Shake Shack, Inc.

Greetings and welcome to the Shake Shack first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Rick Powell, Senior Vice President of Finance and Investor Relations. Thank you, Rick. You may begin.

Thank you, Paul, 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 26, 2021. 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 2021 earnings release. which can be found at investor.shakeshack.com in the news section. Additionally, we have posted our first quarter 2021 supplemental earnings materials, which can be found in the events and presentation section on our site as an exhibit to our AK for the quarter. And with that, I'll turn the call over to Randy.

Thanks, Rick, and good evening, everyone. Really happy today to share the continued comeback and forward momentum here at Shake Shack. Spring has ushered in a great energy around the country in our hometown of New York City, too. With COVID cases stabilizing and more regions steadily loosening restrictions, we're optimistic that improving trends can continue for our industry. As always, I want to start with a shout-out to our team members who've worked through so much hardship, and now with a full year of the pandemic behind us, they're still leading the way back to our resuming growth. We move forward today with confidence for the opportunity we see ahead. In the first quarter of 2021 and so far through April, our financial performance continues on an upward trend, Total revenue was at $155.3 million in the first quarter, up 8.5% from last year, with average weekly sales improving to $64,000 compared to $62,000 in the fourth quarter. We exited the first quarter with March average weekly sales of $68,000, improving again to $69,000 in fiscal April. Same-shack sales were up 5.7% in the first quarter and up 86% in fiscal April versus 2020. We'll also be sharing sales comparisons for the current comp base versus 2019, as this was down 14% and 15% in fiscal March and April, respectively. Suburban checks continue to lead our recovery, with April nearly flat at down just 1% versus 2019. In terms of profitability, check level margin was 15% for the first quarter, exiting with March at just under 19%. Let's move now to talk about our strategic focus and priorities. Because we've moved through this period of continued sales and profit recovery and to the significant opportunity ahead, our team is focused on opening and operating great Shacks. We're executing on the evolution of our physical Shack formats and digital transformation while maintaining a critical focus on the creation of great products and an elevated guest experience, all culminating in enhanced convenience and access for our guests and an expanding addressable market for Shake Shackers. Highlighting growth during the first quarter, we opened 10 domestic company-operated shacks and have opened another five so far in Q2. We expect to open between one and three more through the end of this quarter for a total of 16 to 18 new shacks by the mid-year point, an incredible accomplishment by the team in what has continued to be a challenging operating environment. As we look to the back half of the year on the various state of permitting or construction of our 21 class, we expect the remaining shack openings to be more weighted to the fourth quarter. Assuming no unforeseen COVID-related delays, We're on target to open between 35 and 40 new company-operated SHACs this year across both urban and suburban markets, although more weighted to suburban as we continue our market penetration strategy. We continue to guide to an accelerated development plan of 45 to 50 SHACs next year in 2022. Towards the performance of the SHACs we've opened so far this year, we're really encouraged. Average weekly sales for our 21 class was over 79,000 in the first quarter, more than 20% higher than the system average. Some of our most recent openings in new markets such as Boulder, Indianapolis, and Portland resemble the excitement previously seen before the pandemic, with lines around the block and strong sales out of the gate, encouraging indicators for the robust and accelerated development plan we've laid out. Our newest shack in Fishers, Indiana, just outside Indianapolis, features our second shack track drive-up window. And we've also opened new shacks in Santa Monica, L.A., Hoboken, New Jersey, and more. ShackTrack Digital Convenience leads with about a third of the class featuring walk-up windows, about 10% with a drive-up window, and many other shacks featuring curbside and or enhanced interior pickup experiences. Additionally, we're making a big commitment to testing drive-thrus, now with the potential for up to eight of these planned through 2022. We expect to open our first at the end of this year. Turning to the recovery and growth of our license business. We currently have 16 shacks temporarily closed due to COVID impact. However, during the first quarter, we opened two new international shacks in the Middle East with six additional openings in the second quarter through fiscal April, mostly in Asia. We saw improvement in total weekly sales performance throughout the first quarter, increasing from 5.6 million in January to 6.3 in March and 6.6 in April. The recent increases have been driven by both our international and domestic license checks, especially in airports that are experiencing increases in TSA traffic. We're also thrilled that all of our baseball stadium shacks have now reopened, including our newest, within the World Series champions, L.A. Dodgers Stadium. With limited fans allowed at games, we don't expect to have a normal sales season, but we're delighted to be bringing Shackburgers back to the ballpark. So far in the second quarter, our U.K. shacks are gradually reopening as the country finally ended most of the lockdown restrictions for the first time in over three months. Our shacks in China have seen strong sales throughout the second quarter so far, and our recent openings in Macau, Beijing, and Singapore continue to extend our footprint in these key strategic regions. As we look to the future and the importance of the Asia-Pacific region, we'll soon be expanding within China's southern region with our first shack planned to open in Shenzhen later this quarter. We're targeting to open between 15 to 20 new licensed shacks in 21, increasingly between 20 to 25 in 22. Our license operations are a critical component in how we will scale our business and our brand, and we expect them to grow substantially over the coming years. Moving on, the pivotal transformation of our digital business, which continues to perform well. We're intensely focused on investments that we believe have been and will be critical to our growth. Traffic frequency, marketing opportunities, all leading towards greater convenience and accessibility to and for our guests. During the first quarter, we fully launched delivery from our own app. I'll be adding web later this year. Offering delivery within our own channels is a key step in our ongoing digital and sales growth strategy and allows us to build strong relationships with our guests and enable more personal and direct communication. We're also working to improve in-app communications, particularly to enhance the pickup notifications experience. And within our shacks, we're testing screens that communicate order readiness to our guests. We've already seen guest experience scores move higher where these initiatives have been rolled out. As in-person dining restrictions ease, we're excited to see our in-shack guests return, all while we continue to strengthen, build upon, and amplify the digital gains we've already made. And finally, at that time of the call where we start to get a little bit hungry, in Q1, we began the limited run of our Korean-style chicken menu. And this launched with really high guest demand and a large amount of buzz. so much so that many of our shacks actually sold out. And while this led to curtailed menu availability in February, we ended the promotion strong in March, having learned a lot that will help us prepare for more chicken LTOs later this year. Currently, we're running a new avocado bacon burger and our chicken shack, topped with freshly sliced avocado and diamond ranch applewood smoked bacon. This will be available for a limited time nationwide, and for the first time ever, in addition to these items, guests can can also have freshly sliced avocado added to any of their favorite burgers. Over the past few months, we've increased focus on our shakes and cold beverage categories as well. Our limited-time offerings here are proving to be increasingly popular. Our spring lemonade trio, for example, featuring strawberry salted lime, blackberry lychee, and mango passionade, contributed to an increase in beverage items per check since launching in early March. These have made up over a third of total cold beverage sales. nearly doubling the sales contribution of previous beverage LTOs. We've got some fun additions in these categories coming in the coming months, and we'll continue to deliver an inspired LTO calendar featuring bold flavors and modern, fun versions of the classics in an effort to continue to elevate everything we do. Finally, on the culinary front, during the first quarter, we launched a new chef collab series named Now Serving. which features a diverse group of local chefs and restaurateurs from across the United States to help us cook up exclusive limited-time menu items. We've had lots of fun running successful culinary collabs in the past, but this year, coming out of the pandemic, we're using these events as an opportunity to feature and give back to our local restaurants, strengthen our brand, and more deeply engage with our communities. A portion of the net proceeds from each collab will go to nonprofit organizations helping local restaurant communities. Finally, I want to highlight our recently published annual Stand for Something Good report, which highlights many of our ESG priorities in 2020 and beyond, and includes for the first time the publishing of our five-year diversity goals for our company. We embody our mission to stand for something good by prioritizing the well-being of our team, sourcing premium ingredients from like-minded producers, committing to responsible crafts and design of our shacks, and actively engaging in community support, support through donations, events, and volunteering. We know we can and must continue to do so much more to offset our impact on the world and make Shake Shack a leader in creating opportunities to drive positive change. I encourage you all to read the report, which can be found in the investor section of our website. Now I'll pass the call over to Tara for more detail on our financial performance.

