Shake Shack, Inc.

Shake Shack third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Anna Lee Luggett, Senior Manager of Investor Relations and FP&A. Thank you, and you may begin.

Thank you, and good morning, 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 gap measures are available in our earnings release and 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 third 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, Annalie. Good morning, everyone. We are pleased today with our third quarter results, especially noting stronger than expected sales exiting September, a trend that's continued into October. We delivered total revenue growth of over 17% year over year to nearly $228 million. with system-wide sales up more than 18% to over $353 million. Average weekly sales outperformed seasonality at $73,000 as we've maintained a trailing month AUV of $3.8 million. Same-shack sales grew 6.3% year-over-year, driven by both traffic and price mix, and October's comp has accelerated to more than 8%. We generated a shack-level operating profit of $35.8 million at a 16.3% margin, up year-over-year, even with a material pickup and inflationary pressures. Our urban markets performed well in the quarter. We saw strong momentum coming out of Labor Day as mobility and back-to-office trends broadly improved. It's clear that in our hometown of New York and other urban centers, things are improving, with more and more people moving about. We remain cautiously optimistic on urban trends long-term as new patterns emerge, but it's good to see the momentum in the right direction. I recently visited our shacks on the West Coast, And you can feel the energy even in downtown San Francisco and the South Bay continuing to emerge. On the development side of the business, we've opened some great shacks recently in places like Beverly Hills, the Meatpacking District in Jamaica, Queens, and New York City, and in suburban Massachusetts and Florida. As you know, it's been a frustrating year of extended timelines to opening new shacks. And delayed openings have probably been our biggest headwind to overall sales growth. In the third quarter, we opened two company-operated shacks, with four more so far in the fourth quarter, as we continue to face challenges from permitting and landlord construction delays to availability of kitchen, electrical, and HVAC equipment. However, I'm happy to report that the tide is slowly turning, and we currently have 35 new shacks under construction, with more to come. We still expect to open 35 to 40 new shacks in fiscal 2022, but looking more likely to come in at the low end of this range, with many of these opening towards the very end of the year. Unfortunately, we and many other retail and restaurant companies are seeing this trend, but it's one we've been preparing for and believe we can execute. That growth, while behind our initial expectations, still represents over 15% company-operated unit growth year over year. You can expect some additional shack-level costs in the coming quarters as we work through this high growth and the extra support needed given the compacted schedule. Despite these pressures, we remain focused on our long-term pipeline and building SHACs to stand the test of time. For 2023, we now expect to open approximately 40 domestic company operated SHACs, which will represent 16% unit growth year over year. We think that's a solid number heading into an uncertain economic and still bumpy supply chain and staffing environment, allowing us to grow significantly, also focusing on our current SHAC performance. I want to take a moment and talk about our bigger total development opportunity. We're not updating any long-term guidance today, but we know we have much more white space potential than our existing targets. And I've been doing the work to quantitatively and qualitatively discuss that opportunity as we assess over time. The high inflationary environment has impacted our historically high returns with near-term profitability pressure, increased cost to build shacks, as well as disrupted sales patterns experienced in the recent years. We've historically targeted our blended AUV for new openings to be approximately 3 million. Clearly, we've outperformed that over the years and expect to continue to do so. We believe our plan to balance urban and suburban growth through a multi-format strategy, including drive-through, has the potential to generate strong long-term AUVs. With the continued strength of our brand, the amount of new formats with which we can target a market, we believe our total addressable market continues to increase. On the profitability side, prior to the COVID and inflationary impact of the last few years, we outperformed our long-term targets of 18% to 22% outprofit at the shack level. While many of our current shacks beat these targets, on average, this is a number we're not consistently hitting today. But we continue to believe it's the right long-term target and one we can return to. We have much to do in this area, and we'll be highlighting some of that work as we go. When we look at overall returns in our shacks, Even against double-digit inflationary pressures and COVID recovery impacts, our business has navigated in the past several years. Our recent classes continue to show strong returns, but we aim to do better than our long-term guidance. Historically as a company, we have done just that. We expect this will take a mix of targeting shack-level operating profit margin improvement, including an intense focus on our operations, cost pressures in our digital business, and further rationalization of our build costs over the long