Shake Shack, Inc.

Greetings and welcome to the Shake Shack fourth quarter 2020 earnings call. At this time, all participants are in listen-only mode. The question and answer session will follow a 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, Rick Powell, Senior Vice President of Finance and Investor Relations. Please go ahead, Mr. Powell.

Thank you, Jerry, and good evening, everybody. Joining me for Shake Shack's conference call this evening 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 to substitute the 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 the 24th, 2020, and form 10Q filed on July the 31st, 2020. 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 fourth quarter 2020 earnings release, which can be found at investor.shakeshack.com in the news section. Additionally, we have posted our fourth quarter 2020 supplemental earnings materials, which can be found in the events and presentation section on our site. by an exhibit to our 8K for the quarter. And 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 staying healthy and safe through these challenging times. As we close the chapter on 2020, I'm so grateful and proud of the way our Shack family has overcome the obstacles that came our way and led to continued recovery of our business while supporting each other and our communities. We are on an endless pursuit to create uplifting experiences today more than ever. And while the reality of this moment remains volatile, we're working to build a thriving SHAC community on the other side of this pandemic. Focusing on our financial progress, we're encouraged with our Q4 results and the momentum that built through January. February results did take a step back, partially due to the extreme weather experience across the nation that caused more than 130 full or partial loss operating days from SHAC closures. However, we are just a few short weeks away from turning the dial on a year of COVID and looking forward to continued recovery. Looking back at Q4, despite the hurdles facing our business, and with much of the country still under varying degrees of lockdown, we're pleased to report revenue of $157.5 million, with same-shack sales improving to down 17.4% compared to down 31.7% in the third quarter. At the end of Q4, roughly half our shacks were still operating with closed dining rooms. and two remain fully closed. Even under those restrictions, we continue to see sequential positive improvement across all regions when compared to the third quarter. With certain markets, such as the Northeast and Southeast, close to flat versus the prior year as we exited the quarter. And our suburban shacks delivered positive growth in fiscal November and December. Full system-wide recovery will take time, especially in our urban regions hardest hit by the pandemic, but we believe we're on the right track to getting there. Despite the challenges, 2020 resulted in the acceleration of many of our strategic initiatives, each of which strengthens the foundation and opportunity for our ongoing growth. We know people will gather again, and we'll be there to meet that demand as it returns. To do so, we'll be concentrating our work in the following areas. First, executing against a robust development pipeline that aims to grow the addressable market opportunity for Shake Shack. We've got our sights set on accelerated development with great real estate in new and existing markets through evolving formats that allow us to capture sales in new ways. Second, capitalizing on the adoption of our digital tools and doubling down on the investments in those channels, especially ShackTrack. So far, we've added 13 exterior windows, which have improved the flow of guest traffic and the experience for in-shack orders and dining. In addition to delivery orders, About a quarter of app and web orders are now picked up through these windows. Our curbside program, available at more than 70 shacks, also continues to show great potential. Although curbside is not feasible for every shack format, given layout and location, we see this as an opportunity to further boost sales long-term, especially in suburban markets. Across all our shacks, we're working hard to add a level of convenience that increasingly allows our guests to experience ShapeShack on their terms by removing friction points that existed in the past. Third, we are focusing on our products, elevating the classics of our core menu and getting back to offering buzzworthy LTOs, eyeing smart expansion of existing menu categories, including chicken, beverage, and frozen custard. Finally, we continue to stand for something good for our teams, for our communities, building the safest possible shacks we can, and enhancing the benefits we offer, creating more jobs and career development opportunities than ever. Diving into shack development, we are really excited to accelerate unit growth, and we'll be targeting between 35 to 40 new company-operated shacks this year, while ramping up in 2022 to 45 to 50 shacks, representing in total about a 45% increase to our year-end 2020 shack count over the next two years. For 2021, roughly 10% of shacks will be in new markets, including Portland, Tampa, Indianapolis, and more. while the rest of the class will expand our footprint in existing markets in areas such as California, the Northeast, and Florida. At just 186 company-operated checks today, we have such a significant ongoing growth opportunity across the country, and our broadening multi-format strategy allows us even new ways to approach each one. Despite the current COVID headwind, we see opportunity in urban markets, including our hometown of New York City. And we'll be looking to incorporate a number of digitally-led ShackTrack formats within those designs. In our suburban market, we'll be building a broad mix of formats, each of which will have some form of ShackTrack, incorporating drive-up windows, walk-up windows, curbside pickup, and enhanced interior pickup experiences. You'll also see us leaning more heavily into drive-through, with our first-ever drive-through Shack planned later this year in Orlando. and a number of others planned in the next two years, places like Kansas City, Minneapolis, Detroit, and more. Within each of our formats, there is much for us to learn, but we're incredibly excited about the journey and the opportunity to continue to elevate the overall SHAC experience. More than ever, and especially in a post-COVID world, we are going to continue to build great gathering places that enrich our neighborhoods and communities while offering the safety and added convenience that comes with our new and enhanced digital tools. Shifting to our licensed business, 2020 was just as tough for our partners around the world and those in our domestic airport and stadium businesses. We saw an overall steady recovery here through the fourth quarter, as business continued to gradually come back in many markets, with average weekly sales improving from 5.3 million in the third quarter to 6.1 in the fourth. However, just like our company-operated business, our licensed environment remains volatile and continues to be highly impacted by the pandemic. This was particularly evident in the first couple months of this year, with weekly sales taking a step back from the fourth quarter to 5.6 million in fiscal January due to volatility in Asia and the significant lockdowns affecting the United Kingdom. However, weekly sales recently increased to just over 6 million in February. Year-over-year trends have also started to improve now that we're lapping the earliest of the COVID impacts seen in Asia in Q1 of last year, 2020. Here in the United States, our stadium business remains closed, with no clear line of sight into how sports will play out for the 21 season or beyond. Many of our airport locations continue to have greatly reduced traffic or remain closed while travel is so limited. However, as we see the vaccine rollout continue and look towards a recovery throughout 2021, we're hopeful we'll be able to get back to some level of operations in these shacks this year. Throughout all of this, our global brand has remained strong and trusted. We hold some of the most premier real estate worldwide, and we see tremendous white space ahead for our licensed business. We're targeting to open between 15 and 20 new licensed shacks in 21, increasing to between 20 and 25 next year in 22, with significant focus in the near term on China and broader Asian markets. We view our international licensed shacks as a compelling route to efficiently and globally scale the business and the brand. It's a critical and highly accreted part of our business. which we intend to grow substantially over the coming years. Moving on to our products, as part of our commitment to deliver an elevated and uplifted experience, we pride ourselves on quality sourcing and serving craveable menu items. We're continually working to bring delicious, modern, fun versions of the classics made from premium ingredients to our guests. As I outlined in our company animal welfare policy, we source fresh, 100% antibiotic and hormone-free proteins that are vegetarian-fed, humanely raised, and source-verified We're proud to use cage-free eggs, non-GMO buns, and milk from farmers who do not use artificial growth hormones. Our strategy continues to be to serve the best ingredients from best-in-class suppliers. The fourth quarter featured our successful hot chicken lineup, a perennial favorite with our guests and one we expect to bring back. As we kicked off 2021 and increasingly focused on chicken, we extended our offerings with a limited run of our Korean-style chicken menu, developed with our partners in South Korea, and featuring kimchi sourced from a small family-operated company in Portland, Oregon, Choice Kimchi. This launched in January with incredibly high guest demand and a huge amount of media buzz, so much so that some shacks have even sold out. We continue to plan for an exciting LTO lineup this year featuring premium burgers, chicken, and veggie items, as well as the expansion of categories such as cold beverages and frozen custards. Our winter citrus aid has been a big hit and one of our strongest selling lemonades, giving us the confidence to keep adding premium-priced beverages to the menu later this year. We've got some exciting new trios of lemonade flavors coming up in the next two quarters, so stay tuned for those. On our shake menu, our current black sugar vanilla and brownie batter hot chocolate shakes have been popular offerings, and we'll be looking to do more with frozen custard throughout the year. Our marketing initiatives include This year, we'll focus on these culinary moments as well as more seamless guest experience we've been building across both InShack and our digital channels. We've invested heavily in our digital product suite along with improved data insight capabilities, which over time will allow us to drive more personalization and targeting in our communication strategy. Our digital marketing campaigns continue to engage digital users through partnerships, including some recent examples of Waze, YouTube, and others, on top of an already robust organic social program. We'll be creating fun, buzzworthy moments through innovative collaborations, including a national series of some of the best chefs across the country. Finally, and most importantly, we're committed to maintaining the safest possible work environment and the creation of continued development opportunities for our team. We made the decision recently to invest in state-of-the-art UV light and air purification systems to ensure a safe and clean working and dining environment for our teams and our guests in Shaq's. We're extremely proud to have been awarded a 100% score for the third year in a row in the Human Rights Campaign Corporate Equality Index for our support of the LGBTQ plus community in the workplace. A key enabler to our accelerated growth, we're going to keep building teams through new and enhanced recruitment initiatives like brand ambassadors and job board promotions. We're going to continue to provide growth to our teams by encouraging promotions from within. And one of the initiatives we're most proud of this year is a program we call Shift Up. Created in partnership with a nonprofit, the Food Education Fund, we launched Shift Up as an employee educational program designed to progress the careers of future leaders of Shake Shack. Shift Up is a 21-week program for entry-level managers and includes training in professional, financial, and leadership skills with the goal of promotion and progression within the company. Our investment in this program includes fully paying our team for every hour spent learning, all with the goal of breaking down those barriers that can exist to progressing up the ladder of opportunity at the shack and ensuring we prioritize and support diversity, equity, and inclusion for our entire team. Lastly, we're proud to share that even through all the challenges of 2020, we promoted over 1,500 people, with more than 56% of those promotions going to women and 76% to underrepresented minorities. We're committed to continuing to build on a strong DE&I foundation we already have in place and believe that Shake Shack is a company where everyone has equal opportunity to rise through the ranks and build a career for life. And while this has been and remains an incredibly tough environment for all restaurant workers, we're so thankful for our leaders, team members, and our home office support team who together continue to ensure our recovery from this pandemic. I'm incredibly proud of the team's work, and I also know we have so much more to do. And with that, I'll pass over to Tara for an update on our financial performance.