Thanks, Randy, and thank you all for joining us this evening. With all the momentum you just heard, we continue to be encouraged by our ongoing recovery and resulting performance. First quarter total revenue was $155.3 million, representing year-on-year growth of 8.5%, of which shack sales were $150.7 million, delivering year-on-year growth of 9.1%, with trends continuing to be positive on all fronts. When we look at the monthly breakdown of our sales performance so far this year, we saw a strong start in January. Fiscal February was heavily impacted by severe winter weather, then followed by a rebound in March. exiting the quarter with average weekly sales of $68,000. Sales continued to hold strong through April, increasing to 69,000, supported by the continued rebuild of in-shack sales. As of the end of fiscal April, the vast majority of our shacks were operating with open dining rooms, albeit many under varying levels of capacity restrictions, particularly in urban shacks. Looking at same-shack sales, we delivered 5.7% year-on-year growth in the first quarter and 86% in April. An additional compare that's helpful to gauge our recovery is to our 2019 sales level. When we compare the first quarter 2021 sales of our current comp base to their respective sales in the first quarter 2019, they were down 14.8%. When we do the same for fiscal April, we have a similar result, down 15% compared to 2019. When looking at our comp base, it's important to remember that it includes some of our previously highest volume shacks in the country and is disproportionately impacted by their performance and the extent to which they've yet to recover, with many in deeply impacted urban centers. This is particularly true for certain shacks in cities such as New York, Las Vegas, Chicago, or L.A., where current performance is having a material impact on our still relatively small comp base. In fact, when we take the 126 shacks in our comp base today and remove the bottom 25 performing shacks, nearly all are urban. Our April comp versus 2019 improves from down 15% to down just under 3%. Within the first quarter same-shack sales results, traffic declined 12.3%. It was offset by a positive 18% price mix, a combination of our year-end price increase taken in December, increased pricing on third-party delivery channels, which rolled out over the early part of the year, and a higher number of items for check, particularly in our digital channels. A quick note before we move on as it relates to same-shack sales. As outlined in our earnings supplemental materials last quarter, In order to normalize for the 53rd week in 2020, our compare periods for both 2020 and 2019 have been shifted forward a week from the fiscal calendar in order to show a more like-for-like comparison. We've included some detail around this in our supplemental materials posted earlier this afternoon to further clarify. We continue to experience recovery across both our urban and suburban markets. However, many major urban markets such as Manhattan remain materially below pre-COVID levels. while office, events, and tourism traffic returns. The split between urban and suburban shacks, as well as by region, can be found on pages 7 and 8 of our supplemental materials, where you'll see suburban shacks nearly flat 2019 levels in fiscal March and April, and a slight increase in recent speed of recovery in New York City. When compared to 2019, our urban shacks were down 25% in fiscal March and 27% in April, with some of our highest volume shacks in the most dense urban or tourism-related areas, such as Las Vegas, New York, D.C., Chicago, and L.A., each of which will take some time to fully recover. Despite the positive momentum in the business, it remains challenging to provide an accurate outlook on sales. However, based on the current operating environment, we believe total revenue in the second quarter is likely to be in the range of $174 and $183 million. with shack sales between 170 and 178 million. This assumes a continued general recovery across the country, together with the benefit from new shack openings. We expect our same shack sales to increase in the mid-40s to 50% range for the same period. We're anticipating licensed revenue to be between $4 and $5 million based on recent trends and continued volatility across an uncertain international recovery climate. As is evident in the strength of our digital sales over the last year, our digital transformation has been and will continue to be critical to our growth. Digital sales mix remained strong in the first quarter at 60% of sales, decreasing to 51% in April as in-shack sales increased. Even with this increase in in-shack sales, the retention of our digital sales levels has been impressive, with 90% retained when we compare fiscal April to our digital sales period of fiscal January. In addition, when we annualize our first quarter digital sales, they equate to a digital-only AUV of $2 million, a clear measure of the strength and impact of digital across our business. And although we expect our digital sales mix to come down as impact sales return, we feel confident in our ability to retain and acquire new guests through these digital channels. We've welcomed almost 2.5 million new purchases through these channels since mid-March last year, And whether through our new digitally-enabled order-ahead options, such as Curbside, or delivery now available through our own app, these channels are proving to be effective as both acquisition and retention vehicles, and with digital guests continuing to demonstrate higher levels of both efficiency and spend. We'll continue to build on this strong foundation with further enhancements to the digital guest experience, evolving and improving marketing tools, and new product launches such as the website and new Android apps for this campus. Moving on to profitability, SHAC level operating margin was 15% in the first quarter, 100 basis point decrease versus the fourth quarter, which had benefited from a one-time occupancy credit, as well as the impact of the 53rd week. First quarter SHAC level operating profit margin strengthened into fiscal March, ending the quarter at just under 19%, albeit positively impacted by the 13th week, but a strong sign for our long-term ability to continue our recovery towards pre-COVID levels of profitability. However, the timing and scale of our margin recovery remains highly dependent on those previously highest volume shacks fully recovering to prior sales levels. Food and paper costs in the first quarter were 29.6% of shack sales, a decrease from 30.1% in the fourth quarter, driven primarily by both our year-end and third-party delivery marketplace price increases, partially offset by some beef inflation in the second half of the quarter, which we expect to continue through Q2. Overall, we expect our total food and paper cost line to slightly increase in Q2 as these dynamics continue. Labor costs in the first quarter were 30.8% of shack sales, compared to 30.3% in the fourth quarter, driven by annual wage increases, higher payroll taxes at the state level, and the building back of our team to support a continued sales recovery. As previously shared, we expect 2021 wage inflation to be in the mid-single-digit range. and do not expect to see leverage in this area in the short term. Other operating expenses remain elevated at 15.4% of shack sales in the first quarter, an increase from 14.7% in the fourth quarter due to additional costs associated with operating during COVID and the return of in-shack sales, with the fourth quarter also having the benefit of a 53rd week. Occupancy costs in the first quarter were 9.2% of shack sales, a slight increase from the fourth quarter, which benefited from a one-time adjustment due to the closure of our Penn Station shack, in addition to the 53rd fiscal week in the fourth quarter. The occupancy line continues to be impacted by sales deleverage, particularly in our previously high-volume urban shacks. Given recent trends and the outlook across those various shack-level cost lines, at shack sales of between $170 and $178 million in the second quarter, we would expect our SHAC level operating margin to improve to between 15% and 17%. G&A expense in the first quarter was $19.6 million, including $1.9 million of equity-based compensation and other non-cash items. As we invest across the business and plan to open our largest classes of SHACs this year and into 2022, we expect full-year 2021 G&A to be between $83 and $86 million, consistent with previously guided levels. Pre-opening expense in the first quarter was $3.6 million, an increase from $2.8 million in the fourth quarter, due to the increased 2021 development pipeline on those first half 2021 new shack openings. We continue to expect full-year 2021 pre-opening expense to be between $14 and $15 million, consistent with prior guidance. On an adjusted pro forma basis, we reported a net gain of $1.8 million, or $0.04, per fully exchanged and diluted share, which benefited from lower taxes related to option exercises and share vesting during the quarter, where we receive a tax deduction for the value our employees receive upon option exercise or share vesting. Excluding the tax impact of a stock-based compensation, our adjusted pro forma tax rate during the first quarter was 29.4%. And as usual, a full reconciliation of our tax rates can be found in the appendix of our supplemental material. Given the continued uncertainty around the outlook for the rest of this year, in particular the timing of full sales recovery and the resulting impact on our taxable income, we're not 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, we're in an incredible position of strength as we look forward to the growth opportunity ahead of us. With our cash and marketable securities balance at the end of the first quarter at $416 million, a significant increase following our $250 million convertible debt issuance that we completed in March. For the purposes of calculating diluted EPS, our share count assumes that this debt has been fully converted to equity, resulting in an immaterial, incremental addition of approximately 450,000 shares to our fully diluted share count. In March, we completed an amendment to our revolving credit facility in order to update terms to reflect the convertible debt issuance and to extend the maturity of the credit facility, which remains undrawn. In connection with the amendment, we incurred a one-time interest expense in the first quarter of approximately $320,000, primarily related to the write-off of previously capitalized revolver costs. We also capitalized approximately £110,000 to deferred financing costs and will amortize these over the term of the revolver. And finally, as we've shared previously, tomorrow is my last day at Shake Shack and marks the end of a period of my career that I will look back on with extreme pride and sincere affection. I'd like to thank Randy, my friend and partner, and the entire Shake Shack family for an incredible four years. I am so proud of everything we've built together and excited for all that lies ahead as Shake Shack continues to take the world on. This is a great company full of amazing people and one I will very much miss. Onward, I'm looking forward to cheering on your every step. And on that, I will hand you back to Randy.

