Earnings call transcript: Shake Shack Q2 2025 sees positive sales growth

Shake Shack Inc. (market cap: $4.01 billion) reported its financial results for Q2 2025, showcasing a strong performance with total revenue reaching $356.5 million, surpassing its guidance. The company’s system-wide sales grew by 13.7% year-over-year, amounting to $549.9 million. Despite these positive results, the stock experienced a slight decline in after-market trading, dropping 1.53% to $90. This follows a 2.83% increase during regular trading hours, closing at $91.4. According to InvestingPro analysis, the stock currently trades above its Fair Value, suggesting premium pricing relative to fundamentals.

Key Takeaways

• Shake Shack achieved a 13.7% year-over-year increase in system-wide sales.
• Restaurant-level profit margin expanded by nearly 200 basis points.
• The company opened its first drive-through with cocktails in Atlanta.
• Same-shack sales grew for the 18th consecutive quarter.
• The stock saw a 1.53% decrease in after-market trading.

Company Performance

Shake Shack’s Q2 2025 results highlight the company’s robust growth trajectory, driven by strategic innovations and operational improvements. The company expanded its restaurant-level margin and maintained positive same-shack sales for 18 consecutive quarters. Shake Shack’s focus on premium ingredients and the "fine casual" dining experience continues to differentiate it in a competitive market.

Financial Highlights

• Total revenue: $356.5 million, ahead of guidance.
• System-wide sales: $549.9 million, up 13.7% year-over-year.
• Restaurant-level profit: $82.2 million, representing 23.9% of shack sales.
• Adjusted EBITDA: $58.9 million, or 16.5% of total revenue.
• Net income: $17.1 million, or $0.41 per diluted share.
• Cash and equivalents: $336.8 million.

Outlook & Guidance

Looking forward, Shake Shack projects total revenue for the full year 2025 to range between $1.4 billion and $1.5 billion, with plans to open 80 to 90 new Shacks. The company aims for low single-digit same-shack sales growth and a restaurant-level profit margin of approximately 22.5%. Over the next three years, Shake Shack targets revenue growth in the low teens percentage and aims to expand its restaurant-level margin by over 50 basis points annually.

Executive Commentary

CEO Rob Lynch emphasized the company’s sustainable growth model, stating, "Shake Shack is not going to be super volatile dependent upon the whims of the guest." He also highlighted the importance of operations, saying, "Our operations are at the heart of everything we do."

Risks and Challenges

• Supply chain disruptions could impact ingredient availability and costs.
• Market saturation in existing regions may limit growth potential.
• Macroeconomic pressures, such as inflation, could affect consumer spending.
• Competition from other "fast casual" dining options remains strong.

Q&A

During the earnings call, analysts inquired about Shake Shack’s new marketing strategy and kitchen innovation efforts. The company provided insights into its traffic and sales trends and detailed its operational improvements, reinforcing its commitment to enhancing the customer experience and operational efficiency.

Full transcript - Shake Shack Inc (SHAK) Q2 2025:

Operator: Greetings. Welcome to Shake Shack’s second quarter 2025 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press Star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Alison Sternberg, Investor Relations. Thank you. You may begin.

Katie Fogarty, CFO, Shake Shack: Thank you, Operator, and good morning, everyone. Joining me for Shake Shack’s conference call is our CEO Rob Lynch and our CFO Katie Fogarty. Additionally, I’m very pleased to announce that Alison Sternberg has joined us as Shake Shack’s new Head of Investor Relations. Alison brings over 25 years of finance and investor relations expertise across multiple industries, including consumer. We’re excited to have her on board and look forward to everyone getting to meet her. Alison, thank you, Melissa. I am delighted to be here today. Shake Shack has long been a brand and company that I’ve deeply admired, and I’m excited to work alongside this talented team to capitalize on the significant opportunities ahead of us. Over the past few weeks, I’ve been immersing myself in the business and collaborating closely with Rob, Katie, and our finance team as we prepare for today’s earnings call.

I look forward to connecting with many of you in the coming months.

Rob Lynch, CEO, Shake Shack: Now back to business.

Katie Fogarty, CFO, Shake Shack: 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 in 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 21, 2025, and our other SEC filings. 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 second quarter 2025 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 Rob.

Rob Lynch, CEO, Shake Shack: Thanks Alison. Good morning everyone. Firstly, I want to thank all of our team members across the country who have been leading the efforts to assist their communities impacted by significant weather. I’m never surprised, but always thankful for the way our Shake Shack team members contribute their time and resources when challenges arise, and I am proud to announce that with their help, we have raised over $100,000 to support communities in Texas and North Carolina impacted by the devastating floods earlier this month. We’re all hopeful that this support can help a lot of people in a significant time of need. Onto our Q2 results. I am very proud of the strong results from the second quarter despite a particularly challenging environment in the first quarter and April.

Although there are still lingering headwinds facing the industry, these results are reflective of our continued execution against our strategic plan and long term aspirations and are the foundation of our confidence in raising our adjusted EBITDA guide for the full year. Just a year ago, I stood here and outlined our areas of focus and I am humbled by the progress that our entire team has made in such a short period of time. On my first earnings call, I shared three key priorities. The first was driving healthy same-shack sales while building brand awareness and affinity. The second was opening more shacks globally with strong returns for us and our licensed partners. The third was improving profitability in our shacks and across the enterprise.