Thanks, Randy. Good evening, everyone. Before we get into the financials, a quick reminder that our fiscal calendar in the fourth quarter contained an additional 53rd week, and we've normalized our performance for this where appropriate, consistent with our pre-release a few weeks ago. As you just heard, we saw continued sales improvement during the fourth quarter, delivering $157.5 million in total revenue, inclusive of $11.1 million due to the additional 53rd fiscal week and total revenue for the full year of $522.9 million. When compared to the third quarter and excluding the 53rd week, fourth quarter sales increased 12.3% sequentially, another solid continued step forward in our gradual recovery. Same-track sales in the fourth quarter declined 17.4% compared to the prior year, an improvement versus the decline of 31.7% in the third quarter. This improvement was driven primarily by an increase in traffic compared to the third quarter, from the decline of 42% to 30% sequentially. Similar to prior years, in mid-December, we took our annual menu price increase of approximately 2% on average across all company-operated shacks. Suburban same-shack sales improved from down 16% in the third quarter to nearly flat in the fourth quarter. and exited the year with positive growth due to the continued recovery of in-shack sales and strong digital channel performance. Urban same-shack sales, although still underperforming suburban shacks, also improved from down 43% in the third quarter to down 31% in the fourth. As of the end of the fourth quarter, our trailing 12-month average unit volume was $3 million, significantly impacted by the pandemic over the vast majority of the year. Average weekly sales were $62,000 in the fourth quarter, a 6.9% sequential increase, and with typical seasonality during the fourth quarter resulting in lower average weekly sales, we were pleased to see the continued improvement buck those trends. The seasonality beat continued in fiscal January with a further increase to average weekly sales of $63,000 and improvement in same-shack sales to down just 5%, with our suburban shacks delivering growth of 8% compared to last year. As Randy mentioned, February has been marked by extreme cold and snow storms across the country, which resulted in approximately 134 operating days impacted by full and partial closures. Through the first three weeks of fiscal February, our average weekly sales were $60,000, with a same-shack sales decline of 16% versus the same period last year. Despite the continued volatility of COVID on both traffic and dining capacity, Until the recent winter weather impact, we were pleased with the underlying trends in the business. As we approach the one-year mark in mid-March, since the initial and extensive impact of COVID, we do, however, remain cautious about our near-term sales outlook, especially in our urban business. However, we're more optimistic as we look further out to a continued gradual recovery as vaccine distribution increases and as we enter spring and warmer weather. In terms of ongoing digital sales mix, This has stayed high at 64% of SHAC sales in fiscal January and 63% in the first three weeks of fiscal February, above our fourth quarter mix of 59%, with delivery being the main contributor to this increase during the colder weather and additional dining room closures at the start of the year. Consistent with recent quarters, our own app and web channels continue to perform well. In 2021, through the first three weeks of fiscal February, sales in those channels were up nearly 300%. versus the same period last year. Since mid-March last year, we've welcomed over 2 million new purchases on our app and web, representing important momentum and ongoing opportunity as we see higher levels of frequency in our digital guests within Shack and have the increasing ability to communicate with them in a much more targeted and personalized manner than other channels. Looking at our digital strengths another way, when we annualized Q4 digital sales, they equate to a digital-only AUV of $1.9 million, an impressive number in terms of overall weight and clearly highlighting the importance of digital both today and moving forward for our business. As we focus on the enhancement of our digital and broader guest experience, we've been working to incorporate delivery within our own app and web channels. We piloted this capability in a handful of shacks in late December, early January, and we've now extended this rollout to over 100 shacks, with full nationwide rollout expected through the end of the second quarter. We're still in the early testing phase, but looking forward to the longer-term opportunity here as we target the migration of third-party delivery orders to our own channels, ensuring they're the most attractive for a guest and to maximize that sales opportunity within our own ecosystem. One piece of that strategy is in relation to pricing, and we're in the early stages of testing a 5% menu price uplift on all third-party delivery marketplaces. We see the ability to offer lower pricing in company-owned channels as a key marketing lever as we look to expand our reach, whilst higher prices across our third-party delivery partners will help offset some of the additional costs that come with this sales channel. It's too early to share any potential impact of this pricing increase, so we'll of course update you as time goes on and we learn more. The performance of all of our digital channels and our increasing integration into new SHAC designs is integral to our future sales growth. And initiatives like Curbside, with its strong adoption to date, gives us confidence in this strategy. We're seeing nearly half our guests selecting Curbside when given the option, with nearly 190,000 unique guests trying Curbside since launch, and average order values over 20% higher than in-SHAC orders at those locations. Moving on to profitability. Shack-level operating margin was 16% in the fourth quarter and 14.1% for the full year. As we moved through the year, we continued to manage costs very closely while protecting areas targeted and maximizing safety, the guest experience, and sales growth. As previously mentioned, the fourth quarter included a 53rd week, which primarily benefited the other operating expense and occupancy lines due to their relative proportion of fixed costs. Food and paper costs in the fourth quarter was 30.1% of SHAC sales, in line with the prior quarter and approximately 50 basis points higher than the same period last year. The year-on-year increase was driven by higher packaging costs due to COVID protocols. In the near term, we expect underlying commodity costs to remain relatively stable, with packaging levels staying high due to digital mix. Labor costs in the fourth quarter were 30.3% of SHAC sales, broadly in line with the prior quarter, and included the year-end retention bonus program we put in place for our SHAC teams. As a reminder of the bonus program, we gave each of our hourly team members an additional $250 to $400 year-end bonus, in addition to guaranteeing manager bonuses throughout the fourth quarter. These were part of a broader investment in our teams over the course of 2020, where in total we paid out close to $6 million. between the onset of COVID and the end of the year through a variety of premium pay and bonus programs. We continue to be eternally grateful to each and every one of our team members and managers for their hard work, commitment, and perseverance during this tough time. We created over 1,000 new jobs across the business last year, including increasing our home office employee count by nearly 20% to further support our growth over the coming years. We issued equity grants to our SHAC general managers and implemented our first paid time-off voting program to encourage election participation. As part of our broader commitment to continue to increase the compensation opportunity of our team members, we increased staffing wages in the majority of our SHACs from January this year. We're launching additional benefits this year also, including a dependent care flexible spending account, expanding the length and eligibility for parental leave, and paying our teams up to six hours to get vaccinated as this opportunity becomes available to them. Our teams are our most critical asset and enabler for growth, and we are committed to continue to invest in their well-being and development. Looking out, we expect labor inflation in 2021 to be in the mid-single-digit range and may experience inefficiency in the short term as we increase hiring and training of new team members to support the continued sales return. Other operating expenses remain elevated in the current environment and were 14.7% of SHAC sales in the fourth quarter. Slight improvement of 10 basis points versus the prior quarter, driven primarily by the 53rd week, partially offset by increased delivery commissions. Other operating expenses increased by 240 basis points compared to the fourth quarter 2019, driven by higher delivery commissions, partially offset by lower SHAC maintenance expenses. And looking forward, We expect operating expenses to remain elevated in the near term due to a high delivery mix, COVID-specific safety supplies for our team, as well as the gradual return of certain other costs in preparation for the expected sales recovery. Occupancy costs in the fourth quarter were 8.9% of SHAC sales, 150 basis points sequential improvement compared to the third quarter, due in part to the benefit of the additional sales in the 53rd fiscal week. together with a $900,000 one-time rent adjustment related to the closure of our Penn Station shack. Compared to the prior year, occupancy was 10 basis points lower in the fourth quarter 2020, again due to the favorable impact of the 53rd week and the Penn Station adjustment, nearly all of which was offset by sales deleverage. G&A expense in the fourth quarter was $19.1 million. a sequential increase as we scale back up investments across the teams in support of accelerated growth ahead. We expect to continue to increase G&A throughout this year as we ramp up our opening schedule, test a broad range of new formats, including our first drive-through, and continue to enhance our digital and data capabilities. At this stage in the year, we expect our total G&A spend for fiscal 2021 to be between $83 and $86 million. Within this number, our equity-based compensation is expected to be around $9 million, with an additional $1 million in SHAC-level labor, a step up from 2020 as our performance share plan was adjusted following the unforeseen impacts from COVID. Pre-opening expense in the fourth quarter was $2.8 million, a sizable increase compared to the third quarter driven by eight new SHAC openings. With a robust development schedule for both 2021 and 2022, we'll see pre-opening expense increase accordingly, particularly in the back half of this year. On a per-shack basis, we continue to find ways to optimize pre-opening operations, especially in existing markets where we can achieve higher efficiencies across most cost categories. We expect fiscal 2021 pre-opening expense to be between $14 and $15 million. Impairments and loss on disposals in the fourth quarter were $7.2 million. driven by a charge related to the early termination of our Penn Station shack lease, combined with an impairment of our home office expansion space in New York, both of which were non-cash charges. One of the many resulting impacts from the last year has been the acceleration of a more geographically dispersed workforce, which presented us with the opportunity to write down some of our home office space and will correspondingly lower some of our rent-related G&A going forward over the period of the lease. We'll continue to maintain our headquarters in New York City, where the majority of our team members will be located. However, we fully embrace the opportunity for certain teams to be more widely situated across the country, particularly those in some of our back office functions. On an adjusted pro forma basis, we have a net loss of $1.3 million, or loss of three cents for fully exchanged and diluted share. Excluding the tax impact of stock-based compensation, Our adjusted pro forma tax rate during the fourth quarter was 24.8% and 27.5% for the full year in line with expectations. A full reconciliation of our tax rates can be found in the appendix of our supplemental materials. Given the uncertainties caused by the COVID-19 pandemic in terms of the timing of a full sales recovery and the resulting impact on our taxable income, we will not be issuing specific 2021 tax rate guidance at this time. However, in a normal operating environment, our adjusted pro forma tax rate, excluding the impact of stock-based compensation, is expected to be between 26% and 28% in line with 2020 levels. Moving to balance sheet, our cash and multiple securities balance at the end of the fourth quarter was $183.8 million. We continue to generate positive cash flow at an operational level, but we'll use cash through 2021 as we ramp up capital expenditures for new shack construction, as well as continued digital investments. Wrapping up, although we still have a long way to go in this recovery, and certainly the February winter storms didn't make life any easier, we're confident in our journey through this and beyond. We have an incredible opportunity for growth ahead, further strengthened by an expanding format strategy, a robust digital foundation, and a passionate and talented world-class team. We'll continue to invest with confidence against that opportunity, focused on the long term as we build a business for generations to come. With that, I'll turn it back to you, Randy.

