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

Very good afternoon. I'm Dennis Geiger, Restaurants Analyst at UBS, and I'm pleased to be joined by Katie Fogertey, CFO of Shake Shack. Shake Shack is a modern-day roadside burger stand with about 290 or more than 290 domestic locations and over 150 international locations. Shake Shack maintains one of the industry's largest growth opportunities behind accelerating global development, a focus on digital and strategic investments, including the brand's somewhat recent venture into drive-thru. With that, welcome, Katie, thanks so much for joining us today.

Thank you. It's great to be here.

So anyone that's looking for disclosures, you can go to our website or I can provide them to you after the meeting.

But maybe, Katie, we could start with sort of where the brand is at from a recovery perspective. Maybe we could touch a little bit on the suburban, urban mix and how that recovery has looked and kind of where we're headed from here? If we could start there.

So our footprint is very different than a lot of the people who you probably kind of lump us as competitors to. Shake Shack was founded in New York City. We have a pretty dense urban footprint in New York, Los Angeles, other markets. Those were deeply impacted by COVID. And so we also have a growing suburban business as well. But prior to COVID, we didn't even have drive-thru there. So when you think about the -- how COVID and its recovery has impacted us, we're still impacted by people not going fully back to the office, that 3 to 4 days a week, we're losing 1 to 2 pretty big days for our urban Shacks. So we're excited by the trends that we're seeing where our suburban business has been performing pretty resiliently and we're still getting that great recovery in our urban business.

That's great. You've been steaming a good amount of momentum in the U.S. for sure, over the last several quarters. You've got a strategy to kind of continue that momentum over the near and longer term. Can you talk a little more about that top line momentum going forward? And really, what are the most important levers that you control to continue to drive the growth that you've been seeing?

Yes. So I think, first and foremost, when we think about sales growth, it really does come with continuing to get our guests to come back into our Shacks more often and to purchase more when they're there. So there's a couple of strategies that we've had at play. When we think about guest experience being one of the key strategic pillars for our company. Right now, we're running White Truffle LTO, which is very craveable, really high-end premium product. You can get a white truffle burger for under $10 in most of our Shacks. We also have a pretty compelling shake offering right now with Tiramisu. It's just a fan favorite. So we're giving our guests these really highly craveable moments that they'll come back into our Shacks for. We also have more channels than we've ever had before. So we're really kind of building that omnichannel gap. So before the pandemic, really people would just come into our Shacks, maybe they'd order ahead of time. Now you can order ahead of time through our app, you can come in with delivery, you can do delivery through third party and kiosk is a very important strategy as well. So continuing to offer more channels in ways that kind of build that check up is a really solid strategy. And then as we're offering with drive-thru, which I'm sure we'll talk about, that just gives yet another convenient occasion for our guests to come and get their Shake Shack.

That's great. I want to come back to a few of these really important drivers of the business in a few minutes. How about just thinking about the macro right now, the trade down, we've seen some of it across the industry trading down into traditional QSR. What have you seen, if anything, over the last several months, few quarters on that front? And does that at all change your strategy in this environment on sort of how you behave going forward?

Yes. I mean it's certainly uncertain macro times have been there. So Shake Shack as a company and just our real estate strategy and who we are with high-quality premium ingredients, we over-index the high-end consumers. We under-index to low-end consumers relative to traditional fast food. Last year, kind of middle of the year, when gas prices started to skyrocket and it was kind of a more pressured time for the low-end consumer, we saw a little bit of an impact in some Shacks. But resoundingly, it wasn't something that kind of upended the business. And we were pretty consistent on that side. Those trends have largely held. In some cases, they've actually gotten better. And what we're hoping to be and what we believe we are showing to be at this moment is just that really premium, nice experience that is also highly affordable for most of our guests. And in this time of high inflationary pressure across all restaurants, a great place for people to kind of trade down into. So we like where we are. We're kind of that affordable luxury, an indulgent amazing occasion.

Great. Makes sense. Want to shift over to development, one of the most important aspects of the growth story here. You've guided 23 to about 40 new company-owned locations. 10 to 15 of those will be drive-thru locations. Can you just talk a bit about the growth potential for the brand in the U.S.?