Over the last year we’ve made meaningful progress in all three areas and we have a clear roadmap to continue scaling Shake Shack with discipline and purpose. Let me begin by reinforcing what we’re building and why we know that we’re positioned to win. Our team members and general managers are the heart of our brand. They deliver a differentiated guest experience anchored in premium ingredients and enlightened hospitality in beautiful restaurants. That is what sets us apart in the category. Team member and guest satisfaction remain our true north as we execute on a long term strategy focused on revenue growth and margin expansion. One of my favorite quotes is from Simon Sinek who says leadership is not about being in charge, it’s about taking care of those in your charge. At Shake Shack, we accomplish this through our culture of enlightened hospitality.

We are laser focused on taking care of our team members so that they can take care of our guests. Over the past year, we’ve evolved into a performance-based culture that empowers our teams to lead with clarity, accountability, and purpose. We’ve invested in leadership development programs that go beyond training to prepare our next generation of leaders to open the many shacks ahead. From Shack-level managers to our Support Center teams, we’re equipping our people with the tools, mentorship, and confidence they need to grow and thrive. We are seeing the results from improved restaurant-level margins to our ability to open the largest class of new shacks on record this year. Our wins are powered by leaders who are deeply engaged and committed to our success.

As we scale, we will remain focused on our number one strategic priority of building this culture of leadership, and it will be our fuel enabling us to grow with consistency, maintain the soul of our brand, and deliver long-term value for our shareholders. To further support our efforts, earlier this month we welcomed Jamie Griffin as our new Chief People Officer, reporting directly to me. Jamie has held multiple roles across various business segments in multi-unit restaurants, always serving as the connective tissue between field teams and senior leadership and helping them to scale. We are very excited to have him on our team as we bring the world’s best fine casual experience to as many guests, team members, and communities as possible. In his role, Jamie will oversee key areas of the company including team member experience, talent acquisition, organizational design, and leadership development, amongst others.

Additionally, he will lead the Shack Support Center HR team to support enterprise growth, build organizational capabilities, and shape our high-performance people-first culture rooted in enlightened hospitality. Our second strategic priority is improving restaurant operations, and the results speak for themselves. In Q2, we expanded restaurant-level margin by nearly 200 basis points year over year to approximately 24%, our highest in the last 24 quarters. This reflects the strength of our operational foundation and the momentum that we are building. We’ve implemented a performance scorecard that’s driving accountability and visibility across our shacks, improving both guest experience and profitability versus last year. We’re investing in tools that empower our teams to operate more efficiently, including smarter scheduling systems and targeted coaching. This past quarter, we achieved improved labor attainment, speed of service, and order accuracy.

Our third strategic priority and a core focus of our long-term strategy is delivering positive same-shack sales with a focus on traffic and culinary mix. In the second quarter, we achieved 1.8% same-shack sales. Growth trends improved throughout the period and into July, where we delivered 3.2% same-shack sales through a combination of culinary innovation, targeted marketing, operational improvements, and digital activations, all aimed at reaching new guests, increasing guest frequency, and reinforcing our value proposition. Culinary innovation is part of our DNA at Shake Shack. We take immense pride in our ability to serve unbelievable food with the finest quality ingredients made fresh to order for our guests. We are continuing to innovate across our core menu along with a strong pipeline of LTOs. We look forward to the next 18 months, where we are going to introduce new innovation to our guests as only Shake Shack can.

We are seeing it today with our limited-time summer barbecue platform, Dubai Chocolate pistachio shake, and new fried pickle side. These offerings are creating an exciting buzz, bringing in new guests while also driving higher frequency. On the marketing front, we are focused on driving sustained engagement strategies, and with our increased scale, we are in the initial stages of testing a paid media component of our business model. We expect to realize the full potential of this brand by clearly defining how Shake Shack is different than fast food and bringing that to life in every market we compete in. As a company, we have historically underinvested in advertising versus many of our larger peers, and while same-shack sales growth has been positive for many quarters now, this has been a limiting factor to achieving our true potential.

In Q2, we delivered close to 2% same-shack sales and approximately 3% of pricing year over year. Compare that to 2024, where we delivered 4% of same-shack sales with approximately 7% pricing. We are building a different, more sustainable, value-enhancing model that still delivers the premium experience that sets us apart. Moving forward, we will support our amazing culinary offerings with traffic-driving media. This has never been the case for Shake Shack. We have historically relied on our word of mouth promotions and other bottom of the funnel marketing initiatives to drive traffic. These tactics will continue to be components of our model where appropriate, but they will be enhanced and supplemented with advertising that brings our brand to life.

Last week we embarked on a paid media campaign around two exciting products and strategies, our Dubai Shake and our new dollar soda promotion to drive Shack app adoption and usage. Building this product marketing muscle is a cornerstone for us to drive long term sustainable traffic. Delivering incremental sales with great products and marketing will provide even more fuel for continued leverage and restaurant margin expansion. Another sales strategy we’ve been focused on is offering combos. We believe that combos or bundled meals are important for drive-through success. By reducing the friction for our guests and increasing our value perception, we see potential for combos to drive throughput and frequency. Our combo meals are now live in all 46 of our drive-throughs and we’re excited about the continued opportunity in this important format.

Looking forward, we’re confident that our holistic approach combining culinary innovation, guest experience enhancements and a 360 degree approach to marketing will continue to drive comp growth and strengthen our brand. Turning to development, we continued to execute with discipline and momentum in Q2, opening new shacks that reflect the strength of our brand and the scalability of our model. In the second quarter we opened 13 new domestic company operated shacks, bringing our first half total to 17. We remain on track to open 45 to 50 company operated shacks in 2025, marking this as the largest class in company history. These openings are concentrated primarily in established markets outside of the Northeast, diversifying our portfolio and increasing the productivity of our supply chain and marketing investments.

