Shake Shack, Inc.

Welcome to the Shake Shack's fourth 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 your host, Michael Aurelio, Senior Financial Planning and Analysis and Investor Relations. 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 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 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, and our other filings with the SEC, including our Form 8-K filed this morning. 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 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. We filed an 8K this morning related to a correction the company identified and brought to its auditors, primarily regarding how the company has accounted for elements of tax depreciation. These errors led to overstatements of income tax expense and understatement of deferred tax assets during the impacted periods. The unaudited amount of the overstatement of prior year non-cash GAAP income tax expense for fiscal 2021 and 2022, as well as an opening adjustment to the retained earnings balance in fiscal 2021 that is related to prior periods to 2021, can be found in the 8K. We will provide additional details in our upcoming 10K filing, which we expect to be filed on time. I will now turn the call over to Randy.

Thanks, Mike, and good morning, everyone. I want to congratulate our teams on an exceptional 2023. This year marked transformative milestones and substantial profitable growth, building upon our already solid foundation for the long-term opportunity ahead. We grew system-wide sales by 24% year over year to a record $1.7 billion. We opened 85 total restaurants, the most ever in a single year, ending 2023 with 518 Shake Shacks across the world. We grew shack sales by 20% to over a billion dollars with 4.4% same shack sales growth and a strong class of 41 domestic company-operated restaurants. In just the past four years, we've nearly doubled our footprint, system-wide sales, and total revenue, and we have a robust pipeline of opportunities going forward. Importantly, we grew our shack-level operating profit even faster than our total revenue, expanding restaurant margin by 240 basis points year-over-year, to nearly 20%, growing SHAC-level operating profit by 37% year-over-year. With this and 110 basis points of leverage in our G&A, excluding one-time adjustments, we delivered over 80% improvement in our adjusted EBITDA to $131.8 million. We ended 2023 with strong momentum in the fourth quarter, with our marketing strategies delivering positive traffic and our operational focus achieving further margin expansion. We executed our five strategic priorities for 2023, and I want to wrap up how we performed for the year across each of these priorities. First, recruiting, rewarding, and retaining a winning team. At the beginning of 2023, staffing pressures were material. We're negatively impacting sales, profit, guest experience. But throughout the year, we improved staffing retention to the best levels we've seen in years, which had a direct tie to our stronger labor and restaurant-level margin performance. Second, we focused on the guest experience. We rolled out kiosks to nearly all our domestic company-operated shacks, a full quarter ahead of expectations. We're seeing a high single-digit checklist on kiosk channel versus the traditional cashier experience. We also made material improvements to how our guests can order through this channel. We advanced our commitment to culinary innovation, a competitive strength of Shake Shack, with improvements to our core menu, as well as exciting LTOs, including white truffle burgers, top-selling spicy fries, and a return of bourbon bacon jam. We also forwarded learnings towards future strategies as we are testing combo meals for the first time at drive-thrus and looking to increase dessert occasion through mini shake and Sunday tests. Number three, get a targeted development strategy this year. We opened 85 shacks across the globe in 2023, including 18 domestic drive-thrus and our first international licensed drive-thrus in Mexico and Dubai. We launched two new markets in the Bahamas and Bangkok. Bahamas also being a new format, our first ever hotel resort shack with a full bar. We built a solid foundation in development with prototype site design that will help us reduce our build costs in coming years. And we know we have a lot more work to do here, especially on build costs and pre-opening, where we believe 2023 was the high water mark. Last year, we demonstrated meaningful improvement in restaurant profit margins. We showed leverage across every shack and level operating expense line item, and drove 240 basis points of expansion for the year to nearly 20%. Importantly, we have line of sight to further margin expansion this year in 2024. And finally, number five, our commitment to investing with discipline. We leveraged G&A, excluding one-time adjustments, 110 basis points, and we grew adjusted EBITDA by over 80% to nearly $132 million. I'm pleased with our progress in 2023, and our teams are energized and building for what's ahead. Our leadership team has developed our 2024 strategic priorities to drive further profitable growth at Shake Shack with a clear line of sight to generating free cash flow, even while investing for a robust pipeline of growth. Our entire leadership team and the board are fully engaged, committed, and incentivized to continue execution in 2024. So today I want to go a bit deeper on our new strategic priorities for this year. First, we're committing to delivering a consistent guest experience. Shake Shack has always been differentiated from traditional fast food and fast casual in our food quality, in the look and feel of our shacks, and in the enlightened hospitality we provide our guests. In 2024, we're committed to delivering a great guest experience consistently across all channels. We have core KPIs for ops leadership. For the first time, we're targeting throughput improvement by reducing guest order times by roughly 30 seconds and even more in our drive-thru locations. We'll achieve this through new kitchen flows that'll roll out through the year, increased real-time reporting, new training, urgency, and goal focus, while continuing to cook to order at the highest level quality in the burger industry. We believe this can grow sales, energize our teams, and improve guest sentiment. Second, our plan this year is to grow sales and strengthen our brand awareness. Shake Shack continues to build upon our global brand appeal. We've nearly doubled our footprint since 19, We believe we're still early in our growth journey at just a small fraction of the scale that our competitors have. And yet we know that we still have a massive opportunity to increase our brand awareness. As we scale, we're leading into new and expanded marketing, brand partnerships, and additional spending opportunities that are demonstrating success. Our advertising spend at roughly 1% of sales is a fraction of many of our peers. We know we can and will invest with success here moving forward. As we've improved our overall profitability, increased our scale, we are able to unlock additional funds for advertising this year, and we'll do so with data-driven discipline. On development, plan to open approximately 40 company-operated shacks and approximately 40 licensed shacks this year in 24. Expanding our footprint is key to driving sales and strengthening our brand awareness. In 2024, the majority of our company-operated openings will be in existing markets across a variety of formats. We'll also be continuing our licensed shack development by going deeper in domestic airports, roadsides, and deepening international expansion in the new and existing markets. Third, we're going to make Shake Shack more profitable. In 2023, we improved restaurant-level margins by 240 basis points to approximately 20%. We plan to further margin expansion in 2024 with our next goal of reaching 20% to 21% shack-level operating profit margins. continuing our work to close the gap to our pre-COVID profitability levels. Katie will share more, but our main strategies on improving forward margins and lowering total cost to serve involve work on supply chain and operational efficiencies. Many of these initiatives are things that we identified in prior years, such as increasing the number of suppliers as we scale, optimizing our freight, and improvements in labor scheduling and deployment. We've also engaged an external consultant to help find additional opportunities. And we'll also look to leverage G&A while continuing to invest more in advertising and for the future growth of our business. Fourth, we're going to continue to improve how we build and open shacks. We believe 23 was a high watermark for our build and pre-opening costs as we dealt with inflation, supply challenges, and a higher mix of more capital-intensive drive-thrus. This year, we've prioritized our commitment to reducing average net build and pre-opening costs by about 10%. The team has begun to employ early prototype improvements to future shacks as a phase one approach, and we'll be doubling down further this year to capture additional savings over time. Some of this work necessarily caused us to slow down timing of the 2024 pipeline, and that will cause a back-weighted opening schedule this year. But as that work takes hold, we'll begin to see more impact in 2025 as we roll out improved prototypes and a strong pipeline of shacks in the years ahead. And lastly, We will continue to develop and reward our high-performing teams. Our people have always been and will always be the core focus. High-performing teams help fuel the success we drove this year, and we expect to drive in 2024. Looking ahead, we'll continue to invest in our teams through increased wages, training, opportunities, enhanced recruitment with AI-enabled recruiting tools, and retention practices to optimize their experience and ultimately drive the business. Now I'll turn the call over to Katie to recap more of 23 and provide our initial outlook for 2024.