I mean, it's really exciting. So we talked about 40 this year. We're looking for about 10 to 15 of those being drive-thru, which means that actually, most of our class will be coming from kind of core amazing iconic Shacks. We're really excited by what drive-thru is unlocking for us in new markets, but we're still kind of not deviating from what has made Shake Shack so great. We -- most of our growth is going to be going into existing markets and really kind of taking more advantage of our scale in those markets. I think one of the things that is the most exciting opportunity for Shake Shack is just as we scale, being able to leverage our system, being able to grow managers and be able to put people in locations and grow them through our system, leverage our area directory structure and our RVP structure, so that those incremental Shacks that we're going, we get some nice economies of scale. It's easier from a distribution standpoint, when our distributors are going out and they're able to make several drops in the market instead of just going out directly and doing a drop in the market and coming back. I can go across the board as to it. And then just brand awareness, the more that you have in the location, generally the more well-known you are from your guests, but then also from employees. It's really hard for us when we go into a new market to stack some of these openings because maybe they don't know who Shake Shack is. They'd be like it looks a little bit expensive, but I'm not sure why. Once we get that critical mass, and we have people who are kind of raised up with our culture, and they understand the value proposition and why they want to be here at Shake Shack and what kind of opportunity that can give them, they tell their friends, they tell their family and you're able to get really great internal marketing escorts for hiring.

That's great. I want to ask about the long-term potential. I think your initial target, which is your latest target is 450 company in the U.S. You haven't touched that yet despite the strength that you've seen in new store opens, et cetera. Anything to comment on there as it relates to considerations for that target? Anything incremental at this stage to say relative to that target?

So we feel really good about our expansion opportunity in the U.S. and also globally with our partners. And when that target was given that was before we really had all the channels that we have today, that was pre digital. That was also before drive-thru and some other formats. And so when I look at the work that we're doing here on our strategic plan and to reduce our build costs and kind of build back kind of the returns of our Shacks, and I look at the success that we're seeing with new drive-thru formats and others, I feel really good about that total addressable market. We haven't given a formal update of that, but we'll definitely keep you posted.

Great. I appreciate that. How about as it relates to build costs and returns as far as what you're seeing, obviously, inflationary pressures on build costs over the past year plus. How do you think about returns right now versus historical returns? And we can get in the drive-thru in a bit, but just curious how that's kind of playing out for you?

Sure. So our returns are just below where we had kind of given long-term targets. And so that's why the work that we have here, that we're doing here is to both address our profitability and lower our build cost to help just continue to bring those returns up, and we feel very confident that we'll be able to meet our long-term targets, if not exceed them. So let's go through what those drivers have been. So a long time ago, this company gave guidance for AUVs to eventually come down from the very strong levels that they were at to about $3 million to $3.2 million. Okay, we closed last year with $3.8 million. We have handily exceeded expectations for what AUVs will be. And it's because as we're expanding into newer markets, we're doing more sales than we thought that we would. That's great. But if you look at their profitability pressures across our P&L, if you look at just broad inflationary pressures, how much more we're paying our workers and frankly, the advent of third-party delivery and that profitability pressure that is put across the entire restaurant system, we haven't taken as much price to fully offset those pressures. We've taken some price, but not all of it. So our return -- our margins are not what they used to be, that's why we're keenly focused on building back up our profitability. We exited last year at 18.8% Shack level operating profit margin. We feel like we're on a good path there. And then let's talk about build cost. You talked about the inflationary pressures we're seeing. It's that and just drive-thrus, especially our first drive-thrus, they're more expensive. We're still working through, and we think we've landed on the correct kitchen format that will really optimize our labor and throughput in there. But things are still elevated, and it's just going to take a while for that to come down. We had about $2.4 million build costs in last year's class net of TI. We're expecting, depending on how the mix of drive-thrus ends up playing out for this year, that to be about the same. And the teams has a lot of work underway. In fact, I just got out of one of the meetings for, we call it, Project 3000, where we're standardizing the box, really getting into what do we need, what's working and how do we optimize labor, what is the design that helps us to optimize labor. So I feel like we're on a good path there as well.