We are continuing to push the limits of what is possible and to think big with our new location at The Battery in Atlanta right next to the Braves Stadium. It’s our first company operated shack offering a great lineup of signature cocktails like the Frozen or On the Rocks Patron Shackarita alongside boozy shakes and many other premium cocktails, spirits, beer and wine. This first of its kind Shack came to life through a fast cross-functional effort across our company and shows just how much progress we have made on transforming our pace of innovation. This location also features promising new equipment that is allowing us to deliver our high-quality experience with shorter wait times. Just a few weeks in, the team is already hitting it out of the park with strong volumes on both game days and non-game days.

The wins we are seeing here reinforce the innovative work we have embarked on around kitchen equipment and layout operations and a broader culinary strategy. We’re also making solid progress on reducing our build costs despite global supply chain uncertainty. We’re on track to reduce our cost to build by at least 10% this year and we’re confident that the work our teams have done will allow us to continue to open many more beautifully designed high-return Shacks. Turning to our licensed business, we had an exceptional quarter with nine new openings and strong performance across regions. In China, we expanded our breakfast offering to more cities along with new menu items tailored to local tastes, helping to stabilize performance in a region that had been under pressure.

We also announced two new licensing partnerships, one with Penn Entertainment to bring Shake Shack to 10 licensed domestic casinos and another with Grupo Addy Multifood Enterprises to open 12 Shacks in Panama with the first opening next year. These new partnerships reflect our disciplined approach to global growth and our confidence in the long-term potential of the brand. I’m also thrilled to share that Shake Shack is now served on Delta flights across 13 domestic airports and guest feedback has so far been amazing. Looking ahead to 2026, we plan to grow new units system-wide by at least a mid-teens percentage with a continued focus on delivering strong cash-on-cash returns for ourselves and our partners. We’re building the infrastructure and capabilities to support this growth while maintaining the integrity of our guest experience and operational excellence.

Lastly, as we scale Shake Shack for the future, we’re making deliberate investments in our long-term strategic capabilities. A key milestone in this journey is the opening of our second domestic support center in Atlanta later this year. This space will serve as a hub for continued innovation, collaboration, and operational excellence, bringing together our teams from across the globe and enabling us to better support our growing Shack footprint. From culinary innovation, restaurant operations, digital transformation, to supply chain optimization and new kitchen prototypes, we’re laying the foundation for a more agile, efficient, and guest-centric organization, one that’s built to lead in the years ahead. New York will continue to be our home, and we will continue to invest in amazing, talented team members there, but this new facility will significantly enhance our ability to build the team pipeline and future we aspire to.

We look forward to hosting many of you there in the near future, and with that, I’ll turn it to Katie for more details on the quarter.

Katie Fogarty, CFO, Shake Shack: Thank you Rob and good morning everyone. As Rob shared, we’re pleased with our second quarter performance and the continued momentum that we’re building across the business. This quarter marks the 18th consecutive quarter of positive same-shack sales growth as we also continued to deliver year-over-year expansion in restaurant-level and adjusted EBITDA margins and delivered double-digit adjusted EBITDA growth. These results reflect the strength of our strategy and the discipline with which we’re executing. Let’s dive into the details. Total revenue for the second quarter was $356.5 million, ahead of our guidance range. System-wide sales grew 13.7% year-over-year to $549.9 million, supported by 22 new Shack openings system-wide and positive same-shack sales growth. In our licensed business, we grew revenue by 20.2% year-over-year to $13.3 million, with sales up approximately 16% to $206.7 million.

We opened nine licensed Shacks in the quarter and saw strong performance across regions including the U.S. and meaningful improvements in trends in China with positive impacts from new menu innovation and extended dayparts. In our company-operated business, we grew Shack sales 12.4% year-over-year to $343.2 million with 13 new Shack openings, including two drive-throughs, bringing our first half total openings to 17. We are on track to open 45 to 50 company-operated Shacks this year, our largest class on record, and are already deep in the work to open even more Shacks next year. Average weekly sales were $78,000 with 1.8% same-shack sales growth. Importantly, and as Rob just mentioned earlier, we grew comps year-over-year despite less incremental pricing in check. Menu price was up approximately 2% and blended across all channels about 3%.

Traffic was down 70 basis points and our trends improved in each month of the quarter with positive traffic exiting the quarter and into July, driven by successful marketing activations, operational improvements, compelling menu innovation, and further improving the guest experience. We are encouraged by the resilience of our Shacks and how we have grown this brand as well as our pipeline of all that’s to come. Turning to culinary innovation, with our strategic culinary calendar, it’s not only driving traffic, it’s also benefiting mix. Mix in the quarter contributed approximately 1 percentage point of growth to our comp, led by summer barbecue and merchandising improvements on our digital and kiosk channels. Items per check declined 1.5% impacted by smaller party sizes. Trends continued to improve into July with positive 3.2% same-shack sales growth in and positive traffic led by our national Dubai Shake offering and additional marketing activations.

Turning to restaurant-level profit, we once again had an exceptionally strong quarter of growth. We generated $82.2 million of restaurant-level profit reaching 23.9% of shack sales. That’s a 190 basis point improvement over last year and our highest second quarter margin since 2019. We’re very proud of the great work our teams have done to improve the financial performance of our shacks while at the same time delivering a better guest experience. Now we’ll go through the components. Food and paper costs were $96.6 million or 28.2% of shack sales, up 40 basis points versus last year. This was led by a mid-single-digit increase in beef costs. Labor and related expenses were $88.1 million or 25.7% of shack sales, down 270 basis points versus last year reflecting the strong adherence to our new labor guides and model.

