go back to our IPO and the story there. We have more than 430 Shacks globally right now, 32 states, 16 countries, and we feel like we're just getting started. And the key here is our format strategy. In the many different ways, we continue to build Shacks that we think are continuing to grow our total addressable market. Core Shacks. This is what you kind of know and love about Shake Shack. We've done this hundreds of times. This will lead our development strategy. These Shacks have strong AUVs. We generally build them for around $2 million. Some of those have been up this year. We see great opportunity to keep doing those in places all around the country and all around the world. This will be the lead. Second, we're doing more and more small formats. This allows us to size down, to go a little bit smaller, to spend a little bit less, especially in this environment where we're spending more in places like drive-thru. And you'll see us do this in various food courts, different urban centers and some suburban. This allows us to go deeper in certain markets, shrink to format a little bit and still do a solid business. We really like this, and you'll see more of these in Shack coming all around the country. Drive thru, talk a lot about it. Let's talk a bit more about it. We've got 11 open. We still feel like we are learning at a massive clip day in and day out. Most of that 11 just opened in the fourth quarter, okay? Really strong starts. We feel great about it. But what are we after? We're going to share some new numbers today. Here's what we're after. We believe that we're targeting an over $4 million AUV. There have been many of the current drive-thrus who are run rating higher than that. Some are below. We're learning what is it about that site, about the layout, about the type of drive-thru that's going to drive that. They're more expensive than our core formats. We're going to spend kind of mid-2 millions on average here. Some will be in the low 2s, some would be 3, some might even be more if we decide to take a site as is that we think is great. And if you look at the history of Shake Shack, this is no different than how we've ever done things. Some of the best sites we've ever had will be there for decades to come because we chose to invest. That's how we're thinking about drive-thru. And this initial CapEx investment is optimized for learning. There will also be some build-to-suit opportunities where we can spend less than this and trade a little bit of a higher occupancy for a lower build-out cost to overall balance our CapEx. That's how we're thinking. And we believe this operating profit should be as good or better as we look ahead. So we've got a little case study here for you. Because we're in Orlando, and I'm sure you're all going to run out and check this out. Just a couple of miles away, this is why we're doing drive-thru small format in our strategy. Right here in Orlando, we just opened, earlier this year Vineland Pointe. This is a drive-thru, okay? It's already running about 86,000 AWS. I think it's going to continue to grow and be stronger. That's a 4.5-plus headed towards a $5 million Shack, okay? We're running about 20% Shack-level op profit. Just less than a mile away, we did a small format in a food court in the Orlando premium outlets, doing nearly $4 million at a 35% Shack-level op profit. We're getting $8.5 million of Shack Burger sales in less than 1 mile. We think there's a lot of places around this country and this world that we can do this. This is why you're going to see different formats coming out of Shake Shack. And this drive-thru will allow us to capture different areas we may not have gone before or additional sales that we can do it. And if you look at it, at the drive-thru, about half our guests are local. Just less than a mile away, less than 15% of our guests are local. Now you're seeing how we're going to capture the total addressable market and continue to grow this opportunity. These are just a few of the data pieces that we're so psyched about. This year, we'll do probably 10 to 15 more drive-thrus and we think that this will be a critical part of our growth moving forward. Go check out one of our drive-thrus. It is a distinct exciting experience that we're thrilled to grow. On the licensed side, I think this is one of the most undervalued, [ ununderstood ] and underappreciated pieces of our business. We think we'll do another 25 to 30 Shacks this year. We did 33 this year. We have new markets opening. We're going to open in the Bahamas. We're going to open in Thailand. Next year, we intend to open in Malaysia and more. When you look at this, just take a look for a second, okay? This is a city that most people in this room have probably never heard of, Suzhou, second-tier city in China, near Shanghai. That's the line at Shake Shack in China this year. For all you hear about China, we have 32 Shacks in China, Mainland China, Hong Kong, Macau. This has been one of the