Great. Lots of exciting stuff going on there. I want to shift over to drive-thru. You touched on it a little bit there. How -- some of the key learnings from drive-thru locations thus far, specifically how employees are sort of managing the complexities operationally of the drive-thru while at the same time, maintaining that all-important Shake Shack experience?

Yes. I mean, drive-thrus are -- that's a different beast. This is a different type of animal than Shake Shack has historically had to train. And we've hired a lot of good external talent to help on that, both in the day-to-day operations at the drive-thru, but then also as we're thinking about design and kitchen equipment and all the stuff that goes along with that, site selection and so forth. We feel like we've landed at a pretty solid design for what drive-thru should look like. And we've tested -- when we say we're testing to learn, this is literally what we're testing. How much labor efficiency can we get and how many -- how much sales can we get with different formats. So we feel like we've kind of landed that one. And that we've also learned a lot about site selection. Site selection of drive-thru is very different than your core Shack. And we've implemented a lot more data and analytics to understand how our guests are moving around just in the broader ecosystem and what that drive-thru -- what are the qualities about that drive-thru guests that we want to think about and incorporate in our site selection. So those are a couple of things that we've had underway here and feel very confident about kind of what we're learning and applying to the go-forward.

That's great. And you gave a couple of numbers or sort of the economics there a minute ago. Can you just provide -- you've provided in the past, I think, some additional metrics around what you're seeing within the box as it relates to drive-thru. What are those for those that may be less familiar? And then how is that kind of guiding -- it may be early, but how is that guiding how you think about the potential for drive-thru across the U.S.?

Sure. So when we talked about our targets, it's still very early days for drive-thru to give an exact read of what is what. We've opened up -- I think we had 6 open up in the fourth quarter. We have 12 open right now. Just still a lot of newness, different areas, locations. We actually haven't even opened up a drive-thru in a core market. We haven't opened up the Long Island drive-thru yet or an L.A. drive-thru. So we've kind of gone very intentionally to go to kind of areas, which we call drive-thru country or the Midwest is where I'm from and kind of learn what can that new format unlock for our guests there. But we don't -- we're far from having like a full accurate read across our entire system. And what -- sorry, what was the other part? The economics, yes. And so as we're targeting here for economics, though, we've talked about we're building drive-thrus to do at least $4 million in sales. That's really what we would like to have there and we're building drive-thrus to have at least a 20% swap. These initial drive-thrus are costing more. We know that. We've given kind of the range, and we're looking to work that down over time. Project 3000 is going to be a really important driver of that.

Great. Looking forward to the Long Island drive-thru, I hope you can manage the traffic pattern with that because...

I mean, it's going to be...

That will be interesting. For those in the room, by the way, I want to go grab the iPad. But if you have any questions, send some through and I'll ask Katie. I guess let me shift though, Katie, over to the staffing situation. It's a strategic priority this year, the recruiting and the retaining of employees. So can we just talk about that where you are from a staffing perspective right now and how you're thinking about training and retention this year?

And it's just such an important topic, I think, for the entire restaurant industry. We just lost so many people, who used to work in restaurants. They have found other areas. The good news is that it's getting better, but there are still areas that are hard to staff. We've done a number of things. We've raised wages. Our wages are up more than 20% since 2019 levels. We've hired external talent to help address the specific issue with a new Head of Training and also a new Head of Recruiting, and these both came from pretty well respected competitors in the industry. And we're also offering tips through all channels. And it's still early to give you a great read on how that's helping us, but we feel really good about it. And our team members are excited about it. In some cases, it's giving them several dollars more. And we've changed the way we're advertising for it. So it used to be when we were hiring, we would say with that starting wage rate. So now offering $15 an hour. We're able to now say we're offering $18 an hour with tips. That's a big differentiator, and we're excited for what that means for our team members. And let's talk about where the tips came from. It wasn't us kind of trying to come up with a way to incentivize our team members. It was our guests who were saying, you guys provide such amazing customer service. We love coming to Shake Shack. And we want to be able to give your team members a thank you. And this was kind of thrown around for years in the company, it's a big question. How do we offer our guest tips? Is it a tip jar, is it whatever? And a couple of years ago, the work went underway to do digital tips. And we were -- last year, we started rolling out to some channels and now it's basically everywhere, except for delivery and the drive-thru. And it's been really powerful. But when we look at where if you tie this to profitability as well, I really do believe that there is a strong link between our ability to retain and train our team members and our profitability. You see this when you look through the data, there is a direct correlation between the tenure of a team member and how many items per labor hour that they can produce. And so we know that there is a great incentive for us, not just because it provides a better guest experience, because our Shacks run better, but also because there is a huge opportunity for efficiency, which will likely play out in the P&L.

