Shake Shack, Inc.

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Shake Shack third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Should you require operator assistance at any time during the conference, please press star 1 on your telephone keypad. As a reminder, this conference is being recorded. I will now turn the conference over to your host, Annalee Leggett, Senior Manager of Investor Relations and FP&A. for Shake Shack. Thank you. You may begin.

Thank you, and good evening, everyone. Joining me for Shake Shack's conference call is our CEO, Randy Garuti, and CFO, Katie Fogarty. 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 financial details section of 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. As a reminder, and as we have discussed and disclosed for several quarters now, 2020 included a 53rd week, and to normalize for a consistent like-for-like comparison, our comparable periods for both 2020 and 2019 have been shifted forward one week from the fiscal calendar. We've included an example calendar on page 19 of the supplemental materials. By now, you should have access to our third quarter 2021 earnings release, which can be found at investor.shakeshack.com in the news section. Additionally, we have posted our third quarter 2021 supplemental earnings materials, which can be advanced which can be found in the event and presentation section on our site or as an exhibit to our 8K for the quarter. I will now turn the call over to Randy.

Thanks, Annalie. Good evening, everyone. I want to start off this call, as I often do, by thanking our teams. There simply has never been a more challenging but simultaneously more rewarding time to be working in the restaurant industry and in our SHAC family. Our teams continue to lead the dynamic sales recovery we're experiencing across the globe, while navigating some real pressures in a constantly changing environment. Opportunity abounds for this team, and I'm proud of them for always standing for something good. This quarter represented the highest total revenue quarter in our company's history. With all the noise, it's easy to overlook that revenue is up 49% this quarter versus the same time last year. In October, we had our highest ever company-operated SHAC sales day, hitting just under $3 million. And in the fourth quarter, we expect to surpass $1 billion in system-wide sales for the year, a first for us. That is quite a comeback our team is making. Our same-shack sales compares continue to improve and are nearly back to 2019 levels on average, most notably exiting fiscal October at down just 1%. Our hometown of New York and our hardest-hit urban shacks are leading the way, building every day as the energy of offices, events, commuters, and eventually tourists slowly returns. For Shake Shack long-term, we believe the balance of urban renewal and the strength and focus of our suburban models will build a solid foundation for the future. None of us knows what's ahead in this environment, but we're hopeful this momentum continues. Yet, as sales keep climbing back, we acknowledge profitability challenges remain, and there's a fair amount of uncertainty for the world in the coming quarters. As many industries have shared, we too are experiencing a swift and broad acceleration in the cost of goods, and labor pressures facing our business. In the third quarter, this coincided with a high number of shack closure days related to COVID and other weather events, which impacted our sales. Katie will dive more into the detailed numbers in a moment, but I want to name a few highlights. As seen in nearly every industry, and especially in hospitality, staffing our shacks remains challenging, but it'll always be our top priority as we strive to deliver enlightened hospitality at every one of our touch points. In July, we made significant investments in higher wages, retention bonuses, and leadership development initiatives. Still at times, and in some shacks, we remain below optimal staffing levels and are working harder than ever to attract and retain the strongest teams. You can count on us to invest in wages, bonuses, and incentives that take care of our teams and offer the kind of career opportunities our teams need. All this will come at a cost, and you've seen this in our Q3 numbers, and you should expect this impact to remain a pressure on near term as we work to elevate our people. In addition, we're seeing inflation throughout the supply chain. Most of the premium ingredients we buy, such as the no hormone, no antibiotic proteins that separate us from traditional fast food, have seen significant increases in a very short period of time. As just one example, beef, the largest part of our basket, was up approximately 30% in the third quarter compared to the same period last year, and up high single digits in from just the second quarter. With supply chain inflation and disruptions being felt across the globe, we're expecting our cost of goods to remain elevated over our historical levels for the foreseeable future. To offset some of this pressure, in mid-October, we took an additional 3% to 3.5% in price across our regional price tiers. This is ahead of our normal annual price raise of roughly 1% to 2%. We've remained conservative on price to shake shack for the 17 years we've been in business, and believe we have continued pricing power should we need to exercise that further next year. So with sales coming back, accelerated growth ahead, and margins pressured, where are we looking around the corner? Well, as we wrap up 2021 and plan for the next few years, here's where we're focused. First, we're elevating our people. You've heard me talk a bit about this today, but we're going to do even more to build a diverse and winning team to meet the growth ahead. We expect to continue to invest in higher wages for our teams, and programs that fuel their growth opportunity. In 22, we intend to host our biennial leadership retreat, where we'll bring together leaders at every management level across the country and the globe to align, inspire, and plan for the growth ahead. Second, we're in the midst of a