Shake Shack Inc. (NYSE:SHAK) Q1 2023 Earnings Call Transcript

Shake Shack Inc. (NYSE:SHAK) Q1 2023 Earnings Call Transcript May 4, 2023

Shake Shack Inc. beats earnings expectations. Reported EPS is $-0.01, expectations were $-0.08.

Operator: Greetings and welcome to the Shake Shack First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Annalee Leggett, Director of Investor relations and FP&A. Thank you. You may begin.

Annalee Leggett: Thank you, and good morning, everyone. Joining me for Shake Shack’s conference call is our CEO, Randy Garutti; and CFO, Katie Fogertey. During today’s call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available on our earnings release and financial details section of our shareholder letter. Some of today’s statements may be forward looking, and actual results may differ materially to a number of risks and uncertainties, including those discussed in our annual report on Form 10-K filed on February 23, 2023.

Any forward-looking statements represent our views only as of today and we assume no obligation to update any forward-looking statements if our views change. By now, you should have access to our first quarter 2023 Shareholder Letter, which can be found at invest.shakeShack.com in the Quarterly Results section or as an exhibit to our 8-K for the quarter. I will now turn the call over to Randy.

Randy Garutti: Thanks, Annalee. Good morning, everyone. Thanks Anna, and good morning everyone. 2023 is off to a strong start with first quarter results ahead of our expectations as we grew sales, expanded margins and remain disciplined on expenses across the company, including G&A and CapEx investments. As we execute against our strategic priorities, we generated total revenue of $253 million up 25% average weekly sales of 73,000 up by more than 7% year-over-year. System-wide sales grew 28% year-over-year to nearly $395 million as our licensed business globally posted our strongest quarter ever. Same-Shack sales were up 10.3% with positive traffic of 4.8%. And as we’ve shared, the team has maintained an intense focus on growing profitability and we executed on that goal to bring restaurant margins up to 18.3%, a 310 basis point improvement over last year.

We opened six company operated and seven licensed Shacks in the quarter, and we have 25 Shacks currently under construction on our way to opening about 40 new company operated Shacks this year. Based on our increased pipeline and strong execution in our domestic and international license business already this year, we’re raising guidance today to 30 to 35 Shacks expected to open throughout 2023. Quarter-to-date solid momentum has continued with AWS and fiscal April rising to 77,000. Same-Shack sales, about 4% and tracking well towards increasing our Shack-level margins back above 20%, which Katie will talk more about in a bit. Now I want to provide an update on how we’re executing our strategic plan. We’re really proud of the team’s progress in each of our priority areas.

First, we’re focused on recruiting, rewarding and retaining a winning team. It’s been a challenging few years for staffing in our industry and this quarter our team showed solid progress. We believe the macro hiring environment while still demanding, has begun to improve. And with that backdrop and the new tactics of our people team, we’ve improved application flow, turnover and retention since last year. Our increased pay benefits and opportunities for leadership development at all levels are resonating with our teams. There’s no question this will translate to better performance overall. Each of these metrics contributes to better throughput, optimizing sales, and increasing our operating profit while building a bench of talented leaders to achieve our growth goals and provide real advancement for the lives of our team members.

Our work here is never done and we plan to double down on these efforts to expand on this improvement. Our second priority is our relentless focus on the guest experience, with the people’s improvements I just mentioned. As a strong foundation, we can better execute our core operations focus menu strategy, and digital tools. This quarter we captured strong performance and guest satisfaction with our premium white truffle menu at our innovation kitchen and throughout our supply chain, we are constantly testing new and exciting menu items for our guests that highlight our commitment to premium ingredients and the kind of menu items that only happen at Shake Shacks. Leave have a strong lineup. Through the remainder of the year, we’re continuing on a path of leading with innovative culinary offerings that use premium ingredients to drive frequency and new guests.

This week we launched our new Veggie Shack nationwide. It’s a delicious only at Shake Shack Burger Patty, packed with real food, full of mushrooms, sweet potatoes, carrots, farro, quinoa topped with American cheese, crispy onions, pickles, and shack sauce. We also launched our non-dairy frozen custard shake nationally. In addition to our longtime guest favorite Truffle Burger, we believe these options can target current guest frequency and capture new guests over the long-term. This summer, on top of the success of our premium lemonade category, we’ll be launching Caffeinated Shack Lemonades for those guests looking for our classic lemonades with an extra zip. Stay tuned for more to come this year. And just one more fun brand note, our team continues to execute dynamic chef collaborations, regional marketing programs in our local communities and attract valuable national media attention.