Related to that, how about as we think about the operational improvements, which I think is also a focus, given where the demand is. What are the biggest opportunities to improve operations inside of the Shack restaurants, maybe how you're using digital tools to unlock that? But if you kind of touch on some of those biggest opportunities operationally.

Yes. I mean, there's a lot. And I think when you're talking about retention, that's simply one of the biggest rocks out there for us. It's very hard to train up team members when they're constantly turning over, right? And this is always an issue with the industry. This is not something that we've gone from no turnover to high turnover. It's just there is a great opportunity for us and the rest of the industry to kind of see that come back in. But then when you think about other things. So kiosks, we're on track to roll out kiosks to all Shacks by the end of this year. Sometimes that can give a good labor savings. It kind of depends on the Shack and how we're using it, but you can have 3 to 4 kiosks in the Shack, and that really helps to redeploy labor and also helps our team members to run the shift when not everybody shows up, right? So when they're more thinly staffed, they're able to execute against a pretty big challenge there. And then when we talk about Project 3000 and the stuff that is being worked on as we think about more prototypes for Shacks to come, this is all top of mind. How people -- how our team members are moving throughout, what reps they're doing. This is central to how the team is thinking about kind of the kitchen of the future.

You talk about technology in some of the response there, which makes a ton of sense. How about if we just think about technology broadly. It's been a big focus for the company for a long time now, a source of investment as well for the company. Maybe just how you're positioned on technology, both operationally as well as from a consumer-facing, a customer-facing standpoint and what those biggest opportunities are? Kiosk seems like a major one as you touched on, but just where you are in those biggest opportunities.

Yes. I mean our guests, that's a guest who expects -- has a very high bar for what restaurant technology looks like. They -- we get compared to people with massive tech budgets and what -- how they expect their app to work, how they expect the kiosk to work and everything in between. And so that's really the experience that we are being comped against, and we're trying to invest with a huge amount of discipline to provide a similar type of experience for our guests. So they -- what is that? It's the app. They expect the app to work always. And we've made a lot of investments, and we're just kind of refining around the edges and really kind of leveraging that going forward. We know our digital customers, they come more often and they spend more with us, and we want to continue to bring more into our ecosystem, even as a lot of our gains are coming from people coming back into the Shack. And it's through how even things like a digital menu board or how we are communicating with our guests within the Shacks. And then on the technology side for our team members, it's always an evolution and a journey where we continue to look to take steps out of their process. We're -- we've experimented with different types of equipment on that side. But how we make our food. We make your orders fresh as you order them. We are not a hot hold, batch cook type of company. And we think that's why our food tastes so good and why our guests love it so much. So...

That's great. Just want to ask related to that, to some extent, about the delivery channel and kind of what your -- what you're seeing there, benefits and ultimately, where the channel can go for a brand that I think is pretty well set up for that channel versus some of your competitors, perhaps?

Yes. So delivery really prior to 2019 wasn't really a big part of the company's story. And in the middle of 2020, early 2020, we turned on all channels for delivery. So kind of opened it up across the board. We've made a lot of investments in doing our own self-fulfilled delivery. So if you go into the Shack app, you can do delivery on your app, and we get a lot of great customer data from that. That's our preferred method of delivery. I think that we've definitely seen our gains coming from in the Shack from people going back to the normal routines. We have -- the best price is through our own channels. And we'll kind of see how that delivery demand shakes out over time. I'm sure there's going to be always some demand for delivery there. And it's just something that we want to continue to drive guests into our own channels.

Makes sense. I want to shift over to margins. It's -- improving those Shack margins is another key priority for the company this year, significant focus for investors. I've got a couple of questions from the room on the margin side of things. So maybe we could talk about the latest impacts on restaurant margins from labor, commodity inflation as it relates to this year, and some of the key levers that you talked about to kind of build back those movements.

