Shake Shack, Inc.

Greetings. Welcome to Shake Shack second quarter 2022 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 Anna Lee Leggett, Senior Manager of Investor Relations in FBA. Thank you. You may begin.

Thank you, and good morning, everyone. Joining me for Shake Shack's conference call is our CEO, Randy Grudy, 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 in the financial details section of our quarterly shareholder letter. 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 18, 2022. Any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change. By now, you should have access to our second quarter 2022 shareholder letter, which can be found at investor.shakeshack.com. in the quarterly results section, or as an exhibit to our 8K for the quarter. I will now turn the call over to Randy.

Thanks, Anna Lee, and good morning, everyone. We're really pleased with the second quarter performance and how our team is navigating this moment of persistent inflation and an uncertain consumer spending environment. Against this backdrop, the team delivered total revenue growth of 23% year over year, to over $230 million, with total system-wide sales up 25% to over $351 million. Average weekly sales across the country continued to strengthen, rising 12% quarter-over-quarter to 76,000, with a trailing 12-month AUV of 3.8 million. Same-shack sales grew 10.1% year-over-year, driven by 7.8% traffic growth, led mostly by the return of in-shack sales. We generated a shack-level operating profit margin of 18.8%, one of our strongest profit quarters since the onset of COVID-19. and the highest total dollars ever at $42 million. All this strength was supported by a consistent return to in-shack dining, a trend we like to see. And with more guests wanting to gather, you can feel the increased energy in our shacks, which has always been a competitive advantage for us. We retained and kept building upon our strong digital business, representing 38% of total sales. And this is all part of our strategy to provide a great guest experience no matter how our guests prefer to order. The trend to note through the quarter, as so many businesses in our sector have experienced, was continued strong growth through mid-May that began then to level off through June, clearly related to a pullback in mobility, a muted return to office trend, and some caution on the part of the lower-income consumer. While our urban SHACs continue to comp near 20% over last year, these factors cause us not to meet or even higher expectations for the quarter. We're pleased to see that July has remained consistent and retained normal seasonality trends. However, while we remain aggressive in our push towards full urban recovery in the long term, we're cautious as we navigate an uncertain macro environment ahead. On new shack development, we opened five company-operated shacks in the quarter, including two new drive-thrus. We are poised for growth with a strong pipeline of shacks identified, in lease, and under construction. That said, the availability of certain HVAC switchgear and kitchen equipment has impacted our ability to open all the shacks we'd hoped this year. However, all these shacks remain strong investments and will open. We're going to have a challenging push in Q4, working to open approximately 20 to 25 company-operated shacks. At this time, we're actively building our pipeline, and we're targeting to increase our development schedule for 2023, as long as construction and equipment availability returns to more historical reliability. As we execute our long-term strategy to diversify and build new shack formats, we're leaning heavily into our drive-thru plans. Today, we operate six drive-thrus, expecting another four more to open this year. We've optimized these investments for learning, testing various markets, building and kitchen designs, and how we flow food through the kitchen. With all these shacks still so new, we only have a small data set, but we are pleased with what we're seeing. Average weekly sales over the last four months have trended above $80,000 for the group. We're also experiencing roughly 50% of those sales coming through the drive-thru channel, as we continue to invest in a great in-shack experience for those guests who prefer to dine that way with us. Consistent with our targets, these results are trending higher than our traditional suburban formats, and leaves us encouraged for what this can mean for our long-term growth opportunity. By the end of 22, we expect to have at least 10 drive-thrus open, and are targeting opening 10 to 15 more in 2023. We spent a lot of time identifying a great pipeline for our 2023 drive-thru shacks, but understand that this new format takes longer to build and is more capital intensive than our traditional formats. Today, we're operating in an environment of higher build-out costs, lower shack level operating profit, and big investments in more expensive models like drive-thru. As we've noted the last couple of years, We've not changed our long-term expectations, but we know there will be SHACs that have a lower return profile given recent and near-term factors. Longer term, our real estate strategy is to continue to invest in new SHAC types and locations. We've consistently outperformed our AUV targets over time. And with drive-through, we'll be targeting a higher AUV opportunity, which could be a huge unlock towards increasing our total addressable market. We're really excited for what's ahead, and we'll keep sharing our learning as we go. Meanwhile, our licensing business continues to thrive, with revenue up 29% year over year, growing with eight new shacks this quarter. Now, despite strong performance broadly, our business in China was impacted by COVID lockdowns and intermittent market disruptions. Our partners are growing in the U.S. and abroad, and our teams are working on a number of new market launches in 2023 and beyond, while going deeper in our current markets. We're proud to announce that on Sunday, we opened our first ever shack in the city of Chengdu, China, to a crowd of excited fans. I want to provide an update now on the four pillars of our strategic plan and give more color around what's been accomplished thus far and what the future holds. I'll begin with our commitment to elevating our people. In May, we brought together over 1,000 leaders, licensed partners, and key suppliers from around the globe for a week-long leadership development retreat highlighted by new learnings and amazing collaborations. Our growth can only happen as we give our teams the opportunity to develop. And we have a strong track record of growing leaders from within, and our investments here will continue. This quarter, we've raised wages in certain markets. We've added tipping functionality for those guests who've consistently asked for the opportunity to leave a tip for our hardworking teams. We've added even more health benefits and educational opportunities for team members at all levels. Enlightened Hospitality begins with taking care of our team, and you can count on us continuing to invest directly in their future. Digital transformation, our second strategic pillar, has provided us with incredible opportunities to get to know our guests better. Our learning curve is steep, and our investments are critical as we add data capability, functionality, and new tools across our digital products. We're pleased with our retention engagement within our digital channels, and we're leveraging new marketing tools that better help us target our guests. This quarter, we've added day park functionality for the first time, and you may have seen our happy hour shack promo, which is driving afternoon shake sales. You'll also notice a much more capable email, push notification, and guest lifecycle component to our personalized and more regional marketing efforts, all geared towards more connection to drive frequency. Additionally, we've been testing enhanced performance marketing efforts across digital channels. We're learning a lot about our ability to acquire, reengage, and drive connection through new channels as we invest more deeply in direct marketing spend towards the future. There's an endless list of projects we want to tackle here, and you'll see us invest with discipline as we go. Our third pillar, the evolution and development of our shacks continues. Earlier I noted the key elements unfolding in this plan. And while the current environment of construction delays is frustrating, we believe this is a challenging season we'll get past and take all of our learnings into a robust long-term pipeline. We expect to open approximately three new shacks in the third quarter. With a challenging fourth quarter ahead, we now update our new unit guidance expectations to 35 to 40 shacks for 2022. In our licensed development, we now expect to increase guidance for the year. With 16 new shacks open as of fiscal July, we expect to open a total of 25 to 30 licensed shacks for the year. Finally, we're always focused on our food and our guest experience. This quarter, we partnered with Maker's Mark to create the Bourbon Bacon Jam Burger and Chicken Sandwich, which has performed well. Our slate of summer lemonades and shakes were also well-received by our guests and proved to be our strongest lineup of cold beverage and Shake LTOs to date. We're proud again to partner with the Trevor Project for our June Pride Shake LTOs with a portion of sales donated to this important and impactful organization. Look out for some more LTOs coming in hot at the end of the year. Our food continues to raise the bar with premium ingredients and quality preparation. I'll now pass it over to Katie to discuss our financial performance in more detail.

