Financing

Customers returned to Shake Shack in January

The fast-casual, "better burger" chain is positioning itself to capture trade-down diners with truffles and more plant-based options. It is also working to rebuild profit margins.
Shake Shack exterior
A new veggie burger is coming soon to Shake Shack./Photo courtesy of Shutterstock.

Staff retention, food innovation and cutting building costs will be the focus for Shake Shack this year as the chain looks to build back restaurant margins.

With inflation and labor costs easing somewhat, margins were moving in the right direction in the fourth quarter, but CEO Randy Garutti on Thursday said there is much work to do to.

Higher menu prices and increased traffic helped boost “same-Shack sales” 5.1% for the Dec. 28-ended fourth quarter, and the company said momentum continued into January, with comparable sales up 17% and traffic growth in double digits as the chain lapped last year’s challenges with the Omicron variant.

The stronger-than-expected results so far in 2023 has given company officials the confidence to raise guidance, saying sales will be between $232 million to $237 million for the first quarter, with same-store sales up by high single digits.

For fiscal 2022, Shake Shack revenue was up nearly 22% to $900.5 million, and same-store sales increased 7.8%. But the chain ended the year with a net loss of $26 million, or a loss of 61 cents per share, compared with a loss of $10 million, or a loss of 22 cents per share, a year ago.

Garutti said operating profit margins grew in the fourth quarter to 18.8%, the strongest in three years and up from 17.4% year over year, which he credited to a menu price increase in October, along with labor efficiencies and positive channel mix as more guests returned to restaurants, particularly in urban centers.

At urban locations in the fourth quarter, same-store sales were up 8% compared with a 3% increase at suburban locations.

As with many restaurants, staffing was an issue for Shake Shack in 2022, but Garutti said efforts to raise pay and expand benefits have paid off—as well as the decision last year to allow guests the option to tip, which in some cases is increasing pay by $2 or $3 per hour.

In addition, the chain filled nearly 60% of operational leadership positions with internal candidates, he said, and 77% of promotions were given to people of color and more than 50% to women.

“While many Shacks remain below their optimal staffing levels, we’ve seen marked improvement in hiring over the last few months,” said Garutti.

Staffing is key as the chain positions to capture inflation-weary diners looking for quality over discounts as they trade down from fine and casual dining.

Last week, for example, Shake Shack launched a White Truffle Burger, as well as Parmesan White Truffle Fries and the vegetarian White Truffle ‘Shroom sandwich.

“We want to capture that trade down and that person who says, ‘You know what, for $9.99 or less, I can get a White Truffle Burger that I could never get at any fast-food-type restaurant,’” Garutti said.

This year, Shake Shack plans to lean into plant-based innovation with the launch of a non-dairy Chocolate Shake, as well as the test of a new Veggie Shack Burger, which Garutti described as a “delicious alternative to the highly processed meatless offerings in the market today.”

The new Veggie Shack Burger is made with mushrooms, farro, quinoa, sweet potatoes and carrots, and topped with American cheese, crispy onions, pickles and Shack Sauce.

“I think we’ve landed on a vegetarian option that’s craveable and we look forward to introducing it to a wider audience to get feedback this year,” he said.

Other LTOs this year designed to drive frequency will include items with new packaging, caffeinated lemonades and mini shakes, Garutti said.

No new menu price increases are planned currently, though pricing increased by mid-to-high single digits in October to offset higher food, paper and labor costs. The pricing will stay in place in the first half of 2023.

The company opened 36 new domestic restaurants in 2022, and 33 new licensed locations, ending the year with a total of 436. Most of the new company-owned units opened in the fourth quarter, he noted. And Shake Shack said it expects to open about 40 new restaurants in 2023, including six in the first quarter.

Shake Shack is experimenting with new formats with the goal of finding efficiencies in both operation and building costs.

The chain has added 12 drive-thrus, for example, and initial results have been encouraging. Another 10 to 15 will be added in 2023, he said, and licensing partner Alshaya has also opened a drive-thru unit in Dubai.

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