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

Great. So welcome, everybody, to our conference and to our fireside chat with Shake Shack today. My pleasure to have Shack's CFO, Katie Fogertey, with us today. The growth story at Shake Shack continues to evolve, and there are a lot of things to be excited about. A strong start to the year, plenty of news in the back half of the year and also into 2026. So looking forward to our conversation in the next 35 minutes. So welcome, Katie. Thank you for joining us today.

Thank you so much for having me here. Nice to see everybody.

Great. So why don't we start with kind of a quick recap of what has happened so far this year and into quarter-to-date? So particularly interested in what drove the acceleration in July, including the inflection into the positive traffic growth that you've seen in the month. So any insights there?

Sure. I would say the story of the year really, as we're rounding out into the third quarter here, it's gone by quite fast. We had a lot of momentum coming out of 2024. And we did a lot on improving operations and kind of building up the very basic muscles around marketing. And then really coming out of the election -- sorry, inauguration and into January and February, the industry broadly had weather problems. There were some shifts in the way the populations were mobility patterns and the industry broadly just came under more pressure. And we certainly were subject to that as well. We outlined to everybody our plan for how we are going to drive sales this year. And it's quite simple, actually. One, a culinary road map. And this is something that Rob Lynch, our CEO, has been very passionate about. He saw this as a core opportunity when he came in about 1.5 years ago. And he looked at the way that we had been rolling out culinary innovation across the company and saw a great opportunity to get much more structured about it to get much more planful, thoughtful, and also test these LTOs and culinary innovation with our guests first. So we had a better idea of how they would impact our comp. And the great news is he's hired up a team. It's very strong, and we quickly put into place an 18-month forward culinary calendar, and you're just starting to see the impact of that today. And that goes to our July comment, too. We had run prior state without having that kind of muscle in place and that structure, it was often kind of a rush to figure out what was going to be on the menu next. That was the reason why we ran Black Truffle for 7 months, great LTO, don't get me wrong. Everybody loves it. But we didn't really have any food news or newness to the menu, and that really could be seen in our comp trajectory in the first part of the year. So really, what you saw in July was the momentum around our Summer BBQ Menu. We had a new shake, Dubai Shake launched everywhere. And we started to test a little bit more around different ways to drive sales. We talked about this on earnings, really coming out at the very, very end of July and into August. We're investing more in media, and that's the next leg of our growth here. So number one -- well, even taking a step back, number one is solidifying our operations, and we've done a ton of work on improving our operations, getting tighter on scheduling, making sure that we have the great guest experience that our order accuracy is up, that our wait times are down, that we're really humming on that side. Then, taking that to the culinary side, make sure we have exciting things to serve our guests, and now it's about amplifying that through marketing and new media, which we started in August and are continuing into September.

Great. We'll delve more into all of those things. But first, kind of last quarter, you did point to some pressures in some of the urban cities like L.A., New York and D.C. Have these markets improved in July, similar to the general fleet that you've seen?

We are definitely seeing a much bigger pickup in share gain and momentum in markets outside of New York and D.C. And we outlined in our shareholder letter, there were a number of markets where we had at least high single-digit comps. And these are major markets. It's Denver, Colorado, Los Angeles. We have Dallas, Houston, Miami, Orlando, just very, very broad-based. As many know, we have a larger concentration in New York and D.C. relative to the industry average. And there's really been some unique pressures in New York and D.C., in particular, around international tourism is down in these markets. Macro pressures in D.C. have also been kind of weighing on broader demand. So we kind of look at the health of the brand, the health of the company, our future opportunity ahead, which, by the way, 99 points plus of our pipeline is in markets outside of New York and D.C., and we see just such great momentum happening and success from all of the strategies that we have to drive the business. And cycles turn, markets turn, and we believe that we're also well positioned to win when the macro turns in our favor in those 2 markets.

Great. So let's just delve into first, the 3 priorities that Rob announced, when he came in as CEO, was driving healthy same-store sales growth, building more Shacks and also improving profitability. So let's kind of delve into all of those components. Let's start by discussing some of your recent menu innovations. Fried Pickles is quite exciting. Summer BBQ, Dubai Chocolate Shake. How did these LTOs perform and impact traffic and check growth?

