Great. So we're gonna get started. So, welcome everyone to day two of the TD Cowen future of the consumer conference. I'm Andrew Charles. I'm TD Cowen's restaurant analyst. Thrilled to be joined today by Shake Shack. For those not familiar, I'm assuming everyone is 'cause there's one downstairs-
But it's a fast casual restaurant specializing in antibiotic-free burgers and chicken, with 530 locations system-wide, with roughly 300 company-operated U.S. locations. Again, if you haven't been, I recommend going now. The new BBQ Menu, Katie and I were talking about beforehand, some of the best menu items we've ever had, highly recommend it. So representing the company today is CFO Katie Fogertey. So Katie, thanks so much for joining me today.
Great, Andrew. Thanks for having us.
Awesome, um- Please.
Do you wanna start off, first of all, just letting everybody know that we are reiterating our 2Q and fiscal year 2024 guidance, as we provided on last quarter's earnings report. You can find all of that on page 12 of our shareholder letter at investors.shakeshack.com.
Awesome.
So with that out of the way, let's go.
Great PSA.
Yeah.
All right, here we go. So, obviously, biggest news, new management. Shake Shack's new CEO, Rob Lynch, is two and a half weeks into the new job. Can you help us understand his initial observations and key focuses as he gets settled in the new role?
Great, yeah. So, you know, we announced this a little bit ago, but it's so great to have Rob Lynch here in the chair. He has been, you know, very busy, as you can imagine, getting with all of our team members. He's been going to a couple of Shack openings. We just opened up, actually, our first Shack in Pittsburgh, his hometown. It was on his first day of work. So that was really exciting for him to be able to be out there with the teams and his family and his neighbors and everybody who, you know, has known him along the way, being able to root him along on this journey. And, you know, even this week, he's out in the field, working with our teams, just really getting to understand what...
You know, the nuts and bolts of what it takes in order to, you know, run shifts at Shake Shack. I remember, you know, kinda rolling back 3 years ago to when I joined, the company. There's really that very special time of when you first start, that you're able to do trials and work with the team members before everything just starts pummeling at you. So it's really great to see him take this opportunity to work very closely with our teams.
Great. And then now that Rob's in his seat, you know, I'd imagine hiring a new COO is at the top of the priority list. So curious, what are the key attributes you're looking for in the new COO, given the space has been vacated, since September of last year?
Yeah, we are all very excited that, you know, one of the biggest priorities here is to bring on our next great COO. You know, Shake Shack is very different than a lot of the larger scale competitors. We have a good portion of our restaurants are company operated. In fact, we have over 300 in the U.S. itself, and that's what the COO will be overseeing, primarily. And so, you know, when we're looking for somebody with that kind of large, at scale, high volume, you know, cook fresh type of background, you know, it's hard to find. It's definitely out there, but it's hard to find.
And again, you know, one of the great things about Rob, just given he's worked at, you know, several very large brands over his tenure, is that he's come into contact with a lot of great talent. And, you know, I think that will be a huge superpower to us, as we look to scale and bring that next leader on.
Definitely, and especially given his drive-through background, which-
Mm-hmm
... we'll talk about in a little bit. So great, let's talk a little bit more about the business. So 2024 same-store sales guidance, it implies roughly flat traffic for the rest of the year. What are the key traffic drivers you have that give you confidence in achieving this?
Sure. So we have low single digit same-store sales guidance, and, you know, in that, we have, you know, price and mix also kind of being at that roughly blended low single digit range. So there's, you know, a little bit of an outcome, you know, on that side, on either side of the traffic, depending on, you know, which side that you move on. But what we've shown in the first quarter, and also in April results, is that, you know, our commitment to increasing our marketing efforts, to driving more, you know, transactional-driven messaging, has helped us outperform what has been, you know, a pretty challenging industry backdrop.
We're really excited about how that's been playing out, how we're growing brand awareness and getting new guests in the door, as well as seeing, you know, strength with our existing guests. You know, if you think about our strategy throughout the rest of the year, it really is to continue to have very thoughtful messaging that, you know, is also generating very strong flow-through, and driving to the bottom line.
