Shake Shack, Inc.

Greetings and welcome to the Shake Shack first quarter 2020 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Rick Powell, SVP of Finance. Please go ahead.

Thank you, Hector, and good evening, everybody. Joining me for Shake Shack's 2020 first quarter conference call is our CEO, Randy Gurusi, and President and CFO, Tara Komal. 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 gap measures are available in our earnings release and the appendix to our supplemental materials. Some of today's statements may be forward-looking, and actual results may differ materially due to a number of risks and uncertainties, including those discussed in our annual report on Form 10-K filed on February 24, 2020, and two current reports on Form 8-K filed on March 17 and April 17, 2020, respectively. 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 had access to our first quarter 2020 earnings release, which can be found at investor.shack.com in the news section. And additionally, we have posted our first quarter 2020 supplemental earnings materials, which can be found in the events and presentation section on our site, or as an exhibit to our 8K for the quarter. In light of the ongoing environment, our supplemental materials also include certain financial information related to the current quarter. I'll now turn the call over to Andy.

Thanks, Rick, and good evening, everyone. We hope you, your families, and our entire Shake Shack community are all staying safe and healthy during this crisis. I've had the privilege of leading this company through many challenging and many incredible moments. I think we'd all agree this has been an unprecedented test for our world and for our teams. Our message across the company has been consistent, to lead with hope while acting on reality and to make the necessary choices today to ensure our strength and growth continue for years to come. We're confident we've increasingly taken those steps since this crisis began and we're pivoting the business now to be sure Shake Shack captures the opportunity to evolve into an even stronger company as we come out the other side. Today, we'll briefly talk about Q1, which prior to the impact of the COVID-19 outbreak was in line with our expectations and previous guidance. We'll focus more on Shake Shack today, specifically our teams and the important positive momentum of our operating models and digital initiatives. I want to begin by talking about where the company is right now, nearly halfway through our second quarter. Sales have been steadily increasing every week from their challenging lowest point at the end of March. In the last week of our third period, The week before, the week ending March 25th, we experienced numerous shack closures, greatly reduced operating hours, and sales in the comp base averaging down 73% across the portfolio compared to the same period last year. However, since that point, and as we've shared in the supplemental debt provided, each week we've seen encouraging and steady increases in both same shack sales and total sales nationwide. Driven by growth in our own digital channels, the expansion of integrated delivery partnerships, and our shifting operating model. In our most recent fiscal week, the weekend at April 29th, same shack sales were down 45% compared to the same period last year, as sales continue to improve to varying degrees. From a regional perspective, despite all regions being significantly impacted, there are some notable differences in performance, as well as the speed with which some markets are demonstrating improvements, with New York City, not surprisingly, still acutely impacted. Some shacks in the comp base have, however, resumed year-over-year growth. Some are down mid-teens, while others are still down as much as 70% to 80%. And while these sales in aggregate are still a material reduction from pre-COVID-19 levels, we're encouraged by the consistency of week-to-week improvements and the clear signs of a path to recovery. So how does a shack operate today? Well, up until this point, every open shack is operating without a dining room. Thank you so much for joining us. has been a part of our digital innovation strategy, have been the key to our ability to operate in an environment like this. As a result, in quarter two to date, through the week ending April 29th, digital channels represent approximately 80% of our total Shack sales, with our Shack app and web channels showing the most significant growth, nearly three times higher than last year. As part of this, we're also seeing strong growth in a number of guests purchasing for the first time on our own digital channels. Thank you for joining us. and we've taken this time to adapt our strategy to expand our integrated partnerships with more marketplaces, including Uber Eats, DoorDash, Postmates and Caviar, in addition to our previously exclusive relationship with Grubhub. Our intent by doing so is to provide maximum access to Shake Shack during and beyond this crisis and to drive both near and long-term sales. All the strategic imperatives for delivery we discussed over the last year remain important, leading with a commitment to improving the guest experience building a long-term and engaging direct relationship with those guests. Moving forward, we expect to continue to partner with all major delivery service providers to