Yahoo Finance Shake Shack Inc. (NYSE:SHAK) Q1 2024 Earnings Call Transcript
Shake Shack Inc. (NYSE:SHAK) Q1 2024 Earnings Call Transcript May 2, 2024
Shake Shack Inc. misses on earnings expectations. Reported EPS is $0.04944 EPS, expectations were $0.1. Shake Shack Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to Shake Shack's First Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Michael Oriolo, Vice President of SP&A, and Investor Relations. Thank you. You may begin.
Michael Oriolo: Thank you, and good morning, everyone. Joining me for Shake Shack's conference call is our CEO, Randy Garutti, and CFO, Katie Fogertey. 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 29, 2024.
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 first quarter 2024 shareholder letter, which can be found at investor.shakeshack.com in the quarterly results section or as an exhibit to our 8-K for the quarter. I will now turn the call over to Randy.
Randy Garutti: Thanks, Mike, and good morning, everyone. As I wind down my time as CEO of Shake Shack, I want to begin by thanking our team for another solid quarter, sustained execution of our strategic plan, and for building the strong foundation of momentum for what's ahead. This was the 13th consecutive quarter of positive Same-Shack sales, the seventh straight quarter of year-over-year restaurant-level margin expansion, and our highest first quarter restaurant margin since 2019. We achieved a record level of Q1 adjusted EBITDA overall at $35.9 million, grew total revenue by 14.7% to $290.5 million, with 1.6% growth in Same-Shack sales, an average weekly sales of 73,000. The trailing 12-month AUV across our Shacks at $3.9 million.
We grew system-wide sales by 12.3% year-over-year to $443 million as we built Shacks across new and existing markets. And while we faced weather headwinds in January and throughout the quarter, our trends steadily improved with each month and into the second quarter, ending fiscal April at 4.9% Same-Shack sales with approximately flat traffic and further showing strong ongoing momentum in the fiscal May to date as our sales and profitability initiatives take hold. In the quarter, we continued to improve profitability, increasing restaurant-level profit margins to 19.5% with expansion of 120 basis points year-over-year. We grew first quarter adjusted EBITDA by more than 30% year-over-year and improved our adjusted EBITDA margin by 150 basis points, growing from 10.9% last year to now at 12.4%.
We also continue to grow our footprint around the globe, opening eight new Shacks in the first quarter for company operating and for license. We continue to expect approximately 80 Shack openings this year system-wide, roughly 15% unit growth, and we are building a robust pipeline of growth for the coming years. Our licensed business grew sales by 8.1% year-over-year despite ongoing challenges in the Middle East and some of the macro pressures in China. It's an area of our business that is asset-light and highly accretive to our bottom line and one where we're confident in the long-term opportunity to go deeper in existing markets, as well as open new markets. And with our licensed partners, we opened four new Shacks so far in the second quarter and eight year-to-date.
In our company-operated business, we opened four new Shacks in the quarter including two new drive-throughs, adding our first in the Greater Chicago area and our first in Metro New York area in North Brunswick, New Jersey. These two sites represent a continued goal of unlocking our TAM as we utilize our multi-format strategy with drive-through. Today, we have the majority of the class open or under construction as we look to open roughly 40 Shacks this year at an average build cost that's approximately 10% lower than last year's level. That said, it's important to remind you that this class of '24 will be heavily back-weighted with Q3 and Q4 openings. And for next year, we're setting ourselves up well with a solid pipeline into 2025 to grow openings and further lower build costs versus 2024.
I'd like to give an update now on how we're tracking on our 2024 strategic priorities. Our first priority this year, delivering a consistently great guest experience with improved speed of service and standardization across all of our channels being paramount to hospitality this year. We're making solid progress on our goal to reduce wait times in our Shacks with more than half of our restaurants improving their ticket times by at least 15 seconds in the first quarter as compared to last year. We're showing progress across all formats, including drive-through with strong operational focus, Shack visits and assessments and enhanced training. In the coming months, we're rolling out new key tools to help us improve more on not just wait times but also the total guest experience, including how we take orders and flow food through our kitchen.
We've also shown some early improvements on our guest satisfaction scores both in Shack and in our digital channels. And we know that there's still ample opportunity to advance all these metrics, including order accuracy, which we believe will layer up to an even better guest perception and long-term frequency opportunity. Our second priority, growing sales and strengthening our brand awareness. We're living in a competitive and often discount-based restaurant environment right now. We're also growing in new markets where we have lesser brand awareness upon entering than we do in our core markets. We are materially stepping up our investments in marketing this year in our Shacks and in G&A to help drive, continue to share our brand story, to amplify the quality of our ingredients and communicate what makes Shake Shack so special to so many audiences.