Thanks so much, Tara. And as Tara just mentioned, tomorrow is going to be her last day here at the Shack as she begins a new chapter as a CEO. of a private life science company, and I want to take this opportunity to just once again thank Tara for her huge contribution over this past four years. She leaves us in such a strong position, and I'm thrilled to see her take on a CEO role, and I'm going to be rooting for her every success. We will miss you, Tara. Know that you are always part of the Shack fam. Our search process is well underway, and we look forward to strengthening our executive team through this transition. In the interim, Tara's responsibilities will be well transitioned to other existing members of our Shake Shack leadership team. We still have a considerable way to go until we reach full recovery, but every day we're seeing positive signs and increased confidence in Shake Shack's opportunity moving forward. Can you and your family stay safe and stay healthy? And with that, operator, please go ahead and open up the call for questions.

Thank you. We will now be conducting a question and answer section. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that participants limit themselves to only one question. One moment please while we poll for questions. Thank you. Our first question comes from Nicole Miller with Piper Sandler. Please proceed with your question.

Thank you. Good afternoon. Appreciate the update. And certainly, you know, a look at how things are going currently. I wanted to understand the pipeline in terms of how stores have opened. So when I reflect on pre-pandemic levels, I think open at just record revenues, they had honeymoon, and probably were a little disruptive or distorted to comp. And I wanted to understand how the stores have opened during this past year, during the pandemic. And I'm wondering, you know, if they open at more, maybe call it normalized, maybe you could share a percentage or an AUV they open at or percentage of mature volume, because I'm starting to think maybe they enter the comp base and produce a comp list. And while this has always been about dollar sales growth, it seems like this could turn into a comp story. Is there anything you can share on that thought?