Other operating expenses were $50.8 million or 14.8% of shack sales, up 40 basis points year over year driven by an increase in marketing expenses and our digital mix, partially offset by improvements in utilities. Occupancy and related expenses were $25.6 million or 7.5% of shack sales, down 10 basis points year over year led by stronger sales. Taken together, the results our operators delivered in the quarter and the progress we continue to show against our strategic priorities underscores our momentum and commitment to delivering sustainable margin growth for this year and beyond. G&A was $40.7 million or $40.1 million excluding one-time adjustments. The year over year increase reflects strategic investments in our people to support our growth and additional marketing investments. Equity-based compensation was $5.2 million, up 39.3% year over year with $4.7 million in G&A.

Reopening costs were $5 million, up 23.4% year over year as we opened 13 new company-operated shacks in the quarter and prepare for a strong opening ahead. We grew adjusted EBITDA by 24.8% year over year to $58.9 million representing 16.5% of total revenue, a 160 basis point improvement compared to last year. This marks our highest adjusted EBITDA level on record and second quarter margin since 2018, underscoring the meaningful progress we’ve made in strengthening our business fundamentals. Despite navigating a challenging inflationary environment and persistent macro headwinds, we’ve continued to invest responsibly in our long-term growth opportunities. That’s positioning Shake Shack well for sustained growth in sales and margin, and that’s reflective in our three-year outlook. Depreciation and amortization expense was $26.5 million. Net income attributable to Shake Shack Inc. was $17.1 million or $0.41 per diluted share.

Adjusted pro forma net income was $19.5 million or $0.44 per fully exchanged and diluted share. Our GAAP tax rate was 25.1%. Our adjusted pro forma tax rate that excludes the tax impact of equity-based compensation was 24.6%. Our balance sheet remains strong with $336.8 million in cash and cash equivalents at the end of the quarter. That’s up approximately $35 million year over year and $24 million sequentially. We grew operating cash flow by 21% year over year to a record $65 million. We invested $38 million in CapEx to support our strong opening calendar and are on track to deliver another approximate 10% reduction in our build costs this year. Now onto guidance. Our guidance assumes no material change in the macroeconomic or geopolitical landscape for the third quarter of 2025.

We expect system-wide unit openings of 20 to 25 with 13 to 16 company-operated and 7 to 9 licensed. Same-shack sales to grow positive low single digits year over year. License revenue of $13.3 to $13.6 million. Total revenue of $358 to $364 million, up nearly 13% to 15% year over year. Restaurant-level profit margin of 22% to 22.5%. This represents 100 to 150 basis point improvement year over year driven by our operational improvements and sales leverage. We expect low single-digit inflation in food and paper costs with beef prices now up low teens. Onto our full-year 2025 outlook where we expect system-wide unit openings of 80 to 90 with 45 to 50 company-operated and 35 to 40 licensed.

Same-shack sales to grow positive low single digits year over year, license revenue of $51.5 to $52.5 million, total revenue of $1.4 to $1.5 billion, and we’re currently tracking to approximately the midpoint of this range. Restaurant-level profit margin of approximately 22.5%. This is 110 basis point improvement year over year, and with our strong margin performance year to date and plans for the quarters ahead, we’re currently tracking very well against this guide. Food and paper inflation of positive low single digits led by beef up mid to high single digits, labor inflation up low single digits. We expect G&A to be between 11.5% to 12% of total revenue.

As Rob mentioned, with our profitability tracking ahead of plan and solid wins from some recent marketing activations, we’re excited to invest a portion of these incremental profits into additional marketing strategies in our major markets to support Dubai Shake and Dollar Soda. While we haven’t factored in a revenue or profit lift yet from this incremental media into our 3Q and full year outlook, we’re optimistic about its impact and look forward to updating you for your modeling purposes. You should assume that G&A will be evenly split between third quarter and fourth quarter for the remainder of this year.

Equity-based compensation expense is guided to $22 million with approximately $20 million in G&A, adjusted EBITDA of $210 to $220 million representing 20% to 25% growth year over year, depreciation and amortization expense of $107 to $109 million, preopening cost of $18 to $19 million, adjusted pro forma tax rate of 24% to 25%, and net income of $50 to $60 million. We remain confident in the trajectory of the business and in achieving our three-year targets of growing revenue by at least as low teens % year over year, expanding our restaurant-level margins by at least 50 basis points a year, and growing adjusted EBITDA by at least a low to high teens % year over year. Embedded in these targets is a low single digit comp expectation driven by 1% to 2% mix, 1% to 2% price, and flat to up 1% traffic.

Thank you for your time and with that I’ll turn it back to Rob.

Rob Lynch, CEO, Shake Shack: Thank you, Katie. I want to thank our teams again for their hard work and passion for Shake Shack, which is the engine behind our strong second quarter performance and the momentum we are seeing across the business as we continue to execute against our long-term strategic plan. Thank you to everyone on the call today and for your interest in our company. With that, operator, please open up the call for questions.

Operator: Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please limit to one question and one follow up question. One moment while we poll for questions. Our first question is from Brian Vaccaro with Raymond James. Please proceed.

