SHAK - NYSE

Greetings, and welcome to the Shake Shack's Fourth Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Oriolo, Senior Financial Planning and Analysis, Investor Relations. Thank you, sir. You may begin.

Thank you, and good morning, everyone. Joining me for Shake Shack's conference call is our CEO, Randy Garutti, and CFO, Katie Fogertey. 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 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 23, 2023, and our other filings with the SEC, including our Form 8-K filed this morning. 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 fourth quarter 2023 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. We filed an 8-K this morning related to a correction the company identified and brought to its auditors, primarily regarding how the company has accounted for elements of tax depreciation. These errors led to overstatements of income tax expense and understatement of deferred tax assets during the impact of periods. The unaudited amount of the overstatement of prior year non-cash GAAP income tax expense for fiscal 2021 and 2022, as well as an opening adjustment to the retained earnings balance in fiscal 2021, that is related to prior periods to 2021, can be found in the 8-K. We will provide additional details in our upcoming 10-K filing, which we expect to be filed on time. I will now turn the call over to Randy.

Thanks, Mike, and good morning, everyone. I want to congratulate our teams on an exceptional 2023. This year marked transformative milestones and substantial profitable growth, building upon our already solid foundation for the long-term opportunity ahead. We grew system wide sales by 24% year-over-year to a record $1.7 billion. We opened 85 total restaurants, the most ever in a single year, ending 2023 with 518 Shake Shacks across the world. We grew Shack sales by 20% to over $1 billion with 4.4% same Shack sales growth and a strong class of 41 domestic company operated restaurants. In just the past four years, we've nearly doubled our footprint, system wide sales, and total revenue and we have a robust pipeline of opportunities going forward. Importantly, we grew our Shack level operating profit even faster than our total revenue, expanding restaurant margin by 240 basis points year-over-year to nearly 20%, growing Shack level operating profit by 37% year-over-year. With this and 110 basis points of leverage in our G&A, excluding one-time adjustments, we delivered over 80% improvement in our adjusted EBITDA to $131.8 million. We ended 2023 with strong momentum in the fourth quarter with our marketing strategies delivering positive traffic and our operational focus achieving further margin expansion. We executed our five strategic priorities for 2023, and I want to wrap up how we performed for the year across each of these priorities. First, recruiting, rewarding, and retaining a winning team. At the beginning of 2023, staffing pressures were material. We’re negatively impacting sales, profit, guest experience, but throughout the year, we improved staffing retention to the best levels we've seen in years, which had a direct tie to our stronger labor and restaurant level margin performance. Second, we focused on the guest experience. We rolled out kiosks nearly all our domestic company operated Shacks, a full quarter ahead of expectations. We're seeing a high-single digit check lift on kiosk channel versus the traditional cashier experience. We also made material improvements to how our guests can order through this channel. We advanced our commitment to culinary innovation, a competitive strength of Shake Shack, with improvements to our core menu, as well as exciting LTOs, including White Truffle Burgers, top-selling Spicy Fries, and a return of Bourbon Bacon jam. We also forwarded learnings towards future strategies as we are testing combo meals for the first time at drive throughs and looking to increase dessert occasion through Mini Shake and Sundae Tests. Number three, with a targeted development strategy this year, we opened 85 Shacks across the globe in 2023, including 18 domestic drive throughs and our first international licensed drive throughs in Mexico and Dubai. We launched in two new markets in the Bahamas and Bangkok. The Bahamas also being a new format, our first-ever hotel resort Shack with a full bar. We built a solid foundation in development with prototype site design that will help us reduce our build costs in coming years, and we know we have a lot more work to do here, especially on build costs and preopening, where we believe 2023 was the high water mark. Last year, we demonstrated meaningful improvement in restaurant profit margins. We showed leverage across every Shack level operating expense line item and drove 240 basis points of expansion for the year to nearly 20%. Importantly, we have line of sight to further margin expansion this year in 2024. And finally, number five, our commitment to investing with discipline. We leveraged G&A excluding one-time adjustments of 110 basis points and we grew adjusted EBITDA by over 80% to nearly $132 million. I'm pleased with our progress in 2023 and our teams are energized and building for what's ahead. Our leadership team has developed our 2024 strategic priorities to drive further profitable growth at Shake Shack with a clear line of sight to generating free cash flow even while investing for a robust pipeline of growth. Our entire leadership team and the Board are fully engaged, committed, and incentivized to continue execution in 2024. So today, I want to go a bit deeper on our new strategic priorities for this year. First, we're committing to delivering a consistent guest experience. Shake Shack has always been differentiated from traditional fast food and fast casual in our food quality, in the look and feel of our Shacks, and in the enlightened hospitality we provide our guests. In 2024, we're committed to delivering a great guest experience consistently across all channels. We have core KPIs for our ops leadership. For the first time, we're targeting throughput improvement by reducing guest order times by roughly 30 seconds and even more in our drive-through locations. We'll achieve this through new kitchen flows that will roll-out through the year, increased real time reporting, new training, urgency, and goal focus, while continuing to cook to order at the highest level quality in the Burger industry. We believe this can grow sales, energize our teams, and improve guest sentiment. Second, our plan this year is to grow sales and strengthen our brand awareness. Shake Shack continues to build upon our global brand appeal. We've nearly doubled our footprint since '19, but we believe we're still early in our growth journey at just a small fraction of the scale that our competitors have, and yet we know that we still have a massive opportunity to increase our brand awareness. As we scale, we're leading into new and expanded marketing, brand partnerships, and additional spending opportunities that are demonstrating success. Our advertising spend at roughly 1% of sales is a fraction of many of our peers. We know we can and will invest with success here moving forward. As we've improved our overall profitability and increased our scale, we are able to unlock additional funds for advertising this year and will do so with data driven discipline. On development, plan to open approximately 40 company operated Shacks and approximately 40 licensed Shacks this year in '24. Expanding our footprint is key to driving sales and strengthening our brand awareness. In 2024, the majority of our company operated openings will be in existing markets across a variety of formats. We'll also be continuing our license Shack development by going deeper in domestic airports, roadsides, and deepening international expansion into new and existing markets. Third, we're going to make Shake Shack more profitable. In 2023, we improved restaurant level margins by 240 basis points to approximately 20%. We plan to further margin expansion in 2024, with our next goal of reaching 20% to 21% Shack level operating profit margin, continuing our work to close the gap to our pre-COVID profitability levels. Katie will share more, but our main strategies on improving forward margins and lowering total cost to serve involve work on supply chain and operational efficiencies. Many of these initiatives are things that we identified in prior years, such as increasing the number of suppliers as we scale, optimizing our freight, and improvements in labor scheduling and deployment. We've also engaged in external consultants, help find additional opportunities and we will also look to leverage G&A while continuing to invest more in advertising and for the future growth of our business. Fourth, we're going to continue to improve how we build and open Shacks. We believe '23 was the high watermark for our build and preopening costs as we dealt with inflation, supply challenges, and a higher mix of more capital intensive drive throughs. This year, we've prioritized our commitment to reducing average net build and preopening costs by about 10%. The team has begun to employ early prototype improvements to future Shacks as a Phase 1 approach and will be doubling down further this year to capture additional savings over time. Some of this work necessarily caused us to slow down timing of the 2024 pipeline and that will cause a back weighted opening schedule this year. But as that work takes hold, we'll begin to see more impact in 2025 as we rollout improved prototypes and a strong pipeline of Shacks in the years ahead. And lastly, we will continue to develop and reward our high performing teams. Our people have always been and will always be a core focus. High performing teams helped fuel the success we drove this year and we expect to drive in 2024. Looking ahead, we'll continue to invest in our teams through increased wages, training, opportunities, enhanced recruitment with AI-enabled recruiting tools, and retention practices to optimize their experience and ultimately drive the business. Now, I'll turn the call over to Katie to recap more of '23 and provide our initial outlook for 2024.