term. We're focusing on improving on our design and construction to optimize sales, throughput, and build costs, while streamlining SHAC models that look and feel better than ever. It's early days, but we're excited for the near and long-term impacts this will have on our development plans in the coming years. Before I move on, just a quick update on drive-thru initiative. We now have six drive-thrus operating today and expect to open three to four more by the end of the year. with another 10 to 15 in the pipeline for 2023 and more identified for 2024 and beyond. Drive-thrus are a key step in the evolution of our company. We're encouraged by the early operational flow and performance to date. We're optimizing for learning and building on our long-term goals. Initial drive-thru investments will be high as these new units have larger footprints, more tech elements, and continue to have a great in-shack dining experience. This is the right place to focus additional capital right now with the goal of unlocking a larger total addressable market. I believe in the next year, as we get a strong class of drive-thrus and we learn more about the real estate design and operational decisions we've made, we'll have a much clearer view on the size of the prize. On our licensing business, where revenue grew over 20% year over year, even as we lapped a heavy opening schedule in 2021, faced COVID disruptions in China, and have a new headwind from the strong U.S. dollar. We opened six new shacks in the quarter, including a roadside location on the New Jersey Turnpike and our first-ever museum location at the Smithsonian Air and Space Museum in Virginia. We also opened our eighth shack in Shanghai this quarter, which is our 28th shack in the greater China market. After a pause during COVID, we're happy to see our partners in Japan return to growth, with our newest shack opening at the Universal Studios in Osaka last week. We're leaning into this important part of our revenue and profitability plans long-term and are excited to deepen relationships in current and future markets. In Korea, after recently opening our 23rd shack and nearing the early completion of our development schedule, we've extended and expanded our operating agreement to go even deeper in the market. We're looking ahead towards new markets of Thailand and Malaysia in 2023 and 2024, We just announced the shack will open in a premier location at the Atlantis in the Bahamas. Lastly, we've just opened our first ever roadside shack on the New York Thruway as we look to unlock new format opportunities both here and abroad. We have a robust pipeline worldwide next year and expect to open 25 to 30 new licensed shacks in 2023. A few more updates on the rest of our strategic plan. Above all else, we remain committed to elevating our people. A relentless focus on standing for something good with our people, with our guests, is a key pillar of our culture and how we intend to grow our workforce. Staffing and retention have improved slightly but remain challenging. There's no question we have an opportunity to optimize throughput and total opening hours as staffing patterns improve over time. We're heavily focused on recruiting, retaining, and developing our people and just graduated our sixth class of team members looking to grow into management through our new Shift Up program. It's a key pipeline for our hourly team members who receive the training required to elevate to a manager position. We're also proud to offer our teams competitive wages. In some of our shacks, with our new tipping availability, team members can at times be earning more than $20 an hour in pay, on top of generous benefits and development opportunities. So current and potential team members can see Shake Shack as a long-term career path. These are just a few examples of how we strive to be an industry-leading employer. When it comes to the all-important guest experience, we're focused in the shacks, where most of our gains are happening. And while we're committing more than ever to our digital evolution and the continued strength of those channels, we're also working with a persistent attitude towards clean, welcoming, and well-operating restaurants. In menu innovation, we continue to lead the way with dynamic and fun products, providing our guests with elevated, premium, high-quality ingredients that they can't find at traditional fast food, other fast casual concepts, or even casual dining. Currently, we're running a great LTO, partnering up with YouTube sensation Hot Ones on a collab creation of a spicy bacon burger, bacon chicken, and bacon cheese fries. We even offered the option for our bravest guests to buy the extra spicy Last Dab hot sauce packet on digital channels only. The Last Dab was the Hot Ones menu's hottest sauce, made from the Apollo Pepper, California Reaper, and a Pepper X Hybrid, landing at $2.5 million on the Scoville scale. This menu also had strong guest reception and satisfaction results and is particularly successful on our own digital channels. On beverage, we continue to see increasing demand and contribution to average check through our latest seasonal lemonades. We also just launched our holiday shake trio, which has historically been a fan favorite. This year, we're offering Christmas cookie, chocolate milk and cookies, and chocolate peppermint shakes. Lastly, as we look to attract even more frequency long term, we continue to test a new non-dairy chocolate shake, and we'll be testing a new version of our veggie shack at about 30 shacks towards the end of this year. I'll now pass it over to Katie to discuss our financial performance in more detail.