New store development is key part of revenue growth, as Shake Shack experiences pressure on labor, operating margins
Shake Shack reported its financial results for Q2 2018 in a company release and via an investor conference call August 2. Its total revenues, including licensing fees, increased to $116.3M, representing a 27.3 percent increase over the same quarter last year. Total Q2 company store sales, including the impact of new restaurants, increased to $112.9M, a 28.3-percent increase from last year. Comparable Q2 store sales (“same-shack sales”) increased 1.1 percent, compared to 1.8 percent decrease reported in the same period last year.
Price and mix contributed approximately 3.7 percent to comparable sales, partially offset by a decrease of 2.6 percent in comparable traffic.
Total store sales, including the new impact of new stores, increased to $112.9M, up 28.3 percent from last year. Net income rose 29.2 percent of sales or $10.6M compared to $8.2M in the same period last year. Total net income as a percentage of sales was 9.1 percent, compared to 9.0 percent last year. Net income derived exclusively from Shake Shack store sales was $7.6M, up 55.9 percent from last year. Adjusted EBITDA was $21.9M, representing a 12.9 percent increase.
While food & paper costs remained unchanged as a percentage of sales at 28.1 percent, labor was a different story, increasing to 26.3 percent of sales, a 80-basis-point increase. Higher other operating expenses were also part of the quarter’s higher costs, rising 130 basis points to 10.9 percent of sales. On the investor conference call, Shake Shack CFO, Tara Comonte, said delivery commissions and repairs & maintenance were the largest contributors to those operating expenses.
Despite these pressures, Randy Garutti, chief executive of Shake Shack, reiterated Shake Shack is committed to paying $13.00 per hour as a starting rate to attract a higher caliber of employee for an improved guest experience. For example, in Nashville, where the chain will open soon, he noted, the minimum wage rate is only $7.25 per hour, so the Shake Shack hourly rate will far exceed the prevailing rate. “We’re not stressed about it.” Garutti said. The chain’s CEO expects that over time, kiosks will help reduce labor expense, but suggested the company is focused on the development and quality of its people.
He also noted that the chain has already developed several leadership-rank managers from existing team members in just a few years, and this was evident in the May Leadership Retreat. This year’s theme was how the chain can stay connected with the community as it grows. Shake Shack will drop plastic straws in 2019, as a further commitment to the communities where it operates and the environment.
Shake Shack expects to install a new SAP system for the home office, an impact not yet quantified. Additionally, the company is opening a new Innovation Center in Manhattan, connected to the new home office there, said Garutti on the call.
Year-to-date, Shake Shack total revenue was $215.4M, up 28.2 percent from last year. Shack store sales increased 28.9 percent to $209M. Comparable sales have increased 1.3 percent this year, compared to a 2.1 percent decrease in the first two quarters of last year. Net income for the 26 weeks was $15.6M, compared to $12.0M a 30 percent increase from last year. As a percentage of sales, total net income was 7.2 percent—the same percentage last year. Net income attributable to Shack-only operations was $11.1M year-to-date, up 55.4 percent in dollar terms.
Shake Shack Q2 digital initiatives, development highlights
Digital initiates are on track, noted Garutti. App sales are consistently higher as a percentage of sales in new stores, which indicates higher tech engagement as the company continues to grow. Shake Shack is also adding digital ordering from a web-based browser to accommodate guests who may want to order ahead, but want to do so from desktops and not the app. Shake Shack will also continue to offer app-only specials.
Kiosks have been installed in five new stores since the Astoria Place, New York City kiosk-only store opening. Kiosks in new stores are in addition to the availability of cashiers. “Guests love the kiosks,” said. Garutti. The New York-based chain is monitoring kiosk development carefully to assess the impact on flow, speed of service, guest experience, labor leverage, kitchen throughput, guest experience and in-store behaviors. Shake Shack’s delivery program is still being calibrated as the chain tests different delivery platforms and ascertains how it can best deliver fresh, hot food to the customer in the best way.
In the second quarter, the 180-unit chain reported 11 new restaurants opening across the system, five of which are domestic openings. The most recent opening was in Fahaheel, Kuwait and in Staten Island, N.Y. During the quarter, the Shake Shack opened in new domestic markets of Charlotte and Greater Cleveland, marking the first entry into North Carolina and Ohio. It also opened its first store in Hong Kong at the Central IFC Mall.
Shake Shack’s global licensing partners have opened 11 new restaurants year-to-date, said Garutti. He also indicated that the fourth quarter was heavily-weighted with some of these openings. Here are the new Shake Shack stores that opened during the second quarter:
Seoul, South Korea — Central City
Orlando, FL — The Mall at Millenia
Riyadh, KSA — Granada Center
Charlotte, NC — Park Road
West Hartford, CT — West Hartford
Hong Kong, China — Central, IFC Mall
Fujisawa, Japan — Terrace Mall Shonan
Osaka, Japan — Hanshin Umeda
Orange Village, OH — Pinecrest
Fahaheel, Kuwait — Al Kout Mall
Staten Island, NY — Staten Island Mall
In Q3, the better-burger chain has opened in the Williamsburg neighborhood of Brooklyn and in Highlands Ranch, Colo. in the Denver area. New Shake Shacks will open in the markets of Nashville, Birmingham, Seattle (South Lake Union) and in San Francisco this year. The company expects to continue to open stores in Asia, and the last half of the year should bring another 16 to 18 stores to the total system, according to Garutti. December will be the heaviest month, noted Comonte.
International development has been a key factor in growth and is expected to continue in the same manner. Japan’s development agreement has been completed with the 10th store ahead of the five-year commitment, and a new licensing agreement is in place for an additional 15 stores by 2024. Shake Shack will enter Shanghai in 2019. A July announcement brought the news of expansion into the Philippines with a 15-store development deal with SSI Group to be completed by 2025. London saw Shake Shack’s 9th store open, and Shake Shack celebrated its fifth year in the United Kingdom.
Veggie burgers are in test in California, New York, and Texas and the number of stores has expanded to 18. This fall, Shake Shack is bringing back the Hot Chick’n Sandwich, a crispy chicken breast, sprinkled with a guajillo and cayenne pepper blend and topped with slaw and pickles, as a limited-time offer, or LTO. The sandwich was an overwhelming guest favorite and was a LTO last summer.
The company’s sales will total $446M to $450M this year, according to the current guidance, said Comonte. This represents a 24 percent to 25 percent increase from 2017. Comonte notes that average unit volume, or AUV, is currently around $4.5M, but will decrease to $4.1 to $4.2M as new unit development impact is felt in the form of cannibalization to existing restaurants.
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