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

So at Shake Shack, enlightened hospitality, which starts with our team members, has always been at the core of everything we do. That's not going to change, but we need to accelerate that. So we're putting the infrastructure in to do all of that. And really, what that entails is developing the talent, building a leadership pipeline and making sure that our leaders of tomorrow are building the acumen to be able to run a $4 million revenue business. And we're really proud of the fact that Shake Shack is not like a lot of other restaurants. We're not just preparing food. We're actually making the food, like we're actually cooking. And so we have an appeal for people that aspire to be culinary leaders that come and work at Shake Shack. So that's only going to continue to grow as we continue to grow and penetrate into markets in a much bigger way. So building that pipeline is job number one. Job number two is operations. So everything at Shake Shack starts with the food, but then quickly goes to operations, right? I mean how you deliver the food, how you deliver enlightened hospitality can make all the difference. We are really excited about the way we're evolving our operating model. We're getting more efficient, the way we manage our restaurants, we're working on new processes, new equipment that can conceivably help us be faster. Really proud of the progress that our teams have made. Up until a year ago, Shake Shack didn't even measure speed of service. And today, we're maniacally focused on it. And that focus has led to significant improvements in our speed of service, which is going to mean a lot more as we go into suburban markets and leverage drive-thrus in a much bigger way. So we're really excited about the advancements we're making there. And so we talk about it in terms of people, performance and profit, right? The people we already talked about building the culture of leaders, building tomorrow's GMs, performance, the metrics and the KPIs that we use. And if we do all that right, we're going to deliver profits. And it's been amazing to see the improvements in margins over the last 7 months just having a little bit more focus on how we're operating our restaurants, and that's what gives us the confidence to go in and open a lot more restaurants. We're building labor management tools. We just implemented a new labor model in Q4, which is really -- which we're really excited about. We've built a new scorecard where we say, here's what it takes to be successful at Shake Shack. When Stephanie Sentell, our new COO, showed up at Shake Shack, she asked her teams, who are your best operators, and they didn't have an answer. They said, "Well, what do you mean? The best from a retention standpoint, the best from a guest service standpoint, the best from a profitability standpoint. So her first job was building a scorecard where everybody is going to be measured on the same criteria, and we rack and stack every Shack. 330 Shacks top to bottom. And so now the folks that are -- that show up in the bottom know they're there, and it's not about berating them for being there. It's about helping them understand what's different about what they're doing from the people at the top, and so we can continuously improve and make all of our Shake Shacks the best in the system. And as we -- a big part of the profitability and the margin enhancement is driving comps. Everybody in here is focused on comps. And we have gotten a lot better at driving comps at Shake Shack, and we're only going to improve. We're going to focus on culinary innovation -- strategic culinary innovation, where we're going to build a strategic calendar than not just brings in new guests but also optimizes the tickets that our current guests create. We're going to work on our core menu. We have opportunities like adding combos. We've talked about adding combos that's going to improve our speed of service. It's also going to improve our value equation. And then our digital footprint. We've gotten really good at targeting guests with surgical incentives that give them what they need to come back more often. And the last thing I want to talk about on this front is we're investing heavily in our tech stack to what Danny calls connecting the dots, right? Enlightened hospitality was all about connecting the dots, understanding your guests in a way that made them feel like they were the most important person in the restaurant. What we're trying to do that from a digital standpoint, we're connecting every channel so that when a guest comes in, whether it's in our kiosks, or our third-party delivery or our web or app, we know who they are, what they've purchased and how we can deliver what they need to get them to come back more often and spend more while they're there. Build and operate our Shacks, the fourth strategic priority. This is really important. This is about how we get to the 1,500, right? And all the things I've talked about to this point, driving the margin, enhancing our margin, improving our operations or what really allow us to have confidence that we're going to deliver 1,500 Shacks because we need -- the biggest part of this is we need to go into places we haven't really been in before. We've just started over the last 3 or 4 years to really go out in the suburban American, open drive-thrus. We didn't have that optimized out of the gate. Today, we're working to do that. But we're also going beyond that. We're looking at smaller footprints, so we can go into real estate that we didn't previously have access to. And that's going to give us -- that's going to open up the aperture and give us the access that we need to go and expand rapidly. But it only -- it only works if we can get the cash-on-cash returns that we're getting today. And so in order to do that, we need to be able to deliver consistent margins with where we are today with smaller Shacks doing less volume. And that's why when we put our long-range guide out, we give that range of $2.8 million to $4 million because we will be going into different places than we have been in -- usually, historically, it's kind of the corner of main and main for Shake Shack. We'll be looking at other places to go, but we still have to deliver the returns that we expect. And we're going to do that because we've got great margins. We've got great operations. And we are reducing the cost of our builds. I mean if you look at what we've done just over the last couple of years, our development and procurement teams have done an amazing job. We reached an all-time high of a net cost of $2.6 million just 2 years ago. This year, we wrapped up with an average of $2.2 million, and we've already committed to another 10% reduction next year. So as we continue to hold on our AUVs, improve margins and decrease the cost of the assets that we're building, we're going to continue to deliver great returns for our investors. And in order to do that, we've had to do a couple of things. So our development process, we've gotten smarter about our real estate. And we're getting improvements in cost reductions just from the scale. I mean when we had 200 Shacks, we were -- and building 20 a year, we weren't able to get the same pricing on the materials and the same scale benefit. So as we get bigger, it's only going to get better and improve the cost at which we're spending. And so with that, we have a ton of confidence in our ability to deliver the numbers we put out today. But Katie is going to walk you through that in a little bit more detail.