Last month we teamed up with Universal Studios as they took over our Brooklyn Shack for the launch of the Super Mario Brothers movie, movie Premier. The event was [indiscernible] by Chance The Rapper and helped kick-off the extraordinary success of the movie. The team continues to target national media partnerships as we look to grow our brand and footprint. Third, we’re executing on a targeted development strategy for growth. As we’ve discussed and you’re seeing around the industry, persistent inflation and construction costs, permit delays and equipment availability continue to impact our openings and our near term returns. But the team is making significant progress on accelerating pipeline prototype design and new Shack openings. Year-to-date, we’ve opened nine Shacks with strong sites in Walnut Creek, Portland, Oregon, Jersey City, and more.

I want to take some time today to share some of the work the team is doing to improve our returns on Shack builds over the long-term. This year we expect to open up 15 drive-throughs, and now with this higher mix of drive-throughs and ongoing inflation pressures, we do expect our build costs for the class of ’23 to be somewhat above last year’s average. While our core Shacks are impacted by inflation, most of that system average cost increase is due to our commitment to drive-throughs that cost more to build than our traditional core Shacks. So what are we doing about it? Well, since the drive-through project has begun, we’ve learned a lot and we are honing-in on cost reduction elements of the design. We’re refining templates for efficient and more standardized operations.

This year we expect to reduce drive-through costs by about 10% versus 2022. And in future years, we’ll be rolling out new and tighter prototypes for drive-through and core Shacks focused on combining the Great Shack experience we’re known for at a reduced cost and ability to scale. Long-Term costs will vary depending on sites and geographies that we target as an example; next year we may spend more on certain drive-throughs in the New York Metro and California markets, but we correspondingly expect a strong return on higher sales there as well. We’re working on our next generation of designs with an aim to execute on additional cost saving measures. We’re going to optimize the size of the Shack-box, how many seats we need, standardized kitchen designs and building materials that can reduce total cost of future Shack-classes.

But this work takes time to roll through the system and while you won’t see an immediate impact this year, this intense focus balanced portfolio, Shack-types and new next generation prototypical designs will add up to more savings over time on our cost to build and overall returns. We’re committed to further improve this part of our economic model and we’re really excited about what’s ahead. But regarding the license business, we saw extraordinary growth and execution in the first quarter and we expect that trend to continue. Our team has performed exceptionally well in China, and our domestic business continues to grow. We continue to expand our global footprint as only the Shack brand can do. We’re unlocking new regions and formats with the introduction of development agreements in Israel and Canada, as well as new Shack’s opening in roadside travel plazas throughout the U.S. I was fortunate to join our teams on a multi-country Asia trip this spring, and I had the privilege of welcoming our first in Bangkok to an incredible crowd with strong sales.

Since opening, I had the chance to connect with our teams in mature markets such as Singapore and Japan where our growth continues and to plan ahead for our upcoming opening in Malaysia and potential other markets in Southeast Asia. There’s a lot that’s probably underappreciated and undervalued about this part of the Shack’s story and our strategy. My hope is that our shareholders take the opportunity to visit some of our international sites. We take great pride in the amazing brand we share globally, and I’m really thankful for our team members around the world continuing to execute and standing for something good. Wherever Shack Burgers are found, our fourth priority is being even more profitable in our Shacks ahead of our own expectations.

We delivered 18.3% Shack-level off profit this quarter. We showed strong progress on our key initiatives including driving sales, especially in our own channels, labor efficiencies, off-premise profitability and managing controllable supply chain and other operating expenses. There’s still much work to do and there is risk around the macro environment and continued cost inflation this year, but with a plan the team has put in place, we’re guiding Shack-level off profit of 19% to 20% for the full year and we see the opportunity to return over 20%. Katie will share more details on the work here in a bit. Finally, the fifth pillar of our plan is we build an enduring business. We are committed to investing with discipline. We’re deploying capital towards strong return — returns in four main areas.

We’re going to build Shacks, update our current Shacks, invest in our digital infrastructure and structure our home office capabilities to further support our restaurants. We remain confident that we can meet or exceed our long-term unit, cash on cash return targets over time by growing sales and profitability and lowering development costs, all of which we emphasize in our strategic plan. We’ve got the right plan in place. We’re pleased to see progress taking route. I’m now handed off to Katie to share more about the details of the quarter and expectations for the rest of the year.