Thanks, Randy, and good morning, everyone. The past year was a year of solid profitable growth as we drove 240 basis points of Shack level operating profit margin expansion in the year, building up to approximately 20%, further closing the gap to pre-COVID profitability levels, and growing Shack level operating profit by nearly 40% year-over-year to a record of $208.2 million. We did this by successfully implementing our profitability improvement programs in our restaurants and home office, including better forecasting and labor scheduling, and other operational and total cost to serve initiatives, and with our commitment to investing with discipline, we levered our G&A, excluding one-time adjustments by 110 basis points, while still prioritizing advertising and marketing investments and we grew adjusted EBITDA by more than 80% year-over-year to a record of $131.8 million. We ended the year on an optimistic note for the fourth quarter with solid execution against marketing and operational strategies that drove strong sales growth with positive traffic and solid flow through, and as a result, we were more profitable despite continued inflationary pressures. Fourth quarter total revenue was $286.2 million, up 20% year-over-year as we opened 24 company operated and licensed units and grew system-wide sales approximately 21%. Licensing revenue was $10.5 million in the fourth quarter and licensing sales were $166.4 million, up 24% year-over-year, and with particular strength in our airport and domestic locations and nine openings. We face geopolitical pressures in the Middle East and continue to see macroeconomic pressures in China, and in both markets, we expect to experience further volatility in our sales for the foreseeable future. Shack sales in the fourth quarter were $275.8 million, growing nearly 20% year-over-year, supported by opening 15 domestic company operated Shacks and driving strong Same Shack sales with positive traffic through our marketing strategies. Our sales outperformed historical seasonality throughout the whole quarter and all of our regions saw sequential traffic improvement since the third quarter. We grew Same Shack sales by 2.8% versus 2022 with traffic up 1.4%, which accelerated through the quarter, driven by success of our strategic marketing initiatives as well as approximately 1.4% price mix. We generated 76,000 in average weekly sales, up from 74,000 in the third quarter with mid-single digit price and positive traffic across both in Shack and digital channels. Fourth quarter Shack level operating profit was $54.6 million or 19.8% of shack sales, 80 basis points higher versus last year despite continued inflationary pressures across our Shack P&L, and we achieved this with our strong sales performance and strategic initiatives around food cost, labor, and other OpEx driving strong flow through. In the fourth quarter, food and paper costs were $80.3 million or 29.1% of Shack sales, flat quarter-over-quarter and down 40 basis points year-over-year. Food and paper inflation was up mid-single digits year-over-year, led by beef up mid-teens and fries up high-single digits with pressures broadly across our basket. Labor and related expenses were at $78.6 million or 28.5% of Shack sales, down from 28.9% in the fourth quarter of 2022 and down 30 basis points quarter-over-quarter. With increased sales and positive traffic, the benefits from our strategic initiatives including improved forecasting and labor scheduling drove strong flow through on our better sales. Late in the fourth quarter, we implemented the first round of tests of our new labor modules. Now, as a reminder, this new scheduling standard leverages the unique characteristics of a Shack in terms of channel and menu mix to enhance deployment. While takeaways are still early, we are pleased with the initial results from this test and expect to expand it to additional Shacks in the first quarter with the potential to rollout broadly later this year. Other operating expenses were $41.1 million or 14.9% of Shack sales, up 30 basis points from the fourth quarter of 2022, as we faced increased repairs and maintenance expenses, a higher delivery sales mix, and continued inflationary pressures in energy and utilities. Occupancy and related expenses were $21.2 million or 7.7% of Shack sales, down 20 basis points from the fourth quarter of '22 driven by sales leverage. G&A was $35.8 million or 12.5% of total revenue. Excluding $900 million in one-time adjustments, G&A was $34.9 million or 12.2% of total revenue, down 130 basis points from 13.5% of total revenue in the prior year, despite continued investments needed to support our growth across technology, marketing, and operations. We ended 2023 with $125.1 million in G&A, adjusted for legal settlements, professional fees, and other one-time expenses. Pre-opening costs were $5.1 million in the quarter as we opened 15 new company operated Shacks and depreciation was $24.5 million. On a GAAP basis in the quarter, we reported a pretax income of $1.5 million and a tax benefit of $5.3 million. On an adjusted pro forma basis, we reported a pretax income of $2.4 million and a tax expense of $1.4 