We'll continue to do this actively in a thoughtful way that focuses on strong returns. You'll see this play out in all of our channels, including an upcoming packaging evolution, in Shack designs and throughout our brand marketing. Steady increase in aided brand awareness in the quarter and saw continued strong returns on our advertising spend in performance marketing. These marketing initiatives have shown success in driving both new and existing guests to our omni-channel ecosystem. Through creative brand campaigns, timely offers, promotions and focus on our best-in-class core menu as well as LTO launches. The team's employing a lot of new tactics to maximize impressions, trial and frequency across initiatives, all with an eye towards profitable sales growth.
We're also investing this year in building on the data and guest recognition capabilities to allow for more personalized marketing opportunities in the coming years and to drive more conversion and consideration. We know we're just getting started on these increased marketing initiatives and we're excited to ramp spend here and we're looking ahead. We continue to drive excitement around our menu offerings with our limited time only menu featuring the Korean barbecue burger, Korean chicken sandwich and our Korean fries. The Korean chicken sandwich was brought back after being a fan favorite in early '21 and we're excited to expand the menu to our burger offering this year, which has had strong performance in guest reception. We're looking forward now to our next round of summer LTOs as well.
Our third priority, continuing to build on our wins from the last two years and make our restaurants even more profitable with a goal now to get between 20.2% and 21% restaurant margins for this year. And Katie will walk through more of this. We're showing clear continued progress at improving the operations of our restaurant and our flow through today is among the highest levels we've delivered since 2019, despite high inflationary pressure. Additionally, our teams are working on additional operational, supply chain and cost to build opportunities to both build and protect our profitability while focusing on improving the guest experience. Our fourth priority this year, making improvements on how we build and open our Shacks. We're pleased with the sales levels in our recent openings and believe last year's class was a high watermark in terms of cost to build as we make progress against our goal to bring down the bill costs for the class of '24 by approximately 20% - excuse me, 10%.
We've opened eight Shacks year-to-date and have 19 currently under construction as we go to approximately 40 new company operated Shack openings this year. We've generated solid wins here on lowering our build costs with structural redesigns, including steel to wood construction, improving the cost profile on exterior finishes and exhaust systems, as well as making meaningful improvements to interior furniture, kitchen equipment optimization, as well as signage and other opportunities. In total, we continue to improve the look and feel of our Shacks while being more efficient with our level of investment. And we're building a strong pipeline for 2025 to grow unit openings at an even lower build cost than we expect to achieve in '24. And we're also showing strong progress on lowering our pre-opening costs by at least 10% this year.
Opening restaurants in a more reliable manner as we have seen fewer impacts from unanticipated delays and have stronger coordination across the company. And finally, as you know, Shake Shack is a people first business and our people must always be our focus. We've made great strides to improve our turnover and increase retention. And this year we're building on that strong foundation with strategies to support our great teams. Our team members are at the core of how we execute our '24 strategic priorities. And we'll continue to benefit as team members stay with Shake Shack for longer. We're one of the fastest growing publicly traded restaurant companies. We offer our team members meaningful opportunities for career growth, including providing equity to our general managers and above.
We're constantly working on strategies to elevate our people with greater training, development, communication, and collaboration. I'm really excited to see our strategic plan continue to drive the evolution of Shake Shack. With a string of continued improvements shining a light on our long-term opportunity for our team members and our stakeholders, I'm pleased to transition to my advisor role and hand the baton to our new CEO, Rob Lynch. I'll now hand it off to Katie to share more about the details of the quarter and expectations for the second quarter.
Katie Fogertey: Great, thank you and good morning. We're off to a solid start to 2024 with another quarter of continued profitable growth. Relative to the first quarter of last year, we grew total revenue by 14.7%, expanded restaurant margins by 120 basis points and grew adjusted EBITDA by 30.2% to 12.4% of total revenue. That's up 150 basis points versus last year. Our 2024 strategic priorities build on the tremendous success we showed last year and are designed to bring us continued improvements in our profitability and cashflow, even against macro pressures. And we're showing solid signs of strength so far this year. And each month we have improved sales. April got even better as we grew Same-Shack sales by 4.9% with approximately flat traffic and we carried a momentum into fiscal May.