Katie Fogertey: Great. Good morning everyone. We are proud of our strong results this quarter that are a direct outcome of our team’s solid progress on our 2023 strategic plan. We grew revenue by 25% year-over-year as our teams executed well on recent openings and drove higher sales in our existing company operated and licensed Shacks. We also showed strong improvement in our restaurant margin this quarter, expanding it by 310 basis points year-over-year to 18.3%. This is the highest first quarter restaurant profitability margin we have posted since Covid and we generated record high quarterly restaurant profit dollars and adjusted EBITDA in what is typically the softest sales quarter of the year. We accomplished this despite the many profitability headwinds we face, including the large number of Q4 and q1, new Shack openings, ongoing inflationary pressures and mobility measures and key markets like New York City still deeply impacted from Covid.

And we did this by executing on our plan with some important highlights and actions, including tactically increasing menu prices to protect margins against broad-based and persistent inflationary pressures, by driving sales into our own more profitable channels by showing better cost controls over our other operating expenses and by bringing more Kiosks into our Shacks, driving efficiencies and other benefits. We are reassured by these results and we look forward to showing continued progress through the rest of the year. We understand the many macroeconomic risks that may further impact the restaurant sector and our results. However, our business has demonstrated a level of stability that now allows us to go back to our pre-Covid guidance practices and reintroduce full year guidance for total revenue, same-Shack sales, our licensed business and Shack-level operating profit.

We are also providing a new guidance metric with full year adjusted EBITDA. And as we continue to observe a normalization of our trends, we are reducing our urban suburban disclosures as regions are now a stronger driver of our performance compared to just the level of urbanity. So now on to first quarter results. Total revenue was $253.3 million up to 24.5% year-over-year. Shack sales grew 24.1% to $244.3 million. Licensing revenue grew 36.7% to $9 million. System-Wide sales reached a record high at $394.7 million, up 27.5% year-over-year with stronger sales and flow through as well as expense discipline. All points of our 2023 strategic plan. We grew adjusted EBITDA by 163.9% to $27.6 million. This quarter we generated 73,000 in average weekly sales and grew same-Shack-sales by 10.3% versus 2022 with 4.8% higher traffic.

Year-over-year price was up high single digit and our mix was driven by more guests returning to pre-Covid behaviors, including channel shipped into in-Shack and smaller group sizes. We have discussed that a key strategy for us to improve our restaurant profitability is to drive sales into our own channels where we are most profitable. We showed strong progress against that goal in the first quarter as we grew in-Shack, same store sales by more than 20% year-over-year and more than doubled our total Kiosk sales versus last year. Putting Kiosk into our Shack is another key way we have identified to improve our sales and profitability and we shared a goal last year to roll out Kiosk nearly all Shacks by the end of 2023. We are proud to report that we are executing ahead of this timeline.

Kiosk order values are higher than traditional cashier transactions. Kiosk is our highest margin channel and we are pleased with our return on investment here. We are also pleased with April same-Shack sales of about 4% versus last year; an average weekly sales of 77,000 up versus the 76,000 in March despite shifts in the spring break calendar. In April, we benefited from driving a strong mix of sales into our own channels and had a lesser benefit from menu price than we did in the first quarter. Our license Shacks also performed well this quarter as we grew sales 33.4% year-over-year to $150.5 million. We have had successful recent openings across the world and our partners have performed exceptionally well serving the strong guest demand in particular in the U.S. with airports and our new roadside Shacks as well as China and Mexico.

First quarter Shack-level operating profit was $44.7 million or 18.3% of Shack sales, 310 basis points higher versus last year. Despite margin pressure from a large number of recent Shack openings and persistent inflation, our strong performance this quarter was a direct outcome of progress on our four key priorities to improve our restaurant profitability. First, driving sales and prioritizing our channels where we are most profitable, we are leveraging targeted marketing strategies to drive awareness and visits. In addition, we are directing more business into our own channels by offering the lowest menu price there, early access to exciting LTOs as well as value added day-part promotions. Second, targeting labor efficiencies and growing throughput.

