Shake Shack, Inc.

Greetings and welcome to Shake Shack's second 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, Senior Vice President of Finance and Investor Relations.

Thank you, Laura, and good evening, everybody. Joining me for Shake Shack's conference call is our CEO, Randy Garuti, and President and CFO, Tara Comont. 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 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, Form 10-Q, filed on May 4, 2020, as well as our Form 8-K business updates throughout the quarter and into July. 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 second quarter 2020 earnings release, which can be found at investor.shackshack.com in the news section. Additionally, we have posted our second 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. With that, I'll turn the call over to Randy.

Thanks, Rick, and good evening, everyone. We hope you, your families, and our entire Shake Shack community are all staying healthy and safe. Through this difficult time, I've been incredibly proud of our team. They have continued to show up, support each other, our guests, our communities, and our suppliers. They've had an unwavering commitment to excellence and hospitality in the face of an incredibly challenging operating environment. We owe them a debt of gratitude and remain committed to their safety, well-being, and ongoing development and growth. In the second quarter, we committed to pay an incremental $2.4 million across premium pay, guaranteed bonuses, and scheduling-related premiums to our teams in order to recognize the incredibly challenging conditions they're dealing with every day. We're happy to share that we'll be continuing to support our teams in this way into the third quarter. Looking at the second quarter, shack sales were down 39% compared to last year, while same-shack sales declined 49%. However, sales showed continuous improvement through the quarter. Sales in June did see a significant impact from temporary shack closures and reduced operating hours related to nationwide protest activity. Carl will go into this in further detail, but given the high growth nature of our business and relative small size of the comp base, yet again, same-track sales should not be the sole metric on which to understand current business performance. Total sales and average weekly sales continue to grow. And in fiscal July, we saw an 8% increase in average weekly sales compared to the prior period. As of today, approximately 95% of our domestic company-operated shacks are open, an improvement from the roughly 90% open at the time of our last earnings call. Less than half of our shacks are currently operating with interior dining, however, a reduction from a few weeks ago, as some previously reopened interior dining rooms have once again needed to close, as we prioritize safety, particularly in high-risk states. Of those that are open, they're operating at limited capacity and utilizing outdoor patio seating where available. Since the beginning of our company, we've built some of the world's favorite community gathering places. People's desire to gather with other people, share great food, hospitality, and the Shack experience is the very thing right now most challenged by COVID-19. While so much of our real estate footprint has been centered thus far in urban office travel and dynamic traffic driving sales environments. As these are the most impacted restaurants around the globe, that's what you see in our numbers. Our suburban shacks tell a slightly different story, with a less acute impact than our urban shacks, achieving a faster recovery and with consistently improving performance across all regions over the last four months. We continue to believe in the strength of the strategy that has led us to industry-leading AUVs and those deep connections we make with our communities. In the meantime, we're going to improve those shacks most challenged by the current environment while doubling down on the places around the country where we're learning, growing, and in some cases, doing even better than last year. We remain fully committed to our long-term growth opportunity, which we believe is as strong as ever. With a robust real estate pipeline that was paused earlier in the year, we're back in a place where we've restarted new shack development. We've opened four company-operated shacks in the first quarter and have successfully opened five shacks since the pandemic started, with a total of nine openings year-to-date. And we're pleased that this class is open with encouraging levels of sales and are so thankful to our teams for getting them open during these challenging times. and working so hard to become an essential part of their new neighborhoods. In today's ever-changing environment, nothing is certain, especially the permitting, construction and opening of restaurants. But assuming current conditions persist and no major work stoppages get in our way, we believe we expect to open between six and 11 additional domestic company-operated shacks, back-weighted towards the end of this year for a total of 15 to 20 for the full year. COVID-19 effectively cuts our development plan in half for this year from our original guidance. Looking ahead to 2021, we have a strong pipeline of leases. We're being proactive and opportunistic when it comes to real estate. With a strong balance sheet and a robust multi-year development plan, we are aggressively in market, looking to benefit from additional opportunities that we expect in a forever changed retail landscape. In our licensed business, total sales have also shown gradual improvement. as approximately 80% of our licensed shacks have now reopened. We successfully returned the shack unit growth with the opening of four new licensed shacks since the onset of COVID-19. All shacks right now in Hong Kong, mainland China, Japan, and Korea, with the exception of our Incheon Airport shack in Korea, are now open, although in most cases with limited hours and smaller capacity dining rooms. This is an ever-changing situation. And even this week, we've seen Hong Kong close and then Partially reopened dining rooms again due to recent spike in cases. In the Middle East, the majority of shacks have now reopened, but primarily for takeout and delivery with a slow reopening of dining rooms. In the U.K., approximately half of our shacks have reopened, but we're excited to be testing four new cloud kitchens in various neighborhoods throughout London, which has helped offset some sales loss and taught us a lot about this model in the U.K., Our domestic licensing business, Shack, Inc. Airport, Stadiums and Roadside, remains the hardest hit in our portfolio. With just half of our airport locations now open and operating at severely reduced sales, while air travel remains at a fraction of its pre-COVID-19 level. And nearly all of our domestic stadium venues remain closed. As an example of the dynamic and quickly evolving environment, our Terminal 3 location at the LAX airport will not reopen. as the airport has chosen to take this time to tear down and replace the terminal entirely. As we look ahead, continue to build opportunities for growth, we're excited to have recently announced the expansion of our existing partnership with Maxine's Caterers Limited, which targets a development agreement of 15 additional shacks across South China by 2030, including locations in Shenzhen, Guangzhou, and more. This