Shake Shack, Inc.

Greetings, and welcome to the Shake Shack fourth quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Anna Lee Leggett. 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 an isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release in 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, 2020 included a 53rd fiscal week, and to normalize for a consistent like-for-like comparison, When discussing 2021 year-over-year sales and revenue metrics tonight, we've excluded the impact of the 53rd week in 2020. We've included metrics including the 53rd week in our press release and a slide detailing the impact to the same-shack sales calculation in the financial details section of our earnings supplemental. 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 fourth quarter 2021 supplemental earnings materials, which can be found in the events and presentation section on our site, or as an exhibit to our 8K for the quarter. I will now turn the call over to Randy.

Thanks, Annalie. Good evening, everyone. Tonight, we'll highlight the strong fourth quarter recovery and full year 2021 performance, following up from our pre-release of initial revenue and profitability results earlier in January. Katie and I will also be giving color on the current quarter's performance, especially in in light of Omicron impacts. As always, I want to take a moment to thank our team. This recent Omicron wave amidst an already challenging staffing environment has been a tough hurdle for our teams. The way they get out there day after day to take care of each other and their communities amazes us, and they deserve our thanks. More than ever, it's important we maintain our commitment to stand for something good by elevating our people. This is Shake Shack. The fourth quarter represented a strong improvement in sales and profitability. and highlighted what recovery can start to look like when urban centers travel in return to pre-COVID movement patterns take hold. In 2021, we had a record system-wide sales of over $1.1 billion, growing over 47%, marking the highest sales in the company's history. Average weekly sales outpaced historical seasonality at 74,000. Same-shack sales were up nearly 21% versus 2020. and for the first time pushed positive versus 2019 at up 2.2% due to the strength in both urban and suburban markets. Our licensed shacks in the U.S. and around the globe also performed well, contributing to record licensed revenue. Our shack-level operating profit in the fourth quarter was 16.4%, benefiting from strong sales offset by continued labor and cost-of-goods inflation. The environment of commodity and labor wage inflation is still taking a material impact on our restaurant margins. We expect this dynamic for the foreseeable future. But in order to offset some inflationary pressures, we took a price increase of 3% to 3.5% in October of last year. Given the continued outlook, we've decided to take another 3% to 3.5% in March, resulting in an inflation-based price raise of 6% to 7% heading into Q2. We'll also be raising our price premium on third-party delivery services from 10% to 15%, higher than our in-shack pricing. This gives us the opportunity for better profitability on those channels and even more reasons to drive people to our own digital channels for the best value. Shake Shack has historically taken roughly 2% price per year, and that's given us a strong value proposition for our premium products. We believe these current price raises are necessary to protect margins. We'll be keeping a close eye towards the cost of our business, and we'll consider whether additional price may be necessary later this year. We're committed to delivering a high-quality restaurant experience at a reasonable price, and believe this value proposition is key as we expand in new and existing markets across the country. While the fourth quarter results represented a lot of optimism around our recovery, we started this year with much more volatility on the business due to Omicron. The first quarter typically experiences a seasonal decline in sales versus the fourth quarter, but in January, a sharp increase of COVID cases limited our ability to staff and keep all of our restaurants fully open. Additionally, we saw many of the drivers of our business, such as office returns, events, travel, tourism, and the general gathering of people that contributes to Shake Shack's best results turn downward. Combination of lower than average sales per hour, reduced hours and outright closures due to COVID resulted in materially lower sales versus our seasonal expectations. We expect these trends may continue to impact sales in our company owned shacks and our licensed business through the first quarter. However, We're happy to report a steady uptick in sales over the last few weeks. With fiscal February month to date, same-shack sales of approximately 13% as of Tuesday of this week. With Omicron rates now plummeting, we'll point back to the fourth quarter as an indicator of the kind of momentum we know can occur as a more normalized consumer environment returns. No one quite knows the timing of how people will move about following this recent Omicron wave, but we're bullish on what spring and our recovery can look like later this year. So let's check in on each of our strategic pillars for 2022. First, elevating our people. We're not alone in the challenges of staffing and increased turnover amongst our teams. Omicron exacerbated this over the last couple months, and our teams work diligently to hire, train, and develop leaders at every level. We'll remain an employer of choice through our competitive pay, benefits, and commitments to our team and the way we take care of them during tough times like these and through their tenure as they rise up through the ladder of opportunity here at Shake Shack. Heading into 2022, we have raised hourly starting wages more than 13% over where they were at the end of 2020. This year, for the fourth year in a row, the Human Rights Campaign Corporate Equality Index gave us a 100% score and named us as the best place to work for our LGBTQ plus team. Yet another way our team is recognized as we stand for something good. This year, we'll also host our Biennial Leadership Retreat, where we'll gather all of our managers, partners, key suppliers for a week of inspiration, learning, and connection as we prepare for the incredible growth ahead. In 2021, we filled nearly 60% of operations leadership positions with internal candidates, 70% of those being people of color and approximately half of