Shake Shack is stepping up its investment in marketing with the goal of increasing brand awareness in a tough macro environment, the company said Thursday.
It was the last earnings call for outgoing CEO Randy Garutti—and his 38th for Shake Shack since it went public nine years ago—who is retiring and will move to an advisory role as incoming CEO Rob Lynch, formerly of Papa Johns, steps to the helm in coming weeks. As it turns to promotional strategies to better drive traffic, the burger brand will likely benefit from Lynch’s background as a marketer, Garutti said.
Same-store sales grew 1.6% for Shake Shack during the first quarter, but that mostly reflected menu pricing, as traffic was down 2.1%. Bad weather in January—mostly impacting units in New York City— was blamed for a sales loss of about $3 million, and without that impact, the company said traffic would have been flat.
The burger chain is seeing big regional differences, however, with traffic up by mid-single digits in the Southeast, including a 9% increase in traffic among its restaurants in Florida, year over year, with same-store sales growth in the mid-teens. Restaurants in the Northeast also saw same-store sales up about 4%, with high-single-digit comps seen in Long Island and Boston, said CFO Katie Fogertey.
Garutti, however, said sales improved sequentially through the quarter, and same-store sales in April alone were up 4.9%, in part as a result of a promotion through the month offering a free chicken sandwich on Sundays, a move that was clearly a dig at Chick-fil-A.
To deal with wage pressures, particularly in California where the fast-food wage jumped to $20 per hour in April, Shake Shack in January raised menu prices 5% on its delivery menu, while maintaining the 16% premium on third-party delivery. Overall, menu prices were up about 3% in total, but that included a 7% increase in California units and 2% to 2.5% increase in other regions. The chain has no further plans to raise prices this year.
The 525-unit chain is also planning on adding 40 new restaurants this year, including in new markets like Pittsburgh and Canada.
As it moves into new markets and expands in existing regions, Garutti contends that many people still don’t really know what Shake Shack is.
He said the brand needs to continue to communicate its core menu of premium, made-to-order burgers and hand-spun shakes, as well as promote limited-time offers, like the Korean barbecue burger, chicken sandwich and fries offered during first quarter, he said.
Shake Shack has never significantly invested in advertising, Garutti said, but the chain has more “arrows in its quiver” to promote the brand and its inherent value at a time when lower- and even some middle-income guests are trading down.
“We’re also investing this year in building on the data and guest recognition capabilities to allow for more personalized marketing opportunities in the coming years, and to drive more conversion and consideration,” he said. “We know we’re just getting started on these increased marketing initiatives, and we’re excited to ramp spend here looking ahead.”
The fast-casual chain continues to make progress with profitability, hoping to achieve restaurant margins between 20.2% and 21% this year. During the first quarter, restaurant margins were 19.5%, up 120 basis points year over year. Net income for the quarter was $2.2 million, compared with a loss of $1.6 million a year ago, and total revenues, including licensing, were up 14.7% to $290.5 million.
Shake Shack has trimmed buildout costs by 10%, and Garutti said next year’s batch of restaurants will be built even more efficiently.
And the company is focusing on reducing labor costs with a new staffing deployment model in test that will be rolled out later this year.
Shake Shack is also seeing a better-than-expected lift on orders through kiosks, now in all units. The chain is seeing a percentage check lift in the high teens, compared with traditional counter orders. And new enhancements are coming that will improve upsell and customization through the kiosks, Fogertey said.
Garutti said he is leaving Shake Shack in good hands and he expressed gratitude for having the opportunity to lead the brand over the past 24 years of growth.
Rather than thanking him for his service, Garutti urged well-wishers to visit a Shake Shack to “say nice things to the employee who’s working hard day after day to be a team member of this restaurant and make it what it is, because it has certainly been them that has made it all happen.”
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