Rob Lynch, CEO, Shake Shack: Hi, good morning and thank you. I had a quick question. I guess we could start on the margin front. The labor productivity here in the second quarter seemed to take another step higher, if you will. Could you just elaborate on some of the incremental efficiencies that you saw in the second quarter? And Katie, maybe you could touch on the puts and takes embedded in your third quarter store margin guidance as well. Hi, Brian. I’ll start with kind of the work we’re doing in operations and Katie can talk a little bit more in detail about the specific impact on the margin. This has been a focus area since I got here. We have really focused on making sure that we can deliver the kind of performance that we need in order to invest in driving the comp sales.

We have not heavily invested in marketing up until very recently because we needed to make sure that when we sent people, we sent our guests into the restaurants, they were going to get great service. We’ve improved across all three of the things we really measure in our scorecard: people, performance, and profits. We have improved all of our recruiting and retention numbers. Every guest metric is moving in the right direction in terms of performance. Our speed of service has significantly improved. From a profit standpoint, it’s really driven primarily by the new labor model and the labor attainment of that model. We deliver the highest labor attainment in the last, since we’ve been really measuring it and monitoring it closely in this quarter. Our teams have just done an unbelievable job. We’ve got great leaders in place.

We’re developing talent in order to be able to open up our new shacks. The results speak for themselves. I’ll let Katie get into any detail on the margins.

Katie Fogarty, CFO, Shake Shack: Yeah, I just want to echo all that Rob said about the amazing job that our operators are doing and what an impact the performance scorecard is having on our labor. There are really a lot of other aspects of our restaurant-level margin line. We showed great progress in the quarter overall, expanding our restaurant-level margin by 190 basis points year over year. Some of that was due to some nice sales leverage we had with our 1.8% comp, but we also did have a nice pickup on the labor line. As we look forward to the rest of the year, embedded in our guidance for the third quarter and then the approximate 22.5% for the full year, we expect to continue to see nice wins on a year-over-year basis on our labor line.

The foundational things that our operators are putting into place, led by Stephanie Sentel and Damon Thomas, have really helped to give us a stable foundation for which we can grow. If you can see from the strong flow through that we had in the quarter, as we look to invest more into marketing to drive sales, this will be a powerful engine for us to continue to grow margins over the long term. As we look to some puts and takes for the third and fourth quarter, just remind everybody that we do have a heavier opening schedule planned in the third. In the fourth quarter, we have a new opening team to help open our restaurants with excellence and get us to profitability sooner, which was a benefit in the second quarter.

We’re hopeful that we’ll continue to get a nice win on that side in the third and fourth quarter. That’s not really reflected in our guidance.

Rob Lynch, CEO, Shake Shack: Great, thank you. If I could just ask a follow up, just in terms of the kitchen Innovation Lab. I know it’s still early days and maybe it’s a couple years away until we see some of these things rolled. Are there any new learnings on new kitchen prototypes or kitchen formats or new equipment that might have improved quality, throughput, or other benefits to the business that you might be willing to touch on? Yeah, I mean, I can just share that. We kind of mentioned in the comments that we opened The Battery Shack about a month ago now. We’ve been working in Atlanta on a lot of new equipment prototypes and we implemented some of those into the back of the house at The Battery.

That is a very high volume Shack, especially the week we opened, which was the week before the All Star game was there and a lot of home games. We kind of put our feet to the fire and I was blown away by the amount of volume we were doing and the service times we were providing. It’s not a lot of rocket science. It’s really just bringing our kitchens into the 21st century with equipment that currently exists. We’re not inventing stuff, we’re just optimizing our processes. We’re optimizing our design and our standard prototypes. Some of that is in our fry station, some of that is in our make station, and some of that is in our cold station around our shakes.

We were able to significantly improve not just the speed but also the throughput and our ability to hit the high volumes that that Shack demands. I think as we get that equipment into more Shacks and we really start deploying that, we’ll be prepared to share a little bit more in detail around what that equipment is and the opportunities that we see moving forward.

Operator: Our next question is from Christine Cho with Goldman Sachs. Please proceed.

Katie Fogarty, CFO, Shake Shack: Thank you for taking my question. Could you discuss some of the major changes to your go-to-market strategy with the new culinary calendar that includes four main platforms per year along with sides and beverage LTOs, and what kind of implications that would have on your advertising and marketing? I’m guessing the potential paid media investment that you talked about is one piece of that. Could you also elaborate on how you would approach that paid media investment and how you plan to track the returns from performance? Thank you.

Rob Lynch, CEO, Shake Shack: Yeah, Christine, I mean we are so excited right now. We decided this quarter because we’re out ahead of where we thought we were going to be from a profit standpoint to test and invest in some paid media programs. That’s really been just the last two weeks and we couldn’t be more excited about the results we’re seeing. This brand has never had top of funnel paid media launched at scale. It’s hard to believe, but all the marketing has always been word of mouth, earned media, and bottom of funnel kind of promo activations. We leaned in on making some of these investments and we are ecstatic with the results. As we look at the calendar moving forward, we’re absolutely going to create awareness at the top of the funnel level around our LTOs.

We have built an 18-month culinary innovation calendar that is locked and loaded and we have, you know, it’s not just me saying, hey, I like this stuff. We’re actually doing guest testing on some of the, on a lot of the big items that we’re launching and we’ve got incredible scores back on some of the concepts and some of the product or food that we’re creating. When you take that and you create awareness amongst millions of people that otherwise wouldn’t have found out outside of earned media or word of mouth, we think there’s a lot of comp benefit there. I’ll just tell you the composition of the comps is important and we called it out in the script, but I want to reinforce it. Last year we delivered 4% comp growth with 7% pricing. We were down almost 300 basis points on traffic.