Yeah, thanks, Nicole. You know, some of the numbers we shared in the first quarter, just taking those 10-plus that we've opened since, you know, we're opening at that $79,000 a week average. And, you know, that's an over $4 million AUV, right? Really strong start. If you look at going back, call it 18 months or a little bit less maybe, you know, pandemic entries, It's been mixed, right? We've talked a little bit about it. Generally, our shacks have opened pretty strong, but obviously nowhere near what they would have done pre-pandemic. So it's mixed. As you think about that, yeah, it certainly could be something down the road that we expect all of these shacks, both new and current, to be growing well out of this. I mean, you see us over 80% comp in the comp base versus last year, which was the hardest-hit time. We also – are comping against 19, which, interestingly, in the beginning of 19, some of those new shacks entering the base were some pretty busy shacks. We had opened our first in the San Francisco area near Stanford, Palo Alto. That was a really big start. That now comes into the comp base in Q1. So it's just another – I talk a lot about this, but the comp base for Shake Shack has always been, you know, small relative to everything else going on in the company. It's always been something that we watch, but you have to understand it. And we call that out specifically as we talked about some of the 2019 compares. And you look at, you know, it's a small amount of shacks that are causing the negative when you really look at it. And I can tell you, walking around New York City myself today, we had a collab today with a great chef. Madison Square Park Shake Shack was packed. It felt incredible. But if you walk over to the Theater District or Herald Square, two of our busiest shacks we've ever had, they are a fraction of themselves still today. Our Grand Central shack, one of the best we've ever had, is still closed, still closed. You know, these are shacks that will absolutely come back. It's just a matter of time. And when they're comping against the 2019 strike, it's pretty noisy. And that's part of why we wanted to share the 2019, and I hope everybody understands what that looks like. Long way back to the question, we're really excited about the shacks we've opened. You know, our first one in the Portland area, as well as Indianapolis, Hoboken, some superstars. We're really excited about it.

That's a lot to think about and digest and appreciate it. And, of course, Tara, congratulations to you. You'll be missed by our community as well, but good luck out there. Thanks.

Thank you, Nicole.

Thank you. Our next question comes from Jared Garber with Goldman Sachs. Please proceed with your question.

Hi. Thanks so much for the question. I wanted to get a sense of if you have any color on the labor environment, what you're seeing there. Obviously, we've heard about the, you know, supply challenges on the hiring side. And I even noticed anecdotally some restaurant concepts in the area locally here kind of throttling the in-store dining and going back and forth between having open restaurants and just doing digital-only orders. So just wanted to get a sense of what you're seeing there and how you're viewing the market right now.

Yeah, thanks, Jared. Yeah, I mean, I'll walk around my own neighborhood and I'll see some restaurants that'll have a, you know, closing early due to staffing. You know, that's something you rarely saw in the world. Look, you can read any article today and understand what that pressure looks like. It's obvious. It's clear. We're not immune to that. Look, Shake Shack has challenging staffing, has always been part of the restaurant business, always will be. But we're certainly in a particular moment where it's hard, right? It's hard. I think our teams have done extraordinary work in hiring, keeping, and developing staff. many people in leadership positions. But it's not an easy time, that's for sure. You know, we've not seen material impact in any way, but there's moments where we certainly – and it's certain shacks, too. This is a countrywide, every region, from time to time you'll have moments where, you know, you'd like to hire a few more people and make sure that we're fully staffed up. So, look, we gave the majority of our shacks raises last year, the entry-level wages, to throughout the country, most places. That's part of the pressure on our labor line that you've seen and that we are proud to invest in our team. And there's no doubt, you know, there's a lot of call for great people right now. So we'll be looking to keep strengthening our teams, and, you know, it'll be a challenge.

Thanks. I appreciate that. And just one more quick one. Is there anything that we should think about in terms of the urban shacks decelerating on a two-year trend from March to April? It would seem that mobility data looks to be getting better in a lot of these urban environments. I'm just curious why maybe you're seeing a deceleration there.

Well, there's a couple things. First of all, it's minor, right? I mean, if you look at the numbers, they're nearly the same, right, when you look at March-April, but slight deceleration. This is, Jared, why I'm going to keep saying how small the base is and how wildly impacted it is. So, like, let me give you a great example. When you look versus 2019, you might have Las Vegas Strip, one of the busiest shacks in the world, is actually not in the 2020 comp base because at this time in 2020, it was closed, okay? So it's not helping us where it should be. And versus 2019, it's hurting us because it was super busy in 2019. And that one shack has the opportunity to bounce things around. And you've got to understand, and this is where we ask our shareholders and you all to really understand how – how impacted it can be by just a few shacks. There's also some spring break movement in those March numbers, and versus 19 is another thing that impacts it. But, look, I think as we look at it, we are excited by the year-over-year compares. We've got work to do, and it's very clear. I've said this a couple times, and I'll use this language again. When we look at the shacks that are down, we ask ourselves, does it make sense that they're down? And you say, yes. I understand why the theater district in New York is way down and impacting us. You look at the tracks that are up, and you say, does it make sense that they're up? And we say, yeah. You know what? For the most part, it does. And that's where we are encouraged by the signs, and we know we've got a lot of work to do. Look, we need offices to fill back up. We need cities to fill back up. We need Broadway and other things like it, events and games and all the things that will be energetic. We're on the right tracks. We'll continue to improve, I think, and, you know, we'll be impacted a little bit versus 19 individuals from time to time.

And just to add to what Randy just said, as he said, the spring break fell in a different month between the two years, which is the noise that he alluded to. So it fell in April of 2019 and March 2021. So creating a bit of noise when you look at such a short time period between just two single months.

Thanks. Really appreciate the caller there.

Thank you. Our next question comes from Lauren Silberman with Credit Suisse. Please proceed with your question.

Thanks so much, Antara. Congrats on the role. You'll certainly be missed. On the 2Q, just a quick one, comp guide of mid-40% to 50%, can you also understand what that implies for average weekly sales and or the recovery relative to 2019, just given all the noise in the comp base?