Sure. So broadly speaking, we can walk through our restaurant P&L. Inflation has been a huge pressure, food and paper inflation and also just the higher mix of off-premise orders that have higher paper usage, that's been a pressure. We've taken some of the price, but not all of it. Our fry prices just jumped 30% last year. Our fry prices are not up 30%. And we want to continue to have a mindful and appropriate approach to pricing that's driven deep with data and analytics and really it has an eye on -- in this moment, we all have to pass on price in order to help protect margins, but not so extreme to a level that would derail traffic. And so that's constantly -- we don't want to ruin our value perception with guests in this moment. And then on -- so we'll kind of see how the rest of the year shakes out on that side. We are going to be running kind of, call it, high single-digit price into the middle of this year. And then if we don't take any additional price, we're going to kind of be ending the year rolling off all of it.

And just on that point, the customer resistance or lack thereof that you've seen thus far to the price and then how that's kind of shaped how you've thought about pricing throughout the year.

I mean we feel good about what we're seeing and what we have seen. Now that doesn't mean that just because you feel good about something that you should continue to go. So no guidance there on that front, but we are watching also the potential for various commodity inflationary pressures and kind of acting accordingly, but we do believe that we have the opportunity to take more price if we need it. And how we're taking price, it's not a blanket. We didn't take a blanket 7.5% across all the company. It's a very targeted approach to areas where we have a bigger gap to our competition and there's a higher willingness to pay. There are some places where we took 2% and then there are some places where we took more.

Makes sense. New store inefficiencies, I want to touch on first. You spoke to that a little bit as it relates to the 4Q, and that's largely coming from the development strength that you've seen -- that you saw in the fourth quarter. Those pressures will normalize as you highlighted. Can you just talk a little bit about the potential for that going forward?

By the way, this is something that we always see, right? It's just -- for those who are not as familiar, last -- or in the fourth quarter, we opened up 22 Shacks, which -- for us, that's a big number. We opened up 36 in the year. So it just shows you how back-end weighted that opening was. We had faced numerous delays from HVAC availability, electrical equipment, tenant permitting, you name it across the board, very similar story for a lot of other restaurants. But when we open up a new restaurant, when we open up the new Shack, we staff it up, oftentimes with brand new people, and these can open very strong. And then typically, we have this honeymoon period where over the course of 2 years, we have sales kind of more normalized to more run rate levels. Okay. So what does that mean? So when you staff up a restaurant initially with a lot of new people, who weren't trained very well, you're not very efficient, right? And as those sales normalize, you're constantly kind of also training up that team as well. So this is always a pressure for us. It's just when you have 22 opening in a single quarter, that's the pressure, and this is why we've been highlighting it and flagging it to investors, that this is kind of going to be a larger than normal pressure on our P&L in the first quarter. It usually takes 3 to 6 months for those restaurants to kind of get in line with normal flow through normal profitability. And so that's kind of what was embedded with guidance.

And then you touched on it some, I think as we talked about operations before, but just as far as efficiencies from a restaurant perspective, whether it's the kiosk, the packaging I think you've spoken to, just how significant can that be?

So I'm really positive about what kiosks can do as far as helping just also educate our guests about what all of our menu items are. I don't know, this might just be my own personal thing, but when I go into a Shack, and I know the menu cold, but you look up at the menu boards and then you're dealing with a person here and it is more challenging. Whereas when you go to a kiosk, the way that we've had it, you should all just go use a kiosk if you haven't already, you start with, okay, here's my sandwich options. Here are my burger options. Oh, chicken, maybe I'll get those chicken bites. Oh, fries. Oh, I want a milkshake. And you can actually just see this in the way that the ticket is put together on a kiosk versus an in-Shack order. So that, I feel very, very good about driving higher checks and also higher profitability as well, just happen to have a higher beverage attach, higher LTO, higher-margin attach rate on that side.

I think it's a great point, looking at the menu versus kiosk or app, it is dangerous. I think, when you think about, I'll get this and...

Oh, I know. Dangerous or good?