Thank you, Randy, and good morning. I want to thank everyone on the line for joining us at this new earnings call time. The leadership retreat in Tucson gave me a front-row seat to the amazing culture and leadership Shake Shack has built and is scaling across the world. The strength of our people pipeline and our ability to elevate our valued team members into management positions directly impacts our growth opportunity. I am so proud of our amazing leaders of today and the strong bench of future leaders we continue to build here. Now on to our financial results. Our second quarter total revenue grew 23.1% year-over-year to $230.8 million. SHAC sales grew 22.9% to $223.1 million. Licensing revenue grew 28.5% to $7.7 million. System-wide sales grew by 24.8% year-over-year to $351.7 million. And we generated SHAC-level operating profit margin of 18.8%. These are strong growth and profitability metrics and represent the highest level of revenue and SHAC-level operating profit dollars on record, in spite of low double-digit blended food and paper inflation, as well as substantially growing our investments and our team members. SHAC sales were tracking in line with our expectations for most of the quarter. However, we faced several sales headwinds in June that drove SHAC sales below our expectations. First, our 10.1% same-shack sales growth in the quarter and positive 7.8% traffic was led by strength in our higher income guest base and guests who live near our shacks. Shake Shack locations tend to over-index to higher income guests than traditional fast food. However, starting in June, we saw less traffic from guests with lower incomes. Also, we know the number one reason our guests tell us that they would come to Shake Shack more often is if a shack was built closer to their homes. We saw traffic growth from guests who live close to our shacks, but consistent with the rise in gas prices in June, we saw some traffic pressure from guests who live further away from our shacks. Additionally, some key urban recovery trends that had benefited us in prior quarters broadly held but did not improve. Despite this, our deeply impacted urban markets like New York City, Boston, and Washington, D.C. all saw same-track sales grow by more than 25% in the second quarter. We expect that recovery would have been even stronger had mobility metrics in urban locations, including return to office, incrementally improved. In some areas where COVID cases rose in the quarter, we also realized a degree of added operational pressures and temporary shifts in consumer behavior. And then further, we lost sales from opening fewer restaurants later in the quarter than we had anticipated. As Randy noted, construction and supply chain delays are impacting our timing of expected openings. We now expect to open approximately 35 to 40 shacks this year, with many occurring late in the fourth quarter. We face risk of kitchen equipment availability and permitting and inspection delays. Build costs are elevated, the supply chain is challenging, and we are seeing cost pressures across our restaurant P&L. We remain committed to executing on our strong unit growth opportunity, however, are also keeping a careful eye on preserving strong unit returns and building restaurants that stand the test of time. This discipline will impact how we achieve development targets in any given year as we scale our business for the long term. While we cannot be certain how consumer spending and mobility patterns evolve throughout the rest of the year or how a wide range of scenarios could impact our business, we remain laser-focused on delivering a great guest experience in digital and in-check channels with elevated offerings reflective of our fine dining culinary roots. In the second quarter, we generated 76,000 in average weekly sales, up 12% from 68,000 last quarter and up 6% year over year. This is the highest quarterly AWS that we have generated since the onset of COVID. As our results have shown over the past two years, we generally show stronger recovery at times when consumer mobility metrics improve and less so when they are impacted. Consistent with consumer mobility trends stabilizing in May and June, AWS trends went from 76,000 in April to 75,000 in May and June. July, AWS held flat with June at 75,000 in line with historical seasonality. Second quarter, same-shack sales grew 10.1% year-over-year. Our in-shack check was the highest on record, and our same-shack sales were negatively impacted by channel mix as in-shack momentum continued to build. Items per check were flat across our channels compared to the first quarter and performed in line with historical seasonality. Items per check remain above 2019 levels, driven by more digital sales and our focus on cold beverage innovation. We remain pleased with the guest reception to our March price increase and believe we have additional pricing power to help address persistent inflationary pressures throughout the year. In mid-fourth quarter, we plan to increase price by 5% to 7%, reflecting an even more targeted approach to pricing across various markets and tiers. With this, we will maintain a blended high single-digit price across our channels for the remainder of the year. July same-track sales rose 5%, led by high single-digit traffic growth year-over-year in urban markets. The June to July progression was consistent with historical seasonality, as macro mobility and COVID pressures we experienced in June persisted into July. We expect they will remain for the rest of the quarter. Urban same-check sales grew 19% versus 2021, and we believe our recovery would have been much stronger if not for mobility, namely return to office, urban transit, and urban tourism leveling out and in some instances reversing. Consider that without an improvement to mobility metrics, Manhattan same-check sales rose 37% year over year, and our New York City teams executed on the largest sales volume since COVID. However, midtown New York City weekday lunch and dinner traffic is still on average more than 40% below 2019 levels. Suburban same-shack sales grew 3% year-over-year, lapping a positive 52% comp in the second quarter of 2021, even as we realized strong sales in our urban shacks. Positive same-shack sales in our suburban shacks were driven by positive price mix, while traffic trends were flat year-over-year. July saw similar macro headwinds as June, and we see a strong opportunity in suburban markets as we expand development and evolve formats like drive-up, curbside, and drive-through. As Randy noted, it's a very exciting time for our digital business as we are seeing benefits from our marketing and technology investments, all made with an eye on growing our digital channels. In the second quarter, we held our digital sales even as in-check traffic grew more than 20% year-over-year, And we retained nearly 80% of the digital sales that we generated during the peak pressures on our dine-in business in January 2021. We continue to invest to build our digital business to drive long-term traffic growth. And here are just a few exciting things that we've been cooking up in our digital labs. In July, we launched our first ever digital day part promotion, where guests can buy one shake and get one free from the hours of 2 to 5 p.m. on weekdays. Our Shacks are very busy at lunch and dinner. However, we view this midday as underutilized from a staffing perspective and are excited about the early read on the incrementality of this offer. It's driving digital frequency and app downloads, and as an added plus, many of our guests are coming in for the Shake Shack happy hour and getting other items as well. We're excited to learn and try new things with this new capability. Second, We have just rolled out a new automated marketing strategy to better directly communicate with our guests. This is giving us a new opportunity to build frequency for our long-term traffic