Thanks, Tara. I want to end today with a few notes on ESG. Investing in our communities has always been in our roots, since we began as a hot dog cart to support a park 20 years ago. As we continue to expand and evolve our mission to stand for something good, we are focused more than ever on our ESG efforts. and we'll be publishing our second annual Stand for Something Good report in the second quarter. As we grow, we plan to double down on our commitments and accountability towards positive change. This year, in addition to the initiatives we named today, we supported our workers through investments such as premium pay, additional pay, promoting a diverse workforce, launching four employee resource groups, running company-wide unconscious bias training, and expanding our mentoring program. We improved sustainability of our supply chain, and operations by increasing our commitments to buying more regeneratively ranched and non-GMO certified beef, as well as cage-free eggs. We built our shacks thoughtfully to optimize energy management with local and public transportation convenience and use of sustainable materials. We've even made donations to the Equal Justice Initiative, Fresh Air Fund, ROAR, and other local nonprofits. We proudly provide over 11,000 meals to healthcare and frontline workers and others. We're grateful for the opportunity to give back to our teams, guests, and communities, and are confident we can continue to make a positive impact as we grow in 2021. To you and your families, stay healthy, stay safe, and with that, operator, please go ahead and open the call for any questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you need to remove your question from the queue. For participants using equipment, it may be necessary to up the handset before pressing the star keys. One moment, please, while we poll for questions. The first question is from Lauren Silberman, Credit Suisse. Please go ahead, ma'am.