Thanks, Randy, and good morning, everyone. The past year was a year of solid profitable growth as we drove 240 basis points of SHAC-level operating profit margin expansion in the year, building up to approximately 20%, further closing the gap to pre-COVID profitability levels, and growing SHAC-level operating profit by nearly 40% year-over-year to a record of $208.2 million. We did this by successfully implementing our profitability improvement programs in our restaurants and home office, including better forecasting and labor scheduling and other operational and total cost to serve initiatives. And with our commitment to investing with discipline, we levered our GNA excluding one time adjustments by 110 basis points while still prioritizing advertising and marketing investments. And we grew adjusted EBITDA by more than 80% year over year to a record of 131.8 million. We ended the year on an optimistic note for the fourth quarter with solid execution against marketing and operational strategies that drove strong sales growth with positive traffic and solid flow through. And as a result, we were more profitable despite continued inflationary pressures. Fourth quarter total revenue was $286.2 million, up 20% year over year, as we opened 24 company-operated and licensed units and grew system-wide sales approximately 21%. Licensing revenue was $10.5 million in the fourth quarter, and licensing sales were $166.4 million, up 24% year-over-year, and with particular strength in our airport and domestic locations in nine openings. We face geopolitical pressures in the Middle East and continue to see macroeconomic pressures in China, and in both markets, we expect to experience further volatility in our sales for the foreseeable future. Shack sales in the fourth quarter were $275.8 million, growing nearly 20% year-over-year, supported by opening 15 domestic company-operated shacks and driving strong same-shack sales with positive traffic through our marketing strategies. Our sales outperformed historical seasonality throughout the whole quarter, and all of our regions saw sequential traffic improvement since the third quarter. We grew same-shack sales by 2.8% versus 2022, with traffic up 1.4% which accelerated through the quarter, driven by success of our strategic marketing initiatives, as well as approximately 1.4% price mix. We generated $76,000 in average weekly sales, up from $74,000 in the third quarter, with mid-single-digit price and positive traffic across both in-shack and digital channels. Fourth quarter, shack-level operating profit was $54.6 million, or 19.8% of shack sales, 80 basis points higher versus last year, despite continued inflationary pressures across our SHAC P&L. And we achieved this with our strong sales performance and strategic initiatives around food costs, labor, and other OPEX-driving strong flow-through. In the fourth quarter, food and paper costs were $80.3 million, or 29.1% of SHAC sales, flat quarter-over-quarter and down 40 basis points year-over-year. Food and paper inflation was up mid-single digits year-over-year, led by beef up mid-teens and fries up high single digits, with pressures broadly across our basket. Labor and related expenses were at 78.6 million, or 28.5% of SHAC sales, down from 28.9% in the fourth quarter of 2022, and down 30 basis points quarter over quarter. With increased sales and positive traffic, the benefits from our strategic initiatives, including improved forecasting and labor scheduling, drove strong flow through on our better sales. Late in the fourth quarter, we implemented the first round of tests of our new labor modules. Now, as a reminder, this new scheduling standard leverages the unique characteristics of a SHAC in terms of channel and menu mix to enhance deployment. While takeaways are still early, we are pleased with the initial results from this test and expect to expand it to additional SHACs in the first quarter with the potential to roll out broadly later this year. Other operating expenses were $41.1 million, or 14.9% of SHAC sales, up 30 basis points from the fourth quarter of 2022. as we faced increased repairs and maintenance expenses, a higher delivery sales mix, and continued inflationary pressures in energy and utilities. Occupancy and related expenses were $21.2 million, or 7.7% of check sales, down 20 basis points from the fourth quarter of 2022 driven by sales leverage. G&A was $35.8 million, or 12.5% of total revenue. Excluding $900,000 in one-time adjustments, G&A was $34.9 million, or 12.2% of total revenue, down 130 basis points from 13.5% of total revenue in the prior year, despite continued investments needed to support our growth across technology, marketing, and operations. We ended 2023 with $125.1 million in G&A adjusted for legal settlements, professional fees, and other one-time expenses. Pre-opening costs were $5.1 million in the quarter as we opened 15 new company-operated shocks and depreciation was $24.5 million. On a gap basis in the quarter, we reported a pre-tax income of $1.5 million and a tax benefit of $5.3 million. On an adjusted pro forma basis, we reported a pre-tax income of $2.4 million