growth among the 4.2 million and growing unique Shake Shack digital guests in our system on top of the millions more guests who have access to directly communicate with them through digital channels like email. This new automated marketing strategy will allow us to better segment our guests to target specific offers and messaging across multiple platforms. Third, Kiosk continues to show strong sales and margin opportunities, and with labor efficiencies are part of our longer-term initiative to build on SHAC-level operating profit margins. Today, we are doubling down here on Kiosk with plans to roll them out to nearly all SHACs by the end of 2023, targeting significant progress on this goal by the end of this year. And as a company deeply rooted in providing enlightened hospitality and We are developing more digital capabilities for an improved guest experience across our channels and to learn more from our guest feedback. Finally, you are also going to see some new exciting improvements to our app and website over the coming months as we continue to target conversion, building our digital business for long-term, sustainable growth. Licensing sales of 128.6 million rose 28% year-over-year. Our domestic SHACs, in addition to select international markets, performed well. Our licensing sales were impacted by continued COVID lockdowns and intermittent market disruptions in mainland China. As most of our licensing sales are generating currencies outside of the U.S. dollar, we faced headwinds from a stronger dollar during the quarter, a pressure that we anticipate will continue impacting this area of the business. Total SHAC-level operating profit was $42 million, or 18.8% of SHAC's sales. our SHAC-level operating profit margin improved despite growing sales headwinds and low double-digit inflationary pressures. In the second quarter, our food and paper costs were $66 million, or 29.6% of SHAC sales, down from 30.3% in the second quarter of 2021 and down 80 basis points quarter over quarter as our March price increase and the 38 basis point benefit from credits related to our biannual leadership retreats helped us offset a portion of the low double-digit higher cost in our basket. Full details can be found in our shareholder letter on page 12. The inflationary environment remains uncertain, and we are planning for low double-digit blended food and paper inflation throughout the rest of this year, led by chicken, dairy, and paper and packaging. But we're also facing significant incremental cost pressures in our crinkle cut fries stemming from historically high inflation in the potato market that is being passed along to us. Our paper and packaging costs rose around 20% year-over-year in the second quarter, and we continue to plan for a mid-teens percentage year-over-year for fiscal 2022. Labor expense was $65.9 million, or 29.5% of total check sales, down from 30.7% in the prior quarter and up 50 basis points year-over-year. We continue to invest in our teens and have raised starting wages by high single digits year-over-year as we work towards optimal staffing levels. We continue to invest in growing efficiencies within our own four walls and generating flow through on incremental sales. However, staffing pressures and elevated turnover remain a headwind to our sales and margin performance as new team members take time to get trained and to optimize throughput in high volume shacks at peak periods. Our best staff restaurants generally tend to meet our sales expectations and we know that where staffing is not optimized, it's harder for our teams to meet full opening hours and strong throughput. Other operating expense was $32.6 million, or 14.6% of total shack sales, up from 13.4% in the second quarter of 2021, given inflationary pressures on costs to operate our dine-in business. We are seeing elevated costs to keep our shacks sparkling clean and to repair and maintain restaurant equipment. Occupancy was $16.7 million, or 7.5% of total shack sales. down from 8.2% in the second quarter of 2021, aided by strong sales recovery in our SHACs, especially in some of our highest volume locations. G&A was $29.1 million, which includes a nearly $3 million expense to support the leadership retreat. Pre-opening expense was $2.8 million in the quarter as we opened five new SHACs. Depreciation was $18.1 million, up 25% year over year. We realized a net loss attributable to Shake Shack Inc. of $1.2 million, or negative $0.03 in earnings per share. On an adjusted pro forma basis, we reported a net income of $0.1 million, or $0.00 per fully exchanged and diluted share. Excluding the tax impact of stock-based compensation, our pro forma tax rate in the second quarter was 12%. Our balance sheet remains in a strong position, as we ended the quarter with $358 million in cash and marketable securities. We will continue to leverage our strong cash position in support of investing in new SHAC openings in a variety of formats, including drive-through, in addition to supporting our other company-wide initiatives. Now on to guidance for the third quarter of 2022 and full year 2022. So our guidance assumes no new COVID or supply chain-related disruptions, additional unknown inflationary pressures, or major shifts in consumer spending. We are also assuming that urban and suburban consumer mobility trends remain constant with what we realized in June and July. For the third quarter, we are guiding total shack sales of $213 to $218 million, mid-single-digit year-over-year growth in same-shack sales, and approximately three new company-operated shack openings. While we are not yet providing guidance for the fourth quarter, we plan to open 20 to 25 company-operated shacks. Most of these will occur towards the end of the quarter, so new shack openings will have a minimal impact on 4Q revenue. Licensing revenue guidance of $8 to $8.5 million reflects a degree of ongoing uncertainty around international travel as well as COVID pressures, specifically in China. We expect total revenue of $221 to $226.5 million, growing 18 to 21% year-over-year. We guide 3Q's SHAC-level operating profit margin of 16% to 18%, reflecting ongoing and a wide range of potential inflationary pressures, including dairy, packaging, and fries, as well as investments to support our team members and drive our in-SHAC traffic growth. We continue to have a disciplined but growth-minded G&A investment approach for this year. However, with consideration for development delays and unknown macro impacts, we have tightened our guidance range to $111 to $113 million. We remain committed to investing in our long-term growth and strategic initiatives, including elevating our people, our digital transformation, and the evolution of our formats with DriveThru. We have also seen some encouraging success with various marketing efforts. However, we are finding efficiencies to meet our lower development schedule as we think about planning over the next 18 months. We continue to expect full-year depreciation of 70 to 75 million, pre-opening of 14 to 17.5 million. We are accruing more non-cash rent than normal in pre-opening expense given the level of delays we are experiencing and are tracking at the high end of the pre-open full-year guidance. We expect our adjusted pro forma tax rate, excluding the impact of stock-based compensation, to be 28 to 30%. We are planning and managing through ongoing inflationary pressures, and potential shifts in consumer spending patterns, with an eye on improving our long-term profitability, driving sales growth, and investing ahead of our robust pipeline across the world. The operating environment is likely to remain challenging for some time, but we believe we have the right plan in place to elevate our people and drive the long-term growth of Shake Shack as we navigate these uncertain waters. Thank you for your continued interest in our business, and with that, I can turn it back to Randy.