Thanks. So just to start, digital sales have been pretty consistent at about 60% plus or minus over the last several months. Is that digital sales next sustained or to what extent are digital sales dollars being sustained even as markets reopen? And then can you share how that digital mix differs across urban versus suburban SHACs and just the composition of the digital mix? How different is that in urban versus suburban SHACs?

Yeah, I'm happy to say that. Hey, Lauren. Yeah, we're very pleased with the digital mix staying high. If you actually look in our supplementals, you can kind of eyeball the extent to which the dollars have been retained. I mean, we've got incredibly high levels of retention within that sort of 63% in February. So retaining really all the digital sales from the high points of the pandemic is In terms of the split, you know, there really isn't a sort of a headline around urban versus suburban. It differs to some degree shack to shack. But suffice to say, they've been very strong really across the entire base. So whether that be app, web, or digital. And with 2 million new purchases welcomed to our own channels, we're super excited about what our momentum and these numbers can mean for us on a go-forward basis.

And, Lauren, I'll just add, I mean, you saw in supplementals, we obviously had a kick-up in the first two periods of this year that we showed, and that was a lot of it due to delivery increasing in cold weather. I think what will be interesting, none of us exactly know the encouraging signs or how sticky that sales has been. I think it will be interesting as people return to restaurants and as we begin to open more dining rooms and welcome people back to gathering at Shake Shack, and to using our digital tools where that goes. And, you know, as Tara said, 2 million new fans of Shake Shack using our digital tools over the last year is an exciting opportunity. That's what we'll be focused on.

Great. And then just, Brandy, you talked about all the exciting new formats in both urban and suburban markets. I think it's firstly average build-out costs have been up to 2 million. Can you provide just an update on where you're seeing average build-out costs and how are these expanding designs also expanding the range of build-out costs?