Now onto first quarter results. Total revenue was $290.5 million up 14.7% versus last year, driven by strong performance and new Shack openings system-wide and positive Same-Shack sales despite weather impacts in the quarter. We grew system-wide sales by 12.3% to a record high of $443.3 million with a line of sight to approximately $2 billion of system-wide sales in 2024. In license, we are pleased with our strong domestic performance and continue to face macroeconomic headwinds in the Middle East and China. We grew licensing sales by 8.1% year-over-year to $162.7 million and had a low single digit sales headwind from foreign exchange in the quarter. We opened four license Shacks, growing the global license Shack count to 226. We grew company operated Shack sales by 14.9% year-over-year to $280.6 million with four Shack openings and 1.6% year-over-year in Same-Shack sales.
Weather pressured our sales in comp in the quarter and our trends improved as weather pressures eased. We estimate that weather alone contributed to a sales loss of about $3 million that's due to impacted mobility, closures and reduced hours. Traffic was down 2.1% and excluding weather, we estimate traffic would have been approximately flat. Even with the weather pressures though, we saw strong Same-Shack sales and traffic trends across most of our shacks in the quarter. We generated mid-single digit positive traffic in the Southeast and in Florida specifically, we grew traffic by 9% year-over-year with mid-teens Same-Shack sales growth. Same-Shack sales in our Northeast shacks were also strong up 4% year-over-year with high single digit comp seen in Long Island and Boston.
New York City sales however were pressured by weather and infill. We are encouraged by the building momentum in our business year-to-date as we've worked past these heavier headwinds in the earlier in the year and saw broader impacts from successful marketing initiatives that carried us into April with 4.9% Same-Shack sales growth and approximately flat traffic. First quarter check rose low single digits supported by mid-single digit menu price, partially offset by marketing strategies that drove a negative low single digit mix, our IPC was flat. On pricing, to address food and wage inflationary pressures which were in particular in California with the move to $20 per hour and minimum wage, we took the following steps. In January, we raised the menu price on our own delivery by 5% and maintained the 15% premium on third party channels as compared to our own delivery.
In mid-March, we raised menu prices by about 3% in total. However, this was comprised of about 7% menu price in California to address the wage pressures and about 2% to 2.5% price in all other regions. That level of pricing is very consistent with historical pricing practices. And this netted to mid-single digit price in the quarter, we have no current plans to further increase price this year. We're going be lapping about 2% price in mid-May and 1% in October. And importantly, while we expect the inflationary pressures and wages and food and paper to persist, we continue to leverage our operational efficiencies as a powerful tool to help protect our profitability and our value proposition for our guests. We moved the needle more on kiosk in the quarter, which is now our largest order channel and our most profitable and an important tool for our operators to manage the order journey and focus on delivering a great guest experience.
Average order values on kiosks are at least now a high teens percentage over traditional in check with recent digital enhancements to the user experience driving even stronger upsell. Later this year, we're launching new wayfinding and other optimization work to build on our success with this strategy. Restaurant level profit was $54.7 million or 19.5% of Shack sales. That's 120 basis points better versus last year as we benefited from higher sales from marketing strategies and improved operations in our Shacks. We had strong flow through in our restaurants, which once again exceeded 2019 trends, a testament to the success of our initiative across both sales and operating costs in our Shacks. And as we continue to build on our operational performance, we were able to look at sales driving initiatives with a wider lens than before.
Food and paper costs were $80.3 million, or 28.6% of Shack sales, down 80 basis points versus last year and down 50 basis points versus last quarter, as menu price and supply chain strategies helped to offset inflation, weather, and other pressures. Net of our strategic actions, blended food and paper inflation rose low single digits year-over-year. Beef was up high single digits, and we had continued pressures in fries and buns. Paper and packaging costs decreased low single digits year over year. Labor and related expenses were $81.5 million, or 29.1% of Shack sales, down 130 basis points versus last year, despite making greater investments in our team members, as we had the benefits of price, as well as operational improvements, such as better forecasting and labor scheduling and kiosk adoption.