Yeah. Talk a little bit more about the marketing efforts. You know, this is something historically that Shake Shack really hasn't utilized that much. I mean, we forecast about a $20 million budget, so obviously, not as big as some of the peers, but obviously, you're starting to focus more on this.
Mm-hmm.
What is the best way to maximize the bang for the buck?
Yeah, I mean, you, you hit the nail on the head there, that we, as a company, have massively underspent relative to our competition on marketing, and we have this amazing business that we have today. And so, you know, really what we're seeing here is, you know, continually learning, investing incrementally more. Also, from a finance perspective, studying the returns that we're getting on the back of it, getting very precise, understanding where we have more confidence to lean in, to continuously grow our brand awareness. This is where somebody like Rob is, is actually very interesting to bring to the table. Not only does he have a strong marketing background, but also, you know, a lot of the people at Shake Shack, are from New York, right? Especially at the home office.
We obviously have Shacks all across the country, but you know, have a New York view of Shake Shack. And you know, I know myself, you know, have kinda grown up with the company, from being, you know, in Madison Square Park to where it is today. A lot of our guests in newer markets don't really have that same knowledge of the brand, and we do see a really big opportunity to invest more in growing that brand awareness, of sharing our story of why our food raises the bar, of our premium ingredients and our commitment to quality and also to hospitality.
I think at this moment, you know, it is a really interesting lane to lean into, in a thoughtful way, of course, to remind people and educate people on how we're truly differentiated from traditional fast food.
Yeah. And talk a little more about the philosophy or the open-mindedness, if you will. I mean, Rob's core competencies, you know, come to marketing, given his career, obviously a very successful marketer in the industry. Talk about your open-mindedness, though. I mean, you're at 1.6% of your sales roughly today. Fast casual can go as high as 3% or so. I mean, is there an openness to wanting to ramp the mixes or the marketing spend as a percent of sales? I mean, clearly, if you just keep 1.6% y ou're growing top line at such a rapid clip that, you know, advertising budget's gonna grow on itself. But how are you thinking about kinda where our advertising spend will go?
I think it's more of a question today, I mean, obviously, we've made commitments to continue to increase our advertising spend. It's also on the quality and what we're doing, and that's why somebody with, you know, his type of background coming in, is an interesting thing to look at, you know, what we've been doing. Analyzing our strategy, giving kinda things that have worked before, and helpful hints along the way, to give us more confidence in the dollars that we're investing today, and also to get smarter to where we want to be over the long term. You're absolutely right, our unit growth and sales growth itself will naturally lead to a greater number of marketing dollars, even if we don't increase that percentage.
I think there's an efficacy of the marketing spend, and then also the dollar amount that, you know, we're really excited for him to dig into.
Super. Okay, great. Changing gears, you know, a question that we get quite a bit is just Quick Service has been intensively focusing on value, is gonna ramp that up this summer as well. You know, the broader Fast Casual category has seemed to have gotten, been immune from this and insulated, including Shake Shack, you know, especially with your April results of 5%, you know, comps roughly. But, I guess I'm curious, what, what confidence can you help instill that you're still able to achieve sales guidance as some pretty crazy hamburger value offers are about to surface?
Yeah, it's hard to tell how the rest of this year will play out on that particular area, but what I can tell you is a couple of things that give me confidence in the guidance that we just reiterated. So first of all, you know, Shake Shack, just overall as a company, while we do have low-end exposure, we under-index to low income relative to traditional fast food. We over-index to high income. And so that kind of, you know, naturally, the people who are coming to us, you know, there is a little bit of a higher willingness to pay, I would say, than kind of the value wars where some might be participating in. The second thing is, what we do is truly differentiated.
You know, our premium cook fresh brand commitment, we're doing things that others are not able to do, and then at a $5 price point, I'm not sure we'll be able to do. So I kind of view that as our competitive advantage, and you know, will give us kind of a source of, you know, a better standing kind of throughout all this. Not to say that we won't be impacted. You know, the last time this happened, Shake Shack was an entirely different company.
But I think staying clear and core to who we are and what we are providing our guests, and at the same time, as we've discussed with our commitments to increase our marketing, and continuing the education about who we are and why our product raises the bar, is kind of the strategy that will help us, you know, get through whatever might be the rest of the year.