Yeah, well, the range expands. That's exactly the right way to think about it. Look, we've been pretty consistent about this. You'll see this in our numbers in the 10K. I mean, that roughly, and I'm saying approximately 2 million number, you know, after our pre-opening cost is about right. It has been pretty static there for a while. I think what you'll start to see, though, is this year we're going to invest in some of those new formats. So there will be some checks where we are choosing to spend more. when we build some of these drive-throughs, some of them, not all, it really depends on the location and the deal, but certainly now we want to invest that we expect it to be a little bit elevated this coming year. And then at the same time, we'll balance that out with some of the less expensive, some of the core format shacks, some of the food court shacks where we're able to spend less and still have some decent sales. But we do expect to invest in the learning process that drive-through should give us. And as we mentioned, you know, doing a handful of those in this next 12 to 18 months is going to be exciting. And we're not going to hold back on spending the right amount of money to make it great. So stay tuned, and we'll see where it goes from there.

Great. Thanks so much.

The next question is from Jared Garber, Goldman Sachs. Please go ahead, sir.

Hi, thanks for the question. Actually, kind of a follow-up to Lauren's question just before, but maybe the flip side, thanks for the color on the build costs. But on the top line side for new units at Tara, I think you mentioned that if you annualize current digital sales, you're running at basically a digital AUV of 1.9. How should we be thinking about that sort of $3 million sort of typical run rate new unit build with, you know, keeping in mind sort of this acceleration in the digital business?

Yeah, you heard the numbers right. That was a Q4 annualized digital number. So, you know, an impressive number. We think it's an impressive number at one point, an effective AUV of 1.9 million. I mean, as Randy just said, you know, this is – we've built this incredible momentum within digital, and we're going to continue to build on that foundation. But as dining rooms reopen, as people come back to work and cities and come out and about again and back to shacks, you know, we don't expect it to stay at at the 60, 64%. So it'll level off somewhere, and so will that AUV. At this point in time, we haven't updated our $3 million class average target, and we're not updating that today. I think right now our first focus is getting back to full recovery. and using all the different levers that we have at our disposal to do that. Digital is one of them. There are many others. So, no updates to that, but yeah, digital is certainly an increasingly important part of how we get there.

Great.

Thank you. We have a question from Michael Thomas, Oppenheimer and Company. Please go ahead, sir.

Hi, thanks. Hope everybody's well. I wanted to follow up on something that Randy touched on a few minutes ago. You know, obviously nobody knows what's going to happen going forward, but in the areas where you've seen sort of less restrictions, can you just talk about, you know, what sort of consumer habits have been like and how those have shifted over the last several months as those restrictions kind of opened up? And how does that inform you about what you think may happen going forward? And did you do anything differently in those areas, whether it be marketing, you know, or digital targeting?

Yeah, it's a great question. Look, I think it is so varied by region, and especially in this last few months, right? We reached peak COVID cases and peak restrictions, really, over that December-January timeframe that have just now started to ease. I think generally the things we point to are this. dining rooms are a good thing for us. We like to open them. About 75% of our shacks have some form of a limited dining room open today. A lot of our shacks really benefit when the weather warms up. That's been true of our company if you look at the seasonality with us forever. So we're especially hard hit when, you know, we have places that are closed. But all of it is pointing to the need for us to progress with the digital tools. So even within all those ups and downs, the digital tools continue to be the preferred channel. And that's super exciting. Whether you're in Ohio or Texas or California or New York City, we're really leaning into that. And there's one important thing I want to make sure we you know, we talked about it in the script, but you know, we have just now launched delivery through our own app. I'm actually ordering delivery tonight myself from my local Upper West Side shack in New York City through our app. And we're really excited about that. That is super test. I mean, we just just launched literally last week in New York City. So we're excited for that. And when you see that start to happen, it just builds more and more, more and more things. Look, as I look out, no one can guess and we're done guessing when COVID ends. And as people get vaccinated, we hope cases stay low and keep going low. But it's clear to us that as that happens, that's good for our business. We're excited that we continue to strengthen the momentum through January. And, you know, we're hopeful that as we start to lap, we're only a couple few weeks really away from lapping. the beginning of the hardest hit times that COVID offered last year. So we're excited for that. We're excited to get people back in restaurants and continue to use our digital tools. So lots to do, all about the format and the digital transformation.

Awesome. Thanks. And can you just talk about margins a little bit, maybe put some guardrails around what you think maybe margins might look like at different sales volumes as sales kind of start to come back towards you guys? Or maybe talk about what margins would look like if dining rooms would be open, assuming off-premise remains elevated versus pre-COVID levels. You know, is that accretive overall to your margins? Or, you know, what's the best way to frame up margins as we think about the go-forward? Thanks.

Yeah, I'll have to say that. I mean, I think the best way to think about margins on a go-forward basis is that they follow sales. The faster we can get back to full recovery on the top line, the faster we will see our bottom line recover. There are obviously some certain takes within that, some short-term, some longer-term that we don't know yet in terms of the extent to which there'll be any differing margin profiles in some of these formats. But, you know, that's, we haven't launched some of them yet, so we've got a lot of learning ahead of us. So right now, you know, we are, we're pleased with the progress to date. There's been a high degree of cost control across the business, as I mentioned, throughout the year, yet continuing to spend where we see fit, where safety is a priority, where guest experience can be enhanced, where sales driving initiatives can be rolled out. So really with the focus on top line and experience. You've seen, we mentioned, we've had this for the last few quarters. We continue to invest in our teams. We continue to have elevated sales. packaging costs, that will continue for the short term. And, of course, I think as we come out the other side of this, some of those COVID-specific costs will roll off. But, again, to go back to the way I answered the earlier question, actually, you know, we're really just so focused on maximizing that top line, not just as we recover, but for the long term as we expand across the country, as we build on this digital foundation to test these new formats, And that's the way we're going to continue to drive accretive profitability over the long term through continued aggressive sales strategy.

Awesome. Thanks so much.

We have a question from John Glass, Morgan Stanley. Please go ahead, sir.

Thanks very much. First, if I could just ask about some of the early learnings and maybe the sales benefits from both Shack Tracks where you put them in. I think you noted there was a a small handful in curbside. So I know you said the check is bigger in some cases, and obviously it's early days, but do you have a sense yet what those do to sales overall? Is there a 10% lift, 5%? Or do you have an expectation of what it could do over time, early days?