and a tax expense of $1.4 million. Excluding the tax impact of equity-based compensation, our adjusted pro forma tax rate in the fourth quarter was 55%. Adjustments can be found on page 30 of the shareholder letter. We reported fourth quarter adjusted EBITDA of 31.4 million, up approximately 60% year over year, or 11% of total revenue, marking a significant improvement relative to 8% of total revenue in the fourth quarter of 22. And for the full year of 2023, we grew adjusted EBITDA by over 80% to 131.8 million, or 12.1% of total revenue, 400 basis points higher than the prior year. We realized a net income attributable to Shake Shack Inc. of $6.8 million or $0.15 per diluted share. On an adjusted pro forma basis, we reported a net income attributable to Shake Shack Inc. of $1 million or $0.02 per fully exchanged and diluted share. And finally, our balance sheet is strong, as we ended the quarter with $293.2 million in cash and cash equivalents and marketable securities. up approximately 8 million from last quarter. Now on to guidance for the first quarter and full year of 2024. Our guidance assumes no material changes in the macroeconomic or geopolitical landscape and the potential impact of system-wide sales or costs. For the first quarter, we guide total revenue of $288.4 million to $292.8 million, with $9.4 to $9.8 million of licensing revenue, approximately four company-operated openings, approximately two licensed shack openings, and for same-shack sales to be up low single digits year over year. January same-shack sales were flat, with an approximate low single-digit headwind from unfavorable weather, as well as pressures from comparing over a particularly strong January 2023 average weekly sales that had a large benefit from a high number of shacks that we opened in the fourth quarter of 2022. Outside of weather impacted weeks though, we saw that the underlying strength of our fourth quarter trends continued into January. And while we're not providing specific numbers around February, our trends have improved from January levels and our guidance reflects this. As we execute on our 2024 strategic plan, we are guiding to first quarter SHAC level operating profit margin of 19 to 19.5%, representing approximately 70 to 120 basis points improvement year over year. In the first quarter, we were planning for low single-digit year-over-year inflation in food and paper costs, with pressures led by uncertainty in beef pricing, the largest part of our basket. For 2024, we are guiding total revenue of $1.21 to $1.25 billion, growing about 11% to 15% year-over-year, with approximately 40 company-operated and 40 licensed openings, both of which are backed and weighted, and same-check sales to grow by low single-digits with low single-digit realized price. Our pricing plans for this year are modest and consistent with our pre-COVID pricing patterns of low single digits. We recently increased price in our digital channels and plan to take additional menu price in areas with outsized labor inflation, such as California. But for the majority of our checks, we plan to increase in-check menu prices by about 2.5% this year. We guide full-year license revenue of $45 to $47 million, up 11% to 15% year-over-year, as we factor in a degree of continued macroeconomic and geopolitical risk. The Middle East and China together were approximately 40% of our total licensed units and comprise the material amount of our 40 projected openings for 2024. We're targeting another year of restaurant margin expansion as we guide SHAC-level operating profit margins to 20% to 21% as we focus on driving sales and delivering on continued operational improvements. The low end of this guidance range, while nearly flat year over year, contemplates a weaker sales backdrop a worsening staffing backdrop, and the potential for even more elevated inflationary pressures in beef and other areas of the supply chain. We guide 2024 GNA to 139 to 142 million, which is up 11 to 14% year over year, driven by a planned large increase in advertising spending to drive greater brand awareness and sales, while still having a disciplined approach to run rate GNA. We are increasing spend on areas of marketing where we have high visibility in our returns and will continue to closely monitor and adjust accordingly with changes to our business. We expect approximately $18 million of equity-based compensation expense, with about $17 million in G&A. We guide full-year depreciation of $100 to $105 million and pre-opening of approximately $17 million, in line with our commitment to reduce pre-opening costs per SHAC by at least 10%. We guide adjusted EBITDA of $160 to $170 million in fiscal 2024, This represents 21% to 29% growth year over year and solidly outpacing total revenue guidance growth for 11% to 15%. And finally, we guide for fiscal year 24 adjusted pro forma tax rate, excluding the impact of stock-based compensation, to be 20% to 25%. Our overall tax rate will be impacted by a number of factors, including our level of profitability, tax credit, state mix, and other impacts. So thank you for your time. And with that, I'll turn it back to Randy.

