Shake Shack, Inc.

Good day and welcome to the Shake Shack fourth 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. At this time, I'd like to turn the call over to Anneli Leggett, Senior Manager of Investor Relations and FP&A. Thank you. 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 GAAP measures are available on our earnings release and financial details section of our shareholder letter. Some of today's statements may be forward-looking, and actual results may differ materially 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 fourth 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. 2022 was a year of continuous improvement in SHAC formats and feel. culinary innovation, and focused strategic planning for the exciting road we have ahead. We ended the year opening 69 shacks globally, growing our unit count by more than 18%, with system-wide sales expanding more than 22% year over year to a record $1.4 billion. Our total revenue grew over 21% to approximately $900 million, led by new openings and 7.8% same-shack sales. We continue to build back our SHAC-level operating profit margins to 17.4 for the year, exiting the year at 18.8% in the fourth quarter, all the while continuing to demonstrate the global appeal of our brand as we stand for something good in all that we do, elevating our teams and communities along the way. We ended the year with solid momentum in the fourth quarter, raising average weekly sales, expanding our margins, and investing with discipline on G&A and CapEx. Our performance was led by price and strong in-SHAC traffic growth reaching $76,000 in average weekly sales and 5.1% same-shack sales. This momentum has carried into January, with total revenue up nearly 35%, including a 17% comp and double-digit traffic growth as we lapped last year's heavy impact from Omicron. Our licensed business performed well in the fourth quarter despite pressures from COVID-related disruptions in China and other regions, and some of that volatility in our China shacks has subsided in January. And we're cautiously optimistic that things can begin to level out towards a more normalized sales environment internationally this year. Our 18.8% SHAC-level operating profit margin in the fourth quarter was supported by our October menu price increase, efficiencies in labor, and positive channel mix as more guests return in SHAC. Rest assured, though, that our work to build our profitability is far from done. We have a plan in place to continue this improvement in 2023. Given the uncertain economic backdrop, we expect conditions to remain challenging for some time. However, we're confident that we have the right strategic priorities and team in place across the company to navigate these pressures and set us up for solid long-term growth. We shared a lot of detail around our 23 strategic plan at the ICR conference in January, presentation and replay of which is available on our IR website. Today, I want to recap where we're focused this year. Our number one focus is is on recruiting, rewarding, and retaining a winning team. Fielding an exceptional team is the key ingredient to operating efficient and successful Shacks. We've not been immune to the staffing challenges the industry has faced, and we've doubled down on recruitment, retention, and training efforts. We've raised pay, expanded benefits, added tips, and enhanced access to the opportunities our team members have to advance in making Shake Shack a real career choice. Last year, we filled nearly 60% of operations leadership positions with internal candidates, a critical pipeline to meet our growth goals. 77% of our promotions were awarded to people of color and over 50% to women. While many shacks remain below their optimal staffing levels, we've seen marked improvement in hiring over the last few months. Now let's remember that we opened 22 domestic company operated shacks in the fourth quarter, so we're still in the midst of a lot of training, and moving team members around to support new openings. We're expecting to have some additional costs running into the first quarter as we get to more optimal operations. We still have a lot of work to do, but we're incredibly proud of how the team is developing. Our second priority, keeping our relentless focus on the guest experience. Shake Shack has always been differentiated from traditional fast food, and we win by doing what most QSR and other restaurants are either unwilling or unable to do. Between collaborating with celebrity chefs for marquee events and LTOs, departing with media companies like Hot Ones, as well as brands like Maker's Mark for our bourbon bacon jam, we are continually learning how to better drive engagement with new and existing guests. This past week, we launched our White Truffle LTO, which includes the White Truffle Burger, a vegetarian option with the White Truffle Shroom, and Parmesan White Truffle Fries. This is a great example of something only Shake Shack can do online. creating an elevated, affordable culinary experience. This will also be a big year for plant-based innovation. We plan to launch our non-dairy chocolate shake, as well as our new veggie shack burger, developed right here in our innovation kitchen in the West Village. It's an elevated and delicious alternative to the highly processed meatless offerings in the market today. It's packed with mushrooms, farro, quinoa, sweet potatoes, carrots, and more, topped with American cheese, crispy onions, pickles, and shack sauce. We think we've landed on a vegetarian option that's craveable, and we look forward to introducing it to a wider audience to get feedback this year. We also plan to keep a rotating group of LTOs to drive frequency, and you'll see various tests on a number of new items through the year, including new packaging, caffeinated lemonades, mini shakes, and more. We're offering a better overall experience, committed to premium ingredients, and greeting our guests with genuine hospitality. This is our competitive advantage and our focus. When we do this well, we believe more people than ever will come. Our third priority is focused