John, we're super excited about it, yet it's just way too early. And unfortunately, the compares are so challenging, right, because sales every month are tweaked by so many other factors having nothing to do with a normal compare. What I can say is this. I've been at a lot of shacks recently, watching it, witnessing it, seeing it live, new shacks that opened for the first time with it. And what we love about it is the clarity and separation of flow. One of Shake Shack's biggest problems forever has been it's busy and it's hard to get your food. And when we can have a shack track window, things just get smoother. When we can have delivery couriers out in a separate area, things just get smoother. And we really love that. So, look, our goal is absolutely that ShackTrack should be a long-term increase of sales opportunity for us. It's why we're doing it and why we're building into all our tools. As you said, some of the evidence that we do have today, whether curbside or otherwise, is people are using it. People are choosing it. And the average check is generally higher when they do. So those are good things. but we've got a lot of normal recovery to have as we go. I'm most excited to see as people return into dining rooms, how do we figure this out? There's going to be some flow to figure out, but it's all pointing in a good direction, we believe, on ShackTrack.

My second question is I just wanted to revisit digital and specifically delivery. I don't think we've ever learned what delivery is. As a percentage of sales, maybe I'm wrong, but It's got to be meaningful, you know, just given the way you've talked about it. Maybe if you're willing to talk just directionally in terms of total digital sales, what that is. And as you think about, you know, delivery and the impact to margins, you talked about a price increase. So, one, what has been the drag from a commission standpoint on margins, you know, just in the last couple of quarters? And what portion of that do you think is offset by that 5% trial of price increase?

Yeah, Jo, I mean, you're right. We haven't split out delivery up until this point, and we haven't today. So it's within the 63%, Jo, that's the February number. And, you know, delivery is an important part of our business. It has been for the last few years, and it certainly is in a COVID environment. One of the reasons that we don't split out by channel and I've said this before is because it's really just not the way we look at the business. We're trying to build a set of experiences for our guests that really can be interchangeable where we can use enhanced marketing tools, bringing convenience almost to the last question you just asked, Randy, around consumer behavior. We want these these different channels, including delivery, and certainly delivery through our own app, to be customer acquisition opportunities, to provide opportunities to engage with Shake Shack in a way that you maybe wouldn't have otherwise been able to. And then from there to drive frequency and to drive retention and to drive enhanced long-term sort of customer loyalty and engagement. In terms of the third-party delivery channel, yes, it comes with a cost. It's too early for us to talk to what a 5% uplift will or won't do in terms of that channel over the long term. It's literally, you know, in its infancy in terms of being rolled out. So we'll have to update you on that one. And no specifics to share, but the delivery commission itself sits in the other OPEX line, and it is certainly the biggest drag to that line. And we expect that to continue to be the case, certainly while delivery remains elevated in a COVID situation. type environment. So no specifics, but sort of directionally, you're right. It's meaningful. It's expensive. And I think we've got a lot of opportunities, as Randy pointed out, in terms of bringing it back into our own ecosystem so that although it still costs us in there, delivery doesn't suddenly become free when it's in our own channels, but it does allow us to engage the guests on a direct basis. It allows us to communicate with them in a much more targeted and personalized manner going forward as opposed to that relationship being a sort of third-party invisible one when it's through a third-party marketplace.

Thank you.

We have a question from John Ivanko, J.P. Morgan.

Please go ahead. Hi. Great. Thank you. I was hoping, you know, if you had a sense of, you know, what's happened to some of your near and relevant competition, both in urban markets, perhaps most importantly, but also suburban markets. I know you root for everyone to survive, and obviously the growth and the entrepreneurial nature of this industry is really what drives it along, but the reality is it has been difficult for a lot of independent operators. Do you have a sense of a percent, even if you want to really loosely talk about that, of the amount of relevant nearing competition that has come out in terms of your trade areas is the first question. Secondly, You know, with so much cash on your balance sheet, $180 million, I would assume, you know, whether it's, you know, asset deals or maybe even brand deals must be crossing your desk at a rate where they perhaps weren't before. You know, if you can kind of talk about, you know, if there's a way to kind of juxtapose maybe taking advantage of some of that competition, which at least in the near term may have been weakened.

Yeah, John, so on competition, again, You've certainly seen that, especially in the hardest hit urban areas. I mean, I'm sitting here in New York and so many of our friends are still remain closed or barely reopen. You know, even our founder and chairman, Danny Meyer, has not reopened his dining rooms in New York City. Right. Some of the best restaurants in New York. That'll take time. And hopefully that takes that comes along with people returning to the city for work. I think it's so different though, right? If you go to Florida, you go to Texas, generally things are acting fairly normally. So when you look at some of the more traditional elevated fast food or fast casual that we might compete with that you cover, They're doing well. They're winning. Right. Whereas some of the casual dining has been hit a lot harder. I think we always have sat in the middle there. And that has been our sweet spot. And I think it's been our sweet spot as we've slowly recovered here and will be. There's going to be some level of less restaurants for a while. We will probably benefit from that in some form over the near term, but I'm a believer that great entrepreneurs, especially in the restaurant business, are going to come back swinging pretty hard and create some great stuff. In the meantime, what it creates for us is real estate opportunity, and we're capturing that. You saw it. You've seen it in our commitment to upgrade and do more. You're seeing it in the kind of real estate we're looking at, whether urban. I'm walking around New York City every day saying, wow, that's a great spot. Maybe we should look at that. and suburban, where there are many companies, even in the drive-through scenario, that have given up sites and we've got that opportunity. So I think all of that will be a net win for Shake Shack. And then on the balance sheet side, We're – look, since we've been born, we've been looking for great opportunity. We're thankful that we have the balance sheet that we do, and we're constantly looking at that. Right now, when you look at our approach, we're squarely focused on ramping up growth. You're seeing it in our guidance here. You're seeing it in the actions we're taking. You're seeing it in the G&A commitment that we've made for this year. And we've shared some of those expenses and guidance for that reason, because we want you to know that even though our sales will take time to recover – you can expect us to keep hiring great people so that we can meet that demand. But we have no plans for any kind of further M&A or use of that cash today. But we never say never. We're always looking at great opportunities. This brand has a special opportunity down the road.

The next question is from Chris Cole. Please go ahead.

Yeah, good afternoon. Good afternoon, guys. Can you hear me? Okay.

Yep.