million. Excluding the tax impact of equity based compensation, our adjusted pro forma tax rate in the fourth quarter was 55%. Adjustments can be found on Page 30 of the shareholder letter. We reported fourth quarter adjusted EBITDA of $31.4 million, up approximately 60% year-over-year, or 11% of total revenue, marking a significant improvement relative to 8% of total revenue in the fourth quarter of '22. And for the full year of 2023, we grew adjusted EBITDA by over 80% to $131.8 million or 12.1% of total revenue, 400 basis points higher than the prior year. We realized a net income attributable to Shake Shack Inc., of $6.8 million or $0.15 per diluted share. On an adjusted pro forma basis, we reported a net income attributable to Shake Shack Inc., of $1 million or $0.02 per fully exchanged and diluted share. And finally, our balance sheet is strong. As we enter the quarter with $293.2 million in cash and cash equivalents and marketable securities, up approximately $8 million from last quarter. Now on to guidance for the first quarter and full year of 2024. Our guidance assumes no material changes in the macroeconomic or geopolitical landscape and the potential impact of system wide sales or costs. For the first quarter, we guide total revenue of $288.4 million to $292.8 million with $9.4 million to $9.8 million of licensing revenue, approximately four company operated openings, approximately two licensed Shack openings, and for Same Shack sales to be up low-single digits year-over-year. January Same Shack sales were flat with an approximate low-single digit headwind from unfavorable weather, as well as pressures from comparing over a particularly strong January 2023, average weekly sales that had a large benefit from a high number of Shacks that we opened in the fourth quarter of 2022. Outside of weather impacted weeks though, we saw that the underlying strength of our fourth quarter trends continued into January and while we're not providing specific numbers around February, our trends have improved from January levels and our guidance reflects this. As we execute on our 2024 strategic plan, we are guiding to first quarter Shack level operating profit margin of 19% to 19.5%, representing approximately 70 basis points to 120 basis points improvement year-over-year. In the first quarter, we are planning for low-single digit year-over-year inflation in food and paper costs, with pressures led by uncertainty in beef pricing, the largest part of our basket. For 2024, we are guiding total revenue of $1.21 billion to $1.25 billion, growing about 11% to 15% year-over-year with approximately 40 company operated and 40 license openings, both of which are back end weighted, and Same Shack sales to grow by low-single digits with low-single digit realized price. Our pricing plans for this year are modest and consistent with our pre-COVID pricing patterns of low-single digits. We recently increased price in our digital channels and plan to take additional menu price in areas with outsized labor inflation such as California. But for the majority of our Shacks, we plan to increase in-Shack menu prices by about 2.5% this year. We guide full year license revenue of $45 million to $47 million, up 11% to 15% year-over-year, as we factor in a degree of continued macroeconomic and geopolitical risks. The Middle East and China together were approximately 40% of our total license units and comprised a material amount of our 40 projected openings for 2024. We're targeting another year of restaurant margin expansion as we guide Shack level operating profit margins to 20% to 21%, as we focus on driving sales and delivering on continued operational improvements. The low end of this guidance range while nearly flat year-over-year contemplates a weaker sales backdrop, a worsening staffing backdrop, and the potential for even more elevated inflationary pressures in beef and other areas of the supply chain. We guide 2024 G&A to $139 million to $142 million, which is up 11% to 14% year-over-year, driven by a planned large increase in advertising spending to drive greater brand awareness and sales, while still having a disciplined approach to run rate G&A. We're increasing spend on areas of marketing where we have high visibility in our returns and will continue to closely monitor and adjust accordingly with changes to our business. We expect approximately $18 million of equity based compensation expense with about $17 million in G&A. We guide full year depreciation of $100 million to $105 million and preopening of approximately $17 million, in-line with our commitment to reduce preopening cost per Shack by at least 10%. We guide adjusted EBITDA of $160 million to $170 million in fiscal 2024. This represents 21% to 29% growth year-over-year and solidly outpacing total revenue guidance growth for 11% to 15%. And finally, we guide for fiscal year '24 adjusted pro forma tax rate, excluding the impact of stock based compensation to be 20% to 25%. Our overall tax rate will be impacted by a number of factors including our level of profitability, tax credit, state mix, and other impacts. So, thank you for your time, and with that, I'll turn it back to Randy.