Sure. Let's dig into that a little bit, I mean, in terms of the best practices. So if we go back, you know, in my view, the analog for the industry is a lot like 2018, we last saw Quick Service go pretty headfirst into value. You know, this obviously predates your time at the company, but there's clearly some tribal knowledge, you know, from this time, still at Shake Shack. So I'm curious, you know, what are those best practices to help protect traffic, given Shake Shack is not a discount-oriented brand? Your 2018 strategy or your 2018 results were pretty on par with the rest of those years as well.
I think it's really hard to make these comparisons of us today versus 2018. We had about 60 Shacks in the comp group at that time. We were very heavily focused in a couple of markets, and we've just spread out much more than that. We have, you know, over 300 Shacks today overall in the company. We have, you know, not to mention digital. We have delivery. We didn't really have a delivery business back then or really, you know, frankly, a digital at all. And we just have more and more channels for our guests to come to us, including 35 drive-throughs. So, you know, it's hard to say, you know, this is what happened then, and this is what we should do now.
But I do feel very good about the strategy that I both shared to you, and it's part of our strategic plan of making sure that we are continuing to take care of our guests, provide a great guest experience. We wanna have, you know, hospitality ring true through every touch point, at the company, at Shake Shack for our guests. And then, you know, if I look towards, you know, menu innovation and things that we have planned later this year, there are some very exciting things that I think will set us apart from those that are just really kind of diving into fighting for the lowest possible price point.
Awesome. You mentioned digital. I wanna talk more about that. But, you know, there's been value-oriented offers, I'll call them, you know, on some non-core menus, very popular during shoulder periods as well. So stuff like Free Fry Fridays, stuff like, you know, shake, buy one, get one shakes during the shoulder periods. I thought it was pretty cheeky what you guys did around the antibiotic-free chicken as well back on Sundays in April. So, you know, how are you thinking about this? You know, what are the guardrails, I guess, in place around what's on the table for, you know, digital offers versus stuff that, hey, we're not gonna do this, this isn't Shake Shack?
So first of all, there's a priority of making sure that we're driving brand awareness and frequency and incrementality through our own channels. And you'll also see us leaning into opportunities to use other channels as well, where we have great economics and high incrementality as a way to achieve more guests. We study everything that we're doing, and we have kind of a database which just get learned and get smarter every day. And I think that what we're seeing right now, and this has been true for the past couple of quarters, is when we do something like a Free Fry Friday, for example, or maybe we do a BOGO through a delivery partner. You know, first of all, we're giving somebody kind of that hook, that reason to come, and it is a driver of frequency.
Also, these orders are actually quite robust. And I think that right now, just with, you know, inflation and, you know, kind of consumers broadly, just hearing about it, seeing it, feeling it, living it every day, you know, having that kind of value-added opportunity gets people excited to transact. And we're doing it in a way that is, you know, creative to our bottom line.
Yep. Talk a little bit more just around the, you know, they are, to your point, meant to inspire build add-ons. Talk a bit more about the mix headwinds you saw in the quarter, though, that there was some compression on the mix. You know, what's driving that, and how do you help reconcile that and improve mix going forward?
Sure. So a lot of the mix was actually just a result of our marketing strategies. And so it depends on how things are constructed, but overall, you know, you'd see a benefit to your traffic on the back of marketing strategies, and depending on what it is that you're doing, you might see if it's a free Fry Friday or something on that side, you will see a little bit of an impact on the mix. But stripping that out, you know, if you look at the mix building strategies that we've been working on, we feel very good about. You know, first, I'll talk about kiosk in general.
That's been a really great driver of mix, and certainly is improving, year-over-year, and we have a lot of strategies in place to continue to drive, kind of, upsell and more premium feel through that kiosk, which is now our largest sales channel and our highest margin sales channel. And then also, you know, you'll see us really kind of pulse into some exciting menu innovation as well.