No, I mean, Lauren, we're not breaking it down any further at this point. I mean, I think suffice to say, as we've said in the prepared remarks, it's really hard, honestly, to give any kind of forward-looking guidance right now at all with a high degree of confidence. So not breaking it down any further than that range right now, and we'll keep you up to date if we see any major changes in that, but not giving AWS guidance.

And, Lauren, I want to add, too, in addition to the examples I already gave, which are challenging, Governor, we went through in Q2 of last year numerous and various closures from time to time, whether there were protests in a city where a shack had closed and then comes out of the comp base, and the bouncing back and forth of that, just, you know, very hard for you to model, certainly, but it's all baked into that 45% to 50% comp expectation that we have.

Okay. Appreciate that. And then just on digital, retaining 90% of January digital sales, it looks like digital weekly sales seem to be running in line or above what you saw throughout most of 2020. So at this point, together with all the enhancements you've made to your digital ecosystem, is your expectation that you'll be able to hold on to or even grow digital weekly sales as on-premise continues to rebuild, understanding the mix might come down or is expected to?

Yeah, I think it's really hard to say. I'm sorry to answer without an answer. But right now, I think we know how important digital has been through the last 12 months. We knew how important digital was going to be to our business for the long term. And yes, we're really encouraged by some of these metrics that we're sharing. I think we do expect digital mix to continue to come down as internet comes back. But as I mentioned earlier, in the prepared remarks, we're also really bullish around digital as an acquisition tool, as a frequency tool, as an engagement tool. So I think, you know, without being able to give specifics as to weekly sales levels or mixed numbers, digital is going to stay a very important part of our business, and we'll continue to be investing in the team and in marketing tools to continue to use what's really just a foundation at this point in terms of some of these relatively newly launched products.

All right. Thank you guys very much.

Thank you. Our next question comes from Michael Tomas with Oppenheimer and Company. Please proceed with your question.

Hi. Thanks. Hope you guys are doing well. You know, your average weekly sales in April are a little bit above what you saw in March, but your guidance for margins for the second quarter, 15 to 17 percent, is well below the 19 percent exit rate you guys were talking about for March. Can you maybe walk through what's changing between March and what you're expecting for the second quarter? And then I know you're not providing guidance beyond the second quarter, but is that a good base to think about as we build through the rest of the year, and what are some of the things that we should be keeping in mind, either headwinds or tailwinds to those numbers? Thanks.

Hey, Michael. It's Rick here. Yeah, I can take the margin question. So, yeah, as Paul mentioned, and I think Randy, who's prepared for March 2, we were – Q1 – We're about 15% in terms of our SHAC level margin. We exited pretty strongly at 19% of SHAC level margin in March. So that gives us a bit of confidence sort of going forward that we can get back to those sort of pre-COVID levels of margin. But having said that, and this is where I think sort of the answer to your question lies, there's still a huge amount of moving parts within the various line items. Tal went through a bunch of them, but I'll cover a few of them. you know, on here. One, you know, we've got some, you know, we've got kind of started some de-inflation, you know, in the second half of the first quarter. We're starting to staff up, right? We're starting to staff up for the ongoing sales recovery, particularly in the in-check dining room opening, those types of things. And I think also, you know, the headwinds around, you know, some of the large, you know, shacks that we've got that have really, you know, that have sort of reduced levels of sales, that we really sort of rely on those to recover before we can recover those types of margins. I think there's a lot of good signs in terms of how we're sort of managing the cost of the business as the sales recover. But there's a bit of a lag. You know, we want to staff up, we want to be prepared, we want to give that guest a great experience when they walk in the shack. And so we're starting up slightly in advance of those sales levels. But I think You know, as I say, that's really what's driving the 15% to 17%, which would still be an improvement on our Q1 levels, which is about the 15% range. So I think we're comfortable with where the margins are lying right now. We're pleased with the exit 19% in March, and we'll continue to manage that very, very closely as we move through the next quarter and the rest of the year. And then if you'll remind me in a second part of your question, Michael, that would be helpful. Sorry. Okay.

No, that was it. You answered it. I'm going in the second half of the year, so I appreciate it. Thank you very much.

Great. Thanks. Thank you. Our next question comes from John Glass with Morgan Stanley. Please proceed with your question.

Hi there. And Tara, congratulations and best of luck. We'll miss you for sure. Randy or Tara, just in reflecting on your suburban shock performance in March and April, and I don't want to beat this, but almost every restaurant has seen a pretty massive acceleration. And I would say most restaurants are seeing sales levels well above 19 levels. There's stimulus spending, there's pent up demand. There's just a lot of reasons. Why do you think that's not the case for Shaq then? Because I would think that you would get those same benefits.

Well, if you look, I mean, John, if you look at it, we're basically flat. So given where we've been, if you follow that, that, That trend line, that's certainly an improvement, certainly an upward trajectory that we have been on. So I won't speak to other more casual values, but, again, I'll keep speaking to the small and volatile comp base. This is on a comp base of half of our restaurants-ish, a little bit over that. And we've gotten to basically flat in the suburban versus 19. So, look, we certainly think we've benefited a bit from stimulus. It's hard to always quantify exactly how much and how that works. But that's probably been good for us, too. But, look, we're continuing to rebuild. We're in a lot of places, whether suburban or otherwise, that don't act like anyone else in your coverage book. That's just what it is. If you look at the Shake Shack locations, even the suburbans, they are generally put in places where people gather. And, you know, that's taking time to come back. People are gathering locally. differently. And again, if you look at everything is continuing on the upward trajectory, it's good news, and we want to get further. And we'll be we'll be working on that. But we definitely need the patterns of how people move. You know, to keep improving, you know, just to note, our suburban average weekly sales also continue to increase over time. So that's a good sign as well.

Okay, the only thing I would ask a couple things that after that is one, You know, we mentioned the bottom 25 performing shacks. I mean, they were mostly urban, but there are some suburban in there, some large sort of shopping malls and things that are getting hurt sort of equally as hard. So I think to your point, we've seen, you know, some really, really strong performances on the suburban side of things, like Randy said. And they are good on an AWS basis, but, you know, on a comp basis, they're relatively flat. Okay. Thank you very much.