Thanks, Katie. Before we open up the call to Q&A, I do want to give a brief update on behalf of our board of directors on the CEO search. We are really fortunate that the role of CEO at Shake Shack is among the most exciting and biggest opportunities in the industry today. We've had enormous interest. The board search committee is pleased with how the search is progressing, and we're on target, we believe, with expectations to transition leadership in the coming months. I also want to announce that today the company is promoting long-tenured leader Michael Kark to president of our global license business. Michael has been leading our international and domestic license relationships since he joined the company 12 years ago. He's led one of the most nimble and innovative teams in the industry and will continue to chart the course for this exciting and critical part of our growth ahead. Congrats to Michael and to all of our partners around the globe. In the meantime, I remain deeply committed to executing against our strategic priorities to deliver profitable growth in the year ahead and ensure a seamless transition for my successor. I have the utmost confidence in our seasoned leadership team and never been more optimistic about Shake Shack's potential as we build upon this last year's success and enter 2024. With that, operator, thank you, and let's go ahead and open up the call for questions.

Thank you.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. We ask that you limit yourself to one question and a follow-up so that others may have the opportunity to ask questions. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Brian Vaccaro with Raymond James. Please proceed with your question.

Thank you and good morning. You noted that average weekly sales through the fourth quarter exceeded your normal seasonality and you attributed some of that to your strategic advertising initiatives. Can you elaborate on the levers that you're pulling there? Is that mainly focused on markets with lower awareness and kind of any way to frame what percentage of your units? you would classify as lower awareness and the sales improvement you're seeing behind some of those initiatives?

Thanks, Brian. Yeah, I mean, listen, first of all, I want to come back to the point I made overall. We have big opportunity here to continue to expand this as we scale. I think it's important to continue to name, listen, we're not big enough yet to capture the kind of scale that we'd love to have a Super Bowl commercial someday, right? We're just not there yet. But there'll be a day where that can happen. Today, we've got to test and learn into the strategies that we're getting a strong return on. So when you think about what we've done, we started talking about this last quarter and do some of this in the third quarter. We did a bunch in the fourth, and we'll continue to do that. Lots of things happening. There's a few kind of lower brand awareness markets where we did employ various media tests. Most of what we're doing is increasing our one-to-one performance marketing efforts that we're getting smarter every day. We use Braze on some of our marketing efforts there. We're just getting a better connection directly to our guests. We're doing various really fun brand partnerships, things like our partnership with Trolls, the movie in the fourth quarter, and other things that continue on down the line that we use our culinary template to do. We also are doing things in our own channels. If you saw, we did a fun Promotion with a chicken dance. If anybody in the NFL did a chicken dance, we were going to do free chicken shacks in our app. So that and a couple others like that drove a lot of traffic to our channels, which we really like. We also do things with third-party DSPs from time to time to promote those channels where we see a good return. So all kinds of different things. Right now, for instance, we're doing free Fridays through about a six, seven-week period in this time of year. That captures what we love about that is it captures our guests. It drives frequency. It kind of helps laps guests in the app go for an order. And within all that, my final point is we've been really happy to see that these things not only accretive to sales, but also to profit. You know, when we do things like that, we're not seeing we're not doing them to lose profit. We're doing them with with positive profit gains. So really happy to see it. And I think the main point you want to take away is as we increase that to some extent this year, we'll keep testing and learning and new strategies in all kinds of markets to see where it hits best. So we've got a lot of opportunity ahead and the marketing team is set up to fire a lot this year.

All right, that's great. And sorry if I missed it, but Katie, can you level set where was advertising spend in 2023? And what's embedded in your guidance, kind of ballparking what's in guidance in advertising for 2024?

Yeah, so you're going to get the 2023 number in the 10-K, so I don't want to front-run that. But what I will say is that our guidance assumes a material step-up in our underlying advertising spend. And what's really important is that taking out that increase in advertising, we are showing continued discipline and leverage on our kind of underlying run rate GNA. So it's been great to be able to, you know, see, you know, drive increased profitability here and also be able to unlock, you know, that really powerful source of funds to help drive the future growth of the company.

Great. And if I could just ask one quick follow-up on the topic of throughput, obviously, the time to get your food and average ticket times is really important to the guest experience and being consistent on that metric. I think you said you're looking at you're targeting a 30 second improvement with even more in the drive through. But can you level set what your average ticket time is today? Any perspective on how that's trended over time or perhaps how variable across the country just to help us frame the opportunity on that? Thank you.

We haven't really released specific numbers on that. We've generally said over time it's been this sort of six to eight minute ticket time as we cook fresh to order over time. It's really not a regional question. It's more of a volume question, obviously. When you're busier, sometimes those times extend. Our goal for this year is consistency and continue to just improve and be relied upon better for what our guests can expect. So that's the goal we've set out there, an ambitious target for our teams to knock 30 seconds off the average order over the course of this year. This is going to take time. It's not tomorrow. This will be through the year as we go. And as we kind of exit the year, that's really been our go-to. Thank you. All right. Thanks very much. Thank you. We need to operate the questions to one because we have a lot of people on the line. So thank you.