Thanks, Katie. Before we open up the call to Q&A, I do want to give a brief update on behalf of our Board of Directors on the CEO search. We are really fortunate that the role of CEO, Shake Shack is among the most exciting and biggest opportunities in the industry today. We've had enormous interest. The Board search committee is pleased with how the search is progressing and we're on target we believe with expectations to transition leadership in the coming months. I also want to announce that today the company is promoting long-tenured leader Michael Kark to President of our Global License Business. Michael has been leading our International and Domestic License Relationship since he joined the company 12 years ago. He's led one of the most nimble and innovative teams in the industry and will continue to chart the course for this exciting and critical part of our growth ahead. Congrats to Michael and to all of our partners around the globe. In the meantime, I remain deeply committed to executing against our strategic priorities to deliver profitable growth in the year ahead and ensure a seamless transition for my successor and the utmost confidence in our seasoned leadership team and never been more optimistic about Shake Shack's potential as we build upon this last year's success and enter 2024. With that, operator, thank you, and let's go ahead and open up the call for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Brian Vaccaro with Raymond James. Please proceed with your question.

Thank you, and good morning. You noted that average weekly sales through the fourth quarter exceeded your normal seasonality, and you attributed some of that to your strategic advertising initiatives, can you elaborate on the levers that you're pulling there? Is that mainly focused on markets with lower awareness and kind of any way to frame what percentage of your units you would classify as lower awareness and the sales improvement you're seeing behind some of those initiatives?

Thanks, Brian. Yeah. I mean, listen, first of all, I want to come back to the point I made overall. We have big opportunity here to continue to expand this as we scale. I think it's important to continue to name, listen, we're not big enough yet to capture the kind of scale that we'd love to have a Super Bowl Commercial someday, right? We're just not there yet, but there will be a day where that can happen. Today, we've got to test and learn into the strategies that we're getting a strong return on. So, when you think about what we've done, we started to talk about this last quarter and do some of this in the third quarter, we did a bunch in the fourth, and we'll continue to do that. Lots of things happening. There's a few kind of lower brand awareness markets, where we did employ various media tests, most of what we're doing is increasing our one-to-one performance marketing efforts that we're getting smarter every day. We used to brace on some of our marketing efforts there. We're just getting a better connection directly to our guests. We're doing various really fun brand partnerships, things like our partnership with Trolls, the movie in the fourth quarter, and other things that continue on down the line that we use our culinary template to do. We also are doing things in our own channels. If you saw, we did a fun promotion with a Chicken Dance. If anybody in the NFL did a Chicken Dance, we were going to do free Chicken Shacks in our app, so that and a couple others like that drove a lot of traffic to our channels, which we really like. We also do things with third-party DSPs from time-to-time to promote those channels, where we see a good return. So all kinds of different things. Right now, for instance, we're doing Free Fridays, right, through about a six, seven-week period in this time of year. That captures -- what we love about that is, it captures our guests, it drives frequency, it kind of helps lapse guests in the app, go for an order and within all that, my final point is, we've been really happy to see that these things not only accretive to sales but also to profit. When we do things like that, we're not seeing -- we're not doing them to lose profit, we're doing them with positive profit gains. So really happy to see it. And I think the main point we want to take away is as we increase that to some extent this year, we'll keep testing and learning new strategies in all kinds of markets to see where it hits best. So we've got a lot of opportunity ahead and the marketing team is set up to fire a lot this year.

All right. That's great. And sorry if I missed it, but Katie, can you level set where was advertising spend in 2023 and what's embedded in your guidance, kind of ballparking what's in guidance in advertising for 2024?

Yeah. So you're going to get the 2023 number in the 10-K, so I don't want to front-run that, but what I will say is that our guidance assumes a material step up in our underlying G&A or advertising spend. And what's really important is that taking out that increase in advertising, we are showing continued discipline and leverage on our kind of underlying run rate G&A. So it's been great to be able to see -- drive increased profitability here and also be able to unlock that really powerful source of funds to help drive the future growth of the company.

Great. And if I could just ask one quick follow-up on the topic of throughput, obviously, the time to get your food and average ticket times is really important to the guest experience and being consistent on that metric. I think you said, you're looking -- you're targeting a 32nd improvement with even more in the drive through, but can you level set what your average ticket time is today? Any perspective on how that's trended over time or perhaps how variable across the country, just to help us frame the opportunity on that? Thank you.

We haven't really released specific numbers on that. We've generally said over time that's been a sort of 6 to 8 minute ticket time as we cook fresh to order over time. It's really not a regional question, it's more of a volume question. Obviously, when you're busier, sometimes those times extend. Our goal for this year is consistency and continue to just improve and be relied upon better for what our guests can expect. So that's the goal we've set out there. Ambitious target for our teams to knock 30 seconds off the average order over the course of this year. This is going to take time, it's not tomorrow. This will be through the year, as we go and as we kind of exit the year that's really been our goal. Thank you. And if [Multiple Speakers] and as we go, if we can keep -- thank you -- if we can keep, operator, the questions to one because we have a lot of people on the line, so thank you.