Thank you. Our next question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.

Great. Thank you very much. I have one question and then just a quick follow-up. The question, Randy, just as you think about 21 and 22 unit openings, primarily, I guess, U.S. company operated, but ramping up next year to 45 to 50, now you're approaching, I guess, one a week, which would still be, I guess, 20% or more unit growth year on year. So I'm just wondering if you can offer some confidence in terms of The people, the real estate, people are talking about slowdown in terms of getting people to actually build these sites. I'm just wondering your confidence in accelerating and the system being able to handle that level of growth on what is now becoming a larger and larger base. And then I had one follow-up.

That's a great question. I think we have a lot of confidence in that. The sites are there. We remain a premier site. brand and tenant for developers and all kinds of sites. So the sites we are very confident in. The openings of people, that's where we're working, right? As we said earlier, none of that is easy. It's never been easy, and it certainly won't be easy. But we feel really good about our company and our team's ability to meet those targets. That is something that we have continued to do over years. The thing we'll be watching a little bit is cost to build, right? You're seeing this in lumber and steel prices. We know that as we look ahead at contracts that are moving ahead into later this year and into next year that will be built, we'll probably expect some cost inflation, some of those raw materials, and the overall build cost. Hard to say whether that will stick. We all know you can see lumber – and steel are just up dramatically. We've got to build things, right? So that costs real money. So we're confident we've got them built. But we're watching that as we take a look to keep an eye on the overall investment that we expect to tick up a bit. And we'll talk to that more later as we start to see those prices start to come in. It hasn't really hit us yet, but we expect it to come.

Gotcha. And then just on the follow-up, and it kind of ties in with my congratulations to Tara – But as you think about the search to fill in the role, Tara obviously now was CFO and president. It seemed like you gave her the president role to give you more time to focus on the future growth and vision of the brand. So I'm just wondering whether you're thinking about hiring a CFO and a separate president or whether there are other opportunities to expand in the C-suite or whether you think one person might be able to fill that void. Thank you.

Well, that's a great question. You know, we're going to hire a great person. And that person is then going to fit their skill set into who we are as a company, as an executive team and a leadership team. We have some incredible candidates that want to be here. At this time, we're not assuming we will fill the president role that Tara grew into over time. And she did amazing work in that role. And in the meantime, she also lifted her team and she lifted the entire executive team to the point where we're really operating well as a leadership team in this company right now. And we want to bring in a CFO who will be focused on those tasks mostly and contribute to every bit of the strategy. So we're excited to, you know, eventually find and hire the next right person. We'll keep you posted when that happens. Great. Best of luck, Tara.

Thank you. Thank you. Our next question comes from Andrew Charles with Cowan. Please proceed with your question.

Great. And, Tara, best of luck in your next role. You know, I'm sure it was a tough decision, but, you know, wish you the best and good luck. Two questions for me. I know there's been a lot of questions around the underlying March to April performance, but if I look at the overall 2Q guidance, it does imply underlying trends decelerate further in the combined May and June period. And I'm just trying to get a better sense of why that is. I know the reopening is something that we're all pretty excited about, but why does the guidance imply a bit more deceleration looking forward?

I mean, I think as we've guided forward through Q2, it's generally a relatively flat seasonal period when you take sort of the last part of the first quarter and the second quarter. We're focused on driving average weekly sales up and to the right. But there's still a lot of uncertainty out there. And so I think we're taking what I think is the right approach, which is a cautious approach to look at this point in time, even though, as Randy started, spring has been ushered in to New York City. There's still a lot of recovery that we need out of those urban shacks. And so we want to be cautious to that fact at this point.

Okay, great. And then the follow-up question was a few years ago, the concept test at breakfast, I know it's pretty popular in travel centers, and right now, obviously, those are mentioned as some of the high-volume locations that are closed, even transit is obviously down significantly. But, you know, looking ahead just with the reopening, is breakfast something you're looking to look more into? I know it's offered at the Madison Square Park location. Is this something you guys are taking another look at? Take advantage of increased mobility for a day part. That's probably the most sensitive to mobility.

You know, it's not a focus today, Andrew, but one of the exciting things that we look at when we start talking about drive-through, drive-ups, shack track windows, and that curbside convenience is it starts to open up that question a little bit more. If you look traditionally at shack sites, there are certain ones that could certainly be great for a breakfast opportunity, but we think that functionality of the format shift for the long term could create a better – for moments like that. So something we're looking at, not an immediate focus. Our immediate focus is, you know, most of the shacks that serve breakfast are the airports and transit centers that are either closed or still trying to figure out their sales. So we'll get back to that for sure. We're actually going to be testing some new breakfast items not too far from now at some of those airport shacks, learning a little bit, and we'll see. But, you know, it's definitely something we've got our eyes on for something down the road, not an immediate focus.

Thanks, Randy.

Thank you. Our next question comes from David Tarantino with Baird. Please proceed with your question.

Hi. Good afternoon and congrats, Tara, on your new role. Very exciting. We'll miss you. I first have a clarification question on how you're viewing the sales trends. I want to maybe use Q4 as the starting point. If I look at what you're running in March and April on that kind of two-year comp, it doesn't look like there's been a lot of progress on the recovery. And specifically, you know, again, looking at some of the suburban sites, it looks like it actually ticked down a little bit. So I guess the clarification question is, are you saying that that is a function of what's happening underneath the surface in the comp base, or is there something else in your mind that's maybe causing that trend to stall out a bit?

Yeah, it's a little bit of a mix. I mean, again, it's not – it is sort of – But if you look at some of these shacks, some of these huge shacks, you know, it's hard to improve. I'm going to keep using the theater district as a perfect example of a large swinging shack versus 19th. So, yeah, I mean, we've got recovery to go. It is our numbers in the comp base are wildly swung by large urban restaurants. And that's why, you know, we're looking at average weekly sales. to focus on that has continued to see an upward trend, not percentages. And, um, and we know that that's part of it. We know that some of the noise there and, um, you know, we're looking forward to that continuing to improve over time.