Awesome. Definitely talk about kiosks. Obviously, it's a distinguished feature of, you know, of Shake Shack. You know, you talked about how, most recently, check lift is closer to high teens versus high single digits. You know, what's the key here? I mean, obviously, to your point, highest margin, most data-rich channel. How do you keep getting the guests to come back there? I mean, specifically, one thing that I noticed is that, look, it knows my name, it knows my phone number, it knows what I like. How do you communicate with that customer more? You know, it just seems like there's a ripe opportunity with kiosks here.
Yeah. I mean, I think that kiosks could be our largest guest acquisition channel. Now, a lot of investment is required to bring you along on that journey. And so, you know, we have ambitions that are up there with the largest tech budgets, and we have probably one of the smallest tech budgets, and that's just the reality of Shake Shack, and it's always been that way. So, you know, that's also part of the work that, you know, we're really excited to get Rob in here on. You know, he's built digital businesses at other companies as well, and getting his thoughts and feedback and guidance on that side. But, you know, I think that if you look at kiosk overall, it's just a channel that guests want to go to.
You know, prior to making the decision to retrofit all of our Shacks with kiosks, we really had kind of an existential question of: Is this something that's gonna be negative for hospitality? Is there some benefit to really having that, like, you know, that order point, that touch point with our, our team members, and are we going to kind of ruin the brand by going to a kiosk channel? We were able to study it enough to get a lot of confidence around it. Even the Shacks that maybe had a high cash mix, for example, where there was maybe a question of if kiosk would work there, immediately overnight, you know, we saw that once we put the kiosks in there, guests went to the kiosks. Our cash mix, you know, dropped a bunch.
And it just has provided a great guest experience when, you know, done correctly, and something that we're continuing to refine and improve along the edges. And if you think about the Shake Shack menu, and you think about the brand awareness that I talked about earlier, not being kind of, you know, as strong in some of our newer markets as it is in our core. What the kiosk allows you to do, it really is a fantastic visual merchandising platform. It carries you through the entire menu.
You get to see the amazing visuals of our LTOs, and it just drives upsell and add-ons versus, you know that feeling when you're in the line, and everybody's behind you, and you're waiting a long time, and then you're like, "Uh, what am I gonna get?" And you kind of rattle something off, but you didn't really have a lot of time to sit with it. So we're excited by what we've been able to drive this far, and you'll see us continue to push the envelope on improving the software experience, as well as this year, we're going back and kind of looking at where maybe we're not hitting our internal goals on a kiosk mix in a certain restaurant. Do we need to move? You know, is it a way-finding opportunity?
Is it, you know, something with training the teams and so forth.
Last question I have on sales before we move on to margins around culinary. PSA, it's after 11 A.M., downstairs is open, the barbecue menu is there for you. What is the philosophy, though, around culinary? It seems like this year you guys are extending out the LTOs a bit more, you know, longer time horizons. Is this something that we can think about going forward, that these are platforms you're gonna do, call it three, 4x a year? Is that the right way to think about it, or h ow's that philosophy changing?
Yeah, we've been kind of, like, oscillating between 3x a year to 4x a year. I think it depends on, you know, first of all, the, you know, what LTO it is, and, you know, we've been doing enough of these over a good period of time, and also our culinary team has really stood up a really strong test-and-learn process. So if you go to the innovation kitchen in the West Village, for example, you're gonna be able to try some of the things that might make it onto the menu. And we have a number of locations across the country that we try to, you know, have kind of a good A/B test on, Is this something that the guests want? Is this, you know, something that's good for ops as well.
And then, you know, ultimately, you know, does this also help our margin? So, you know, we, we think that 3x-4x a year currently is the right, number. But, you know, we also... You know, with Rob coming in, and obviously he's, he's done a lot on culinary as well, it'll be interesting to see how he approaches, that, that, as well. And I know that, you know, we'd never wanna do anything that's gonna really blow up ops. That's always, always, top of mind, especially with the flow-through that we've been able to generate. We don't wanna go back on that. But, you know, there's certainly some opportunities to continue to provide, our guests with exciting reasons to come back, and that's really what you see with the LTOs. They're a great driver of frequency.
We offer them in the app first, so you tend to see a nice spike in app downloads on our app exclusives, and just a really strong way to continue to communicate with our guests.
Awesome. All right, we'll try and make everyone hungry before lunch.
Yeah.