Both, both, it could be both. I think, depending on your angle. I want to talk about profitability longer term, I got a question or 2 here. And I know you guys get it often as it relates to longer-term profitability. A lot of moving pieces right now macro in your own business, I think. Anything to share on longer-term profitability considerations, how you're thinking about it, how investors perhaps should think about it just to add at this juncture?

It's something we're highly focused on. It's one of our key strategic priorities. And we've walked up kind of the bigger 4 buckets that we've been focused on here. We haven't given any long-term guidance around where we expect margins to land except for our goal for our unit development is to have 20% plus SLOP. So that's something that I would keep in mind. But how to get there? So number one, sales and it's also sales into our own channels. So we want to drive sales broadly overall. We really want to see, especially in our urban locations, more of the momentum building up on that side. But where it's an even bigger benefit to our profitability is when that's an in-Shack, a kiosk order and even our own white label delivery order. It's really the third-party delivery and the rise of that, and we'll see how that all shakes out that has been kind of that new pressure on our P&L that we hadn't seen before. Then the second one is on labor and labor efficiencies. So S-L-O-P, so I'll go through it, right? So on labor efficiencies, we want to drive retention. We want to have our team members just get better in our Shacks, and that's a lot of the focus right now. And then longer term, as we are thinking about what that ultimate kitchen design looks like for drive-thrus and others, that is all key part of how we're thinking about building out for the future. On other OpEx, that's also been kind of a big pressure for our company, it's not just in higher delivery fees that we're paying, it's also we've had R&M. We've had T&E creep up. Utilities are up for us. We'll see, I think, utilities is largely inflationary driven and just depending on how that all shakes out. T&E is something that we're dealing with around heavy opening schedules and as staffing normalizes, and if we can approach a more kind of regular opening cadence, that should work out over time. And then R&M is just elevated because just as we were facing issues with opening up our restaurants and getting availability of new equipment, we're also facing that in our own restaurants. If a grill goes down, maybe I might have replaced it before, we have to service it now because we don't have that replacement. And sometimes that can be expensive and that lands on the P&L. I think a lot of those are going to be transitory and stuff that the team is working on. And then kind of the final largest opportunity for our margin expansion is on just pricing and how we're thinking about pricing in our own channels and other channels, continuing to keep a strategic eye on what we can do on that front.

Great. I want to touch on G&A. You've spoken to the G&A really as sort of an investment as a key driver of the growth potential for the business. So maybe what are kind of the biggest components of that investment spend as you look ahead, that can have the biggest impact on growth for the business?

Sure. So on G&A, where I would look at kind of the biggest investments we're making here. Number one, it's supporting our Shacks. And it's not just the infrastructure you need in the back office to help make sure that everybody's reports run smoothly and inventories track correctly and whatnot, but it's on the people and making sure that we have the management structure in place that will help guide the Shacks forward. So as we open up new Shacks in new markets, oftentimes, we have to hire at the corporate level to support that. The other side is on our digital business. And so we have pretty good, I think it's 36% of sales coming from our digital side at this point. That's before kiosks too. So when you add kiosks to that, it's much higher. There's a lot of ongoing expenses that we have as a company just to maintain that. So when we think about why we're so bullish on the potential for digital long term, what we want to have with having more guests in our own channels, being able to directly communicate with those guests through individualized personalized marketing, getting able to kind of learn from that guest behavior. That all -- there's a cost associated with that, and that's in G&A as well. And then our license business, we're very excited for what that can be as well. We haven't spent any time really talking about it this time. But there's a body of -- at the company, there's a whole bunch of people who support that business as well.

Terrific and I was going there next, domestic license first, maybe if we could go there. Maybe just first, that the recovery of that business, which was more impacted over the last few years for obvious reasons. And more importantly, what that development opportunity looks like going forward for kiosks?

I mean I was -- I've been living in airports recently, as I'm sure we all have been. But last night, I was in JFK and just walking by both of our Shacks there in Terminal 4 packed at 9:00 at night. We're -- you're right, the airports were and stadiums were heavily impacted by COVID, and they are some of our strongest recovery stories out there. And we're really excited. Now what's hurting us, what's holding us back there, our ability -- or our partner's ability to staff some of these locations. If it's hard to staff a restaurant right now, it's much harder, it feels like from what we see, to staff airport locations, whether it's other restaurants or it's retail, you're still kind of seeing these airports kind of work up to full staffing on that side.