Okay. Got it. And then my real question, Randy, um, you have over $400 million in cash on the balance sheet now, which is probably more than you'll ever need to, to grow the business. Um, I guess what are your thoughts on why you're having or sort of having that much cash on the balance sheet? And what are your specific thoughts on how you deploy it, including whether you would be interested in making an acquisition or something more transformational?

Yeah, well, there were two critical fundraising moments that happened this year. And, you know what, we're really thankful for them. If you go way back last year, it was at a moment where no company was unsinkable. and we wanted to make sure we ensured our future. We did that with an equity transaction, and that brought in a significant sum. And then we were prepared as we saw the convertible debt market reaching incredible opportunities. Just to be clear for everyone who doesn't know, we were able to issue debt for $250 million at a 0% coupon for seven years. We may never see numbers like that in our lifetime. So we took that opportunity, and we took that opportunity to fortress this balance sheet in a way that we've never had at Shake Shack, and very few restaurants, companies, or companies of our type have it. So what are we going to do with it? We're going to open more restaurants. We're going to accelerate growth, as we told you. We're going to look to make digital investments and people investments that allow for growth. Take a look at our actual size versus anyone else in your coverage universe. And you see the opportunity and how big and huge it can be when we get things going. And that's what our plan has been, to invest in digital drive-through, other opportunities that accelerate and open that funnel. We are wide open to other things, but it is not our focus today. And we'll look at it. We're going to look at things that are exciting and can continue to drive this company forward, and we're thrilled to have that basis of cash to do that. It gives us a a really infinite playbook and mindset with which we can operate.

Thank you very much.

Thank you. Our next question comes from Peter Saleh with BTIG. Please proceed with your question.

Great. Thank you. And Tara, best of luck to you in the future. I want to come back at that last question maybe in a different way with capital allocation. Randy, how are you thinking about maybe development costs per unit as we go through this year and into next year, given all the inflation on labor and building materials? Is there an opportunity for you maybe to deploy more of that capital on a per-unit basis? I don't recall how much TI allowances you guys receive, but is there an opportunity to maybe reduce those allowances a little bit and take a little bit of a lower rent?

Yeah, with each shack, I mentioned this just a few moments ago, but we definitely do think there's going to be some cost pressure on the total cost to build for some period of time. It's really beginning now. You're seeing it in lumber and steel and other build-out costs, some labor costs as well, depending on the market. So we do expect that overall cost to build a shack will increase for some period of time. We'll see. Nobody knows if this will be a long or short-term deal. There's obviously a lot of demand for growth and limited supply on some of these items. So we feel prepared for that. We feel ready. And at the same time, we do in every build look at TI. We're fortunate from a lot of landlords we get some very significant TI. And we do measure with each time whether it's best to have the cash or to have potentially lower rent. And with each one we calculate it. With each one we think about for that site what makes the most sense. from an ROI perspective, and we look at our IRR and MPV and every decision on that and try to make the best possible approach to hit our long-term targets. And we do that as a class, right? We look at the 40 shacks as a class and say, how do we want to balance that out? So, you know, and again, as we do more with these bigger formats, especially in the early days of drive-through, we're going to invest money in drive-through. Some of these formats and pad sites that we think will be a lot of our future They're going to require initially at least an additional investment, and we'll balance that out with something easier to build, such as a food court. That might be lesser to build and still have a very strong return. Some other balanced, you know, urban and core format shack. So we want to do a little bit of everything. We believe now is the time to ramp that up, and we've got our eyes on the cost.

Great. And then just lastly, how are you guys thinking about commodity inflation? I don't recall hearing a commodity inflation number expectation for the year.

Yeah, we didn't give a full commodity inflation number. What we did say was that we've seen some recent inflation on the beef side of things, nothing to the degree that we saw in the middle of last year. of course, but something we're monitoring closely and waiting to see exactly how that pans out from a time perspective. We didn't actually give an updated commodity guidance for the year.

But we do expect that beef inflation is likely to carry on through Q2 to some degree, so may have a bit of an uptick on that food line as a result.

Understood. Thank you very much.

Thank you. Our next question comes from Brett Levy with MKM Partners. Please proceed with your question.

Great. Thanks for taking my call. And Tara, enjoyed the time. Best of luck to you. Randy, you just mentioned drive-thru, so I guess I'll just continue on your store base. If you think about What you're seeing now with all your different iterations on ShackTrack, what kind of learnings are you seeing in terms of fails, margins, makeup of the transactions, how your consumers are differing? Just all of the insights that you might have from the different iterations of the track. Any color on that would really be appreciated. Thanks.

Yeah, it's so much learning, and it's so fast and exciting. You know, I did a tour with our team this week in New Jersey, right, and we were looking at all types of sites, both current and future, drive-through, drive-up, and shack-track, and some that are more urban. And it's really exciting. I think what we love about it is creating a new level of convenience and ease of use for the guests. You know, with each one, they present different opportunities. So some might really lean into curbside. You know, there are shacks where curbside delivery has really taken off, and it's great. There are shacks where it's, you know, we just opened in Indiana, for instance, with our first or second, excuse me, shack track drive up, and people are choosing it. People are figuring it out already. They go into our app. They know they can preorder. They know they can choose, hey, I don't have to get out of my car. Boom, I go around. On margins, look, margins are noisy right now given the recovery period, so hard to answer that. Our goal with all of this is to drive average check. We believe we can do that with these formats, with digital especially, to drive ultimately strong AUVs and strong profits. That is our goal. We're on that road to rebuilding that, and we've got a lot to learn and a lot to build, and that's why we're doing these formats because we think Each one of them in their own way will point to different ways to capture some of that opportunity.

Thank you. Our next question comes from Jim Sanderson with North Coast Research. Please proceed with your question.

Hey, thanks for the question. And Tara, congratulations on your new opportunity. I wish you well as you pursue that. I wanted to ask a little bit more about some of the pain points you're seeing from margin recovery going forward. And I want to understand, is it primarily just recapturing? And could you maybe give us a sense of how those 25 bottom performing stores are impacting or pulling down store margin or operating margin to give us a sense of perhaps what the margins could look like if we excluded them.