Thanks, Katie. Just to close up, I want to end today's call noting that Yesterday, we opened our 400th Shake Shack worldwide. To achieve that milestone is a dream none of us ever imagined when we created a little hot dog cart to raise money for Madison Square Park in New York City 21 years ago. As we reconnected with 1,000 Shack leaders recently at our leadership retreat, it was a reminder for me and all of us how very special this group of people is. We celebrate leaders who've been here for more than a decade and those who've just joined. I'm beyond proud and thankful of our team today more than ever as they work to create an environment where people can do their best work one burger at a time. As always, we hope you and your families stay safe and healthy. And with that, operator, please go ahead and open up the call for questions.

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. Our first question is from Michael Tomas with Oppenheimer and Company. Please proceed.

Hi. Good morning. Thanks. You know, this is the first time you're disclosing any metrics on the drive-thrus, so I was hoping you could dig into that just a little bit more. I mean, on the $80,000 in average weekly sales per week, are you seeing any staffing issues like you've mentioned with some of the other units that could be holding that number back at all that could push it even higher? And then you also mentioned greater frequency from drive-through customers. What's the base that you're referring to when you were saying there's greater frequency? And are you willing to characterize how much more? Thanks.

Yeah, thanks, Michael. Yeah, let's drive through broadly. We're really excited about it. We've only got six open, and some of those have just opened. So all the data is brand new. We obviously want to be careful not to share too much data at this early stage, but we continue to be encouraged about the AUV potential, number one, which is what I led with in my comments, as well as the long-term profit and return metrics that we think we can get out of this model. I think it's going to open up New real estate opportunities all over the country for us could increase our longer-term TAM, and we're really excited about it. As with anything, to your question, yes, when staffing is not optimized, it's tough. And I would say each of the six drive-throughs have had various moments where they have not been fully staffed. We opened a few of them right in the heat of the early Omicron wave in December, January. Lots of learning there. And I think we're putting most of our efforts on learning how best to build this model. You saw, and I noted in my notes, we've already committed to at least 10 to 15 of them next year, and we're looking to do more beyond that. So really excited about what drive-through could mean. When it comes to frequency, we haven't shared any frequency data metrics. What we can see, and again, very early, is that the goal of a drive-through is to give convenience to the already amazing Shake Shack experience. When we've done that, The early signal is that people have come a little more often than a traditional suburban format that we have. That's really exciting. That's good news. And the last piece of data we gave was that about half of the people are using the drive-thru and about half are using our other channels. And that feels really good to us because you'll go to a Shake Shack drive-thru and someday you might want to be inside and have the full Shack experience. This is why we're investing in this full, beautiful design. And some days you might want the convenience of driving around and moving on towards what you've got to do in your day. This is brand new for Shake Shack, and it's really important. When I talk about 400 shacks over 21 years, for us to just be doing this now, getting all this learning and thinking about what could be ahead, it's really exciting. So that's the early data. We'll keep you posted as we go. I'm sure we're going to have lots of ebbs and flows and shacks that will be way above that, shacks that will be below that average that we just shared. But we've got four more this year to learn from and a whole bunch more coming.

Thanks, Randall. It's super helpful. Just to follow up, you mentioned some headwinds from the lower-end consumer. So it sounds like you have some pretty sophisticated data here when you're bifurcating your customer base. Is there any way you can talk about how big of a cohort the lower-end consumer actually makes up out of your customer base? Thanks.

Yeah. So across our company, we generally tend to over-index to high-income consumers, especially relative to traditional fast food. That being said, you know, we have a number, a wide range of customers that we service. And in the quarter, you know, while we saw some strengths from the higher-end guests in June, we did see, especially in certain pockets, a little bit more weakness from the lower-end consumer. We also saw, you know, what we talked about, kind of people who we saw increased traffic from people who live close to our shacks, but we did see some pressure on the periphery from people who, our guests who make longer road trips, we saw that in June with the spike in gas prices that was a little bit weaker for us.

Thank you.

Our next question is from Nicole Miller with Piper Sandler. Please proceed.

Thank you. Good morning. Could you define low income, the threshold there, and high income? And also when you say live near a shack, what is the distance you're measuring?

Yeah, we're not going to get into that granular detail, but just when you look at it across an income scale, the lower income that our guests were, the more of a traffic impact we had. And then same thing kind of with the periphery.

And then when you talk about afternoon happy hour, what was the food attach rate to some of those shake incidents, and is there potential to include food in the discounts going forward?