most rapidly growing pieces of our business. Yes, it has been massively impacted by everything you read about China, but it's going to be a fantastic piece of our business. So much so that last week, we opened a restaurant in Wuhan. That is Shake Shack in Wuhan. Nobody in this room ever heard of Wuhan until 3 years ago. There's 14 million people that live in Wuhan. There's a Shake Shack there that looks like that. The global opportunity in our brand and the way it hits around the world, wherever we go is distinct, special and a huge opportunity. This allows us to look like a franchise company without feeling like it here at home. It is a great part of our business that is asset-light, allows us to reap strong cash returns, and we will keep doing it driving our global brand around the world. In Asia, we continue to grow, opened 4 Shacks in Korea this year, another 1 in Japan, so much more to go. Our business in Singapore, the Philippines and elsewhere is strong. Growth ahead. Thailand next year, as I said, we will continue to look at new markets. We've earn conversations around the globe. We actively say no 5 times a day to lots of markets and lots of people who want to open Shake Shack. There's a right pace to do this, and we're doing real well. In airports, we've got 23 Shacks in airports. Obviously, they've had a strong comeback this year, and we expect that business to continue to grow. Lots of opportunities in airports. This was our first Shack ever with a bar. Go through the Denver airport and we're serving margaritas at the Shack. This has taught us a lot about whether we should consider more alcohol at Shacks in licensed environments or even ones that we own someday. Beer and wine has always been a fun part of Shake Shack. In Roadside, we've now got 4 open in roadside travel plaza. Every time you pull over to get gas on the New Jersey Turnpike or the New York Thruway or you name it, you're disappointed in what the offer is. Imagine you roll up and there's a Shake Shack there, watch it happen. We're super excited about this, and we expect to do 3 to 5 more of these this year. We've got a deal for launching more in upstate New York, and we're super excited about roadside and all the different ways we can grow. And we're even looking at different licensed opportunities, like if anyone's been to the Atlantis in Bahamas, a premier, huge resort, we're going to open a Shack there later this year. Super excited about that, and it also opens up this way of thinking of could we, in the future, consider premier resort property opportunities that would allow us to have a licensed Shack in an area where we have a captive audience like here. And we think this is a great part of our business. With that, I'll leave it over to Katie to talk a little bit more about improving our margins as we go.

Great. Thanks. So Shake Shack has been a very profitable company since the start. These last few years have really hit us hard in terms of sales and inflationary pressures. But what are we doing about it? We talk about slap a lot here at Shake Shack, but I actually think it's a really great way to break down where our target opportunities are. So what are our opportunities here to drive margin improvement? One, sales growth; two, labor strategies and efficiencies just getting better with the labor that we have in the Shacks; three, improving our off-premise profitability. This is a new part of our business, and we've been making improvements to increase the profitability there. And four, strategic menu pricing and supply chain initiatives. This is not an exhaustive list. We have projects underway for all items on the P&L, including R&M and utilities. But as we kind of contextualize the biggest opportunities we see here, I think SLOP is a really great way to look at it. So on sales, number one, our focus is driving sales broadly, but we're specifically focused on driving sales into our own channels, which have a higher margin. Number two, on labor, we're addressing industry-wide staffing pressures that we're facing. It's impacted our sales, it's impacted our profitability. We're working on retention to get more efficient and to have greater hours of operation and be more consistent on that side. Number three, we're continuing to make improvements on our off-premise profitability. We're driving more traffic into our own channels, which have a higher margin. We've also passed along some of the added expenses to our third-party guests. And then last, we've really done a big look at packaging and coming up with ways to be more efficient, use less packaging and reduce the cost of packaging that we have in our to-go orders. And then last, we all know commodity inflationary pressures have been material. We've taken some, but not all of the price that we need to offset these pressures. So we're continuing to leverage our pricing strategy and supply chain initiatives to address all of these pressures. Then our last final strategic pillar