Turnover rates remain much better than last year, which is also helping our teams be more efficient in our restaurants. We're going to continue to lean on strategies to improve operations and support our profitability, while keeping an eye on the value proposition to our guests. As an example, we've been testing a new labor model that allows us to be much more targeted in our staffing needs across our Shacks, adjusting for format, menu, and channel mix, including kiosks, to provide a great guest experience. The early tests here have been encouraging, and we expect to roll it out to all of our Shacks by the end of the year. Other operating expenses were $41.9 million, or 14.9% of Shack sales, up 60 basis points year-over-year, as we invested more in Shack-level marketing and other expenses to support our sales strategies.
Occupancy and related expenses were $22.2 million, or 7.9% of Shack sales, up 30 basis points from last year's level. All in, we are very pleased with the level of margin improvement we delivered in the quarter, as we continue to build back our profitability, which we know is vital for our long-term growth. G&A was $35.9 million, excluding $3.1 million in one-time adjustments, G&A was $32.8 million, or 11.3% of total revenue. That's 40 basis points favorable to last year, and up 10.8% year-over-year, compared to total revenue that grew 14.7% year-over-year. G&A excluding advertising expenses and one-time adjustments was up high single-digit percent year-over-year, as we continue to be disciplined and run rate spend, and open additional funds for sales driving strategies and marketing.
Pre-opening costs were $2.8 million in the quarter, down 22.6% year-over-year, with non-cash rent making up over 40% of this line item. We opened four Shacks in the quarter, versus six in the same quarter last year. We have targeted to reduce our pre-opening expenses per Shack by at least 10% this year, and we're on a strong path to achieve this goal, with enhanced reporting and coordination with finance, development, operations, and people resources. We see the greatest opportunity to improve on our labor expense in pre-opening, and we're encouraged that our strategy is already showing material improvements on this line item. So all in, despite unfavorable weather in the quarter, continued macroeconomic pressures to the consumer, and inflation, our team's strong execution against our strategic plan was evident in the quarter, as we grew adjusted EBITDA by more than 30% year-over-year, to a first quarter record high of $35.9 million, or 12.4% of total revenue, that's up 150 basis points from the prior year, and the best first quarter adjusted EBITDA margin since 2019.
Depreciation was $25.4 million, up 19.3% year-over-year. We realized net income attributable to Shake Shack Inc., of $2 million, or $0.05 per diluted share. We reported an adjusted pro forma net income of $5.6 million, or $0.13 per fully exchanged and diluted share. Our GAAP tax rate was 19%, and our adjusted pro forma tax rate, excluding the tax impact of equity-based compensation was 2.8%. Finally, our balance sheet remained solid, with $284.8 million in cash and cash equivalents, and marketable securities at the end of the quarter. That's down $8.4 million versus the prior quarter, as we grew operating cash flow by approximately 55% year-over-year, and made investments in recent openings, and the 27 Shacks that we've currently opened this year, and that are under construction.
We're well on our way to execute against our target to open approximately 40 Shacks this year, on the company-operated side. Now on to guidance, which reflects the degree of uncertainty around the consumer spending outlook, and inflationary headwinds. This range does not reflect any additional unknown delays to our development schedule, or any changes to the macro landscape, beyond what we're already experiencing today. For the second quarter, we got a total revenue of $308.9 million to $314.3 million. That's up 13.6% to 15.6% year-over-year with $10.9 million to $11.3 million of licensing revenue. Approximately ten company operated openings, eight to nine license openings. Same-Shack sales to be up low single digits year-over-year with low single digits price mix.
We guide second quarter restaurant margins to be approximately 21.5% to 22%, with strength driven by operational improvements and menu price with blended food and paper expected to be flat to up low single digits. Beef, which is an area which we do not contract and have a higher degree of uncertainty, is expected to be up mid-single digits year-over-year. Our full year 2024 guidance calls for; total revenue of approximately $1.22 billion to $1.25 billion, that's 12% to 15% year-over-year growth. Same-Shack sales to grow by low single digits year-over-year, we're expecting licensed revenue to reach $45 million to $47 million, restaurant margins of 20.2% to 21%, a 30 to 110 basis improvement from 2023. Reflecting expense from the CEO transition, our 2024 G&A guidance is $142 million to $146 million, and equity-based compensation expense is approximately $20 million.