Yeah, thanks, Nicole. We're really excited about leaning into some of that. Look, Shaq's never been a discount brand. We don't intend to be. We're a premium brand with premium ingredients, and we're not looking for cheap value meals. That's not how we serve our food. But we are looking, especially in this economic time, to think about how do we provide additional added value for people. So, for instance, we're doing this shake event, you know, kind of a buy one, get one between the hours of two and five. And what we're seeing is a significant attach rate, almost to the point of a close to normal average check. So that's pretty exciting because what we're finding is, yeah, I'm going to come and get the shake, but I'm also going to get maybe a burger fry and some other things with it. So we feel really good about incrementality that can be driven by this. And the ultimate return on sales and our op profit because we're gaining a whole other sale out of it now we'll see again very new we'll see what we can do what we intend to do is test as you said other items so why not use this new functionality and test some of our other maybe burgers maybe fries some of the other things that that guests love as well as other hours right we have you know Shake Shack's competitive advantage has always been that we have a very high frozen custard We also have alcohol that can drive some potential later evening sales opportunities. And we think this new functionality, the ability to really connect, is going to be so additive over time. And we're still a young company here. Our digital tools, while a massive part of it, are still really at the early stages. So when we can unlock stuff like this over time, and this is small and a minimal impact today, but it has opportunity to really grow. So excited about all the new marketing opportunities and digital opportunities we have.

Okay, thanks for that. Thank you so much.

Thanks, Nicole.

Our next question is from Jared Garber with Goldman Sachs. Please proceed.

Hi, good morning. Thank you for the question. I wanted to just circle back. I know the business obviously has a pretty hefty exposure in Midtown, and I think you noted those locations are still down about 40%. Is there any way to get a sense of how some of the restaurants are doing, maybe not in that part of Midtown, but some of the more residential areas in Manhattan or some of your urban environments maybe that are performing a bit better? I mean, it seems a little bit macro-related, but is there any ways that you guys are thinking about offsetting some of those challenges, or is that just really a wait and see as the macro normalizes?

Yeah, thanks. It's a great question. And you are correct in saying that there's variability, right? I think we've got to caution you and everybody when we talk about urban, suburban, that not all urban was born equal, right? There's a lot of restaurants, both in New York and other urban centers. And let's not just make this about Midtown New York. We tend to do that in these conversations because Shake Shack was born here. We're talking about a lot of urban centers, large cities around the country. So when we do that, there are lots of neighborhoods in New York and otherwise that where sales are up versus 19. Solid shacks, we're feeling really good, getting back to profitability, signals are really good. That's the most encouraging thing about this. And then there are shacks in core urban centers, some in Midtown and others, where, look, when Katie shares a piece of data that 40% of our lunch guests just aren't here yet, and you look at whether it's subway, mobility, tourism, and other things, they just haven't returned to where they were. And as we talked about, sort of the challenge of where we're at right now is that's also started to level off in June. So we see mobility trends today in some of our core urban centers that are lower than they were a year ago and that are lower than they were at the end of last year even. So while there are moments and pockets of places that feel really busy or travel, you see headlines of certain places that are in fact very busy. There are many others that just aren't. And, uh, So how do we feel about that? We're not going to predict the future. I don't think anybody knows where this is going to go, nor do we. But we're believers in the urban ecosystem. We're believers in those high-volume shacks that have led the company for so long that continue to be deeply impacted. We think they're going to continue to get back over time. It's hard to say when. And at this moment, what do we need to see happen? And where is the upside? The upside is going to be more return to office. We'll see where that goes after this summer. More general mobility for commuting, the way people move around town, more higher occupancy around hotels, convention centers, and both regional and international tourism. So all that stuff together has come and come and come and go and ebbed and flow through this last few years, but there's still a long way to go. And with that, that's how we'll trend. So to your last question of what do we do about that, well, we keep running better restaurants day in and day out. We lean into our real estate strategy that next year will be majority suburban. And we're really excited about those. You hear our drive-through, you hear our drive-up models, shack track, and others. But that doesn't mean we're abandoning urban centers. We are going to build a lot of urban shacks next year and otherwise. We're also going to go to some new markets next year. So as we target a really robust pipeline, it's going to be diverse, it's going to have a lot of formats, and it's going to take on lots of trends that will help balance that portfolio over time. The imbalance of our portfolio towards heavy urban centers traditionally has been the challenge for us, and that is what has happened this summer.

Thanks, and then just one follow-up. Katie, you noted that the kiosk is a major initiative over the next, let's say, maybe 18 months or so, and I know we've talked about this quite a bit. Can you just remind us maybe what you plan on achieving in penetration of those kiosks by the end of this year versus that full 23, and then just remind us of some of the sales and margin benefits you're seeing in the stores that already have those? Thank you.

Great. Hi, Jared. Yeah, so we're very, very excited by what we're seeing in kiosks. We're seeing that we have a higher check in kiosk channels. We're seeing a better attach rate of our LTOs. This is really kind of, when I think of kiosk, it really is kind of the only digital ecosystem in the shack, besides people's phones, that people can sit there with the menu and really understand and go through the entire process. And we see guests responding quite positively to it. it's also one of our highest margin channels as well. And we see that we're able to, you know, get some staffing efficiencies in our shacks where we have kiosks. So we're very excited to sit here and roll them out to essentially all of our shacks over the next 18 months. We're targeting significant progress on that by the end of this year. We're not going to get into the exact number there, but, you know, this is one of our top priorities here.

Thank you.

Our next question is from Jake Bartlett with Truist Securities. Please proceed.

Great. Thanks for taking the question. My first one is just on seasonality in the summer months. You gave us what July was for your average weekly sales. I'm just wondering, in a typical third quarter, versus July, how would August and September average weekly sales trend? Just wondering what the normal seasonality is.

Yeah, normal seasonality is, you know, call it August, roughly flat with July. And then, you know, we'll see kind of what happens in September. But, you know, consistent with the rest of the industry, it tends to be softer.

Great. That's helpful. And then, you know, Katie, I'm wondering, on the restaurant-level margins, you've beat pretty significantly in the last couple quarters. I'm wondering what surprised you the most, you know, in the quarter to kind of drive such upside? Yeah. I look at I think food cost inflation was about in line with what you expected. Just, you know, what are the moving pieces there that kind of really drove the beef versus expectations?