This year and this quarter, we delivered almost 2% sales growth on 2% pricing. We are moving the model to not be dependent on pricing and we are making consistent sequential improvements in traffic. What that means is we’re going to be able to compete in really all macroeconomic environments. For the last year, all the commentary has been about we’ve got this value-oriented guest, this value-oriented market, can Shake Shack compete in that type of market. We are doing all the things and the heavy lifting to be able to compete in good times and bad. Shake Shack is not going to be a super volatile dependent upon the whims of the guest. Moving forward, we’re building a model that can sustain itself and drive consistent traffic growth moving forward.

That’s all around the culinary innovation and the marketing that we’re putting behind it and then the frequency that we are going to pick up because our guest satisfaction scores are so much better, because our operations are so much better.

Katie Fogarty, CFO, Shake Shack: Thank you, that’s really helpful. Katie, can I just clarify with you? Is it fair to understand that the introduction of the higher end of the range of G&A guidance was related to this advertising and marketing plans associated with the paid media, or was there something else? Yes. No. I mean, the majority of, if you kind of look at the first part of this year, we’ve been tracking to about 11.7% of total revenue. With the industry and weather pressures in the first quarter, that was a little bit of a pressure. We’re kind of expecting that same level to persist through the rest of the year, and that is really with this added media investment. I just want to make sure that it’s very clear to everybody that we have not, you know, we just launched this two weeks ago.

We have not put any impact from what we’re seeing right now in our top line or our margin guidance. We’re making these investments because we do believe that they will drive sales comp and margin expansion, but that is not in the guidance today.

Operator: Our next question is from Michael Tamis with Oppenheimer & Company. Please proceed.

I just wanted to ask about the adjusted EBITDA guidance raised to $210 million to $220 million. As you just talked about, you have some higher G&A, you’re making these investments, a little bit lower pre-opening, but you maintained the revenue and restaurant-level margin guidance from last quarter. Can you help us understand what’s changed within that outlook that allowed you to increase your guidance? Thanks.

Katie Fogarty, CFO, Shake Shack: Yeah, absolutely. As we’ve shown this year, we are tracking very well against our expectation to expand our restaurant margins to be approximately 22.5%. That is a range. We’re expecting to have continued strength in our restaurant margin throughout the rest of this year. In the comments I kind of talked about, we’re tracking very solidly, strongly against the guidance for the approximately 22.5%. That is an implied range, not an exact target.

Gotcha. Thanks. The follow up is, you know, you’re obviously stepping up the intensity of marketing, the promotions, and the LTOs. Rob, you’ve mentioned in other calls that these actions are designed to be margin accretive, not dilutive. Can you just help us maybe understand, you know, how are they margin accretive? Is anything about the elevated commodity environment that you’re seeing right now change the way you’re thinking about deploying any of these innovations that you already plan for? Thanks.

Rob Lynch, CEO, Shake Shack: Sure. I mean the majority of the elevated commodity situation is in beef and obviously we sell a lot of beef, but we are able to mitigate a lot of that with productivity in our operations and in our supply chain. What we haven’t talked about on this call a lot yet is the supply chain optimizations that we are actively working against and delivering. We have looked at every facet of our supply chain, our suppliers, across all of our ingredients, our logistics and distribution network. We are very confident that we’re going to be able to mitigate a lot of this beef inflation with supply chain and operational productivity.

Specifically on how the marketing and the culinary innovation will be margin accretive is we’re launching like amazing new to the world type featured items that will be premium priced and all the mix that flows from our burgers into this new innovation is going to be mix accretive and therefore margin accretive. Also, we have an opportunity just to create fixed cost leverage. Our sales have been in kind of the, for the first half of the year have been obviously in the 1.5% comp. When you factor in both quarters, if we’re going to deliver low single digits, we have to do a little bit better than that in the second half. As we continue to drive sales, we’re going to continue to pick up some leverage especially as we continue to get more efficient with our labor.

We’ve committed in our long range guide to continued margin accretion and we’re very confident that that is going to come to fruition. Despite the investment in marketing, we’re really confident that we’re going to continue to get more productive.

Operator: Our next question is from Sharon Zackfia with William Blair. Please proceed.

Katie Fogarty, CFO, Shake Shack: Hi.

Operator: Thanks.

Katie Fogarty, CFO, Shake Shack: I wanted to ask more about the marketing plans and if there’s kind of any thought about maybe bifurcating the messaging. It seems like kind of in the New York region, maybe it’s more of a call to action and frequency dynamic, whereas the rest of the country still might be more brand awareness. How do you think about kind of maybe micro targeting geographically some of the messaging to kind of yield the consumer behavior that you want?

Rob Lynch, CEO, Shake Shack: It’s a great question and it’s actually what we’re trying to do. This has kind of been our first test. We launched our media into about 15 different markets and about half of them were Dubai Shake focus, which was much more of a culinary brand type message around come and get Dubai Shake. In eight other markets we did dollar drinks, which really the intent there is to generate app downloads. We’re seeing actually very high order, very high check on these dollar checks. People aren’t coming in and just buying a dollar drink. The check total on our dollar drink transaction is about the same as our average total on our checks. We’re getting a lot of revenue from promoting dollar drinks. We wanted to test both of those messages in different markets to understand how each of them react.