Our next question comes from Sharon with William Blair. Please proceed with your questions.

I was actually really excited to hear about the initiatives on throughput. You know, I'm one of those people who would love to get through the line faster, so I definitely appreciate that. I'm sure you have a lot of unmet demand. Can you talk about the labor modules that you tested, I think, at a few locations in the fourth quarter? And is that the same as what you're talking about with new kitchen flows and kind of the timing of real-time reporting and what that kind of looks like at the unit level? Thanks.

Sure. So I'll put this one with Randy. But on the labor module side, these are two different things. How we flow food through our kitchens is very different than how we're thinking about kind of, you know, better and more bespoke deployment. You know, over the course of Shake Shack's history, as I'm sure you've followed, we've evolved. We've added more channels. Our menu has, you know, changed. And as we've grown across the country, there are just shacks with different characteristics than others. And so, you know, especially with the kiosk rollout that we did last year, we thought it was the right time to revisit with time and motion studies and the great data that the team has built up here, a really bespoke, you know, per-shack staffing and deployment model module. And we, you know, did the first round of the test late last year. We're really encouraged by the results there. We talked about, you know, rolling out to more shacks this year. It's important to note none of that is actually embedded in our guidance for 2024 SHAC level operating profit margin improvement. So it's something that we're still rolling out here. And what I would say too is that it's not just about reducing the number of people in the SHAC. It's actually about right-sizing the deployment we have there. So there's some areas where we feel it's appropriate at certain times of the day to add more people in. We think that that's important for our ability to execute a great guest experience and capitalize on the opportunity there and by different formats. But Randy, do you want to take that?

Yeah, just on the kitchen flow, just to be more specific, this is something, this is going to always evolve forever, right? I mean, this is every restaurant every day, continue to try to figure out the best way to move food and, but can remain, keep integrity in how we cook our food. What we've been working on really for the better part of the last year and a half is testing various different flows that can help that same great food move through the kitchen in a more organized way that saves time. And that's what we're working on. And that'll take, you know, the small percentage of our restaurants doing that today. And, you know, most of our new restaurants will open with our linear kitchen that changes that flow. Some of our existing restaurants will convert. But it's more about just how we move the food. And it's not really about renovations and all any other major costly thing. It's really just about a different flow of food. So we've got a lot of work to do on that, among other things. And that's in the works.

Our next question comes from Brian Mullen with Piper Sandler. Please proceed.

Hey, thank you. Just a question on the drive-throughs. Could you speak to how those are doing in general? You know, understanding there have been some learnings, maybe some locations you might have done differently in certain instances, just looking to understand your degree of optimism about drive-throughs overall and if you think they have a solid long-term future at Shake Shack. Any thoughts would be great.

Yeah, thanks. The answer for the long-term future is you bet. We're big believers in it. I think in order to capture market share, continue to hit our major growth goals and hit the white space that this country has, we want to drive through work. We know we've had lots of things that we've learned. We have about 30 right now. We opened 18 last year. We'll have a smaller percentage of the class in 2024, but still a significant commitment this year and the years ahead. So We continue to learn. As I've said in previous conversations about drive-through, we've got some that are below our targets, some that are above, lots in the middle. And I think what we're learning is best positioning, best real estate, best flow, and then you take that into the operational flow and locking in what we believe now our prototype for the coming years will be a little bit smaller, a little bit less seats, and we're taking significant costs out of the cost of build. So that's been really the work and the flow so that over time we can continue to drive stronger returns here. But really excited about drive-thru and we will say we still have a ton to learn and it's all going to continue to roll forward. We're excited this year to open some drive-thrus in some of our higher brand awareness markets. We've got some in California, we've got some in New York, New Jersey, and that'll be exciting for us to learn how that goes and how people choose to use Shake Shack at a drive-thru experience.

Our next question comes from Sarah Senator with Bank of America. Please proceed with your question.

Oh, great. Thank you very much. I just wanted to ask a little bit about how you're thinking about, you know, the margin outlook versus the same-store sales. You know, you've done a lot of work on restaurant-level margins. But if I go back and look at the sort of initial guide, for this year restaurant level margins, I think was 19 to 20 and comp was kind of low single to mid single. So you came in at the high end of the range for both. Um, but so is that sort of how we should be thinking about this, which is there are kind of puts and takes. So even though you have opportunities maybe on the margin side, and if you could talk a little bit about what you think the biggest ones are, that would be helpful. Um, but we should really be thinking about this as sort of, uh, you know, you need a certain amount of comp to lever. um, the expenses.

Great. Um, so, you know, our guidance for this year is for low single digits, um, same check sales growth. Um, we, you know, are anticipating to have positive traffic, um, and we're taking, you know, especially at our, our, most of our shacks, you know, less price, more consistent with what we did in pre COVID, um, areas, uh, times. We're also at the same time, though, you know, we talked about having a meaningful step up in advertising expense. And, you know, we'll see how that, you know, helps to benefit and impact our company. We're certainly doing that with, you know, strong confidence in what we've seen before historically with that and bringing that up to new levels, more meaningfully higher levels. On the point on our restaurant margin guidance for 20 to 21%, You know, we saw certainly throughout last year and especially in the fourth quarter, very strong flow through on these incremental sales. And so we're excited for what's ahead. We also have a number of initiatives on our operational improvement plan, though, through total cost to serve, work that our supply chain team is doing to help offset inflationary pressures. Some of that's in the guidance, but also, you know, there's a lot of white space opportunities still available there. And then on labor, you know, we've been really efficient with the added sales that we've been seeing as a result of our marketing efforts and expect to continue to have opportunity on that side.