Our next question comes from Sharon

I was actually really excited to hear about the initiatives on throughput. I'm one of those people who would love to get through the line faster, so I definitely appreciate that. I'm sure you have a lot of unmet demand, can you talk about the labor modules that you tested, I think at a few locations in the fourth quarter, and is that the same as what you're talking about with new kitchen flows and kind of the timing of real-time reporting and what that kind of looks like at the unit level? Thanks.

Yeah. Sure. So I'll flip this one with Randy, but on the labor module side, these are two different things. How we flow food through our kitchens is very different than how we're thinking about kind of better and more bespoke deployment. Over the course of Shake Shack's history, as I'm sure you've followed, we've evolved with adding more channels. Our menu has changed and as we've grown across the country, there are just Shacks with different characteristics than others. And so, especially with the kiosk rollout that we did last year, we felt it was the right time to revisit with time in motion studies and the great data that the team has built up here, a really bespoke per Shack staffing and deployment model -- module. And we did the first round of the test late last year. We're really encouraged by the results there. We talked about rolling out to more Shacks this year. It's important to note, none of that is actually embedded in our guidance for 2024 Shack level operating profit margin improvement. So it's something that we're still rolling out here. And what I would say too, is that it's not just about reducing the number of people in the Shack, it's actually about rightsizing the deployment we have there. So there are some areas where we feel it's appropriate at certain times of the day to add more people in. We think that that's important for our ability to execute a great guest experience and capitalize on the opportunity there and by different formats. But, Randy, do you want to take the…

Yeah. Just on the kitchen flow, just to be more specific, this is something -- this is going to always evolve forever, right? I mean, this is every restaurant, every day, continuing to try to figure out the best way to move food, but remain -- keep integrity in how we cook our food. What we've been working on really for the better part of the last year and a half is testing various different flows that can help that same great food move through the kitchen in a more organized way that saves time and that's what we're working on, and that'll take the small percentage of our restaurants doing that today. And most of our new restaurants will open with our linear kitchen that changes that flow. Some of our existing restaurants will convert, but it's more about just how we move the food and it's not really about renovations and all, any other major costly thing. It's really just about a different flow of food. So we've got a lot of work to do on that among other things and that's in the works.

Our next question comes from Brian Mullan with Piper Sandler. Please proceed.

Hey. Thank you. Just a question on the drive throughs, could you speak to how those are doing in general? Understanding, there have been some learnings, maybe some locations you might have done differently in certain instances, just looking to understand your degree of optimism about drive throughs overall, and if you think they have a solid long-term future at Shake Shack, any thoughts would be great.

Yeah. Thanks. The answer for the long-term future is, you bet. We're big believers in it. I think in order to capture market share, continue to hit our major growth goals, and hit the white space that this country has, we want to make drive-through work. We know we've had lots of things that we've learned. We have about 30 right now. We opened 18 last year. We'll have a smaller percentage of the class in 2024, but still a significant commitment this year and the years ahead. So, we continue to learn. As I've said in previous conversations about drive through, we've got some that are below our targets, some that are above, right around -- lots in the middle. And I think what we're learning is best positioning, best real estate, best flow, and then you take that into the operational flow and locking in what we believe now our prototype for the coming years will be a little bit smaller, a little bit less seats, and we're taking significant costs out of the cost to build. So that's been really the work in the flow so that over time we can continue to drive stronger returns here, but really excited about drive through, and we will say we still have a ton to learn and it's all going to continue to roll forward. We're excited this year to open some drive throughs in some of our higher brand awareness markets. We've got some in California, we've got some in New York, New Jersey, and that'll be exciting for us to learn how that goes and how people choose to use Shake Shack at a drive through experience.

Our next question comes from Sara Senatore with Bank of America. Please proceed with your question. (ph)

Okay. Thank you very much. I just wanted to ask a little bit about how you're thinking about the margin outlook versus the same store sales. You've done a lot of work on restaurant level margins, but if I go back and look at the sort of initial guide for this year, restaurant level margins, I think was 19% to 20% and comp was kind of low-single to mid-single. So you came in at the high end of the range for both, but so is that sort of how we should be thinking about this, which is there are kind of puts and takes, so even though you have opportunities maybe on the margin side and if you could talk a little bit about what you think the biggest ones are, that would be helpful. But we should really be thinking about this as sort of you need a certain amount of comp to lever the expenses.

Great. So our guidance for this year is for low-single digits Same Shack sales growth. We are anticipating to have positive traffic and we're taking -- especially at our -- most of our Shacks, less price more consistent with what we did in pre-COVID areas -- times. We're also, at the same time, though we talked about having a meaningful step up in advertising expense and we'll see how that helps to benefit and impact our comp and we're certainly doing that with strong confidence in what we've seen before historically with that and bringing that up to new levels or meaningfully higher levels. On the point on our restaurant margin guidance for 20% to 21%, we saw certainly -- throughout last year and especially in the fourth quarter, very strong flow through on these incremental sales, and so we're excited for what's ahead. We also have a number of initiatives on our operational improvement plan, though, through total cost of serve, work that our supply chain team is doing to help offset inflationary pressures, some of that's in the guidance, but also there's a lot of white space opportunities still available there. And then on labor, we've been really efficient with the added sales that we've been seeing as a result of our marketing efforts and expect to continue to have opportunity on that side.