We’re seeing great benefits here from recruiting and retention tactics and better staffing is helping us to extend our operating hours and be more efficient. Kiosks are another important tool to help drive efficiencies in our Shacks. Third, improving off-premise profitability and other strategies to lower our control — to lower our controllable expenses from standards for condiments and lessing — lessening packaging and to go orders to premium prices on third party delivery, we continue to push forward opportunities to be more profitable and off-premise. We also showed strong progress here in the quarter with controlling additional elements of other operating expenses. As just an example, we were able to lower our repair and maintenance expenses that have been a meaningful headwind in prior quarters as we were able to secure additional needed supply for critical restaurant equipment.

And lastly, we will continue to take a strategic approach to menu pricing and supply chain opportunities. On this point, we are pleased with the guest reception to the price we’ve taken thus far and we’ll take approximately 2% price towards the end of the second quarter. This level is more in-line with our historical annual price increases and is needed to help protect our profitability against persistent food and paper inflationary pressures. But bottom line, we are encouraged by the margin expansion we delivered in the first quarter and despite the pressures we face, we have line of sight into further improvements throughout the year. Now into the components of restaurant profitability. Food and paper costs were $71.8 million or 29.4% of Shack sales 100 basis points below last year.

Our blended food and paper inflation increased by high single digits year-over-year, which was off-set by the benefit from a higher menu price. Additionally, with our focus on operations and investing in our people with training and retention programs, we were able to improve our waste impact versus last year. Our beef coast — cost rose slightly versus last quarter levels and were down high single digits versus last year. Importantly, nearly every other item in our food basket showed accelerating cost pressures versus last year, including fry cost rising by more than 20% and dairy and other cost increasing by double digit percentages. Labor and related expenses were $74.3 million or 30.4 percentage Shack-sales down from 30.7% in the first quarter of 2022 and up 150 basis points quarter over quarter as we continue to make investments in our valued teams needed to staff and operate our Shack.

As expected, we face profitability pressures from the 28 new Shack openings over the past six months, still working their way up to optimized staffing levels. However, in our more mature Shacks, our teams capitalized on strong sales and produced solid flow through as we execute in our plan to improve our restaurant profitability. Other operating expenses were $34.9 million or 14.3% of Shack-sales down a hundred basis points from the first quarter of 2022. With our improvement coming from our menu price, driving sales in our own channels, lower marketing expenses and better management of expenses like R&M. Occupancy and related expenses were $18.6 million or 7.6% of Shack-sales down 70 basis points from the first quarter of 2022, with the benefit really coming from higher sales performance.

G&A was $31.3 million or 12.4% of total revenue, excluding $1.6 million in legal settlements and professional fees. Adjusted G&A was $29.7 million or 11.7% of total revenue showing 90 basis points of leverage versus last year, as we invest with discipline. Pre-Opening costs were $3.6 million in the quarter and depreciation was $21.3 million. We realized net loss attributable to Shake Shack Inc., of $1.5 million or $0.04 per share. We reported an adjusted pro-forma net loss of $290,000 or one cent per fully exchanged and diluted share. Our adjusted pro-forma tax rate, excluding the tax impact of equity based compensation was 17.2%. Finally, our balance sheet remains solid with $293.4 million in cash and cash equivalence at the end of the quarter.

Now on guidance, which balances the strong underlying business factors we’ve seen so far in the first quarter with the degree of uncertainty around the consumer spending landscape and our current expectations for ongoing inflationary pressures, this range does not reflect any additional unknown delays to our development schedule. For the second quarter, we guide total revenue of $269.5 million to $274.8 million with $9.5 million to $9.8 million of licensed revenue. We guide for both our company operated and our licensed partners to each open approximately 10 new Shacks and for same-Shack-sales to grow by low to mid single digits year-over-year with high single digit price inclusive of the 2% price increase we plan to take at the end of the second quarter.

Covid has had a larger impact on our business than many of our competitors, and its lingering impacts on consumer mobility patterns, including work from home trends, has been a challenge for us. However, even with the pressures we face and persistent inflation, we guide second quarter Shack-level operating profit margins to reach approximately 20%, marking the highest level of quarterly profitability that we have delivered since the onset of Covid. And with more consistent trends we’re seeing in our business, we’re able to finally re reintroduce full year guidance for many metrics. For the full year 2023, we guide total revenue of $1.06 billion to $1.11 billion, representing 18% to 23% year-over-year growth with licensing revenue of $39 million to $41 million.