on development and how we grow from here. We believe our total addressable market globally continues to expand. We opened 36 domestic company-operated shacks in 2022. In the fourth quarter alone, we opened 22 restaurants in a balance of formats, including core shacks, small formats, and five new drive-thrus. While many of these shacks opened just weeks, and in some cases just days before the quarter ended, we're encouraged with the early results as they settle into 2023. In this coming year, we expect to open about 40 shacks, with roughly six of them in this first quarter, having just opened a new drive-thru in Dublin, Ohio, and a core shack right here in New York City in Brooklyn's Bed-Stuy neighborhood. Currently, we have 24 shacks under construction. On drive-thru specifically, with 12 open today, we're encouraged by the initial reads and are targeting to nearly double that with our plans to open 10 to 15 more drive-thrus this year. We know there's still much we have to learn and much to prove out as we've been rolling out a few different designs as well as kitchen flows so that we can optimize this investment for learning quickly and evolving the model for the long run. Our licensed shack business is the other key part of our development strategy. 2022, our partners opened 33 licensed shacks, 20 of those in Asia, three in the Middle East region, two in Mexico, and eight in the United States in our airports, travel plazas, and event venues. This is an asset-light way to grow our profitability over the long term. It speaks to the strength of our brand, which resonates globally across geographies and cultures. Very few, if any, restaurant companies at our scale are have successfully grown with this level of excitement and brand acceptance around the globe. And you'll see us continue to build in existing markets while adding new markets in the future. This year, we expect our partners to open between 25 to 30 more licensed locations across formats and regions, with six to seven more in the first quarter. Nearly half of our openings we expect to be in Asia, including a launch in Thailand later this spring. We'll also unlock another format type, as we partner with the Atlantis in the Bahamas to open our first-ever resort hotel shack. We'll also test our first drive-thru in our licensed business with our partners Alshaya in Dubai. And lastly, we're spending a lot of time considering new countries, territories, and formats where we can grow this critical part of the shack opportunity for the long term. Our licensed business and partners remain an incredibly dynamic, profitable, and powerful way to keep expanding our presence and brand across the globe. Our fourth priority is improving our overall company profitability with particular focus on our domestic company operated checks. We know the dynamics of the last few years have impacted our historical margin profile. We're focusing our work to rebuild over the long term. We're committed to improving profitability by driving sales, emphasizing our own higher margin channels, finding COGS, labor, and OPEX efficiencies, improving off-premise profitability, and utilizing strategic menu pricing. We showed margin progression in the fourth quarter and we have the right plan in place. Leading with sales, our priority has to be to retain our winning team. We have to keep improving staffing levels so that we can optimize total hours and sales potential. Our big opportunity, especially in newer markets, is around building our brand strength. We've been testing various brand campaigns across media channels, investing in targeted performance marketing, and more than ever, building community marketing with our regional leaders participating in and supporting more local events than ever. On the expense side, we've got an intense focus on every line of the P&L in our shacks. We're building teams to collaborate with our operators, designers, and suppliers to go after the profitability measures we can tackle this year. And Katie will talk more about these efforts in a bit. Finally, as we build an enduring company, we are committed to investing with discipline. We see growth opportunities with a strong return potential across development, digital, and our business overall. The last few years, we made the critical decision to fortress our balance sheet with a historically low cost of capital. That's provided us with the dry powder to grow in this current environment, and we're committed to doing it with discipline while remaining aggressive. You'll see us continue to deploy capital towards strong returns in four main areas. Building shacks, updating our current shacks, investing in our digital infrastructure, and structuring our home office capabilities to support our restaurants. We have historically outperformed our long-term AUV targets while delivering strong cash-on-cash returns. Over the last few years, with profitability under pressure and net build costs elevated, on average, our new SHACs generated returns just below long-term targets. Building back our SHAC-level out-profit margin, as well as addressing higher build costs, is the work to be done to bring us back to our longer-term return targets. This SHAC class of 22, average net build cost is tracking around $2.4 million. Inflationary pressures in the building and construction market worked against us last year, but we're also investing in a more expensive mix of shacks with drive-thrus included. In 2023, we expect a similar build and cost mix as we target 10 to 15 drive-thru shacks. We're addressing cost savings where we can for the class of 23 and beyond. We've tasked our operational and construction design teams to work towards bringing down long-term average cost to build for all formats. We're going to keep building shacks to win. with focused and scalable designs and formats where we know we can drive strong returns over the long term. We've got the right plan and team in place for 23, and we'll keep you posted on progress as we go. With that, I'll hand it off to Katie to share more about the details of the quarter and expectations looking forward.