Yeah, it really does come down to our beef costs were lower than we had anticipated and we had put in guidance last quarter. You know, beef is about a third of our basket. So when that, you know, moves around, we have pretty big impact and we just tracked a little bit lower than we had thought.

And the other thing I'll add, Jake, is, you know, flow through when we have higher sales through this whole time, right? We're continuing. We're off our historical highs, right? We've had to rebuild and continue how to run our restaurants. And in those restaurants that are returning sales, flow through is significant. And we've got to keep that. And that's been really proud of the team for how they ran their restaurants this year. Look, the pressures, as Katie said, is not abating. We're going to continue to have lots of inflationary pressures on a lot of our cogs and other things continuing forward. part of our guide forward for the moment. And especially in the next quarter, before we take additional price in the fourth quarter, that'll have some impact. But, you know, I think one of the, one of the solid outcomes of this quarter has been how the team really ran the restaurants with what they had.

Great. Great. That's helpful. And then my last question is just on staffing and you didn't mention that, you know, some stores are not optimally staffed and that's impacting sales at those stores. So the question is, What are you seeing kind of at the margin here? Are you seeing an improvement? Is turnover going down? Is staffing availability increasing? Could that be more of a tailwind to the recovery in sales in the back half of the year, do you think?

It's definitely an opportunity when we look over the long term because we know we're not where we want to be or at our historical norms kind of pre-COVID. Look, us, our industry, and the whole world, and every industry is grappling with staffing problems. We're not immune to that, and we are not where we want to be. So our historical turnover today and not optimized staffing levels is not where we want it to be. It is better than it was in the first quarter, for sure. It is better than it was at the end of last year, for sure. Those are all encouraging things. We've continued to take care of our teams, pay them more, adding tipping, adding other benefits. We've really tried to continue to give our teams more and more reasons to join, to stay. But when you have new teams and you have a higher turnover environment, you're not optimized in the perfect sales per hour that you could be doing at busy restaurants. And we know that, and we see it as opportunity as we go forward. We know that's where we can continue to unlock. But it's still going to take some work, and we don't expect staffing to get easy any time in the near future.

Great. I appreciate it.

Our next question is from Jeff Farmer with Gordon Haskett. Please proceed.

Thank you. I have a follow-up for you guys and then another question. In the prepared for March, you did mention that wage rate increases and the introduction of tipping capability in certain markets was on the way or maybe has already happened. But can you just provide a little bit more color? And what I mean by that is, Like roughly how many of these markets do you think that you have the opportunity to introduce tipping capability as an example?

Yeah, it's brand new, and it's pretty much rolled out everywhere, but not in all channels, Jeff. That's, I think, the key way to understand it today. For the most part, it's not on any of our kiosks. It's a significant part of our sales in most of our restaurants. So it's just recently been added to some of our digital channels. So it really began as a ramp-up, as a test. We've really liked what we've seen, and we've been encouraged at how many people want to thank our team in that way. So it can add a really nice additional hourly income for our team. We're excited by it. There are new costs to us and taxes for that, but we think it's a great way for our team to continue to earn. And we hope over the long term it will help our turnover. So there's just a handful of markets where it isn't rolled out yet. some markets where we're going to take our time with it and others where we're continuing to go. And as Katie said, with kiosk, both functionality and more rollout, you know, we'll look at that channel over time, but it's not in there just yet.

Okay. And then just as a follow-up, last one on wage inflation, obviously you mentioned some wage rate increases coming, but I might've missed this, but I'm just curious what the wage rate inflation was in the second quarter and and what the outlook is for the back half of 22.

Let's get that exact number.

Right here, it's in the shareholder. Okay, so we raised starting wages by high single-digit percent in the second quarter, and the blended rate for 2022 is going to be mid to high single-digit. Last year, we had a pretty big announcement of investments in our team members in 3Q and 4Q that have carried over into this year, so we're going to kind of be lapping that, but continuing to invest in our teams.

All right. Thank you. Our next question is from Brian Vaccaro with Raymond James. Please proceed.

Hi, thanks, and good morning. I wanted to ask just about the pricing decision, and maybe you could walk us through how you landed on the 5% to 7%. And I was hoping maybe you could speak specifically to where you think your value proposition is relative to your fast casual peers. Any quantification there would be fantastic. And just also the pricing decision, thinking about context or maybe seeing some light at the end of the tunnel as it relates to commodity inflation. So how did you balance that decision?

Lots of things in there. Thank you for the question. Look, we've traditionally been super conservative on price. for the history of this company, right around 2%, right? In the last year, we've had two different price races in the 6% to 7% range. In addition, we've added some additional price on our third-party delivery channels that we charge a 15% premium on there. So all that has gotten into where we are today. We are going to take another between 5% and 7% in kind of mid-fourth quarter, right? Why are we doing that? Well, wish we didn't have to, but... It's the minimum really that we need to do as we look at so many of the input costs of our business coming in higher. And specifically, French fries have had record level increases in the inflationary environment. Our buns, our dairy, and chicken, some of the other things. And while beef has kind of leveled, it's leveled at a very high level. And so everything's up. And that's just a factor. Everything's up to build restaurants. So we... even with those numbers that are high for us, that remains cautious in our overall approach. And when we look at our basket, we actually feel really good about where it is relative to other fast casual, other even better burger. Obviously, we're going to be more than traditional fast food, and we should be. Our premium ingredients need that price point. So we feel really good about, again, as Katie said earlier, we generally tend to have a higher income guest for the most part, but we want this, we want Shack to be affordable for everybody. And it's been traditionally a solid trade up opportunity for people who aspire. And it's been a nice trade down in moments like this for casual diners who want to spend a little less, but still have great ingredients and a great experience. That's where SafeShack's always positioned itself. We feel like our pricing today keeps us there. And it's something, Ron, that we're going to have to keep an eye on because, you know, I will see where commodity costs go. You know, there's some signals of certain things coming down. There's a lot of things that are not coming down at all. And a lot of things that remain, fryer oil I didn't mention, you know, things like that. These are expensive items, and we are hopeful that those things level off, and that can be a long-term tailwind for our profit in the coming years. But at the moment, there's a lot of pressures on the costs in our business.