Our next question comes from Michael Tamas with Oppenheimer. Please proceed.

Hi. Good morning. Thank you. You talked about some interesting sales drivers in the '24, including combo meals and desserts and increasing your marketing spend obviously, can you talk about some of the work you've done that suggests those are the right strategies, maybe why now? And then related to that, do you think those platforms are required to hit the positive traffic goal you're talking about for '24 or can the core existing strategies get you there? Thank you.

Michael, great question. I think those strategies that I named specifically on the tests of combo meals, Sundaes, Mini Shakes, those are not core to our assumptions at all, and this year would be immaterial at best, and what we want to do there, why are we looking at that. Well, Shake Shack (ph) combo meals, Shake Shack has never had a combo meal in the history of the company. Time will tell if that's the right thing, if that's what our guests want. What we wanted to do and as part of our drive through goals is, that speed is a goal here. We know Shake Shack is not the fastest and we want to test how people react to that. And I think the initial news is well, a lot of people like combo meals at drive through. That shouldn't be a shocker to anybody in the industry. The question is whether that'll be the right thing for us long term, so we're trying various pricing strategies, various visual, and merchandising strategies, and things that do not put us in that fast food category, but still really give that consistency to the guests. On our kind of dessert destination goals, look, Shake Shack before COVID had concretes, right, our Frozen Custard Sundaes. We've continued to hear from guests, they want us to continue to have more options and what we're doing there is bringing back Sundaes. We're going to be expanding those tests. We have Mini Shakes at a number of Shacks right now, we'll be expanding that test, but not rolling out to the entire fleet just yet. These are things we want to tweak, get right, and the whole goal there is, can we increase some of that day part expansion? Can we get some more afternoon? Can we get a little average Shack? And how do those things work into the digital universe that we live in today? So I love menu innovation. As you know, we're really good at it here. We got to keep doing it, but we're doing it prudently. So all in all, the factors in the guide that we gave are really based on what we see as kind of our run rate opportunity, a lot of that increased marketing opportunity, and hopefully, an economy that cooperates and lots of opportunity. Those are the things that -- some will be out of our control and the things that are, we're going to keep driving the business.

Our next question comes from Andrew Charles with TD Cowen. Please proceed.

Great. Thank you. Katie, I just want to better understand the components of the 2024 low-single digit same store sales guidance. This embeds expectations for 2.5% price and positive traffic, so inherently is mix expect to be negative. I would think with the kiosk efforts and the traction you're seeing there, the high-single digit boost in ticket that you're seeing theoretically that should be a good guy, but is delivery sales embedded to be a continued headwind through '24? Just looking for some more color within the components. Thanks.

Sure. So yeah, we talked about low-single digit price that we're expecting for the year, down traffic, we're goaling ourselves, we're targeting to have positive traffic. We've embedded some ranges, though, on that side in that guide. And kiosk overall, I have to say, we're really excited by what it continues to provide for us. Our sales on kiosk in the fourth quarter doubled year-over-year and we implemented some new technology upgrades in that channel to continue to drive increased attach rates and customization. But we'll have to see how that continues to play out through the rest of the year.

Our next question comes from Jake Bartlett with Truist Securities. Please [Technical Difficulty]

Great. Thanks for taking the question. On the margin expansion guidance for '24, great to see that, I'm wondering if you can just help us understand what's driving it. It looks like just COGS, or commodity cost inflation being flat to low-single digits and low-single digits price would be a contributor. So, if you could maybe disaggregate the drivers, including what you're proactively doing, some of the supply chain initiatives, labor initiatives, just trying to kind of understand more specifically what your actions are doing to your margin outlook.

Yeah. Absolutely. So first of all, again, really excited to have the strategies in place and the confidence here to sit here and guide for 20% to 21% Shack level operating profit margin for 2024, marking another year of continued profitability improvement. I think when we go through the P&L, on food and paper, we put our inflation outlook to be flat to up low-single digits year-over-year for the full year. It's important to note, though, that our initiatives that we're doing on supply chain, whether it's increasing the number of suppliers, optimizing our freight and other initiatives are driving that to be to the flat to up low-single-digit level. We would have been in a worse position had we not had these operational improvement programs already in place. The one thing I'll caveat there, though, is that beef is the largest uncertainty to that basket and it's something that we are watching closely. On labor, we have been driving very strong flow through as a result of our increased -- better overall sales forecasting and our better deployment and just really leveraging increased sales and traffic that we've seen overall at the company. So those are two areas where we really do expect to show continued improvement in 2024. Also, both areas where we are facing inflationary pressures on wages particular, we're kind of anticipating a low-single-digit increase, but we all know that there's certain areas of the country that are going up a lot more than that, and with the programs that we have in place, we're confident in our ability to navigate these continued inflationary waters.

Our next question comes from Peter Saleh with BTIG. Please [Technical Difficulty]

Great. Thanks. Thanks for taking the question. I did want to come back to the advertising discussion. I think in 3Q, Shake Shack targeted more advertising in the West, can you just give us a sense on where you were spending the incremental dollars or where you were testing some more advertising in 4Q? And just, in terms of 2024, are you targeting specific regions or how do we think about your spending on advertising next year or this year rather?