As I shared, we really haven’t done this on this brand before. We’re gathering all this information, understanding how these different messages impact both our traffic as well as our check average. Moving forward, the media will be up against our big LTOs. Neither of these are the featured item of the quarter. Moving forward, we will start doing that. That will be primarily a brand and culinary product message that may or may not have a call to action or a featured price point. We’re kind of entering into a new dynamic with marketing these things and targeting specific guests, primarily in the digital channels with specific messages.

Katie Fogarty, CFO, Shake Shack: Thank you.

Rob Lynch, CEO, Shake Shack: Thank you.

Operator: Our next question is from Jim Sanderson with North Coast Research. Please proceed.

Hey, thanks for the question. I just wanted to review your outlook on traffic. I think you started the year with about a negative 4.6% and improving ever since then. To get to the flattest traffic for the year implies 1% to 2% traffic growth in the current quarter and fourth quarter. Is that the right way to look at that?

Katie Fogarty, CFO, Shake Shack: We’re not breaking out the traffic guide for the full year, Jim. What I would say is that our traffic has improved in every month, really coming out of the weather pressures that we had in P2. We did have nice positive traffic in July as well with our 3.2% comp. What we have with menu innovation, that’s in our guidance today and the potential, which is not in our guidance for the lift from media, we are pretty encouraged by our traffic trends and the outlook for the rest of this year.

Rob Lynch, CEO, Shake Shack: Okay.

As a brief follow up, you mentioned some marketing initiatives in the back half of July. Has that been a primary driver of the traffic improvement? Is there anything you can take away from your learnings that would help us to understand how that is moving traffic?

Katie Fogarty, CFO, Shake Shack: Yeah, I think it’s a great, you know, July is a really great example when you just take a step back and you look at what we’re doing overall. You know, it’s exactly what we’ve been talking about. It’s about having compelling culinary out there and then on top of it starting to amplify that message. We didn’t have much of the media impact in July. A lot of this was really most of the quarter was just launching our great culinary. Towards the end of the month, we amplified it as Rob talked about in some of our major markets around Dubai.

Operator: Shake.

Katie Fogarty, CFO, Shake Shack: We are really excited overall by what our culinary calendar and our media plan can do.

Rob Lynch, CEO, Shake Shack: I think maybe what we should call out is that the 3.2% is our period seven, which runs through July 24.

Katie Fogarty, CFO, Shake Shack: Yeah.

Rob Lynch, CEO, Shake Shack: We turn the media on right at the end of that. Although we’re still in July, the fact that the media wasn’t baked into the 3.2% because our period ended. We haven’t disclosed the results of the media.

Operator: Our next question is from Jake Bartlett with Truist Securities. Please proceed.

Rob Lynch, CEO, Shake Shack: Great.

Thanks for taking the question. Mine is on the underlying same-shack sales trends. I’m thinking about the Dubai Shake and what that might have contributed. You do the rough math. I think 50 shakes were offered a day. It would imply a pretty significant contribution to same-shack sales. You saw a step up in July, but certainly not what that contribution might imply. If you could talk about the impact of the Dubai Shake and then the underlying trends, whether there’s some pressure that’s offsetting the lift that you’re getting from the Dubai Shake.

Yeah, I mean, I would tell you that the Dubai Shake has done exceptionally well. We’re going to finish essentially selling as much as we forecasted to sell, but it was different in different markets in different Shacks. It wasn’t like every Shack did 50. Some Shacks, some regions did a little bit less, some regions did more. In the end, right now, with the media turned on the Dubai Shake, we’ve seen a very significant lift in our consumption of Dubai Shake. We are confident that when we have great culinary and we market it, we can sell it. At the rate that you’re describing, up until the media, it probably wasn’t 50 Dubai Shakes per Shack per day. Okay.

As we think about the cadence throughout the quarter, you have the Dubai Shake is benefiting July. You’re doing some advertising on the Dubai Shake. How long is the Dubai Shake going to continue? As we look at the balance of the quarter, feel comfortable with the guidance. Seems like you have a big driver that might be going away, but maybe not. I just want to kind of understand what your plans are for the rest of the quarter.

Yeah, I mean, we can’t be a one trick pony. Right. I mean, we have to continue with consistent culinary innovation that drives traffic and put the media behind it. The Dubai Shake will run pretty much through the month of August, and we’ve got other innovation that comes right behind that that we’re excited about and that we’re going to continue to drive traffic. I think we were moving traffic in the right direction before the Dubai Shake, so we have a lot of confidence in the pipeline, culinary pipeline, to continue to do that.

Operator: Our next question is from Jeffrey Bernstein with Barclays. Please proceed.

Great. Thank you very much. Rob, you talk a lot about the product innovation pipeline. I think you said you have 18 months that’s been well tested. Obviously that’s exciting and it’s driving traffic. Obviously that potentially butts heads with balancing that against the back of the house complexity in order to still make sure that you’re achieving speed of service and guest satisfaction scores. Just wondering, how do you manage that? Wondering where the intersection is between marketing and operations, just to make sure that one doesn’t hurt the other. I had one follow up.

Rob Lynch, CEO, Shake Shack: No, it’s a great question. You know, I’ve been managing that balance my whole career, right from Taco Bell to Arby’s to Papa John’s. I can tell you that one of our strengths at Shake Shack is that we make everything to order. That is a different model than the streamlined assembly line. We have definitely improved our productivity and our efficiency of our core menu operations, but we also have flexibility given just the necessity of the model to be able to flex. We have not only tested this, the innovation pipeline with our guests, we’ve also operationally tested it and vetted it before anything is launched. We’ve put it through both supply chain as well as operational tests to make sure that it’s not going to create problems and mitigate all the great work that we’ve done around getting productivity out of our supply, out of our operations.