Okay, great. Tara, I know the comp has moved around the past few months, but the average of sales has been seen pretty steady in the low $60,000 range. I'm just wondering, is there a reason the restaurant margin would be much different in the first quarter to date period is what we saw in the fourth quarter?

Well, I mean, right now, Chris, we're not giving guidance, as I explained, just because the operating environment continues to be so hard to predict. So as you think about our margin, you know, we've touched on sort of the major drivers in there. Obviously, sales is first and foremost, right? Margin in our business follows sales. In our cost of sales line, we expect packaging to remain elevated. That will be through the first quarter and potentially beyond, albeit within food costs. We don't expect any major inflationary or deflationary moves in there. Labor, we touched on, we'll have low to mid-single-digit inflation there with a combination of mandatory and discretionary increases in the labor line, as well as the fact that we're adding staff as we continue to anticipate this continued gradual sales recovery. So I think, you know, in the margin as time goes on, we'll have these COVID-specific costs. At some point in the future, they'll start to lessen and roll off. And in the meantime, some additional costs will start to come back into the shacks as sales recover. And it's really impossible to be precise about the timing of that transition. So very focused on just continuing to do the right things, spend the money when it comes to our teams, when it comes to safety, when it comes to enhancing guest experience, investing in sales driving initiatives. And that's really the focus whilst obviously maintaining a close eye on cost. I think we've proven that we have been very disciplined in that generally whilst making the right decisions as we go. But just too hard to put a precise point on it right now on a quarter by quarter basis or even for 2021. So trying to give you a little bit of color without being able to quantify it at this point in time.

Let me ask it this way. Is there, I mean, I know that as sales recover, the margin performance isn't going to act in a linear fashion with that sales recovery. So is there a step function or an average weekly sales level where we should expect maybe a step improvement or a step change in the margin performance?

Not that I would call out. You know, I mean, we've got you know, labor, I think, not that I would call outside of those major line items that I talked to. I mean, the only thing I would say is you, I guess, as you compare Q4 margin in particular is that obviously we had the benefit of the 53rd week, which, as I mentioned, helped other OPEX to some degree in occupancy due to that fixed nature. We also had a $900,000 benefit in the fourth quarter from a sort of year-end accounting adjustment to do with the termination of that PEN lease. So I think bear those two in mind as you look quarter to quarter. But other than that, I would just repeat those major trends in the line items that I've called out so far. You know, labor, COG, delivery commission is obviously a big one in other aspects, depending on how and where that continues to fluctuate. But outside of those, nothing else really to call out right now.

Okay, and just one last one. Once a company has delivery available on its own ecosystem, would the goal be to raise prices enough on the third-party delivery marketplaces so that you're really indifferent as to whether the order originates on a marketplace or your own platform?

Well, we want people to order however they want, okay? We want to have great partnerships with third-party. We believe in the strength of those marketplaces and those opportunities. That said, we want to create our channel as the most preferred channel. We want it to be the best price, the most rewarding, and the most engaging. And that'll come in the form of various ways we'll connect with people on our channels, whether it's item-specific, whether it's price over time. But, look, the important thing for us is driving sales in all areas. And we think it's important to have a full digital toolbox that includes all those, Chris. So I want to have them all. And, you know, tonight when I order mine, I'm ordering on the Shack app. And I'm going to have it brought to us by Uber Eats, who is our partner of delivery on the Shack app. And that's where I want to engage right now. And we'll see, you know, we'll see how people choose to do that. Hopefully, they'll do a mix.

Great. Thanks, guys.

Next question is from Jeffrey Bernstein, Barclays. Please go ahead, sir.

Great. Thank you very much. Maybe just to follow up on that, just from the margin standpoint, obviously, it's, like you said, very difficult to predict a month out. But I'm just wondering, let alone a quarter out, but Can you maybe just provide some color in terms of just January? I know you said comps were down 5%. Maybe any directional color in terms of how margins are playing out just in the month of January so we can get a frame of reference for how that compares as the comp improves so meaningfully from the fourth quarter?

Yeah. I mean, Jeff, we're not getting mid-quarter guidance at this point. So nothing really to update when it comes to current margins right now, I'm afraid.

Okay. And then as we think about the the full year 21? I mean, I know there's no specific guidance, but as people think about 21 getting back to 19 levels, or at least that's kind of a talk for the broader industry, can you give any kind of directional thoughts in terms of whether 21 would be reasonable to assume back to 19 levels? I know back in 19 you achieved, you know, 80 plus million EBITDA, but Just wondering whether that's reasonable or whether, just broadly speaking, you see the investments going through 2021 and the cost inflation making that difficult to return to 19 levels in the year 21.

Jeff, it's all going to be about sales recovery, right? I mean, if we can't – you know, we've got to see the urban markets begin to come back. That's a high part of our – a big part of our company still down and continue to be hurt. We need to see travel start to happen. We need to see, you know, a regular – operating environment. And I think we're all some time away from that, right? We're encouraged for a continued recovery. We're encouraged to lap this. But I do think we're a long way away from Times Square being full of people, right? And that's just one visual that help you represent how that's going to change. Now, I personally am an optimist, and I believe that cities are going to recover. I believe New York's going to recover I hope more quickly than most expect. I think travel will begin to come back. But it's going to take that. So I think it's very hard to answer that, and we're certainly not going to guide to that today in any real detail.

Got it. And just lastly, without giving guidance then, just in terms of maybe sensitivity, just to kind of frame it up, whether annual benefit to EBITDA or EPS from a point of comp or 100 base points of margin or any kind of rough numbers, again, not providing any specific guidance, but just a frame of reference.

Yeah, no, nothing really to give on that right now, Jeff. Apologies. We really, you know, it is so challenging right now to be able to predict with any sort of accuracy on a go-forward basis, certainly over the next couple of quarters. So as soon as we have a better line of sight to what we think this year is going to look like, we will absolutely update you. In the meantime, you know, trying to give you as much color as possible in terms of what we do see, on these various lines, but just can't quantify it at this point when it comes to giving forward-looking guidance.

Jeff is right here. If you look at the supplemental page 14, you know, outside of what we've provided sort of in the prepared remarks on terms of, you know, Q4, you know, this is, I think, an area where you can just sort of guide you without specific numbers, of course, in terms of what we feel that is going to be the major items, you know, in 2021.