We expect to grow our system-wide Shack count by approximately 70 to 75 units this year, about 40 of which will be domestic comp company operated, and 30 to 35 operated by our licensed partners. Our guide is for same-Shack sales to grow by low to mid single digits with mid-to-high single digits price and consistent trends in our mix. Despite ongoing inflationary headwinds, we expect to deliver at least 150 to 250 basis points of restaurant margin expansion in 2023 and guide for a full year Shack-level operating profit margins to reach 19 to 20%. As we continue to execute on our strategic priorities, while we are focused on exceeding the spar, inflationary pressures are not debating in this guidance. We’re reflecting a degree of impact from potential consumer softness as well as beef inflationary pressures above and beyond what we’re experiencing today.

But all else equal. If both of these risks did not materialize, we see a path for our restaurant margin to surpass 20% this year. We are planning for food and paper costs to rise by mid to high single digits year-over-year, led by beef costs rising by a similar degree. We do not hedge on many components of our basket, including beef, which is the largest single part of our basket, and an area where we see a significant degree of uncertainty around the cost this year. In the first quarter, our beef costs were up just modestly versus the fourth quarter, and we’re down year-over-year. However, we have recently started to see our beef costs increase with broad-based challenges across the supply chain, and we anticipate this to be a material pressure throughout the year.

We are also seeing signs of even further inflationary pressures from many other items in our basket, including fries that are likely to cost us approximately 20% more this year than last. But above all, we are also making continued investments in our people as we focus on building up and supporting our winning teams. This is resulting in mid single digit year-over-year wage pressures taken together. Our operating backdrop is not easy. Inflationary pressures still remain, and we believe we have the right plan in place to navigate and continue to show higher operating profitability despite these continued challenges. In fact, even with the inflationary and potential macroeconomic pressures, we are planning to grow fiscal 2023 adjusted EBITDA by at least 50 to 70% this year to $110 to $125 million as we target achieving record profits this year.

We have line of sight to exceeding this range. However, this will be dependent on the degree of pressures we face throughout the year. We reiterate that our 2023 G&A guidance of $125 million to $130 million absent the $1.6 million in legal and professional fees that are excluded from adjusted EBITDA this quarter. At the midpoint G&A would be 11.8% of total revenue, more than 80 basis points of leverage versus 2022 levels. Other guidance points, equity based compensation expense of approximately $17 million, pre-opening of $17 million to $19 million, depreciation of $88 million to $93 million, an adjusted pro-forma tax rate, excluding the impact of stock-based compensation to be 16% to 18%. So thank you for your time and with that I can turn it back to Randy.

Randy Garutti: Thanks a lot, Katie. We’re really proud of the team and the way they continue to execute our strategic plan, driving sales and better profitability across our restaurants. We’re going to keep our focus on recruiting, rewarding and retaining this team relentless focus on the guest experience, opening great Shacks through a targeted development strategy, improving our margins and investing with discipline for strong returns. I spent a lot of my time recently in our Shacks with our teams and visiting our partners around the country and around the world. We’ve been listening, learning and working collaboratively across our teams to run better Shacks that are great investments and stand the test of time. I can tell you confidently that our brand carries a weight well beyond our scale today and we continue to execute a plan to scale our business for tomorrow.

Hope we see you all soon for a Shack burger. And with that operator, go ahead and open up the call for questions.

Q&A Session

Operator: [Operator instructions] our first question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.

Operator: Our next question comes from Michael Tamas with Oppenheimer and Company. Please proceed with your question.

Operator: Our next question comes from Jake Bartlett with Truist Securities. Please proceed with your question.

Operator: Our next question comes from Drew North with Baird. Please proceed with your question.

Operator: Our next question comes from Jim Sanderson with North Coast Research. Please proceed with your question.

Operator: Our next question comes from Maggie O’Hearn with Raymond James. Please proceed with your question.

Operator: Our next question comes from John Ivankoe with JPMorgan. Please proceed with your question.

Operator: [Operator instructions]. Our next question comes from Brian Harper with Morgan Stanley. Please proceed with your question.

Operator: Our next question comes from Jake Bartlett with Truist Securities. Please proceed with your question.

Operator: We have reached the end of our question and answer session. I would now like to turn the floor back over to Mr. Garutti for closing comments.

Randy Garutti: Just want to thank you everybody for taking time with us this morning and we look forward to seeing you soon at the Shack. Thanks, take care.