Got it.

My follow up is just on the most recent trends. Obviously, encouraging to see the 3%+ in July, and that doesn’t even incorporate perhaps the last week, which sounds like could have been even stronger. We had heard from a couple others that maybe after several months of industry improvement, July was proven to be a little bit choppier or maybe some slowdowns. I’m wondering how you, if you were to look at your underlying business, take out kind of the Dubai benefit, do you think that the consumer continues to get better and we should assume broader industry improvement in coming months? Have you seen any sign of maybe a change in behavior after the momentum we had seen since what Katie mentioned was the weather issues in February? Just wondering how you see the underlying momentum for the broader industry continuing through the third quarter. Thank you.

Yeah, I mean, I can only speak to Shake Shack and our guests. I mean, we have seen consistent sequential improvement in our traffic. We’ve seen a willingness to buy a $10 shake, which is the most expensive shake that we’ve ever launched. We’ve seen, you know, we have a lot of confidence that our guests continue to see a lot of value in our offerings, whether it’s our core menu or LTOs. That’s why we’re so confident in continuing to drive traffic in the back half and moving forward.

Operator: Our next question is from Jeff Farmer with Gordon Haskett. Please proceed.

Thanks and good morning. You guys did touch on it a little bit, just following up on the standardized scorecard. Two questions. When was that fully rolled out to the system, and what actions are taken for some of the lower performing scorecard restaurants?

Rob Lynch, CEO, Shake Shack: Yeah, I mean, that was rolled out late last year. We also made a couple changes to the structure and the leadership model in the operations team right around that period as well. There’s no hiding from the scorecard. It’s very clear who’s delivering on the KPIs that matter and where there’s opportunities. I can tell you that our operations team has built a very disciplined model where they’re using that scorecard. Literally, Stephanie is sitting down with her four VPs every week and going through the scorecard in their regions and identifying where we’re doing good and where we have opportunities. Those VPs are going to their regional directors and doing the same thing, and those regional directors are going to their area directors. It has just become a very disciplined operating model to identify where we have opportunities to improve.

We’re committed to the development of our leaders and building this culture of leaders. Where there’s opportunities, we’re working with those leaders to identify what’s causing those challenges and to mitigate them. It’s like Thomas Edison’s strategy without execution is hallucination, right. We have become a very strong executing company. That’s why there’s not going to be a lot of volatility here in these labor numbers. We have built a disciplined model, and that’s why we have so much confidence moving forward. It is what we’ve talked about for the last year. It is literally the backbone of everything we do. We have so much confidence in the people leading that group and the way they’re leading it that it affords us the opportunity to go and spend some resources in the supply chain to improve our COGS. We’re running labor right around 26%. COGS are running 28% to 29%.

We think there’s opportunity in COGS because of the work we’re doing in the supply chain. We couldn’t do that if our operations weren’t running so seamlessly. We wouldn’t be making investments and driving guests into our shacks with marketing because we wouldn’t be getting the returns on those investments if we weren’t flowing through to the bottom line. Our operations are at the heart of everything we do. Jamie Griffin, our new Chief People Officer, is an operations people officer. His whole job is building a pipeline of leaders that can open up all of our new shacks and making sure that we have the development programs in place to continue to have a pipeline of managers and assistant managers who can run these restaurants at the peak level. We’ve made those investments.

We’re really confident with where we are and that’s afforded us the opportunity to move on to investing and driving the sales.

Thank you for that. Just as a quick follow-up, from a regional perspective, New York City and the Northeast continue to underperform. The question is to you guys, what’s the opportunity to narrow that spread in coming quarters? Is there something structural that’s holding that underperformance spread in place, or is there something you can do to bring up those two very important markets for you, the New York City area and the Northeast, to improve or narrow that spread versus the rest of the system?

I think it’s a great question, but we have to be careful about what we talk about when we say underperform. I mean, those regions, in particular New York City, are our highest AUB restaurants with our highest margins. They are great restaurants. They’d be the envy of a lot of systems. $10 million restaurants flowing through, 35% plus. They are performing; their comp contribution may not be as significant as in the other markets throughout the country. We got to work on that. We got to understand what the challenges are there. I think at least our assessment would say that some of those challenges are more macro around some of the things that are impacting those regions as opposed to maybe some of the other regions that are growing much more, much faster. We’re trying to take all that into context and make the right decisions.

There are a lot of really good restaurants in New York and the Northeast that we want to make sure we don’t cut off our nose to spite our face.

Operator: Our next question is from Daniel Gulimo with Capital One Securities. Please proceed.

Rob Lynch, CEO, Shake Shack: Hi everyone. Thank you for taking my question on the three year financial target. Of the four, do any of them have serious momentum to come in above target? I only ask because when I model out to 2027, I do bump up against the targets and I’m hesitant to push higher than a team’s communicated goals. I mean, that’s a pretty good problem to have.

Katie Fogarty, CFO, Shake Shack: I would just say these are our targets and we’ve shared our strategic priorities and our progress against them. We are committed to continuing to grow our new Shack openings and continuing to find additional areas of productivity as well as investing in marketing to drive traffic that will also generate additional productivity for our restaurants. Finally, we expect all of this to fall down nicely to pretty strong adjusted EBITDA growth.

Operator: Great.

Rob Lynch, CEO, Shake Shack: Thank you.

Operator: We have reached the end of our question and answer session, and that will conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.

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