So a great LTO has a big halo around it, right? And they can be traffic drivers. Certainly, you want that to bring in both new guests and also encourage guests who haven't visited in a while to come back. They also can be mix drivers. And in the case of Dubai and Summer BBQ and in Fried Pickles, you kind of saw a mix of all of that. And that's really what we are getting at when we are testing these things with consumers ahead of time. We get to really see, does this particular product have the opportunity to be a mix driver? How much traffic will we expect to get from this particular item? How do we want to cadence it? So if we know that this -- a particular item is going to drive a lot of traffic, how can we put that on the calendar in a way that we will lap something that already drove a lot of traffic so that we're smoothing out the comp on that side. And really, when I look at the culinary innovation that's coming, we have a new LTO that's coming next week, all of those things together just really give a great comp backdrop.

Great. You mentioned Dubai Shake is helping to attract new guests into the brand. So what are some of the major differences in the demographics or spending patterns of those guests? How are you converting them to more regular guests, yes?

Yes. I mean, Dubai is a very exciting shake. This was a menu innovation. We actually have had several of these where it was born in the international markets, and we were able to port it over to the U.S. and have great success. Even our chicken sandwich was something that we had developed in our international markets, and we're able to bring it here and it is such a great hero on the menu today. And with the shake, we're seeing guest acquisition, more digital app acquisition as well on the back of it. And it does tend to skew a little bit younger in demographics. And, in particular, when we're able to drive our guests into our app, highest long-term lifetime value of customer, that's a great way for us to continue to connect with that guest over time. That's what we're really trying to build here.

Yes. These LTOs were coupled with some really compelling promotions, too. You had the Burger month, you had the Father's Day promotion. And on the other hand, there were some concerns around margins and intensified promotions. So could you speak to that a little bit?

Sure. I mean this is where having a good comp plan comes into play and why it's so important and strategic to running a business. But we do a balance between our own promotions, menu innovation and other -- now we have media as a quiver in our kit to be able to drive the business. And on the topic of promotions, we've run a number of very successful promotions this year. Some of them have really upped brand awareness, have brought in brand-new guests. One of the ones that I'm actually most excited about is our $1 drink promotion that we're running through our app and the massive app downloads that we're getting on the back of it. But all of that together is really to drive the business, bring in new guests and then continue to connect with them and give them more reasons to come back. The way that we have been structuring these promotions, though has been margin accretive. And that's why you'll often see you can get this item with a particular level of spend or when you do this challenge, when you come 2 times in a month, you'll get something as a bonus for the third time for coming back. And these are a small part of our checks. It's still kind of in the mid-single-digit percentage of our checks overall. And the industry tends to promote at a much bigger scale than that, but we're really happy with what we're seeing, and we're balancing it out with product innovation and media. And just even in July, we didn't have a promotion. That was just culinary driving that angle. And you'll see us flex in and out as we need to balancing culinary innovation, media plans and promotions, all to drive both top line and bottom line.

And without giving out too much, how does your new culinary calendar look like for the remainder of the year in heading.

Delicious. Delicious, no, I'm really, really, really excited about all the things that are coming to the menu, like I said, on the 9th, we will be launching our new LTO. And then you're going to see some side innovation around that. I don't know if anybody saw the post that we put out when Taylor Swift got engaged, but we do have some very exciting side innovation coming that we were able to tag on that very fun moment. And then we'll have additional menu items coming later this year and in test in various markets.

With all of this exciting innovation, can you talk about kind of the implications on advertising and marketing? You did mention exploring paid media. Could you walk us through kind of your approach here? And what are some of the key outcomes that you would need to see to scale the initiative in a more meaningful way?

Sure. So there's basically -- just to level set, we're not going to be talking about business intra-quarter. There's no change to our guidance, and we have complete confidence in our ability to achieve the guidance for the quarter that we gave on earnings. But to remind everybody, when you -- when we gave the guidance for the third quarter, we embedded as a pickup in our G&A expense. And the level that we've guided to split over the third and fourth quarter evenly does reflect, especially in the third quarter, an increase in advertising expense, specifically around media. We are running a couple of campaigns. Right now, we're running one around promoting an LTO menu item, Dubai Shake. The second one was around our $1 drink platform. And we're really excited by what we're seeing on that front. Both of those are 2 completely different verticals of how we're communicating and what that message is. But we are seeing that when we increase spend in that, we are driving the desired outcomes.

Great. So mindful of the fact that you guys are in early stages, you did launch kind of the early version of the loyalty program in early June. How does this inform your plans going forward? So long term, would this be an integral part of kind of building customer loyalty as well as frequency?