How about shifting over to the international side of things, an exciting part of the growth story. In -- outside of the U.S., how are you thinking about the sales and the profit recovery in that business outside the U.S.? And then really the development opportunity outside of the U.S., be it Asia, be it some of your more mature international markets?

So one of the reasons why we increased the revenue guidance for our license business after earnings for the first quarter was really because of the strength that we're seeing coming out of China with easing Zero-COVID policies. That had been a pressure to our sales. And as of the last update we gave, that was looking a little bit better. But COVID pressures have interrupted throughout Europe and not Europe, sorry, throughout Asia, have been in pressure and it's just something that we're starting to work our way out of. We just opened up our first Shack in Japan in several years at Universal Studios. We've opened up a number of Shacks in China, even with all of these COVID pressures. We've got some really nice momentum as well in Mexico. We're going to be opening up our first drive-thru in the Middle East. There's just a lot of really good stuff going on right now with the international business and continuing to evaluate new partners as well as get deeper with our existing partners. And if there's another thing that I would kind of have you walk away with thinking about as it pertains to our international business, and really kind of even our domestic license business, we really only have one kind of format with these partners. We have not yet dived into what a drive-thru will be for our license business and what market that will make sense for. So it's -- it will be exciting to see how we go deeper with our existing markets and then also potential new partners down the pipeline.

That's great. Very exciting. I want to shift over just to capital allocation a little bit, maybe balance sheet and capital allocation. Just thinking about that given your role and really how to think about what that means from a growth perspective and really where the priorities lie from a capital allocation standpoint.

Yes. So we're really proud of our strong balance sheet that we have here. And our #1 investment here is really in our growth. So we're building about 40 Shacks this year. We haven't given any guidance for what that will be for the coming years. But as we think about building back our profitability and investing with discipline and kind of that current run rate, we feel very good about our cash position and how we've prioritized our investments here.

Great. Shifting -- going back to some of what we were talking about with digital and technology. I want to touch on the opportunity for loyalty a little bit. How significant that can be, where you're at from sort of that relationship with the customer through the app, et cetera? How big that opportunity can be for you? Maybe...

Yes. I mean, it's something we think about a lot. And where we are, I think we have about 4.8 million first-time digital purchasers in our own channel. And we also have a number of guests that we communicate with on e-mail as well. We're just continuing to move down that digital evolution. We talked about last year doing more around direct and personalized marketing. So we made some investments last year in our digital business which is, again, it ends up in your G&A as well as you have the subscription cost to maintain these investments. But we now finally have the opportunity to say, oh, Dennis, we know you like XYZ, come try our white truffle. And I think at Shake Shack with a brand that is so big, but a company who is just still very small and growing, kind of reminding people that we are still early on this cycle, this roadway here is important. But yes, we don't have any plans for loyalty right now. We are trying to kind of capture the best parts of loyalty with the structure we have today and continue to grow as we evolve.

You talked about truffle. We haven't really touched on innovation yet. This has obviously been a hallmark for the brand, and you see tremendous results often from it. Can we talk a little bit about how you think about innovation, whether it's add-on, core entree items, LTOs versus permanent? Is the strategy going forward going to be similar to what we've seen historically? Does it change much?

Well, I think also just coming out of COVID and with improving our staffing levels and kind of getting restaurants open to fuller hours, this does allow us to do more exciting stuff on the culinary side. So we're really excited about white truffle. It's awesome. If you haven't had it, you should go have it. It's delicious and it's highly affordable, too. We use real white truffle oil, which for the non-truffle aficionado is probably one of the most expensive ingredients you can do, but we did it in a way that we can still offer to our guests at a very powerful price point. But you're going to see more from us this year where we have our new Veggie Burger 3.0, that's in tests right now, and we could potentially be rolling out. Go try it in the West Village Shack. We have a couple of other Shacks that are testing it right now. I think it's probably one of, if not the best veggie burger that I've ever had. We have Annalee on our team here who's here, who is a huge fan of it. And it's just highly craveable, very different from what you would expect from a more mass produced type offering. We also have been testing our nondairy shakes, which I'm a big fan of, and we have a formula that is nondairy but tastes so much like our chocolate custard, and we expect that, that will be well received as well. And we're constantly coming up with new ideas, whether it's on cold beverage platform, so continuing to evolve what we offer our guests as far as cold lemonades and we've been testing some frozen items, caffeinated lemonades as well have been in tests. It's an exciting time. And we all want to do this, though, without taking off -- taking your eye off of making sure that we're not introducing a lot of complexities into our Shacks. We want to do this in a way that it's just seamless for our team members, but still gives our guests more of an opportunity to trade up, add on and come back more frequently.