Our next question comes from Michael Tomas with Oppenheimer.

Please proceed.

Hi, good morning. Thank you. You talked about some interesting sales drivers in the 24, including combo meals and desserts and increasing your marketing spend, obviously. You know, can you talk about some of the work you've done that suggests, you know, those are the right strategies, maybe why now? And then related to that, you know, do you think those platforms are required to hit the positive traffic goal you're talking about for 24? Or can the core existing strategies get you there? Thank you.

Michael, great question. I think those strategies that I named specifically on the tests of combo meals, Sundays, mini shakes. Those are not core to our assumptions at all, and this year would be immaterial at best. And what we want to do there, why are we looking at that? Well, let's take combo meals. Shake Shack's never had a combo meal in the history of the company. Time will tell if that's the right thing, if that's what our guests want. What we wanted to do, and as part of our drive-through goals, is you know that speed is a goal here. We know Shake Shack's not the fastest, And we want to test how people react to that. And I think the initial news is, well, a lot of people like combo meals at drive-thru. That shouldn't be a shocker to anybody in the industry. The question is whether that'll be the right thing for us long-term. So we're trying various pricing strategies, various visual and merchandising strategies, and things that do not put us in that fast food category, but still really give that consistency to the guests. On our kind of dessert destination goals, look, Shake Shack, before COVID had concretes, right? Our frozen custard Sundays, we've continued to hear from guests. They want us to continue to have more options. And what we're doing there is bringing back Sundays. We're going to be expanding those tests. We have mini shakes at a number of shacks right now. We'll be expanding that test, but not rolling out to the entire fleet just yet. These are things we want to tweak, get right. And the whole goal there is can we increase some of that day part expansion? Can we get some more afternoon? Can we get a little average check? And how do those things work into the digital universe that we live in today? So I love venue innovation. As you know, we're really good at it here. We've got to keep doing it, but we're doing it prudently. So all in all, the factors in the guide that we gave are really based on what we see as kind of our run rate opportunity, a lot of that increased marketing opportunity, and hopefully an economy that cooperates and lots of opportunity. Those are the things that some will be out of our control, and the things that are, we're going to keep driving the business.

Our next question comes from Andrew Charles with PD Calend. Please proceed.

Great, thank you. Katie, I just want to better understand the components of the 2024 low single-digit same-store sales guidance. You know, this embeds expectations for 2.5% price and positive traffic. So, inherently, is mixed expected to be negative? I would think with the kiosk efforts and the traction you're seeing there, the high single-digit boost in ticket that you're seeing, theoretically, that should be a good guy. But, you know, is delivery sales embedded to be a continued headwind through 2024? I'm just looking for some more color within the components. Thanks.

Sure. So, yeah, we talked about a low single-digit price that we're expecting for the year. So on traffic, you know, we're goaling ourselves. We're targeting to have positive traffic. We've embedded some, you know, some range still on that side in that guide. And, you know, kiosk overall, I have to say, you know, we're really excited by what it continues to provide for us. Our sales on kiosk in the fourth quarter doubled year over year, and we implemented some, you know, new technology upgrades in that channel to continue to drive sales increase attach rates and customization. But, you know, we'll have to see how that continues to play out through the rest of the year.

Our next question comes from Jake Barlett with Truist Securities.

Great, thanks for taking the question. You know, on the margin expansion, new guidance for 24, great to see that. I'm wondering if you can just help us understand what's driving it. It looks like, you know, just COGS or, you know, commodity cost inflation being slapped at low single digits and, you know, low singles as a price would be a contributor. So if you could maybe disaggregate, you know, the drivers, including what you're proactively doing, some of the supply chain initiatives, labor initiatives, just trying to kind of understand More specifically, what your actions are doing to your margin outlook.

Yep, absolutely. So, first of all, you know, again, really excited to have the strategies in place and the confidence here to sit here and guide for a 20% to 21% check level operating profit margin for 2024, marking another year of continued profitability improvement. I think, you know, when you go through the P&L, On food and paper, we put our inflation outlook to be flat to up low single digits year over year for the full year. It's important to note, though, that our initiatives that we're doing on supply chain, whether it's increasing the number of suppliers, optimizing our freight and other initiatives, are driving that to be to the flat to up low single digit level. We would have been in a worse position had we not had these operational improvement programs already in place. The one thing I'll caveat there though is that Beast is the largest uncertainty to that basket and it's something that we are watching closely. On labor, we have been driving very strong flow through as a result of our increased better overall sales forecasting and our better deployment and just really leveraging these increased sales and traffic that we've seen overall at the company. So those are two areas where We really do expect to show continued improvement in 2024. Also, both areas where we are facing inflationary pressures. On wages in particular, we're kind of anticipating a low single-digit increase, but we all know that there's certain areas of the country that are going up a lot more than that. And with the programs that we have in place, we're confident in our ability to navigate these continued inflationary waters.

Our next question comes from Peter Sala with BTIG, please.