The G&A guidance excludes the $3.1 million in non-recurring costs that are excluded from adjusted EBITDA year-to-date. Pre-opening of $17 million, depreciation of $100 million to $105 million, and our adjusted pro forma tax rate excluding the impact of equity-based compensation, we expect to be 20% to 23%. Our 2024 adjusted EBITDA guidance is $160 million to $170 million, representing approximately 21% to 29% growth year-over-year. That's nearly double our expected total revenue growth rate, and representing a margin of 13.1% to 13.6%, at least 100 basis points higher than the prior year, and the highest adjusted EBITDA margin since 2019. Now, before I pass it back to Randy for concluding remarks, I want to thank him for all that he's done to bring Shake Shack to where it is today.
To now more than 530 Shacks across the world, generating more than $1.7 billion in system-wide sales over the past 12 months, and our eye to $2 billion in system-wide sales this year. I know this is much bigger than you would ever dreamed it would be in the early beginnings of Shake Shack. So, as a longtime New Yorker, I have marveled in the Shake Shack origin story, being one of our earliest fans and hanging out at the first and at the time the only Shack in Madison Square Park, waiting with friends in very, very long lines, standing for something really good and delicious, like cheese fries, the perfect Shack burger, the excitement around what custard and concrete flavors would be on the menu that day, like Pie Oh My, and of course a cold Shackmeister Ale.
The food and hospitality were always exceptional, and the menu brought me back to my fondest memories growing up in St. Louis. Now, fast forward to them being an analyst covering the stock and learning more about the business and the industry, I had such admiration for what you, Randy and Danny, and the company that you have built, what makes this place truly special and unique and all the potential it has. And I found in the spreadsheets and the deep analysis why what you've created truly set Shake Shack apart from the pack, and I was so excited about your long-term opportunity for growth. Then coming on as CFO three years ago and working with a great team here that you have led, it's been such a privilege to be here and to continue to expand on this story under your leadership.
And we've all grown a lot, and there are many ways and KPIs to measure that growth, but at the core of it all is our teams and the culture that you help seed here. In just three years, we have grown our Shack base by more than 60%. That's more than 200 Shack openings system-wide. We have more than doubled our trailing 12-month system-wide sales and grown our trailing 12-month adjusted EBITDA by over 8.5 fold. We've also navigated some of the most challenging headwinds in the industry in the history of the restaurant sector. We've had a global pandemic, industry-wide staffing and supply chain pressures, and inflation. And together, everyone here has all made material improvements in the business that set us up well for an exciting future, while still staying true to our roots and focusing on taking care of our teams and our guests.
Our commitment to providing a great opportunity for our people and serving guests with enlightened hospitality, that's what makes us all really proud to work here, and it's a true testament to your legacy and your enduring impact here. So I'm honored to be a part of your foundational chapter here at Shake Shack and to learn so much from you and wish you the very best in your next adventures. Your impact here is seen not just in every Shack we have across the world or inner P&L or every great LTO. It's in all of the team members here that you have uplifted and inspired to be great leaders and the best versions of themselves. So I know that we can all here at Shake Shack say, thank you, Randy, and cheers to an amazing 20 plus years.
Randy Garutti: Wow, thank you, Katie. Chewing off script there. Katie, you've been an incredible CFO. You've been an amazing partner to me and everybody in this company. So thank you to everybody on our team I believe this call represents my 38th earnings call as CEO since we went public more than nine years ago. And what this group of people has achieved is a rare, and special accomplishment. And it's exceeded all of our wildest ambitions. Through it all, it's always been about our team. My greatest joy, and I hope our most significant impact has been to create a place where our people could get a start, could develop, could grow, and give them a chance to do their life's best work while taking care of each other and our communities.
As I transition to an advisory role in the coming weeks, it's been a pleasure to get to know and welcome our new CEO, Rob Lynch. Rob's been spending a lot of time working with me to understand our history, and how we've operated. He's been meeting with team members at every level, leaders across the company, and learning so much of what makes us tick. This company is built upon a strong foundation and we're ready to benefit from the next generation of leadership. And I have no doubt Rob will work with this extraordinary team to build a next set of strategies to take us to even higher heights and continue to drive Shake Shack forward. Make no mistake, Shake Shack is something special, and this company's future is bright. I want to thank our guests, our communities, our suppliers, and all of our shareholders through the years for having the confidence in me, and our team along every step of this journey.
And lastly and most important, thank you to every single member of this team, who's ever worked here, who's hard work, creativity, and love for this company has made all the difference. It has been the honor of my career to lead you, and to be led by you. Our people are the secret in the Shack sauce, and I trust that they always will be. With that operator, we can go ahead and open the call for questions.
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