Yeah. Thanks. To answer your question, last year, yeah, we continued some of those tests on the West Coast that we saw some strong return for. We did some things in Texas, that's been a big growing market for us. We opened a lot of restaurants in Texas last year, so there was appointed tests and learned happening there. And for this year, we will keep you posted. I think the teams continue to learn on that. A lot of this is really directed at the markets where we think we can have the highest return, balanced with some spend, where we have lower brand awareness and we just want to make sure that we keep hitting those and having people know who we are, what we do, and driving the exciting opportunity we have. Sometimes it'll go along with openings, our new Shack openings, where those go where we choose to spend. But generally, it's really a lot of one-to-one performance marketing digital opportunities that we see where most of the ramping of spend will go. We think that's the best way to do it at this scale. So when we hear the word advertising, it's not going to be a whole lot of TV commercials and the things you might traditionally think. At this scale, most of the best way we can gain is on digital channels that we've seen strong returns on.

Our next question comes from Brian Harper with Morgan Stanley. Please [Technical Difficulty]

Yeah. Thank you and good morning. With kind of the improving traffic trend in the fourth quarter, what do you think was most impactful to that, maybe it was some of the advertising, but just curious for your thoughts there. And I know that there was a little bit of divergence between New York and the other regions and if you had any thoughts on kind of what drove that.

Well, I think these are the things that we've been pointing out through the call today. I think they're all of those things. We had a good LTO. We had strong and improving comp through the quarter. We had a lot of that advertising targeting, various different promos, and opportunities that we've shared both in our channels and in other channels. So I think it's been a really well played playbook by our marketing team. And again, a lot of that, as we keep saying on this call, increasing the overall spend to get us to a point where we can continue to test and confidently employ data-driven, disciplined spend across our marketing channel. So I think that was really a good part of the Q4 and just a solid lineup of operational execution across the company.

And then in New York specifically, we've been opening a number of restaurants, so we've kind of put some of those pressures there, it's more on the infill pressures, things that we've normally seen throughout the year.

Our next question comes from David Tarantino at Baird. Please proceed with your question.

Hi. Good morning. You made really impressive progress on improving the shop level profitability, so I was just wondering if you could maybe frame up where you think you are in your journey to improve profitability. And I think, Randy, you mentioned a reference to getting back to pre-COVID profitability, and I'm just wondering, if we should be reading that as your goal. I think you had 22% shop level margins or slightly higher than that in 2019, is that the right way to think about your goals or I guess, any way to frame up kind of the long term picture on profitability? Thanks.

Thanks, David. I think the goal is 20% to 21% this year in 2024. That's the clear guide. That's what we're working on. As we've said in the call, lots of initiatives that have been working and lots more that are coming, both to expand upon the current, as well as add new things and we're really clear in the notes today about what those look like. Look, we know we had a higher Shack-level ops profit overall pre-COVID, companies twice the size right now, changed a lot, and we're going to continue to drive that. Our goal will always be to continue to expand on that profitability. That's what we've shown this year, over 240 bps of leverage this year and targeting and guiding for more this year. Lots of opportunity left in the tank and we want to do it deliberately and in constant with the overall successful growth that we've had, so it's a profitable growth journey overall.

Our next question comes from Jeffrey Bernstein with Barclays. Please proceed with [Technical Difficulty]

Great. Thank you very much. Just focusing on the cost side of things, actually, a two part question. The first, Randy, you mentioned the unit cost build reductions of 10%, which you've talked about before, just wondering if there are any concerns. I know you like to enter markets with the wow factor, so I'm just wondering, where the biggest opportunity in the front and the back of the house is to pull out that 10% plus. And then just to follow-up, Katie, you mentioned G&A leverage again in '24, which is clearly impressive considering your outsized growth, I'm just wondering if you could bucket the primary areas of opportunity relative to that revenue growth, so the leverage that you're expecting to achieve there. Thank you.

Thanks, Jeffrey. Yeah. We love to open with the wow as you said. We've had a history of doing that pretty well, want to continue to do that. We're going to build beautiful restaurants. These goals do not take away anything from the differentiating factor we believe is critical to Shake Shack, which is we just don't look and feel like fast food. We are serving a premium product and a premium experience, we're going to continue to do that. I think where the team's been targeting, obviously, we've dealt with a tough construction environment. Every company you talk to is dealing with the same thing, ours is no different. But we've also increased some of our more expensive formats and drive throughs. So, as I've said, a lot of the work is nuts and bolts in the guts of the building that you won't ever see or appreciate that we are figuring out how to do more effectively and efficiently by carving out time. Some of the things, I still don't think you'll notice, but what we know we can do now after learning quite a bit in this last few years as we've ramped our growth, is taking down the overall size of some Shacks, taking down some of the complicated factors of some Shacks as we learn what our guests really want, how often, and provide for peak opportunity. There'll be a good mix this year of our core Shacks, which you kind of know and love, and what we do, as well as some of the drive throughs, where we want to continue to expand. Again 2024, these restaurants were designed a year or two ago, and is not as much immediate opportunity. So we feel real good about what the team is delivering at this approximately 10% target goal, including, by the way, our pre-opening expenses, which we know we can save upon. But as we get into '25 and beyond, we think we'll start to harvest even more of that, and that's the goal. We think that it is just a lot of opportunity for us to continue to build the dynamic wow restaurants that differentiate while taking cost down. So that is the commitment and our team is working hard on it.