Great, so let's just go to margins. You know, Katie, you know, you and your team made great progress on margins over the last 18 months. Where are we in the innings journey of the margin story here?
Yeah.
You know, are there still opportunities to find further efficiencies in the business? You know, we'd love to learn more, where you are in your journey?
Sure. So it's been about 400 basis points of margin expansion. A lot of that has been coming through, you know, kind of a mix between labor and supply chain. If you look at where we are kind of in the versus the pre-COVID, which is a question that I'm often asked. You know, I just wanna remind everybody that pre-COVID, we did not have a digital business, we did not have delivery, so that's just a cost that sits in our restaurant margin today. But across the board, you know, really proud of the progress that, you know, we've been making on building back our profitability. That is having a direct result on our cash-on-cash returns, and it's just core to how we're gonna scale this company.
You know, if I look on supply chain itself, a lot of the progress there has been really around using our scale to our advantage. So whether it is leaning on maybe bringing on an additional supplier, like we did in custard, so that we have an East Coast and a West Coast custard supplier, and we're not having to ship so much in between. Not only are we able to sit here and get, you know, potentially a better price from having two vendors versus one, we're also able to rationalize your freight. And, you know, there's just a number of instances like this, where we have actually provided, in a lot of cases, a better guest experience and better guest product.
But just kind of elevated our game, potentially done some RFPs and, and continue to look at ways that we can just be smarter and scale. On the labor side, you know, kinda going back, you know, while it's, it's been a lot of work for the team, especially not having a COO, it's something that I'm really excited to, to work with a potential, you know, future COO on. But, you know, if you roll back about 18 months, you know, it was really about standing in, in place, better forecasting to our Shacks, using, you know, data science and, and kind of, you know, getting very precise, as precise as possible with the sales forecast there, to also inform the labor scheduling.
Then also, you know, the team working very closely with operations and helping our managers understand, you know, what-- "This is where your schedule is, this is where we think it should be. How can we work on bridging that gap?" Then last year, at the end of the year, we started to stand up a test of a new labor model. This is a time and motion-based labor scheduling system that we've developed internally. And, you know, I think, you know, we've been studying the Shacks and how all of our businesses perform, what's really interesting kind of inside, from outside, is how different these restaurants are. We have over 300 restaurants across the country today. We have some that have very big dining rooms. We have some with, like, food courts that have no dining rooms.
We have some restaurants that have a very high shake mix, for whatever reason. And we have other restaurants that are very heavy on fries and cold beverage. And if I look back to the historical staffing model, kinda treated everybody the same, right? We didn't say, "You need more labor for this," or, "You need less labor for this," we just kind of peanut butter spread everything across. And, you know, over time, maybe a manager might realize, like, "Oh, it feels like we might need a little bit more here or less there." But obviously, with industry turnover and all the staffing challenges that we've had, that, you know, homegrown knowledge becomes harder and harder to find, right?
So, it's really about kind of building up on channel mix and menu mix, what the right appropriate labor is for each of our restaurants. We started to test that at the end of last year. We are rolling it out, you know, to more and more Shacks, with a commitment to have it rolled out by the end of this year.
Great. Is that predictive, is it more just? Yeah, I'm just curious, you know, just is it data-fed? Is it more predictive in terms of when to put people in certain spots? or is it more just, "Hey, we realize we need to allocate certain things to certain places?
So it does help to also address our peaks. So as I was talking about, kind of every restaurant's different, we have very different peaks across our restaurants. Some have, like, extremely busy lunch and dinner, and then others are pretty, you know, steady eddy throughout the day. And so this helps our managers better deploy talent throughout the day.
Yeah. What are the early learnings from the stores that are furthest along, you know, with this new labor module?
Yeah. So first of all, you know, I think anytime you do something that is a big change like this, there's always a question about, you know, will people like it? Will they embrace it? And I think the culture at Shake Shack is just so special, and the managers were so hungry for something that would give them a more targeted approach to how they're thinking about running their businesses, that there's been an extremely strong partnership between the data science world, the finance org, and operations. You know, we're, you know, continuously to refine, you know, some of the administrative tasks. Obviously, in New York, with a Fair Workw eek's jurisdiction, there's just a little bit more regulation that goes on here.