ensure our guests have the maximum amount of choice wherever and whenever they want their shack. In addition to these digital strategies, we've been coming up with other new and creative ways to engage with our guests and give them access to their shack. One of these was the launch of a cook-at-home shack burger meal kit in collaboration with Gold Belly, curated online marketplace for regional, and Artisanal Foods. Ready to cook boxes are shipped with all the staples needed to recreate a classic shack burger at home. This has proved to be a winner with over 12,000 kits sold so far and has created significant amount of positive market exposure in the process. In terms of menu innovation, our focus has been one of simplification and streamlining as we manage through this challenging operational period. As a result, we've temporarily removed a couple of non-core items from our menu all as previously planned LTOs, and we'll continue to evaluate the best timing for launch of additional menu items, such as hot chicken and more. We continue to test and create in the background, and more to come here as we move through this period of recovery. Throughout all of this, our number one priority has remained, safeguarding the health of our team, guests, and communities while we work to keep our shacks open to the best of our ability. Our team has been heroic during this time. As of April 29th, all but 17 of our domestic company-operated shacks remain open only due to the entrepreneurial spirit and dedication of our shack leadership, our team members, and our committed home office support. I'd also like to thank our supply chain team and all of our suppliers around the country who have gone above and beyond to ensure our shacks are stocked with the necessary supplies and equipment they need to protect our employees and our guests. We've taken significant actions to ensure maximum safety for our team members and guests in these times, such as increased cleaning, sanitizing, handwashing protocols, safety distancing, gloves and masks at all times. During this time, we also need to make some tough decisions for the long-term health of our business, which included the need to furlough over 1,000 team members across the Shacks and our home office. We drastically reduced discretionary expenditure, and our home office and executive teams have taken pay reductions. I'm proud to say that we committed to paying 100% of our furloughed team members medical insurance through July 1st and have guaranteed full pay for our shack general managers, even if their shacks are closed. The best news is that as sales have continued to steadily increase over recent weeks, we've gradually begun to bring back a number of our furloughed team members, and our recruiting function is hard at work as we restart hiring in shacks for a continued gradual recovery and a return to the growth we expect ahead. To say thank you to those in our shacks every day in these difficult times across all company-operated shacks nationwide, we've increased hourly wages by 10% through June 3rd and guaranteed bonuses for the second quarter for all active shack managers. Throughout our licensed shack business, it is a country-by-country and day-to-day story. We're working closely with our domestic and international licensed partners as their businesses remain deeply employed. We're working closely with our domestic and international licensed partners as their businesses remain deeply impacted. As to be expected, each region is a tapestry of different challenges. All eight of our stadium businesses are closed for the foreseeable future. Eight of our 13 domestic airport locations are closed, and with those remaining open, doing a fraction of normal sales, with travel overall deeply restricted. Across the world, the vast majority of Shacks are operating with reduced hours and alternative models similar to the U.S., After a blanket closure, we've just reopened two of our 12 shacks in the UK. In our largest region, the Middle East and Turkey, many shacks remain closed, and those open are seeing dramatically reduced sales. In Mexico, we have just two of three shacks open for takeout and delivery only. Across Asia, all 13 shacks in Japan remain closed. Singapore and the Philippines are open in modified formats, but all are facing significant sales reductions. There is, however... Some directionally positive news on the horizon. Our shacks in Korea, China, and Hong Kong have reopened dining rooms in a limited capacity and see mostly increasing sales, albeit slowly. Needless to say, we do expect our licensed operations to remain impacted for an uncertain period of time, and the significant development plans we had for this part of the business in 2020 are temporarily paused. But it is important to remember that that our global licensed business has secured real estate in some of the world's best locations. We believe great locations stand the test of time, and it's just a matter of when, not if, they get back to growth again. We're working closely with our dedicated and world-class partners as we move to recovery and then back to growth, sharing best practices and rebuilding together. Looking ahead, what does Shake Shack look like through these next few months and into the future? and how do we capitalize on this moment to strengthen our company? We're starting to plan for dining rooms, albeit