Shake Shack, Inc.

Greetings. Welcome to Shake Shack second quarter 2023 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 Michael Oriolo, director of FP&A. Thank you. You may begin. Thank you.

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 in our earnings release and the financial details section of our shareholder letter. Some of today's statements may be forward-looking, and the 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 23, 2023. 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 2023 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. As a reminder, during last year's second quarter, our SHAC-level operating profit saw a benefit of 40 basis points from one-time credits related to our 2022 leadership retreat. During today's call, we will discuss year-over-year SHAC-level operating profit and cost comparisons excluding these credits in order to provide a more like-for-like comparison. I will now turn the call over to Randy.

Thanks, Mike, and good morning, everyone. Our team continued to execute our strategic plan through the second quarter and into July. We grew total revenue by 18% to $272 million, with 3% growth in same-shack sales, average weekly sales of $77,000, and trailing 12-month AUV across our shacks at $3.9 million. We grew system-wide sales by 21% year-over-year to $426 million as we continue to accelerate our the growth in our licensed business across new and existing markets. The company-operated business, we opened 10 new shacks, with 23 currently under construction, well on our way to opening about 40 new shacks this year. In our licensed business, our partners opened 13 shacks in the quarter. We target opening 35 shacks this year, representing 17% system-wide unit growth year-over-year. Since the quarter ended, we've seen an uptick in sales momentum, with fiscal July same-shack sales up 4.5% and strong performance around the company. As we strengthen the company for the future, our commitment is to being a profitable growth company. In the second quarter, our teams delivered 21% shack-level operating profit, our highest level since 2019, and a 240 basis point gain over last year. We are disciplined. We are more efficient across our shacks, G&A, and CapEx expenses. In our restaurants, We've identified numerous areas for improved process and cost reductions that we executed against in the quarter with the aim of growing profitability while delivering a great guest experience. We are still early days in seeing the full potential from this work, but with these strategies, we'll continue to improve how we run our Shacks, all the while still improving upon our already strong returns and great guest experience. While our overall second quarter results were strong, our same Shack sales slowed in May. before rebounding through June and strengthening into July. Our highly successful White Truffle LTO that contributed to our strong performance in the first quarter in April sold out early. And we know that our best LTOs drive mix, frequency, and margin, and we saw a slight dip in those contributors in May and early June. That impacted the quarter. In late June, we launched our Bourbon Bacon Burger, a well-liked LTO from last year, which is expected to sell out soon. And in late July, we pivoted to promoting our avocado bacon burgers and chicken. We're looking ahead to September when our LTOs will focus on the return of a guest favorite, hot chicken, as well as a new menu item, the spicy Shackmeister burger, to bring the heat in the year end. I'm particularly excited about our culinary lineup for next year as well, as we continue to evolve and improve the level of guest data and insights that we're weaving into our culinary story. Let me give a mid-year update now on how we're tracking against our 2023 strategic plan. Our first priority is on recruiting, rewarding, and retaining a winning team. I'm proud to report that while staffing is always challenging in the restaurant business, our teams have done incredible work towards improving our retention and turnover. Year to date, we're experiencing the best turnover numbers we've seen in years. Our team members are earning competitive wages, they're staying longer, and all of this is contributing to our operational execution and profitability in the shacks. The near and long-term benefits and returns on this investment in people and retention cannot be overstated. Our people remain our priority, and we're continuing to look at ways to improve their experience and opportunities for advancement in the SHACs. As just one data point, in the last 24 months, with the introduction of our Shift Up leadership curriculum, more than 180 SHAC leaders across the country have taken the 18-week course, and many have graduated from hourly supervisory roles into the next level of management, fueling their development and building a pipeline of leaders ready to take on the growth ahead. Our second priority is our relentless focus on the guest experience. We continue to execute a broad culinary strategy of improving our core menu while delivering exceptional LTOs that keep operations running smooth and efficient. In addition to the comments I made earlier, we also launched our veggie shack burger and non-dairy shake, both of which have received a solid reception. We're featuring a great lineup of shakes this summer, as well as a caffeinated option for our lemonades. In some shacks this quarter, you'll see us testing a new mini shake size, as well as a small test bringing sundaes back to the menu as we look to broaden optionality and operational ease in our dessert category for the long term. We also continue to expand our kiosks, which will be in nearly all shacks by the end of the third quarter, a full quarter ahead of our expectations. We doubled our kiosk sales year over year. as guests return in-check and choose this as their preferred experience. Kiosks enhance guest convenience while driving a higher average check and, in turn, profitability. While kiosk is a key driver of the guest experience and our sales and profitability improvement strategy, we've only begun to explore the potential full capabilities of