Shake Shack Inc. (NYSE:SHAK) Q4 2023 Earnings Call Transcript February 15, 2024
Shake Shack Inc. beats earnings expectations. Reported EPS is $0.02, expectations were $0.01. 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, and 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Oriolo, Senior Financial Planning and Analysis, Investor Relations. Thank you, sir. 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 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 8-K for the quarter. We filed an 8-K 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 impact of 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 8-K.
We will provide additional details in our upcoming 10-K filing, which we expect to be filed on time. I will now turn the call over to Randy.
Randy Garutti: 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 $1 billion 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 Shack 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 nearly all our domestic company operated Shacks, a full quarter ahead of expectations. We’re seeing a high-single digit check lift 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 throughs and looking to increase dessert occasion through Mini Shake and Sundae Tests. Number three, with a targeted development strategy this year, we opened 85 Shacks across the globe in 2023, including 18 domestic drive throughs and our first international licensed drive throughs in Mexico and Dubai. We launched in two new markets in the Bahamas and Bangkok. The 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 preopening, 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 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 of 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 our 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-through locations.
We’ll achieve this through new kitchen flows that will 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, but 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 and increased our scale, we are able to unlock additional funds for advertising this year and will 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 license Shack development by going deeper in domestic airports, roadsides, and deepening international expansion into 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 margin, 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 in external consultants, help find additional opportunities and we will 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 the high watermark for our build and preopening costs as we dealt with inflation, supply challenges, and a higher mix of more capital intensive drive throughs. This year, we’ve prioritized our commitment to reducing average net build and preopening costs by about 10%. The team has begun to employ early prototype improvements to future Shacks as a Phase 1 approach and will 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 rollout 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 a core focus. High performing teams helped 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.
Katie Fogertey: Thanks, Randy, and good morning, everyone. The past year was a year of solid profitable growth as we drove 240 basis points of Shack level operating profit margin expansion in the year, building up to approximately 20%, further closing the gap to pre-COVID profitability levels, and growing Shack 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 G&A, 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 and 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 Shack P&L, and we achieved this with our strong sales performance and strategic initiatives around food cost, labor, and other OpEx driving strong flow through. In the fourth quarter, food and paper costs were $80.3 million or 29.1% of Shack 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 Shack 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 Shack 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 Shacks in the first quarter with the potential to rollout broadly later this year. Other operating expenses were $41.1 million or 14.9% of Shack 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 Shack sales, down 20 basis points from the fourth quarter of ’22 driven by sales leverage. G&A was $35.8 million or 12.5% of total revenue. Excluding $900 million 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 Shacks and depreciation was $24.5 million. On a GAAP basis in the quarter, we reported a pretax income of $1.5 million and a tax benefit of $5.3 million.
On an adjusted pro forma basis, we reported a pretax 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 enter 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 million 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 Shack level operating profit margin of 19% to 19.5%, representing approximately 70 basis points to 120 basis points improvement year-over-year.
In the first quarter, we are 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 billion to $1.25 billion, growing about 11% to 15% year-over-year with approximately 40 company operated and 40 license openings, both of which are back end weighted, and Same Shack 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 Shacks, we plan to increase in-Shack menu prices by about 2.5% this year. We guide full year license revenue of $45 million to $47 million, up 11% to 15% year-over-year, as we factor in a degree of continued macroeconomic and geopolitical risks. The Middle East and China together were approximately 40% of our total license units and comprised a material amount of our 40 projected openings for 2024. We’re targeting another year of restaurant margin expansion as we guide Shack 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 G&A to $139 million 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 G&A. We’re 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 million to $105 million and preopening of approximately $17 million, in-line with our commitment to reduce preopening cost per Shack by at least 10%. We guide adjusted EBITDA of $160 million 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.
Randy Garutti: 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, 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 Relationship 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 and 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.
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