Yes. So taking a step back just for everybody, if anybody is newer to the story. So Shake Shack does not have a capital L loyalty program, like many of us think of when we think of stars and points and all of that. We developed an app in 2018, and as we have done more to build our connectivity with our guest base, we're rolling out guest recognition this year. We're going to have the ability to connect the piping between the kiosk, which is our -- we have kiosks in nearly all of our Shacks, and this is our largest and most profitable sales channel with our app. And we are also actively driving a lot of app downloads and really, really driving that channel because we view this as a strategic area of growth for us over the long term. This year, we also started to roll out some added incentives for people to use the app. So one of them that you just kind of mentioned was this multi-visit challenge. And you might notice this in your app right now. I actually just won my challenge, so I'm very excited about it. But if you come 3 times in a month, you get a free burger. And that's my challenge. You guys might have a different one. We try to tailor them to the individual person to drive the desired outcome, but this is our approach of getting more and more targeted to help drive frequency. Frequency probably is one of our greatest opportunities out there. We don't necessarily have a brand awareness problem. A lot of people know about Shake Shack. A lot of people are very excited about Shake Shack. I mean just look at the way that we open up in new markets and new restaurants. There's lines out the door, and we have very strong AUVs. But where we see our greatest opportunity is in incentivizing people to use our app and to come back more often, and that is one way that we're doing it.

Great. So combos, you rolled it out in all of your 46 drive-thrus. What are kind of your early observations here just in terms of speed of service, average ticket or beverage attachments? And what are some of the things that you need to see to potentially roll it out in other channels as well?

Yes. So we have combos live in our 46 drive-thrus, which is really exciting. And we've been testing various iterations of combos over a couple of years now. And where we've landed on is a platform where it's very simple when you come up to the drive-thru. We have digital menu boards at the drive-thru. And we have -- I think there's probably 6 or 8 options that make it very clear for our guests to come through and quickly order. And that's really where one of our main objectives is to allow our guests to get through the drive-thru as quickly as possible. What we're seeing on the side is we're definitely -- our objective of selling more beverages is being achieved. We're very happy there. We are having a higher order accuracy, in particular, because we're not bogging down the kitchen with a lot of customizations on that front. And the team is just continuously getting better and evolving and iterating on this platform.

Great. So rolling all of this together, how should we think about price, mix, traffic as we think about this year?

This year. So we are very confident, again, in the guidance that we provided for low single-digit comps. That pricing algorithm is, call it, approximately 2% price in time periods, where, as we're in right now, beef inflation is high. There are added pressures -- cost pressures on the business, we might look to take a little bit more than that, but definitely not still being mindful to drive efficiencies through our supply chain in other ways. And then the remainder is traffic, obviously, and then mix through culinary.

Okay. Great. Let's move on to opening more Shacks, right? So walk us through kind of your unit growth expectations in the second half of the year and into '26. What is driving this acceleration that kind of provides that confidence in sustaining that strong momentum on the unit growth side?

Yes. So I don't want to put words in Rob's mouth, but if he's here, he is working very closely with him over the past 1.5 years. One of the things that he's most excited about at Shake Shack when he came in here and still remains very excited to this day is this huge white space opportunity that we have. And he very quickly realized we needed to make some big investments, not big investments, I shouldn't say big, some smart strategic investments in our development team to add more resources so that we could identify more sites, so that we could sign more leases, so that we could work on more projects. And we have been -- and he was very quick to do this right out of the gate. And we have built a very solid pipeline. We're already planned out through this year, through next year, and we're already signing 2027 deals, and really, without that foresight, we would not be in the position to accelerate our development here. And then when you take on -- so part of it is about just getting these more sites and making sure that they're the right ones. We've done a lot of investment over the past couple of years in data analytics in order to really have a robust sales forecast and plan the development side. Then when you think about what we've done on our unit economics as well from lowering the build costs, we're well on our way for another year of 10% reduction in our build cost this year. Our restaurant margin expansion story is incredibly strong. And then you put on top of it, what we are doing to drive sales in the business through media, culinary and operations. It's a very powerful combination of -- it's a powder tag basically. And really, the only limiting factor to our growth is our ability to train up enough leaders to run the next Shacks.

Yes. Let's talk a little bit about the new store productivity. How are your '24, '25 cohorts doing?