Understood. Thank you.

The next question is from Andrew Charles Cohen. Please go ahead, sir.

Thank you. Randy, you talked earlier about the southeast just probably being more opening, and we're seeing that within industry data. That's been an outperformer. And the southeast for you guys, I'm looking at page eight of the supplemental, has certainly been an outperformer and better than average. But can you talk about, you know, the dynamic of the northeast and outpacing the southeast? You know, just curious for you guys, just bucking the trend a little bit here, why the southeast hasn't been the strongest region?

Well, yeah, I mean, you know, northeast, as you showed in the supplementals, was incredibly strong in January. It just had a really straight line, obviously, until this February, a bit of a step back. But generally, the northeast has recovered really well, as has southeast with the same kind of smaller step back. But I think, you know, these are big regions. They're hard to pin down one reason or another. I think when we look at the northeast outside of New York City, we've been pretty strong. We've named that. That's really the core suburban market, right? When we have our shacks in New Jersey, Connecticut, Long Island, Boston suburbs, those shacks in the suburban model have recovered more quickly than the urban. In the southeast, we don't have a whole lot of what we deem to be urban shacks, right? People are generally moving around normally in Florida, right, for the most part, not quite the same in Atlanta, but but still pretty good. So, you know, it really is a tale of every city and how you live. I was, I was in the same day a couple weeks ago in a mall in New Jersey that was packed and outside of everyone wearing masks, you would have thought the world was perfect. And then I came home to Manhattan, and it was a ghost town. And it was fascinating to experience that in the same day and that that right there. is what you see in our chart on, you know, seven, eight of the supplementals that shows that recovery. So, look, I think, Andrew, I'll say it this way. And I've said this a couple of times during the last six months. The way we're looking at the business, where we are up, does it make sense that we're up? Yes. And where we are down, does it make sense that we're down? Yes. With very few examples of the opposite. So that encourages us to see how the flow is going to go and to see how the company's recovering over time.

Okay. And then just one nitty-gritty question. When you get delivery orders through the app, you know, that's obviously going to present a benefit to data collection. But as we think about other op-eds, just qualitatively, will you also see a more favorable commission or cost structure for those orders relative to the commission paid on third-party marketplaces?

Yeah, Andrew, we haven't quantified the extent to which there's any difference in those, but I think the sort of high-level assumption that I would take if I were to use that there isn't really one and that delivery is an expensive channel, it costs to get food delivered, whether that order is taken through a third-party marketplace or taken through our app. So it remains an expensive channel. It will remain a cost and a drag on the other OpEx line while delivery remains high. But as you rightly point out, from a data collection perspective and just owning the transaction and being able to then build on that relationship with the guest on a go-forward basis, the opportunity to drive long-term value through a delivery transaction on our channel versus a delivery transaction on a third party is obviously wildly different.

And, Andrew, the opportunity to market there, right, the opportunity for us to wake up one day and say, hey, we want to do free delivery on our site, right, on our app. You know, the opportunity to digitally market differently to drive sales, that obviously comes with a cost, really opens up now.

Makes sense. Thanks, guys.

We have a question from Brian Mulan, Deutsche Bank. Please go ahead, sir.

Thank you. Hey, follow-up on some of the prior commentary on decreased competition and increased real estate opportunities. On the company on development side, is 45 to 50 units the new ceiling for what the organization can handle in a given year? Or does the company now maybe have the built capability of potentially opening even more than that in theory if next year goes well? You know, I know that might be getting greedy, but it would be great to get your thoughts. Yeah.

Yeah, look, we're not going to go beyond what we just gave, which is 45 to 50. That's probably the appropriate feeling for next year with everything we know today. But look, look at the history of this company. Outside of last year, every year since we've been a company, we've been able to grow a few more shacks a year. And we want to make sure we get to that optimal number where we're still building great restaurants. I do think our format evolution is drive-through and the success of so many others that we've proven before that gives us a lot of opportunity to look at and, you know, feel good about the acceleration in the next two years. And we'll keep you posted after that.

Okay, thanks. And just a follow-up on the domestic license business, you know, Randy, you spoke to some of the COVID-related challenges in the prepared remarks, but As things return to normal, is your opportunity here even bigger than it otherwise would have been? I'm just curious how you're thinking about the business over the next several years.

Has anything changed versus how you're – Yeah, I think we have and we still have a big opportunity. In the domestic license business, really where we're looking at that is today. That is in airports, you know, travel centers, and stadium event businesses. Those places have a long road to go here. You know, airports, you know, you look at the flight data, you know, there's a lot of companies that will say it's a multi-year comeback. So it'll be interesting to see how that shakes out. Our hope is that we have strong partnerships in airports and that we will continue to grow that. But, you know, just here's a perfect example. JFK Terminal 4, we have two shake shacks that are two of the strongest shacks in the system. And they're closed. They have been closed for a year. And there is no sign as to when that will open. That's two powerful Shake Shacks. And LAX was one of the busiest shacks in our company. And the terminal is gone. They're tearing it down, you know, completely because of COVID and the change. So this is going to be a weird world, I think, in airports for a little while. That said, we were really off and running in airports in an exciting way. So I expect there's going to be a bright future for Shake Shack and airports. The other thing is we're going to open – we have one on a roadside in New Jersey, and we're going to open our second, I hope, this year in what's called the Vince Lombardi area. Anyone who's driven the New Jersey Turnpike out of New York City will know that that's one of the busiest and high-trafficked type of areas. You know, we want to do more of those. We want to change the dialogue on what it means to – pull over to get gas and get fed in a way that's entirely different from the traditional fast food experience. So I'm hopeful we can get some more of that, but, you know, we've got to see everybody getting back in their cars and planes and get moving again.

Thank you.

Ladies and gentlemen, we have reached the end of the question and answer session, and I'd like to turn the conference back over to Randy Cabrudi for closing remarks. Mr. Cabrudi.

Thanks, everyone. I know we've run over, and we didn't get to every question, so we'll have anyone who has questions, feel free to reach out another time. Really appreciate you all being with us tonight, and stay safe. Thank you.

This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.