kiosks, such as upselling and connecting personalized marketing across channels. One of our primary focuses of digital investment next year will be improving the kiosk experience towards greater omni-channel adoption and long-term guest connection. With our exciting culinary innovation, continued kiosk rollout, menu strategy, and digital tools, guest perception and value scores continue to improve. Our third priority is our targeted development strategy with a focus on drive-thru and maximizing our total addressable market with great returns over the long term. I've consistently said we are investing for learning early on. So what have we learned so far? We've opened some amazing drive-thrus in the second quarter across the country, including Lancaster, Pennsylvania, Richmond, Virginia, as well as deepening our footprint in Texas, in Sugar Land and McKinney, as well as Katy and San Marcos subsequent to the quarter. Each of these have started stronger than expectation and give us confidence in the ultimate potential for drive-thru. Where we've picked great real estate specific for drive-thru, we are capable of driving strong AUVs and profitability. All told, of the 18 drive-thrus we're operating today, we have some great checks performing above our long-term sales targets. We have some below. our targets and we have a lot in the middle that we're learning from tweaking and improving all around. We have confidence in where they're headed. In some cases we've hit our cost to build metrics and in others we've invested more than our targets which has contributed to a higher cost to build overall this year. We remain encouraged by the drive through opportunity and we're continuing to refine take down cost to build and improve the model overall. We're expecting to open about 15 drive throughs this year and a similar amount in the coming years. We're ensuring future sites take in a lot of the learnings that we've gotten thus far, and will continue to improve each and every day. We are bringing down build costs and prototyping future shacks with 2023 drive-through build costs already trending down about 10% year over year. We believe we can build a more standardized operation in a smaller footprint with less seats and a lower cost to build overall, while still enhancing the great guest experience Shake Shack is known for. While this number may vary in the future due to geographic mix of openings, this gives us confidence we can bring down build costs over time. Next year, we're particularly excited to have much more of the drive-thru class in our strong coastal markets in Long Island, New Jersey, and California, where we generally expect higher AUVs with higher brand awareness. We are continuing to focus on the guest experience and operational improvements specific to our drive-thrus, and we look forward to material progress over time. On our licensed business, Our team is hard at work with our partners to open new shacks and expand our business across the globe. In fiscal April, we opened our first shack in Thailand. And in fiscal July, we opened our first resort shack with a bar in the Bahamas in the Atlantis Resort. Our strong performance in the second quarter was primarily driven by outperformance in our licensed business domestically, which is one of our largest markets. Our airports and new shacks in New Jersey and upstate New York are thriving and capitalizing on busy summer travel patterns. We have a long runway ahead for our domestic licensed business, with 36 licensed shacks across the U.S., including 18 airports, 11 stadiums, six shacks in roadway travel plazas, and one museum. And based on the strength of this business and the continued optimism shared by our partners around the globe, we expect approximately 35 new licensed shack openings this year. Our fourth priority is being even more profitable in our shacks. Second quarter restaurant margin expanded 240 basis points year over year to 21%, marking the first quarter since 2019 where our restaurant margin grew back above 20%. It's a testament to our continued progress on our key initiatives as we achieve 21% despite high single-digit food and paper inflation in the quarter. Finally, the fifth pillar of our plan is we build an enduring business. We are committed to investing with discipline. We're deploying capital towards strong returns in four main areas. We're building shacks, updating our current shacks, investing in our digital infrastructure, and structuring our home office capabilities to support our restaurants. Starting with development, we're excited about all the work the team has done to improve our bill costs over time. However, unlike the high velocity of our restaurant operations, moving the needle here will take time, given long lead times of design and build-out. But we have opportunity and a plan in place, and we are optimistic it will show strong results with future classes. We expect 2023 to be the high-water mark for bill costs. with the class currently tracking about 10% up year over year. Unfortunately, we've had a few very challenging projects that drove the majority of the overruns while also building the highest mix of drive-throughs so far and still working through elevated build costs and delays across the system. All this together had a heavy impact on our class. However, looking ahead, we are already seeing evidence that we have the right strategies in place to lower this cost materially next year and even further in the coming years as new prototypes come into design. Our commitment is to target lowering build costs next year by about 10% for the overall class. As we take down build costs and improve Shack-level operating profit, we expect to continue to improve overall Shack returns well into the future. We've got the right plan in place, and we're pleased to see progress taking root as we continue the evolution of Shake Shack. We remain one of the fastest-growing publicly-traded restaurant companies, and we're growing profitably. while strengthening our brand and our opportunity ahead. I'll now hand it off to Katie to share more about the details of the quarter and expectations for the rest of the year.