Jim, I think we lost you for a couple of seconds. I think you were asking, correct me if I'm wrong, a couple of things. One, about some of the pressures we're seeing on the margin line.

Yes, that's right.

And how the bottom 25 checks are impacting that. That's right. Yes, I think, you know, Tara covered a number of them in the prepared march, and I think we've touched on a few of them. But I think, you know, from March perspective, Q1 was at 15%. We exited the quarter with March at 19, albeit that had a benefit of the 13th week. Some of the pressures are, you know, are ones that we are taking, right, which are we want to be fully staffed and fully prepared for the service recovery, right? So we're We're staffing up in advance of that. We want to make sure the shacks are ready for people to come in and enjoy their food. So there's a bit of us sort of preempting the sales recovery and making sure that we're correctly staffed. I think on the other side of things, there are some headwinds that have been around through COVID, such as the delivery levels, right? the delivery levels around, you know, the elevated sort of delivery levels we've been seeing throughout that, which albeit, you know, InShack is coming back, but retention has been high in our digital terms, which we're really, really pleased about. From a commodity perspective, we've touched on beef, which we've seen in the second quarter, you know, second half of really the first quarter, we've got a line of sight to that, and we expect that to be highly inflated through the second quarter. And then I think, you know, as we look at the bottom 25 shacks, I mean, they tend to be in the higher cost and higher urban areas, right? And they are the shacks that drive pretty high leverage across, you know, across their cost base. So, you know, the route to sales recovery is going to be dependent on those shacks, and the route to our full margin recovery is also going to be dependent to a degree on those shacks. whilst we're sort of maintaining and really managing costs around the remainder of the shacks that are performing well. So a number of things, a lot of sort of moving parts across all of those line items, which we're managing on an individual basis to make sure we're making the right decisions. I mean, it's still tough operating a restaurant right now in terms of, and those types of things. There's still some costs that are elevated around PPE. That's still a thing. So we're managing those, and these costs are coming into the shack and moving out of the shack. We make those decisions very, very carefully each step of the way.

Understood. And just a quick follow-up question. As you've seen your digital sales slightly slip, is there any noticeable change in mix, meaning are pickup orders slipping more rapidly? Is it delivery? Anything that would change that mix between consumers picking up versus using the delivery service?

Yeah, we don't like to think of it as digital slipping. The mix is changing. But we're maintaining a lot of those digital sales, all right? But we've not broken down that level. We know our customers move between all of our channels. Our guests move between all of our channels. So we don't manage it sort of on a channel-by-channel basis. We want to make sure that all of our channels are sort of receptive to the customer depending on their needs for that particular day.

All right. Thank you.

Thank you. Our next question comes from Chris O'Cole with Stiefel. Please proceed with your question.

Okay. Thanks. Good evening. This is actually Alec Estrada on for Chris. You know, looking at the regional breakout of same-shack sales, the southeast was the only region to comp positively in April relative to 19, presumably with Dynon still depressed. Should the off-premise volumes there kind of remain sticky? Do you have a sense for how much higher those AUVs could be in the region? And does that make it an increased focal point for future development plans?

Yeah, sorry, just trying to – I'm looking at the suburban opportunity there. I mean, we've got – every region got better on that chart as you look at it. And, you know, versus 19, as you said, southeast starts to pop up. As we look at development plans, we think every region has great opportunity, including our hardest hit, which includes Manhattan and New York City. But if you look at it, you know, versus 2020, every region is significantly up, all on the right trajectory, including our hardest hit, including Manhattan. So when we think about development, we really think we can be everywhere. You know, I mean, we've got a big opportunity here in every one of those major regions of the United States. We're obviously pretty focused on California, some of the other major regions in the Northeast that we've been strong, but we're not going to let the pandemic dictate the growth plan solely. There's a lot of learning that's happened this year, and we're going to add that to our already robust development plan.

Thank you. Our next question comes from Brian Vaccaro with Raymond James. Please proceed with your question. Hi, thanks, and good evening.

I appreciate the AWS disclosures. It really helps cut through the comp noise, you know, the one year, the two year, taking into account the relatively small base of the comp base. But, you know, I guess I was hoping to get beyond the comp base and maybe think about the 192 company units in total. And could you give us a sense of average weekly sales in suburban versus urban markets, sort of including all class years in the portfolio, and maybe comment on store margins cut across those same lines?

Yeah, that's something we haven't disclosed. And I think, you know, there's reasons for that. I mean, those are going to change significantly over time, right, as, you know, our guests move in and around the country, around their sort of environment, you know, in between the cities and the more suburban areas. So that's not information that we've shared at this point.

Okay, and maybe we could take a step back, sticking with weekly sales. I guess I wanted to ask the question, what does a full recovery in average weekly sales look like in your view? You know, I guess I'm trying to level set expectations versus where you were pre-COVID. I think by our math you were doing something just under $80,000 a week in 2019, but there's sort of this natural decline in average weekly sales as you layer in new units. Does a reasonable recovery get you back to maybe the low to mid-70s? Just curious, given all the moving pieces, you know, pre- and post-COVID.

It's not a number, Rhonda, that we've got into, obviously. It's certainly going to continue to go up from here on average for weekly sales. You know, as you said, we had about a $4 million AUV roughly pre-COVID, a little bit over that, I think, in that $80,000 range, let's call it. And, you know, as we've opened a lot of shacks, as we've said, we expect that number to come down slightly as we add these classes in the $3 million shack average range. So I think we all need to see COVID shake out a little bit in the world, come back to a little bit more of a normal operating environment where all of our shacks start to settle into where they belong. But it's not a number we've given. We expect it to continue to go up over time from where it is today, though.

All right, fair enough. And ask him if I could, sorry if I missed it, how many company unit openings do you expect in the third quarter and fourth quarter? Thank you.

Well, we have between 16 and 18 in the first half, about 35 to 40 for the year. And we do think that will be heavily fourth quarter weighted. So the third quarter will be a lighter development quarter as was the second quarter. So, you know, most of the development this year is going to be in the first and then the fourth quarter.

Great. Thank you.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Randy for any closing comments.

Thanks, everybody. Really appreciate everyone who dialed in tonight, and thanks for following us. I look forward to seeing you soon at a shack. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.