in a restricted and modified capacity, to slowly reopen regionally. We'll be working closely with local authorities, CDC guidelines and our landlords in this process. We'll be clearly following all social distancing and other safety restrictions and recommendations. We expect that the majority of our increased cleaning and sanitation procedures are here to stay. and we plan to move thoughtfully through this next phase of operations in order to keep our teams and guests safe at all times. We expect dining rooms where we choose to reopen to be operating with significantly limited seating capacity. Social distancing requirements will result in cashiers and kiosks also operating at reduced capacity while we shift guests to mobile and contactless pre-ordering. We'll be clearly identifying separate areas and spacing for both ordering, pickup and delivery couriers. We're fortunate that many of our shacks have outside seating will likely have some degree of specific adjustment to operations in order to comply with all guidance and regulations and ensure safety remains the utmost priority. And we're thrilled to announce today the beginning of a plan to add what we're internally referring to as the Shack Track. This is a prime example of how we intend to use the learning from our recent business pivots and turn them into long-term improvements to the Shack experience. Shack Track will result in interior and exterior pickup windows or new pickup areas to improve flow and encourage digital pre-ordering. We've been studying current shack layouts and future shack designs in order to identify where this model can be quickly added. It may take time in many forms, but all towards the goal of continuing to build the community gathering places the world needs, while adding a level of convenience, safety, distance, and frictionless pickup to meet the needs of our guests. In the supplemental deck, you'll see a rendering example of what this could look like in both a walk-up and a drive-up scenario. When we recently renovated our Upper West Side and Grand Central locations, we started to implement this thinking, but the current moment has reinforced how necessary and beneficial this strategy will be for Shake Shack. Across urban, suburban, shopping center, and pad site locations, we expect these new pickup points with both interior and or exterior access will support our goals of convenience while allowing Shacks to be These plans will take time, but will bolster the opportunity we believe they represent. In the meantime, we're going to continue to invest in and improve the end-to-end digital experience, including order-ahead functionality through our app and web channels, as well as a delivery experience, which we still plan to ultimately integrate within our own channels over time. Earlier this year, we shared our plans to develop a new and improved mobile-first digital experience, starting with the rebuild of our web platform and then extending to our app. The intent is to create an experience that will be even more personalized, more engaging, easy to use, and that will allow us to have an increased control over direct messaging, marketing, and to create an even stronger relationship with our digital guests. There's no doubt that this period of time has only reinforced these channels will be key avenues in which we can capture future growth, and we fully intend to do just that. On the subject of new shack development, during this COVID-19 crisis, we have paused all design and construction of new shacks. We are committed to getting back on track with those development plans and the execution of our broader growth strategies as quickly as possible, and our teams are poised to do so when the time is right. In the first quarter this year, we opened four domestic company-operated shacks, and we have an additional eight shacks where construction was either complete or near complete when COVID-19 hit the U.S. We plan to fully complete and open those shacks as soon as it makes sense to do so, albeit today we do not have firm timing at the moment. Additionally, we have another nine shacks in a partial state of construction, but that are also currently paused. We have a strong pipeline of future shacks with signed leases, some already in design. We've also identified a number of potential future sites. At this point, it's too early to give any specific guidance around the timing or number of shacks for either 2020 or beyond, but we will update you as our planning here evolves. We believe with the strongest balance sheet we've ever had, particularly following our recent equity raise that the Shake Shack brand is in an incredibly strong position as additional real estate and development opportunities become available. We'll be ready to capture the white space ahead, what could be a forever changed retail and restaurant environment. We're also taking this time to look at the opportunity to improve terms with our current portfolio within certain leases in process and to capture some great real estate and what we expect to be an attractive market for us. We fully intend to keep building those necessary community gathering places the world will need, while evolving our model to be more convenient, more rewarding, and more accessible than ever. Now I'll turn it over to Tara to give some more color on our first quarter result and current trends.