Shake Shack is Back on the Growth Path

    COVID-19 continues to sag sales, as did recent protests.

    Shake Shack

    Could the pandemic open growth opportunities for Shake Shack?

    Shake Shack was quickly writing one of the sector’s most compelling growth stories pre-COVID-19. It entered the fiscal calendar with 274 total units—163 company-run corporate stores and 111 licensed. The burger fast casual planned to open 40–42 corporate and 20–25 net licensed stores in 2020, keeping it firmly en route to a previously set target of 450 systemwide restaurants.

    To illustrate how fast this moved, there were just 108 total Shake Shacks at the end of 2016. And 60 percent of its U.S. restaurants are less than three years old. At the beginning of 2020, 24 percent were 12 months or younger. The average age of Shake Shack’s entire U.S. footprint: Just 2.9 years.

    Also, 23 of its 31 markets have five or fewer locations.

    The pandemic struck Shake Shack particularly hard, however. Far more severe than larger counter-service, publicly traded chains, which are closing in on pre-virus sales levels, like McDonald’s, Wendy’s, and Burger King. The reality is more of an asset drag than a performance one, as Shake Shack does not tout a heavy drive-thru base that specializes on speed and value. It’s been positioned as a modernist, social gathering spot since inception 16 years ago.

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    In the early weeks, sales at U.S. venues were down as much as 90 percent, with an average of 70 percent—mirroring closer to full-service struggles than quick-service examples.

    The company Tuesday provided another update—its first since Q1 in early May. Among the details, Shake Shack said it’s progressing toward pre-pandemic business goals once again. Namely, it’s started to develop domestically and internationally.

    Shake Shack opened four U.S. restaurants in Q2 (period ended June 24); in Sacramento and Los Angeles; Charlotte, North Carolina; and St. Louis. The company said each “opened with encouraging levels of sales.” Shake Shack debuted four corporate units in Q1 before the full onset of COVID-19 and said it “believes additional and improved development opportunities may be available over time due to the impact of COVID-19 on the overall retail and real estate environment.”

    “Amidst our gradual sales recovery, we've started to open new Shacks again and are looking to the significant growth opportunity that we believe lies ahead for Shake Shack,” CEO Randy Garutti said in a statement. “I am so proud of the resilience of our teams in the Shacks, the innovation across our operating model and our relentless efforts to continue to safely serve our guests.”

    Shake Shack opened 49 restaurants last year, including seven new markets. In the past four years, its appreciated 41 percent compound annual growth rate, ballooning from 44 to 173 U.S. spots. The company’s total revenue hiked from $191 million to $657 million in that span as total systemwide sales bumped to $839 million from $295 million and cash flow from operations lifted from $41 million to $96 million.

    But an interesting development out of COVID-19 will be how Shake Shack selects potential leases. It said Wednesday it “has an identified pipeline of leases in negotiation for continued growth in 2021 and beyond.”

    Before the crisis, the brand forged ahead with format expansion and concentric growth in already developed markets (of Shake Shack’s planned 2020 growth, only 10 percent were slated for new DMAs after roughly 20 percent in 2019), not unlike how Starbucks once built one of the country’s most diversified footprints. Shake Shack pushed into everything from stadiums to shopping centers, food courts, and roadside units visible from interstate signage. Also, food trucks, events, airports, digital-focused designs, and urban. The company previously noted nontraditional venues were essential to its licensing business, especially in terms of driving brand awareness alongside a national growth strategy. Airport, stadium, and roadside models in particular.

    Yet coronavirus has stressed those paths short- to mid-term with no clear vision to latch onto, as travel grinds to a halt and live sports contemplate playing pared-down seasons without crowds or in front of limited capacity venues.

    Shake Shack announced it recently signed a licensing agreement for a new store at the Dodgers stadium in Los Angeles, which is expected to open when baseball reopens to fans.

    While likely these options return to some semblance of normal in time, it’s not going to be an imminent snap. And we don’t have a timeline crystal ball.

    To aid COVID-19 conditions and prepare for a convenience and contactless-fueled future, Garutti said in May Shake Shack would invest in new interior and exterior pickup windows to current and future stores, otherwise known as "Shake Track." These will improve the flow of customers and encourage digital ordering, and provide a critical urban-development option for stores that can currently only serve guests who walk in the door (no drive thru) or order delivery—a less profitable channel for Shake Shack, which recently opened the service to multiple vendors (Uber Eats, DoorDash, Postmats, Caviar) after an exclusive deal with Grubhub, and started selling meal kits in collaboration with Goldbelly.