But overall, you know, I think it's been a really healthy and exciting time. And I, you know, I don't want this to sound like we're just taking labor out of our restaurants, because actually, there's a good number of restaurants where we think we should be doing more sales by having more labor.
Great. I want to talk a little bit more about pricing. You know, this year you're running low single-digit inflation for COGS as well as for labor. You know, pricing's gonna be closer to 5%, it sounds like. So, I mean, is the plan here to kind of throttle back on pricing, let it ride? No. Are there plans, I guess, for the future for pricing as you look out throughout 2024?
Yeah, so our guidance right now does not have any future plans for pricing baked in for this year. I wanna just peel back that about 5%, though, 'cause I think the components of it are super important, across our menu, so basically everything outside of California, just core menu, we took up about 2%. That's very in line with what we had done historically pre-COVID. We took a little bit more in California to help cover, you know, the move to 20. And then, you know, our digital channels, you know, we saw an opportunity to help to address that cost gap we have there. And I think relative to the competition, we are still underpriced as far as a menu price premium on delivery versus the competition.
And that's just a cost, and that channel is, you know, not our best channel from a margin perspective, and it was an important thing to do to help, you know, protect the P& L. And we wanna make sure that, you know, people are paying for the services that they're taking down, so.
Gotcha. You've guided to G&A leverage in 2024 despite increasing the marketing spend. How is this being done? Is it, is it core belt tightening? Is it letting sales leverage, you know, better flow through? You know, how are you able to achieve this?
Sure. And just to remind everybody, we did take up our G&A guidance last quarter for the full year to reflect executive transition costs. You know, I think when you look at our G&A overall, we've made this very core commitment to having a more rational growth, a lower rate of growth on our home office, on kind of our overhead. But then also making substantial investments in our marketing and our sales-driving initiatives and, you know, continuing to invest in operations management, so we can continue to open up more restaurants. You know, it comes from a number of things, including, you know, automation.
Automation on the finance accounting side and being able to, you know, continue to, do what we need to do, but do it in a way that doesn't require always adding a new headcount. And, you know, really taking a bottoms-up approach to, our G&A budgeting, and, and just keeping a careful eye on everything. So...
Great. In the few minutes we have left, I wanna move on to development. You know, at the time of the IPO, roughly 10 years ago, Shake Shack had identified a 450+ store target. You know, I recognize that Rob's gonna have his input on this, but just from a starting base, does that 450, does that include drive-throughs that have become 35% of your portfolio, 35 stores in your portfolio?
That's a good, good number there.
There you go.
Yeah. Okay, so on the 450 target, this was given at, you know, the time of the IPO. The business has changed, obviously, a lot since then. We have not just different formats, including drive-through is one of them. We also have many more channels. And, we're, you know, just—I think at that time, you know, we really did not have a big, strong success story outside of core New York, right? And so we've, we've been proven that this brand can travel, we can grow it, we can scale it, in areas, you know, outside of just core New York. But we haven't updated that target, and we will update you as appropriate.
Okay. Let's talk a little bit more about the drive-through. I mean, I know that, you know, this is gonna be a focus for Rob, a focus for your new CEO as well. You know, you scaled back the number of drive-throughs opening in 2024. Talk about the work you're doing to ultimately presumably ramp this, just given this is where the consumer is going.
Yeah, I mean, it will... I think that drive-through is one of the formats in our roster, which we can look at when we get great real estate. And, you know, we're looking to bring down the build cost this year by about 10%. That's what we've talked about. And, you know, drive-through is a more expensive format for us than, you know, many of our other Shacks. And we just wanna make sure that we're really smart about where we can get that lift from that incremental investment.
And, you know, we're, as we have built out our own real estate forecasting models and getting really close on development, we're getting more and more confidence of where it makes sense to make that incremental investment versus where, you know what, maybe we'll do about the same sales if it was a core Shack. So, I think it's a balance, and, you know, certainly Rob's experience on drive-through and running a drive-through business will be helpful.
Great. Well, in the final seconds we have, I hope as a former sell-sider, you can let me indulge myself in asking for the aye vote. I wanna thank Katie for joining us today.
Oh, come on, guys!