here. Starting with our balance sheet, we have nearly $300 million in cash and marketable securities. We're going to continue to invest that in our business, in development, in digital and things that are going to help grow the long-term business case here. But we're being disciplined in how we invest it. This is G&A, this is CapEx. We consider all investments here. It's development, digital and all others. So just starting with development initiatives. At the time of the IPO, we gave some development guardrails and targets. We've historically generated very strong returns. But as we've discussed, COVID and inflationary pressures have had an impact. The good news here, though, is that our AUVs are tracking well ahead of our long-term thinking. But we know as a company, we need to continue to rebuild our profitability, and we really believe in the plan that we have in place. Third, build costs have been elevated. Our 2022 class was up about 15% year-over-year. This is due to inflationary pressures and the high initial costs as we started to build drive-thrus. We're expecting build costs for 2023 to be roughly similar with 2022. We're going to be building more drive-thrus in 2023 than we did in 2022, but we're working on ways to be more efficient in other formats as well. And then last, as we've discussed, our cash-on-cash returns are tracking at or just below our long-term targets of 30% to 33%. But we have -- we believe that we have the right plan in place to improve our profitability, streamline our build costs and continue to target 30% plus returns for our development. Next, on digital. So we're taking a disciplined approach here to digital and kiosk investments as well. We've grown our digital and kiosk sales by 330% since 2019. It's now half of our sales, over half of our sales. So this year, you're going to see us leverage our infrastructure investment and refine, optimize and personalize our app, web and kiosk channels. We're focused here on driving guest acquisition, frequency, conversion and retention. And then finally, on financials. So this morning, we gave you an update on financials and guidance. The summary that we posted here, this is for the fourth quarter in 2022. So we've already kind of talked about it. I'm going to focus on 2023. Okay, so this is initial guidance today. We're not assuming any new shifts in the macro environment or any COVID disruptions in our guidance. We're going to be updating guidance as necessary in the future. So for the first quarter of 2023, we expect Shack sales of $227 million to $235 million. Licensed revenue of $7.5 million to $8 million. This is reflecting a lot of the disruptions that we're seeing in Asia, in China, in particular, and so there's kind of a wider band of uncertainty there. We expect same-Shack sales to grow mid- to high single digits year-over-year and Shack level operating profit margins to expand year-over-year to 16% to 18%. So just keep in mind, we've historically seen first quarter margins come in sequentially from the fourth quarter. And the 2022 Shacks that we opened, a lot of them happened very late in the fourth quarter. There's probably going to be a little bit of margin overhang there in the first quarter as well. We expect to open 6 to 8 domestic company-operated Shacks and 5 to 8 licensed Shacks in the quarter. And then so, heading over to 2023, we expect to open approximately 65 to 70 Shacks in total, 40 of which about will be domestic company-operated Shacks, 25 to 30 are going to be licensed. We expect G&A to be between $125 million and $130 million, depreciation of $86 million to $91 million, and preopening expenses of $18 million to $20 million.

And with that, we'll kind of wrap it up in our last minute here. How are we feeling? I think when you look at the fourth quarter, all the momentum is in the right direction. And you look at the kind of trends of some of the return to travel, work, events, things like this are all the right things for Shake Shack's momentum. Look, there's going to be some structural changes. I live in New York City. We all know mostly, many of you probably do, there's a lot of changes. It feels pretty good in New York City and a lot of urban centers right now. Our sales continue to track, continue to return. And we're going to be aggressive as we go. We're going to build around 40 Shacks this year, lots of different formats, as I talked about, a ton of different learnings. We're going to be around the world. I think we're going to be one of the highest concept, if not the highest in the industry in percentage unit growth. It's a huge opportunity. And all of our peers that you might be looking at today probably have thousands of restaurants compared to our hundreds. The opportunity is there. It is big, it is vast, and we got the right team in place to go get it. So we're excited. Hopefully, we'll see some of you throughout the day, and appreciate all your time today. Thank you. Have a good conference.