Terrific. Lots to look forward to there. I just want to touch on traffic and check a little bit, even if at a high level, how investors should kind of think about that going forward, potentially as pricing levels start to moderate. Any kind of commentary on that dynamic?

Sure. So we've been highlighting this pressure we've had kind of on our mix here, and that's really from as we're working out of COVID, there was a lot more group orders in COVID, in particular, in our digital channels. And now that we're seeing much more of our gains coming back from In-Shack, that tends to skew to more single and smaller sizes. So now if you're back to the office, you're going to go to get your Shake Shack, you're going to be 1 person. We're seeing more of that than we are of people ordering in groups. And I don't know how that will -- where you will see that level off, but that dynamic has certainly been underway. And if we continue to see this urban recovery and more and more people coming back to the office, logically, you would think that, that continues to happen. It will be interesting to see, though, if you get a trade-off, though, from that to more trading desk orders and more group orders on that side.

Great. Kind of related to that, let's just talk about customer behaviors, maybe a little bit. Any -- are you still seeing changes over the last couple of quarters versus the prior few years in how the customer is using the brand, frequenting the brand, what they're doing from an average check perspective? You kind of touched on some of that a little bit there. Just how that's evolving? And are we normalizing what the latest and greatest there is?

Yes. I mean what I would go back to is just more and more people coming back into our restaurants. That's certainly the trend. And you see our traffic gains are coming from that particular business. So that to us, we'd love to see that as well because that's our highest margin. Go to the kiosk, that's our highest margin. So I hope that, that continues on that front. And then just digital in general. While we had a big surge in digital adoption kind of in 2020 and 2021, those guests continue to come more frequently than nondigital guests. We know when we bring them into our ecosystem, when they're in our omnichannel, we are contacting them. We're in touch with them more frequently. We're giving them reasons to come back, whether you get early access to white truffle through the app only or our other LTOs. That's -- they continue to value that, and it's exciting for what we're building on that side.

Great. And we touched on this some. I want to ask about marketing a little bit. We touched on this as it relates to some of the digital and the outreach to the customer. Can we talk a little more just about the marketing investment, perhaps how that's sort of allowed for this personalized omnichannel experience to some extent? Where that goes, how you think about marketing investment going forward?

A great question. So Shake Shack just underinvests relative to our much larger peers on marketing. We've been much more strategic on how we have kind of grown our customer base. And there's going to be a time where we hit the scale where maybe it makes sense to dip our toes into brand marketing in a broader level, more national marketing. We're not there yet. But last year, we did a test. At the end of last year, we did a brand test in Seattle. And we tested what some out-of-home marketing would be, some TV as well. And we're continuing to kind of evaluate the digital versus brand marketing and where you want to put that pendulum on that side.

That's great. We're running out of time. Maybe I'll get one more in. We kind of touched on it with profitability. We get asked the question a lot about the free cash flow generation. Looking ahead, again, a lot of moving pieces, extreme growth here, right? So you want to invest in that. Any sort of benchmarks or what are some of the key elements to continuing to drive that free cash flow, increasing the consistency of that? We may have touched on a lot of the things already.

There's a lot that is in there, but I would say is it's increasing our profitability and sales. It's pretty obvious, right? And G&A discipline on that side. But then also a more even development schedule helps a lot because you can't start to collect TI from your landlords until you're complete. So that's also one thing that would be more helpful at having a more even cash flow story.

Great. Very helpful. Look, we're basically out of time. I want to thank you and the team very much. Appreciate your insights here and your time. And we look forward to hearing about what's next. So thank you very much.

Thank you, Dennis.

Appreciate it.