digital transformation, investing deeply in the omnichannel guest experience that will lead our future. We've unveiled a brand new website focused on the guest ordering experience, We're launching new menu items exclusively in our app, driving sharp increases in digital guest acquisition, engagement, and sales. We're investing in data infrastructure to better know and connect with our guests more personally, whether through our digital channels, email, and potential offers and rewards. And in every way, we're working to make the digital hospitality of our company an even better guest experience than we've ever had. Count on us to continue to make material investments in our digital transformation in the coming years. As of fiscal September, we had retained nearly 80% of our digital channel sales compared to fiscal January 21, even as in-shack sales return. So it's clear these investments are paying off. Third, we're working hard to build a better shack. You've heard us talk a lot about our excitement for our first ever drive-thru opening this year and our commitment for up to 10 through next year. Construction is coming together for our first few drive-thrus located across suburban locations in Kansas City, Minneapolis, Orlando, and Detroit. These are drive-thru heavy markets where we can optimize our learnings, adapt, pivot, and add to the dialogue of this evolving new format for us. We're also working to optimize our other core shack formats, learning and adding to our drive-up window shacks, most recently opening our newest in Oaklawn in the Chicago area. And all the while, focusing our long-term work on smarter designs and capital allocation, and four-wall metrics that will drive the rapid growth we have ahead. As of fiscal October end, we've opened 25 company-operated shacks this year, with five of those in the third quarter. The fourth quarter will be a busy one as we look to open between 10 to 13 more restaurants. Our new shacks this year continue to outperform the overall company average, strengthening our brand across the country. 2022 class will be 45 to 50 shacks, our largest class ever. About 25% of the class will have shack track drive-up or walk-up windows, and we expect up to 10 drive-through formats. As is often the case, and maybe even more so next year due to supply chain disruptions, we expect the class of 22 to be heavily back-weighted to the latter part of the year. It's also important to spend some time talking about the incredible growth in our license business. We've opened 21 new license shacks so far this year through fiscal October and remain on track to open up to 25 total this year. During the third quarter, we welcomed new shacks in Singapore at Gardens by the Bay, in Monterey, Mexico, and Hangzhou, China. Next year, we'll be going even deeper in these regions as we expand into brand new markets, such as Chengdu in central China. On the domestic license side, we remain committed to growing our presence across airports, event venues, and roadside shacks in the coming years. We also want to congratulate our friends at the Houston Astros, who once again brought shack burgers to fans all season and all the way to a great World Series. We're proud to partner with them and some of baseball's best as we bring Shake Shack to sports fans in stadiums around the country. While our licensed business continues to benefit from the overall global recovery, conditions do remain volatile and ever-changing. As a reminder, as of fiscal October end, six of our airport locations around the world were still temporarily closed. Many of the pressures we feel here exist similarly across the globe. And we're working hard with our licensed partners to keep sharing and building shacks that sustain the test of time in some of the world's greatest locations. Finally, we're working continuously to create an uplifting guest experience by elevating everything we do. We're focused on gathering communities, enriching our neighborhoods, launching great products, and driving our brand in new and innovative ways. On the menu front, we're really excited about our latest LTOs, the Black Truffle Burger and Parmesan Chicken. black truffle fries, which began as an app-only option to drive digital engagement. This burger features sauce made with real black truffle oil and is layered with crispy shallots and Gruyere cheese. At $8.99 in most shacks in our urban markets, this item also pushed the upper envelope of pricing tiers for us, and it's going to teach us a lot about our opportunities to offer even more premium items down the road. On the beverage front, we remain focused on growing our beverage attach rate, In the quarter, we saw continued strong performance from our cold beverage innovation of cocktail-inspired summerades, followed by our October launch of our new winterades, featuring seasonal flavors of cran citrus punch, pomegranate yuzu lemonade, and apple ciderade. In the quarter, we also teamed up with our friend Christina Tosi of Milk Bar for a limited time offering birthday cake and cornflake chocolate drizzle shakes, which we featured in special promotions through our digital channels. Menu innovation continued. continues to be an important part of our strategy to drive traffic to our own digital channels and increase engagement when guests trade up to our exciting LTO offerings and menu add-ons. On the brand side of Shake Shack, we're doing more fun work than ever. Recently, as one example, as part of Ad Week here in New York, we teamed up with Snapchat and turned our Hudson Yard shack into the Snap Shack with a full takeover where the Snap team launched their new augmented reality products inside the shack itself. You could download special filters, experience virtual world of characters partying in the shack upon arrival, and snag exclusive merch through your Snap app. These are the focuses where we need to be spending our time and investing our capital right now. People, digital, new shack growth, and the guest experience. Our team is excited for what's ahead. I'll hand it off to Katie to share more about the details of the quarter and expectations moving forward.