And on your question on G&A, what you probably have surmised from our conference call today and then also our materials is that, we really continue to put a priority on investments that drive sales and drive the future growth of our restaurants. And so we're continuing to take a very disciplined approach to that. You will see it in our G&A investments and in other parts of the P&L. So again, it's about taking a meaningful step up in advertising expense, but at the same, kind of on the run rate side of the business, being very prudent, very disciplined about the investments that we're making there so that we can prioritize the investments needed for the long term growth of the company.

Our next question comes from Jeff Farmer with Gordon Haskett. Please [Technical Difficulty]

Yeah. Good morning, and thank you. Just another follow-up on menu pricing. Katie, I think you mentioned 2.5% pricing for the majority of the system in 2024, but inclusive of the pricing in the California restaurants, and I think you guys just mentioned the 3PD menu price increase, what would that equate to for total system pricing in 2024?

Yeah. So, what we're thinking about that 2.5%, so first of all, there are two numbers that are 2.5% here. So first of all, 2.5% is what we're kind of targeting for about realized price for 2024. There's going to be some areas where we're taking more than that to offset wage inflationary pressures. You talked about California scenario, where they're taking it up a lot in some of our markets, and we're going to be taking price there to help offset those pressures. We also increased the premium we were charging on our digital channels. We're still underpriced relative to kind of our peer average. I still think we have room on that side, but continue to test and learn in that channel. And then overall, the other 2.5% dimension is that's pretty much your average Shack outside of a big wage inflationary zone. That's about the overall price that we're looking to take this year, and that's very consistent with the pre-COVID pricing patterns that we've had. So most of our shacks will have kind of that lower-single digit menu price increase this year.

Our next question comes from Andy Barish with Jefferies. Please proceed with your question.

Yeah. Good morning. I guess for Randy, although, this may change as you hand over the reins, is 40 company owned units kind of the right pace that the company is sort of settling into, just kind of looking at teams and retention and operational consistency and all those kind of things or is there something as bill costs, maybe come down that could accelerate that?

Well, we're not going to guide past this year. 40 is a number we like. We obviously pulled forward a little bit this year and got to 41 for the company operated domestic. On license, we pulled forward a bunch and got to 45, well ahead of guidance. We think 40 is a good number there as well. So you look at kind of 85 restaurants last year, about 80 this year, we like that number. That doesn't mean anything about what we will choose to do next year. Let's talk about what we're looking at. We're building a pipeline for the future that will allow us to continue to grow with strong return. As I noted in my comments, I think it's important to say, when you -- we've taken this last couple of years to sort of pull back a little bit, and say, okay, cool, what have we learned? Our restaurants have got more expensive. How are we going to make them less expensive and how are we going to do them better, so that we can open better restaurants over time with stronger returns for the long term, and that process has unfortunately caused what will be a back weighted sales year this year. So a lot of the new Shack sales will come at the back end of the year. But that was smart work. That was work to make sure that we were investing with discipline and putting our CapEx to work in the right places. So, we really like that. I won't speak for what's ahead other than this year we feel good about the 40.

Our next question comes from Jim Sanderson with Northcoast Research. Please proceed.

Hey. Thanks for the question. Congratulations on a great quarter. I wanted to go back to the combo testing, just if you could provide some more insights on, what metrics you're testing, whether this is looking at discounts to a la carte or if you're trying to build kids meals, family bundles that might move average Shack up? Just any thoughts on the test and how this might impact average Shack going forward? And also why only through the drive-through? Thank you.

Yeah. Thanks, Jim. And again, this is not going to be, do not expect any material rollout of this strategy this year. This is something that we really want to learn into. This is not something you flip on and off easily in a company like ours, who's never done it. So what are we looking for? Number one, we're looking for do our guests want to order that way, right? That'll be the kind of first KPI we have. Then we're going to look at various pricing strategies. Do we need a discount or is it really just about ease of ordering? Testing various levels of a bundled discount and how that feels of that Shake Shack. Can we increase items per Shack, right? What happens to both beverage and shake attached? This is Shake Shack, right, and we're different. We sell a lot of shakes. What happens in the combo meal environment in shakes? These are things we're looking at. And ultimately, can it contribute to a better ticket time, right? Does it help our team in the back as well as the person ordering? And I think where you see the most pressure of ordering time is always at a drive-through window, right? In most of our other channels, especially now with kiosks, it's a lot more relaxed ordering process. You don't have to feel like you got to move forward, but in a drive through, you inevitably feel that way, and so that's why we're testing it at drive-through. So it's only that kind of a couple handfuls of our restaurants I expect it'll kind of stay at that test level for some period of time and we'll look at it. And look, obviously, the industry figured out a long time ago that this is a good strategy, whether it's a good strategy for Shake Shack remains to be seen. We're excited about what we're seeing and learning, and we'll keep you posted if it goes forward.

We've reached the end of our question-and-answer session. I would now like to turn the floor back over to Randy Garutti.

Hey. Thanks, everybody. Appreciate all the time today. We'll look forward to seeing you in the Shack soon. Take care.