agreement increases development targets for mainland China to 55 shacks by 2030, of which just five are open at this time. We're really looking forward to continue our growth in this critical and sizable market. Moving ahead to our menu and product strategies, we've been taking this time to simplify our menu in order to allow our teams to focus on execution. We've temporarily removed some of the most labor-intensive items, paused LTOs, and have been more cautious about new item testing. That said, our innovation kitchen is still humming along, We're excited about a few upcoming product initiatives. This fall, we plan to bring back hot chicken, a perennial fan favorite, while upping the offering this year and adding hot chicken bites and spicy fries. Longer term, as we've talked about in the past, we believe we have many opportunities to expand our menu with additional vegetarian and vegan options. We've got a new veggie shack burger made with real vegetables, herbs, and grains and topped with avocado, roasted tomatoes on a wheat bun. being tested at two Shacks right now, and we hope to expand that test next year. It's a great product, something we've been actively tweaking as we solicit guest feedback. As always, we continue to offer rotating beverages and shakes, such as our current pink lemonade and s'more shake. And as we head into the fall, we're planning the return of our popular pumpkin and holiday shakes. There's no doubt that this moment has amplified the need and the speed with which we intend to execute our plan in order to return to growth and prepare for a strong future. We've been intentional throughout this crisis to double down on those things that have made Shake Shack great and improve those things we know we can do better. For us, that's always meant a focus on creating an uplifting guest experience, crafted one burger at a time. We've elevated every piece of the traditional burger experience, and now we're focused on adding much greater accessibility, convenience, and ease of use to that strategy. That begins with our real estate selection, our shack designs, our digital journey, and the expansion of the way our teams and guests will experience the shack. And indeed, while some of our strongest shacks in the country are the hardest hit right now, we believe this to be temporary. Great real estate stands the test of time. And we're excited about the evolution we have planned to aggressively target a multi-format diversified portfolio of locations that thrives under any circumstances. Our intent is to further the progress we've made during COVID-19 across digital channels and to facilitate more pre-orders with a seamless pickup experience. Here's what we're up to. We've just launched curbside pickup in our app. For the first time, guests can pre-order on the app, identify their car, and we'll bring their order out to them with contactless pay and handoff. This is live and test in around 10 shacks right now, and we expect it to be rolled out to approximately 50 shacks by the end of the third quarter. It's really early, but we're encouraged by the initial results and convenience this adds for our guests. Next, we're adding shack tracks to both existing and new shacks. The shack track experience is an enhanced digital order and pickup solution that includes the ability to order via app, web, pickup via curbside, walk-up window, drive-up window, or with an improved in-shack pickup area. Through the end of this year, we'll expect to add at least eight shack track pickup walk-up windows to existing shacks, as well as add our first drive-up shack track. as we reimagine our Vernon Hills, Illinois shack where guests will never have to leave their car. For 2021, we expect roughly half the class to have either a drive-up or walk-up window, with the remaining shacks having a combination of enhanced interior pickup, curbside, and or dedicated delivery courier pickup areas. We're also really excited today to announce that we'll be building our first-ever drive-through experience in 2021. and we hope to execute more of these in the future as we learn. And as you'll see in the initial renderings we've provided in the supplemental deck, this is not your average drive-thru. Our design will retain the experience of the great community gathering place that has led our brand for 16 years while adding the convenience of pre-order shack track pickup or in-person drive-thru ordering. We've not yet announced the initial drive-thru locations but intend to lead with traditional suburban high traffic corridors. So why are we doing all this? The answer is simple. As we look ahead, our goal is to increase the addressable market opportunity for Shake Shack while driving strong AUVs and returns on capital. We're still in the early days for Shack Track, Drive Thru, and our enhanced pickup models, and we have a lot to learn in terms of sales and throughput, but we're bullish about a potential white space opportunity these formats could create while meeting the evolving needs of our fans. Moving on to digital. As guests begin to return to ordering at the Shacks, the mix between InShack and digital sales will continue to shift. During the second quarter, total digital sales represented 75% of sales. It more than doubled compared to the first quarter of 2020. Our own native web and app channels more than tripled compared to the same period last year. And when they've been combined, continue to be the fastest growing and largest ordering channels for us. throughout Q2 and into July. For fiscal July, digital sales represented 62% of total sales, retaining over 90% of the digital sales that we achieved during fiscal May, even as InShack sales have gradually returned. In addition, we've welcomed over 800,000 first-time purchasers via our app and web channels since early March. This is nearly four times higher than the same period last year. We're delighted with these results, and we're planning for digital sales to remain a significant component of our business and ongoing growth. As a result, we're doubling down on our digital investments that will continue to fuel the guest experience. We've launched a number of new features and functionality in response to COVID-19, and we're now extending much of that learning into broader initiatives. I just spoke about the opportunity we believe curbside pickup can create now and long-term, and I'm proud of the quick work the team did to launch this product. We're also fully rebuilding our broader web and app functionality over the next year with new and enhanced options that will allow additional personalization and feedback as well as functionality to give guests real-time order status among many other features. But the most important new feature will be the ability to offer delivery directly through our own channels for the first time, targeted at keeping guests within our native infrastructure and deepening our ability to connect directly with them over time. In addition, throughout the next year, we'll be leveraging are improving data and insight capabilities along with further guest-facing features such as expanded payment options, gift cards, and much more. Our teams and leaders have used this moment to accelerate the pace of learning and innovation in our company. We're committed to getting after those areas of greatest opportunity as we see them and take this time to set ourselves up for a strong future. With that, I'll turn it over to Tara.