Great, thanks. Thanks for taking the question. I didn't want to come back to the advertising discussion. I think in 3Q Shake Shack targeted more advertising in the West. Can you just give us a sense on where you were spending the incremental dollars or where you were testing some more advertising in 4Q? And just in terms of 2024, Are you targeting specific regions or how do we think about your spending on advertising next year or this year rather?

Yeah, thanks. To answer your question on last year, yeah, we did. We continued some of those tests on the West Coast that we saw some strong return for. We did some things in Texas. That's been a big growing market for us. We opened a lot of restaurants in Texas last year. So there was a pointed test and learn happening there. And for this year, we will keep you posted. I think the teams continue to learn on that. A lot of this is really directed at the markets where we think we can have the highest return, balanced with some spend where we have lower brand awareness. And we just want to make sure that we keep hitting those and having people know who we are, what we do, and driving the exciting opportunity we have. Sometimes it'll go along with the openings. our new shack openings and where those go, where we choose to spend. But generally it's really a lot of one-to-one performance marketing, digital opportunities that we see where we're most of the ramping of spend will go. We've got the best way to do it at this scale. So when we hear the word advertising, you know, it's not going to be a whole lot of TV commercials and the things you might traditionally think at this scale, most of the best way we can gain is,

is on digital channels that we've seen strong returns on.

Our next question comes from Brian Harbor with Morgan Stanley.

Yeah, thank you. Good morning. With kind of the improving traffic trend in the fourth quarter, you know, what do you think was most impactful to that? Maybe it was some of the advertising, but just curious your thoughts there. And I know that there was a little bit of divergence between New York and the other regions. And if you had any thoughts on kind of what drove that.

Well, I think these are the things that we've been pointing out through the call today. I think they're all of those things. We had a good LTO. We had strong and improving comp through the quarter. We had a lot of that advertising, you know, targeting various different promos and opportunities that we've shared both in our channels and and in other channels. So I think it's been a really well-played playbook by our marketing team. And again, a lot of that, as we keep saying on this call, increasing the overall spend to get us to a point where we can continue to test and confidently employ data-driven, disciplined spend across our marketing channels. So I think that was really a good part of the Q4 and just a solid lineup of operational execution across companies.

And then in New York specifically, we've been opening a number of restaurants, so we've kind of put some of those pressures there. It's more on the infill pressures, the things that we've normally seen throughout the year.

Our next question comes from David Tarantino at Baird.

Please proceed with your question.

Hi. Good morning. really impressive progress on improving the shop level profitability. So I was just wondering if you could maybe frame up where you think you are in your journey to improve profitability. And I think, Randy, you mentioned a reference to getting back to pre-COVID. profitability. And I'm just wondering if we should be reading that as your goal. I think you had 22% shop level margins or slightly higher than that in 2019. Is that the right way to think about your goals or I guess any way to frame up kind of the long-term picture on profitability? Thanks.

Thanks, David. I think the goal is 20 to 21 this year in 2024. That's the clear guide. That's what we're working on. As we've said in the call, lots of initiatives that have been working and lots more that are coming both to expand upon the current as well as add new things. And, you know, we've been really clear in the, in the, in the notes today about what those look like. Look, we know we had a higher shack level of profit overall, pre COVID companies, twice the size right now, it changed a lot and we're going to continue to drive that. Our goal will always be to continue to expand on that profitability. That's what we've shown this year, over 240 bits of leverage this year and targeting and guiding for more this year. Lots of, of opportunity left in the tank, and we want to do it deliberately and in concert with the overall successful growth that we've had. So it's a profitable growth journey overall.

Our next question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.

Great. Thank you very much. Just focusing on the cost side of things, actually a two-part question. The first, Randy, you mentioned the unit cost build reductions of 10%, which you've talked about before. I'm just wondering if there are any concerns, and they like to enter markets with the wow factor. So I'm just wondering where the biggest opportunity in the front and the back of the house is to pull out that 10% plus. And then just to follow up, Katie, you mentioned G&A leverage again in 24, which is clearly impressive considering your outsized growth. I'm just wondering if you could bucket the primary areas of opportunity relative to that revenue growth, so the leverage that you're expecting to achieve there. Thank you.

Thanks, Jeffrey. Yeah, we love to open with the wow, as you said. We've got a history of doing that pretty well. I want to continue to do that. We're going to build beautiful restaurants. These goals do not take away anything from the differentiating factor we believe is critical to Shake Shack, which is we just don't look and feel like fast food. We are serving a premium product and a premium experience. We're going to continue to do that. I think where the team's been targeting, obviously we've dealt with a tough construction environment. Every company you talk to is dealing with the same thing. Ours is no different. But we've also increased some of our more expensive formats and drive-thrus. So as I've said, a lot of the work is nuts and bolts in the guts of the building that you won't ever see or appreciate that we are figuring out how to do more effectively and efficiently by carving out time. Some of the things... I still don't think you'll notice, but what we know we can do now after learning quite a bit in this last few years as we've ramped our growth, It's taking down the overall size of some shacks, taking down some of the complicated factors of some shacks as we learn what our guests really want, how often, and provide for peak opportunity. There'll be a good mix this year of our core shacks, which you kind of know and love and what we do, as well as some of the drive-thrus where we want to continue to expand. Again, 2024, these restaurants were designed – you know, a year or two ago and not as much immediate opportunity. So we feel real good about what the team is delivering at this approximately 10% target goal, including, by the way, our pre-opening expenses, which we know we can save upon. But as we get into 25 and beyond, we think we'll sort of harvest even more of that. And that's the goal. You know, we think there's just a lot of opportunity for us to continue to build a dynamic while restaurants that differentiate while taking costs out. So that is the commitment and our team's working hard on it.

