Shake Shack, Inc.

Greetings and welcome to the Shake Shack third quarter 2023 earnings 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 our host, Michael Riolo, Senior Director at P&A NIR. Thank you, sir. 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 Fogary. 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 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 third quarter 2023 shareholder letter, which can be found at investor.shakeshack.com in the quarterly results section or as an exhibit to our AK for the quarter. I will now turn the call over to Randy.

Thanks, Mike, and good morning, everyone. We're really proud of the team's strong and sustained execution of our strategic plan. Shake Shack remains laser-focused on profitable growth. This quarter we grew total revenue by 21% to $276 million, with 2.3% growth in same-shack sales. We achieved average weekly sales of 74,000, trailing 12-month AUV across our shacks at $3.9 million. We grew system-wide sales by 24% year-over-year to $439 million as we built shacks across new and existing markets. Sales began the quarter strong in July and moderated a bit through the end of the quarter in September. However, October has re-accelerated with same-shack sales over 3.5% as we increased various digital and in-shack marketing initiatives, driving October traffic well above September trend. In the quarter, we continue to improve profitability, increasing shack margins to over 20% again, with expansion of 400 basis points year over year. We grew third quarter adjusted EBITDA by nearly $16 million to $36 million, up over 80% year over year. And we improved our adjusted EBITDA margins by 430 basis points, growing from 8.7% last year to now 13%. We also continue to grow our footprint around the globe, opening 25 shacks in the third quarter, 10 company operated, and 15 with our licensed partners. We're on a path to open approximately 80 shacks this year system-wide, roughly 18% unit growth, and we are building a robust pipeline of growth in the coming years. Our licensed business continues to perform, and we see tremendous white space in this highly accretive and asset-light part of our business. We expect to open approximately 40 shacks this year and approximately 40 more in 2024. With a fair amount of global macro and geopolitical headwinds, we expect to navigate a more challenging environment in the coming years. And this is why we've built a diverse portfolio domestically and around the globe to help offset regional volatility. We'll move deeper in existing markets with proven and newer formats like drive-thru, as well as enter several new markets in the coming year. In our company-operated business, we've opened 30 shacks so far this year, well on our way to open approximately 40 before year-end. Looking ahead, we have 20 shacks under construction. And if you recall last year, we had a much more heavily-weighted fourth quarter. We're really proud of the team for better executing a balanced year with a strong class of 23. And our 24 pipeline is solid as we target approximately 40 new openings next year. We're also working through new prototypes for the long term, with a 2024 target to bring down our net investment costs by about 10% from today's average costs. Now let me give you an update on how we're tracking on our strategic plan. Our first priority has been on recruiting, rewarding, and retaining a winning team. And similar to what we reported last quarter, we've achieved some of the best turnover and retention numbers we've seen. and we're generating more than twice the team member applicant flow compared to last year. Not only are our team members staying longer, competitive wages are also attracting more candidates, which is contributing to better operational execution and profitability in our shacks. This commitment to our workforce remains unwavering, and we're constantly exploring avenues to enhance their experience and provide more opportunities for career growth within the company. Our second priority is a relentless focus on our guest experience. We continue to execute a broad culinary strategy of improving our core menu while delivering exceptional LTOs that keep operations running smoothly and efficiently. In July, we offered our Bourbon Bacon Burger, which sold out quickly at the start of August. We pivoted to marketing a core menu favorite, our Avocado Bacon Burger and Chicken Sandwich, before launching our Hot Chicken and Spicy Schachmeister Burger at the start of September. And while guest reception for our current hot menu has been solid, We do have a tougher compare towards the end of the quarter as we lapped last year's launch of our Hot Ones LTO, which started off especially strong due to the very high number of media impressions we received with that partnership. We've also been featuring Spicy Fries, one of our strongest fry LTOs to date. Our lemonade lineup featuring Harvest Berry, Cherry Hibiscus, and Kiwi Apple has also resonated well with guests. As we look to the rest of the fourth quarter, we're excited about additional brand building opportunities in culinary. including our holiday shake lineup that just hit Shaq's yesterday. We've teamed up with Universal Studios for their launch of the Trolls 3 movie, Trolls Band Together, and we'll be serving a series of shakes based on characters in the movie, highlighting Poppy's sugar cookie, complete with blue and pink cotton candy topper that resembles the iconic troll's hair, Branch's chocolate peppermint, and Viva's cinnamon roll. This is our first national offering in partnership with a movie, and we're excited for these delicious and fun shakes just in time for the holidays. Many of our shacks are proximate to movie theaters, giving us the opportunity to benefit and play a unique role in partnering with films. And we have an engaging marketing strategy lined up around trolls, including bold messaging, advertising in many shacks, as well as social media activations. Some of our shacks will even have special activations for kids this coming weekend, including glitter bars, coloring stations, and photo booths. Our third priority, our targeted development strategy and improving returns on our shacks. Our recent openings have performed well, including a number of drive-thrus as we continue to learn more about what makes an optimal Shake Shack drive-thru site and build out. We opened four more drive-thrus in the quarter and one in October through Washington State, Utah, and Texas, bringing the total to 21 company-operated. We'll continue to score well with our guests on overall satisfaction and order accuracy, and we're proud to win an Innovation by Design Award from Fast Company, highlighting our team's work. That said, we know in drive-thru and in shacks generally, some of our biggest areas of improvement remain consistency, speed, and throughput. And this is going to be a big focus for our designs and operational improvements through 2024. Our licensed business showed strong performance overall in the quarter as we opened our first resort shack in the Bahamas at the Atlantis with a dramatic format that includes a full-service bar. Later in the quarter, we opened our second shack within Incheon Airport in Seoul, and we continued deepening our footprint in China. Our domestic licensed shacks performed well by continued strength in U.S. airports and the opening of four more domestic roadside shacks, which we believe can be a growth opportunity for us. We remain highly confident in the long-term trajectory of our licensed business, but we do expect that geopolitical pressures and uncertainty, namely in the Middle East and Asia, could present pressures into the fourth quarter and into 24 in terms of our number of openings and sales. Our fourth priority, driving more profit in our shacks. The team is doing really great work, focusing on the profitability opportunities in our restaurants. We expanded our third quarter restaurant margin by 400 basis points year over year to 20.4%. Our second consecutive quarter where our restaurant margin grew back above 20%, showcasing the continued progression of our strategic priorities. We're winning share in our own more profitable channels, and our kiosk rollout has made our best channel even better from a profitability and guest experience perspective. There are many pressures that lay ahead, including an unknown consumer backdrop and beef inflation. However, we are focused on driving continued improvements that help us outperform historical patterns in light of these cross-currents. And finally, the fifth pillar of our plan, as we build an enduring business, we are committed to investing with discipline. We're deploying capital towards strong returns in four main areas, building shacks, updating current shacks, investing in digital infrastructure, and structuring our home office capabilities to support our restaurants. We're moving purposefully to address opportunities in the supply chain, operations, leveraging G&A, and long-term cost to build. We remain committed to reducing build costs next year by about 10%, as well as pre-opening costs by at least 10% per shack, as we continue to lead with disciplined capital allocation in 24 and beyond. We're excited to see our strategic plan driving improvements 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 now hand it off to Katie to share more about the details of the quarter and expectations for the fourth quarter.