those promotions being women. We still have much work to do, but we're incredibly proud of how the team is developing. Our second strategic pillar is our focus on digital transformation. Katie will go into more specifics here, but I'll begin by sharing that over the past two years, we've invested deeply in our digital transformation, shifting guest preferences over to our digital tools, improving our products and guest experience, adding 3.5 million new app and web purchasers since March, 2020, and enhancing all the ways our guests can more easily and more frequently come to the shack on their terms. We are building a true omnichannel experience. And this year we're We're investing in new brand marketing within our digital products to enhance personalization, drive frequency, and grow guest connection. We're also leveraging digital tools to improve operations by allowing teams to manage the digital business based on current traffic and wait times. We'll be focused on improving the ShackTrack digital experience, upgrading and adding kiosks in Shacks, and developing more personalized ways to connect and reward our digital community. Looking ahead at growth and development of our third strategic pillar, to build a better shack. In 2021, we opened 36 domestic company operated shacks, currently with an AUV of $3.9 million. This year, we're targeting our largest ever development class of 45 to 50 company operated shacks, with our development schedule heavily weighted to the back half, specifically to the fourth quarter of the year. So I want to level set those targets, as we've been shooting for that schedule for a couple years. We expect to open a total of seven company operated shacks in Q1, and between 5 and 7 in Q2, as we're already feeling the impact of supply chain disruption, labor availability in construction, and extended permitting timelines, pushing this year's opening schedule heavily into the fourth quarter. There's risk to these numbers, as uncertainty and availability of timeline critical items has continued to grow even over the last quarter. We'll keep you posted on timing and final guidance, but we're really excited about this year and into the coming years as we transform our portfolio of SHACs around the country. The class of 2022 will feature a big commitment to new formats like drive-thru, while expanding proven formats like urban street retail and suburban freestanding. Now we expect 25% of the class to have a shack track walk-up or drive-up window. In December, we opened our first ever drive-thru locations in Maple Grove, Minnesota, Lee's Summit, Missouri. This past week, we opened our third drive-thru in Livonia, Michigan, outside Detroit, and are preparing upcoming openings in Vineland Point, Orlando, in Castle Rock, Colorado. Our strategy is to open this first group in busy traffic locations so we can optimize learnings from the markets and our guests. We're building an experience that provides the elevated hospitality we're known for, including made-to-order burgers and hand-spun shakes, balanced with the convenience that guests expect at a drive-thru. And while our preliminary results have been impacted by Omicron, we're really encouraged about what we're seeing, how the drive-thru is operating, and all the use cases we can already imagine for how we'll build these in the future. We look forward to continue to expand with up to a total of 10 drive-thrus operating by the end of 2022. Unlocking this potential can have a tremendous impact on our long-term addressable market, and we're focused on deepening our investments, resources, and learning about this critical new addition to the Shack family of experiences. We continue to anticipate build-out costs for the class of 2022 to increase 10 to 15 percent above historical levels due to sustained inflation of material costs and labor costs. We continue to be pleased with the growth of our licensed business. In 2021, this part of our business drove over $400 million of system-wide sales. Contributing to this was the opening of 26 new licensed shacks, highlighted by new market launches in Monterrey, Mexico, Macau, Shenzhen, Hangzhou, and the deepening of our commitment to growth in Korea, Mexico, and more. In the fourth quarter, we opened six new licensed shacks, including our second in the city of Shenzhen. We're really excited to continue building on this momentum in China, and we see this region as a major potential growth focus with expansion this year into brand-new markets such as Guangzhou and Chengdu. We're also proud to announce that we'll be targeting opening in Malaysia in 2023 through a new development agreement. Our international licensed business remains a key focus asset-light strategy to grow our brand and profitability over the long term. On the domestic side, our business in Q4 benefited from increased air travel, especially serving holiday travelers. We'll be building on that momentum with a slate of new roadside shacks in New Jersey and upstate New York in a new development agreement we now have with Apple Green to grow this format. Finally, we're always working on improving our guest experience. In our kitchen, we're uplifting our culinary program with exciting LTOs and buzzworthy collabs which drive engagement with new and existing guests. Recently, we ran our truffle burger and fries, which were the strongest performing LTOs of 2021 in our digital channels, after being launched early exclusively on our app. And right now, we're highlighting our new buffalo chicken sandwich, a crispy ham-breaded chicken breast covered in our buffalo sauce topped with our ranch sauce over pickles and shredded lettuce on a toasted potato bun. This pairs great with our buffalo spiced fries, classic crinkle cuts dusted with our buffalo season served with our ranch sauce. Our seasonal shakes in the first quarter incorporate delicious flavors with a connection to our communities. The Waken Shake is a coffee shake, hand-spun with vanilla frozen custard, maple syrup, and orange zest topped with whipped cream and orange candies. We've partnered with Red Bay Coffee, a Black-owned coffee maker out of Oakland, California, as yet another example of our commitment to gather communities and enrich our neighborhoods by supporting local businesses. We've got an exciting lineup of LTOs planned for this year, focusing on chicken, burgers, shakes, and lemonades, all with the goal of driving frequency check and brand love. And with that, I'll hand it off to Katie to share more about the details of the quarter and our expectations moving forward.