And on your question on GNA, you know, what you probably have surmised from, you know, our conference call today and then also our materials is that, you know, we really continue to put a priority on investments that drive sales and drive the future growth of our restaurant. And so we're continuing to take a very disciplined approach to that. You will see that in our GNA investments and in other parts of the P&L. So again, it's about, you know, taking a meaningful step up in advertising expenses but at the same time, you know, kind of on the run rate side of the business, being very prudent, very disciplined about the investments that we're making there so that we can prioritize the investments, you know, needed for the long-term growth of the company.

Our next question comes from Jeff Farmer with Gordon Haskett.

Yeah, good morning and thank you. Just another follow-up on menu pricing. Katie, I think you mentioned 2.5% pricing for the majority of the system in 2024, but inclusive of the pricing in the California restaurants, and I think you guys just mentioned the 3PD menu price increase, what would that equate to for total system pricing in 2024?

Yeah, so what we're thinking about, you know, that two and a half percent, so first of all, there's two numbers that are two and a half percent here. So first of all, Two and a half percent is what we're kind of targeting for about realized price for 2024. There's going to be some areas where we're taking more than that to offset wage inflationary pressures. You know, you talked about California scenario where, you know, they're taking it up a lot in some of our markets. And we're going to be taking price there to help offset those pressures. We also increased the premium that we're charging on our digital channels. We're still underpriced relative to kind of our peer average. I still think we have room on that side, but continue to test and learn in that channel. And then, you know, overall, you know, the other 2.5% to mention is that's pretty much, you know, your average shack outside of a big wage inflationary, you know, zone. That's about the overall price that we're looking to take this year. And, you know, that's very consistent with the pre-COVID pricing patterns that we've had. So, you know, most of our SHACs will have kind of that lower single-digit menu price increase this year.

Our next question comes from Andy Barish with Jefferies.

Please proceed with your question.

Yeah, good morning. I guess for Randy, although this may change as you hand over the reins, is 40 company-owned units kind of the right pace that the company's sort of settling into, you know, just kind of looking at teams and retention and operational consistency and all those kind of things? Or is there something as, you know, bill costs, you know, maybe come down that could accelerate that?

Well, we're not going to guide past this year. 40 is a number we like. We obviously pulled forward a little bit this year and got to 41 when the company operated domestic on license. We pulled forward a bunch and got to 45, well ahead of guidance. We think 40 is a good number there as well. So you look at kind of 85 restaurants last year, about 80 this year. We like that number. That doesn't mean anything about what we will choose to do next year. Let's talk about what we're looking at. We're building a pipeline for the future That'll allow us to continue to grow with strong return. As I noted in my comments, I think it's important to say, we've taken this last couple of years to sort of pull back a little bit and say, okay, cool. What have we learned? Our restaurants have gotten more expensive. How are we going to make them less expensive? And how are we going to do them better so that we can open better restaurants over time with stronger returns for the long term? And that process has, you know, unfortunately caused what will be a back-weighted sales year this year. So a lot of the new shack sales will come at the back end of the year. But that was smart work. You know, that was work to make sure that we were investing with discipline and putting our CapEx to work in the right places. So we really like that. I won't speak for what's ahead other than this year we feel good about 40.

Our next question comes from Jim Sanderson with North Coast Research.

Please proceed.

Hey, thanks for the question. Congratulations on a great quarter. I wanted to go back to the combo testing. Just if you could provide some more insights on what metrics you're testing, whether this is looking at discounts to a la carte or if you're trying to build kids' meals, family bundles that might move average checkup. Just any thoughts on the test and how this might impact average check going forward and also why only through the drive-through. Thank you.

Yeah, thanks, Jim. And again, this is not going to be, do not expect any material rollout of this strategy this year. This is something that we really want to learn into. This is not something you flip on and off easily in a company like ours who's never done it. So what are we looking for? Number one, we're looking for, do our guests want to order that way, right? That'll be the kind of first KPI we have. Then we're going to look at various pricing strategies. Do we need a discount or is it really just about ease of ordering? testing various levels of a bundled discount and how that feels at Shake Shack. Can we increase items per check, right? What happens to both beverage and shake attached? This is Shake Shack, right? They were different. We saw a lot of shakes. What happens in the combo meal environment is shakes. These are the things we're looking at. And ultimately, can it contribute to a better ticket time, right? Does it help our team in the back as well as the person ordering And I think where you see the most pressure of ordering time is always at a drive-thru window, right? In most of our other channels, especially now with kiosks, it's a lot more relaxed ordering process. You don't have to feel like you got to move forward. But in a drive-thru, you inevitably feel that way. And so that's why we're testing a drive-thru. So it's only at you know, kind of a couple handfuls of our restaurants. I expect it'll kind of stay at that test level for some period of time, and we'll look at it. And, look, obviously the industry figured out a long time ago that this is a good strategy. Whether it's a good strategy for Shake Shack remains to be seen. We're excited about what we're seeing and learning, and we'll keep you posted if it goes forward.

We've reached the end of our question and answer session. I would now like to turn the floor back over to Randy.

Hey, thanks, everybody. Appreciate all the time today. We'll look forward to seeing you soon. Take care.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.