So just to add on to that a little bit, we are taking an even more targeted approach to pricing with this next round than we have in the past and really kind of even getting more refined about where we have higher willingness to pay as well.

All right, that's helpful, Collar. And also on the effective pricing, Katie, if you took no additional, let's just say you take the midpoint, the 6%, could you just level set where your effective year-on-year pricing would be over the next few quarters?

Yeah, it's going to be kind of call it the high single-digit range for 3Q and 4Q.

For both 3Q and 4Q?

Yeah. Obviously higher in 4Q, the price increase.

Because we lap an October price increase, so it was about half of that in October.

Yeah, 3% to 4%.

And the next lap, March, because we took that.

Okay, great, great. And then just on the drive-thrus, you mentioned the strong sales you're seeing, the over 80K. Could you give us any sense of just what the average build-out costs on those six units were? And I'll pass it along.

We haven't broken that out yet. There's going to be a lot of learning on that as we go. They're significantly higher than a normal shack at the moment. We're investing in that as a full experience drive-thru in and out, and we're going to spend some money to build those. It's taken the total class about up 15% this year. But as we do more and more of those, we expect those to be higher. And why are we doing that? Well, it's a full-on build-out. This is something we're building for decades to come. We expect to continue to have strong returns, even at elevated levels of construction costs for the environment plus this model. But that said, we are also going to keep hopefully targeting stronger AUVs and profits over the long run. So that's all part of the goal of DriveThru. And at the moment, in this first couple years of it, you should expect us to invest heavily in the capital of that. It's going to be a capital and learning intensive environment for us. And we believe it hopefully continues to unlock big sales and addressable market opportunity over time. All right. Thank you very much.

Our next question is from Jeff Bernstein with Barclays. Please proceed.

Good morning. Thanks for taking the question. This is product on for Jeff. Randy, I wanted to touch on maybe a bigger picture question. What if, you know, hybrid work and less commuting ends up being a more structural, longer-term factor in the urban shack location? What can operators do to adjust to that? And any color on just how your team members in the store continue to drive sales in those locations would be appreciated. Thanks.

Yeah, I think it's a great question. I don't have the crystal ball to tell you where it's going to land. I think we all expect that the previous world of pre-COVID five-day-a-week normal office hours has changed. Where it lands, I think it's hard to know just yet. I tend to believe that We're not quite back at where it'll land. I think there still remains a lot of more hybrid than may occur, but I don't know where that'll go. So in the meantime, I think those cities generally will tend to fill in with other things. There's going to be more tourism. There's going to be more. You look at it, the price of living in so many of the biggest cities, including New York, has never been more expensive. People want to be in these places, and that's going to continue to fill in over time. So, what do we do about it? Well, you know what? We've got to shift, right? If we used to have a Friday order of 100 burgers for the trading desk, that order might be on Thursday now, or it might be different. And we've got to continue to shift and figure out how to staff. what our optimal hours should be, and how to reach other guests at different times. So what are we doing about that? Well, it's all in our plan that we've talked to. Digital transformation, making it easier for people to get to us no matter what channel they want, whether it's a small order or a large order. And the evolution of our shacks, making sure that we have convenience built into the suburban and urban experience so that we can meet people where they are. And all that's still on a rebuild for us at a number of our shacks that remain impacted by that return office trend. But I also think there's other things that we still haven't fully recaptured. There's things just like conferences that aren't booking yet. Hotel occupancies or hotel rates that are still not the same in core urban centers. How those things move over time is going to be the stuff we're watching and trying to manage our restaurants really well.

I'll also add on top of that that you know, the investments that we've made on having this digital day park capability, you know, while that's just not a statement to urban restaurants, it's a statement for all restaurants, it does have an exciting opportunity to unlock a less utilized part of our day.

Very helpful. I appreciate it.

Our next question is from Andy Barish with Jefferies. Please proceed.

Hey, good morning, everyone. Randy, just on the development pipeline, I guess maybe I'm reading into it a little much, but you noted 23 that you're still building pipeline, and obviously there's some units shifting from 22 into 23. How should we read into that? Do you expect more openings in 23, just given some of the delays in the 22, or any color on that? I know it might be a little early to guide a specific number, but just interested in that wording.

Yeah, I think we have been and continue to build a strong pipeline. That's going to be ongoing even today as we sit here in August for restaurants that could open in 2023. There's lots of leases being negotiated, lots of sites that have already identified. And as we look beyond 23, look at 24, 25, we've got our site set on market plans for every market. We're building into that. We feel fantastic about the shacks that we intend to build during that time. Lots of various formats, lots of new and existing markets, and all of that there. That said, the process just takes longer today. And that is what has been the frustrating part of it, So you may have had shacks that we could identify and open within 12 to 15 months. And now you may have that being 15 to 18 months. And drive-thrus even take longer than that because you've got all kinds of different permitting and things. So when we add that as a core part of our business, we've just got to get ahead of it more. Some of those things are in control. For the most part, a lot of those things are not in our control what's happened. And I think when you get a restaurant, we've got restaurants sitting built right now that don't have a walk-in cooler because you can't get a walk-in. We've got restaurants waiting on air conditioning units. And these are the things that our team did an amazing job of keeping up with during the COVID last couple of years. And many of them have just caught up. So they're taking time. So as we look at the number for this year, we're still going to open system-wide 60 to 70 shacks this year. That's a big number of restaurants for a company that only has 400 in total today. That's really exciting. Our growth for the but it's all still there. These restaurants did not go away. They're just taking a little bit longer to get open. So when we look forward with optimism, we're going to get these shacks open. They're going to be solid investments. We're frustrated by the things that are taking longer, but we'll get there. We'll get there. And as we look at 23, we've got a great class of new cities and new shacks, and we're looking forward to it.