Great. It's a very exciting time to be at Shake Shack and to be sharing all of this wonderful news with you and all of the work that we've been doing to enhance our data and analytics and just get smarter in understanding our business really does set the foundation for continued long-term growth. I wanted to just share some of the highlights from the fourth quarter, all the preannouncement news is in the press release today and more details on the back slide here. But the overarching theme is that we ended 2024 with broad-based strength across the business. We grew total revenue by 15% to $329 million. We grew same-Shack sales by 4.3% with really strong performance by our sales-driving initiatives and all of our strategies at place. We also had a really great end of the year in development with a number of very strong openings from the team. Our AUV for the whole entire company across the board is $4.1 million. This is one of the leading AUVs across the restaurant industry and something we're really proud of. And with all of our focus on growing frequency and going forward, we're very positive about that momentum. On the profitability side, the work that we've been doing for now several quarters and the improvement in the business overall, we drove almost 300 basis points of improvement to our restaurant margin, ending with the fourth quarter at 22.7%. This is the highest fourth quarter margin that we've had since 2017. So it really just shows that the strategies that place are setting the stage for continued long-term growth. And as we talk about all the time and with our target here to grow units by about fourfold, it really does feel like we're just getting started. And finally, on the adjusted EBITDA side, we expect to end the fourth quarter with $46 million in adjusted EBITDA. I hate to end on this point because it's such an amazing point but we grew adjusted EBITDA by nearly 50% year-over-year in the fourth quarter, just tremendous performance across the board. And then here are some highlights for 2024 overall, just taking a step back. We had mid-teens revenue growth. We are approaching nearly $2 billion in system-wide sales with 579 Shacks globally across our company-operated, in our licensed business. We had 76 new openings across the board last year with 4,300 company-operated side and restaurant profit margin, we expanded our restaurant profit margin by 150 basis points last year to about 21.4%. This was driven by some improvements that we've had in the supply chain. A lot of the work that we've had in operations with really refining that labor model and just getting tighter on how we're managing the overall system as well as other profitability improvement plans. But there's still -- when we look at what's to come, we're very excited. And then finally, at about $175 million in adjusted EBITDA, that's 33% growth year-over-year, and we expanded our EBITDA margin to 14% of total revenue. So we're really proud of all of the work that the company has been -- that's been underway. And now looking to 2025, we've guided for another year of mid-teens revenue growth. We're expecting to grow revenue by 16% to 18%. We're anticipating about that 3% growth in same-Shack sales. We're goaling ourselves and with our pipeline in place, we're targeting opening 80 to 85 new Shacks across our company-operated and our licensed business. About 45 of those will be company-operated. That's 14% to 15% year-over-year unit growth, also among the best in the industry. And with all of the work that we have in place, and improvement in the business overall. We're expecting another year of restaurant profitability margin expansion by about 60 basis points to approximately 22%. And then last but not least, we're expecting to grow our adjusted EBITDA by about 14% to 20%. So mid- to high teens on that side to $200 million to $210 million. So a lot of great stuff underway here. We're really excited about the strategic priorities and our path to execute.

Yes. I mean -- and I would just close with -- our strategy is about driving top line sales growth while still maintaining or growing our margins. What the thing I get really excited about is the marketing team, it's like a gorilla marketing team, right? We don't have big national media budgets, but they're out there driving top line sales growth, leveraging surgical, targeted promotions to drive transactions, while we're still growing margins. And that's going to be our goal. And I think we've evidenced over the last few years that this brand continues to have pricing power, but we hold that very closely. Our goal is to minimize the amount of pricing we have to take. We will mitigate inflation to maintain our margins, but we want to continue to improve our value perception in the marketplace. And the things that I've talked about that are going to help our operations, help our speed like combos and other things that we're doing on our menu management side all have intentionality around improving the value perception while continuing to enhance our margins. So with that, I want to thank you all for being here today. I want to thank you for your interest in our company and our brand. We have an amazing executive team. We're building not just a restaurant pipeline, but a talent pipeline that's going to help us achieve these lofty aspirations we announced today. So thank you all.

Thank you.