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Mounting labor costs hit Shake Shack

The fast-growing chain blames wage inflation for its profit margin decline.
Photograph: Shutterstock

Growth-minded Shake Shack, which opened a record number of new units in 2018 and plans to expand another 50% in the next two years, continues to feel pressure from the cost of that growth coupled with still-struggling traffic.

The fast-casual burger chain’s operating profit margin dipped to 22.5% for the quarter ended Dec. 26, 2018, down 2.7 percentage points year over year. The chain’s traffic fell 2.7% in 2018.

Shake Shack executives attributed the margin decline to skyrocketing labor costs and the high costs associated with opening new units.

“We’re not going to stop growth at the cost of near-term profitability,” Randy Garutti, Shake Shack CEO, said during a call with investors Monday. “We believe in growth.”

Garutti cautioned investors to expect similar impacts on operating profit as the New York City-based company seeks to open 36 to 40 new units in 2019.

Shake Shack’s same-store sales rose 2.3% for the quarter with total revenue up 29.3% to $124.3 million.

The company opened 20 Shake Shack stores in the fourth quarter and a total of 49 units in 2018, for a 30.8% overall increase in systemwide unit count.

The chain’s stock price initially fell on the earnings news but has since rebounded and was up 3.23% midday Tuesday.

In addition to opening new units, Shake Shack continues to find ways to drive traffic to its stores. The company continues to test delivery, and, with the recent opening of its test kitchen, it plans to add limited-time offers and new menu items with greater frequency.

The company this week rolled out two food trucks, available to hire for catering and special events, in Atlanta and the greater New York tri-state area.

 

 

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