Yeah, helpful color. Katie, real quick, just on the The cost associated with the May leadership retreat, it sounded like there were some credits up in the food and paper line, but I imagine some of your own expenses also ran through on G&A. Is that a way to think about it, or can you quantify some of the G&A costs?

Sure. Yeah, it was about $3 million.

Gotcha. Okay. Thank you very much.

Our next question is from Chris O'Call with Stifel. Please proceed.

Sorry about that. I was muted. Thanks for taking the question. I wanted to dig in a bit on the 16 to 18% margin guidance. It seems third quarter inflation is expected to be roughly in line with the second quarter. Pricing is similar in that mid single digit range. So what's driving the margin guidance below what you ran in 2Q? I'm just wondering if it's all in the labor line. with additional investments that you're making or if there's something else I'm missing?

Yeah. So we are expecting to have a little bit of a pickup in inflation in the third quarter on COGS. And then also we're just, our guidance has lower sales. So kind of that, that pressure have lower flow through.

Okay. Okay. And then, You know, we've seen other concepts successfully implement delivery menu price premiums with seemingly little impact on the volumes. And I was hoping to get an update on how you're thinking about the potential of raising the 15% delivery premiums on third-party marketplaces to get closer to margin neutral. And then related to that, why you wouldn't add a delivery premium maybe of a smaller magnitude to the white label channel?

Yeah, things we think about all the time. Remember, we did 10%, and then 15% was new to us as well. We want to be cautious there and just take our time. I think we've seen a lot of resiliency in our delivery guests, so we feel really good about that, and that's a conversation we're just going to keep having with ourselves, our delivery partners. When we look at our own white-label app delivery, So far, our strategy has been to keep that consistent with the best value, best price that you can get. So when you come through our channels, you're paying a lot less, and that's our competitive advantage. And that is our strategy today. Something we could look at. Something we could look at adding a little bit over time and making that channel profitable. But again, with so much of – we've got a solid, sticky delivery business that we're really happy about. We like it. It's costly in some ways. but we also have been seeing so much in-check return that we've been focused on that for quite a bit as well. So all the things you say are things we talk about and could identify over time for opportunity. Great. Thanks, guys.

Our next question is from Drew North with Baird. Please proceed.

Great. Thanks for taking the question. I wanted to ask a follow-up on development and specifically the unit level returns you are seeing on recent cohorts, maybe 2020 or 2021 openings. I know you acknowledge that the return could be lower in the near term, given the cost pressures that are prevalent and the higher build costs associated, but are the recent openings still meeting a return threshold that you'd view acceptable? are you willing to share any details around that return threshold that you're targeting as you develop new units in 2023 and beyond? Just some perspective there I think would be helpful.

Short answer is yes, we have solid returns. We continue to invest in great restaurants. It's very hard to measure restaurants that have just opened on what we see as kind of more of a three-year return pattern, right? And historically we've done real well on that, as you know. And I think it's hard to take restaurants that either opened or have opened in this last two to three years during times where sales and profit have been off of historical lows. So those shacks are going to have some kind of near-term impact, obviously, to the return profile. As we look ahead... We continue to target strong returns over the long term. And obviously, I've said we've traditionally beat on the AUV markers that we've set out there and expect to do that. But we also have inflated costs on construction and materials right now. So you've got a balance of things happening there. Overall, Shake Shack has always delivered solid returns. We expect we will continue to do that. And in the near term, there's going to be some shacks that are more pressured than they were in the past, but they're still Solid restaurants with solid returns.

Our next question is from John Ivanko with JP Morgan. Please proceed.

Hi, thank you. Good morning. Looking at, and thank you for the average unit volumes for the drive-thrus, which I think I heard were $80,000 a week for the six. Correct me if I'm wrong. Hopefully not. That's what my question is based on. it's not that much higher than the average. I mean, the average is running 75, 76, but averages are tricky to look at because obviously each trade area is different, demographics, what have you. I mean, is there a way to kind of think about that drive-through volume in the specific markets of which you open saying, hey, we would have targeted 30% to 40% or 20%, whatever the number is, lower for the same unit without a drive-through, just to give us a sense of, you know, how much incremental volume, you know, on a trade area to trade area basis, you know, those units are generating drive-through versus non-drive-through, if that's a possible exercise to go through.

So, yeah, and to your first part, your question is based on the right numbers. Those are early averages from just four months of data that we've shared, okay? You've got some who've been open for eight months, some that have been open for one month. So there's lots within that, okay? So we're really encouraged by it, John, and you are correct in saying that we expect, it's hard to say where it's going to land, we're targeting a premium, significant premium, to what that shack would have been in that similar area. So when you look at like-for-like suburban shacks, either a core model or others that don't have a drive-through, we're targeting this model to have a significant sales uptick. So, yeah, you can't compare four months of data for six restaurants to a decade of data for 200 restaurants, which is what you're talking about with some average AWS, right? So here's what we're trying to build. Number one, trying to open up our total addressable market. Number two, trying to do that with potential higher AUVs, both for those shack types, areas, and the overall company. and a solid return on investment over time. And that's what we're looking for with drive-thru. It is so new for us. I don't know if you've been to one yet, but we're really excited. We think the guest experience is awesome. The team member experience is fantastic to work there. And when you roll up to a shack drive-thru, you really look at it and you say, this is something else. This is exciting. This is a different thing. And let's see how we can unlock it over time. But we will be the first to very humbly say, We got a lot to learn about drive-through. So any data we give in the near term is going to up and change. We've got to understand seasonality patterns that we don't really understand yet, right? We haven't really lived through any historical seasonality on that. And locations, like we're going to get some things right and we're going to get some things wrong. And even in the shacks, the sticks that we have, there's lots of things we wish we did differently. And that will go into the learning of the next batch. And that's why we're saying today how significant our commitment will be to these 10 and the next 10 to 15, at least for next year and beyond. So it's a big bet. It's an important part of our future strategy. And we believe we'll be a healthy unlock towards a much bigger opportunity down the road.

This does conclude. The question and answer session, I would like to turn the conference back over to Randy for closing comments.

Thanks, everybody, for joining our first ever morning call. Really appreciate your time. Look forward to connecting. Thanks. Take care.

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