    The windows could also help third-party delivery drivers. Garutti said earlier: “Across urban, suburban, shopping center, and pad site locations, we expect these new pickup points with both interior and/or exterior access will support our goals of convenience while allowing Shacks to be what they've always been for our fans. These plans will take time, but we're bullish on the opportunity we believe they represent.”

    Shake Shack has not provided a target for how many stores will be retrofitted with a “Shake Track.” And the company said it doesn’t expect a material increase in new build as far an investment.

    To the lease point, however, Garutti did say the current dynamic could alter how it evaluates site selection as it considers where pick-up windows fit.

    A look at a (expectedly) difficult Q2

    Shake Shack’s Q2 revenue came in at $91.8 million, including licensed revenue of $2.3 million.

    The brand’s sales also took an estimated $3.2 million hit due to nationwide protest activity and resulting curfews that resulted in some temporary closures and reduced operating hours, it said.

    Overall, same-store sales declined roughly 49 percent, year-over-year, driven by a 60.1 percent plunge in traffic and an increase in price mix of 11.1 percent.

    Shake Shack said comps improved throughout the quarter, running negative 64 percent, negative 42 percent, and negative 42 percent for April, May, and June, respectively. After adjusting for the impact of protests, same-store sales showed sequential growth, with June delivering a drop of 39 percent, and Q2 negative 47 percent.

    Corporate units’ most recently average weekly sales were $58,000—an increase of 18 percent compared to the week of April 29.

    (Dollar amounts in thousands)

    Q2

    Four-week period ended April 22

    • Average weekly sales: $32
    • Total year-over-year sales growth: –56 percent
    • Same-store sales: –64 percent

     

    Four-week period ended May 20

    • Average weekly sales: $50
    • Total year-over-year sales growth: –32 percent
    • Same-store sales: –42 percent

     

    Five-week period ended June 24

    • Average weekly sales: $52
    • Total year-over-year sales growth: –32 percent
    • Same-store sales: –42 percent

     

    Q3 week ended July 1

    • Average weekly sales: $58
    • Total year-over-year sales growth: –22 percent
    • Same-store sales: –39 percent

     

    One of the anvils on Shake Shack’s performance currently is its New York City volume. Despite the fact 85 percent of the brand’s units are located outside the Big Apple, its home base houses the prime performers. For the most recent fiscal week (ended July 1), NYC same-store sales declined 58 percent versus the prior year. And with the region accounting for about 20 percent of the company’s total sales in Q1 prior to the COVID-19 outbreak, “it will continue to have a notable impact on total company sales performance until there is a material recovery,” the company said.

    It also noted NYC is expected to take longer to bounce back than other parts of the country. As of today, the city doesn’t allow indoor dining, and hasn’t provided a potential date for reprieve.

    Same-store sales for the week ended July 1

    • NYC: –58 percent
    • Northeast: –24 percent
    • Southeast: –32 percent
    • Midwest: –42 percent
    • West: –35 percent
    • Total: –39 percent

     

    Shake Shack said a number of previously closed locations reopened throughout June as markets allowed. However, they’ve come back on line with “significantly reduced sales volumes.” Still, they’re contributing positive to store-level operating profit by remaining open, the company added.

    By Tuesday, six restaurants remained fully closed, up from 17 at the end of Q1. All remaining restaurants at that time were running in a to-go capacity only, with closed dining rooms.

    When Q2 ended, about 60 percent of units were operating with dining rooms at limited capacity. In recent days, though, the company admitted some interior and patio dining rooms have “once again closed for safety reasons” alongside case spikes across the country. No further detail was provided.

    Dine-in business shifted the digital conversation lately. For the week ended July 1, the company said, digital sales represented about 60 percent of total sales compared to a peak of 84 percent in late April. Shake Shack expects this to gradually slide back over time as dining rooms reopen and in-store sales recover. Digital will remain “a significant component of sales and ongoing growth,” the company said.

    On April 23, Shake Shack extended a 10 percent premium pay raise to all hourly employees. It expects the perk to run through at least July 22. Q2 bonuses were guaranteed at a minimum of 10 percent of salary for all active managers.

    Additionally, Shake Shack said it paid all hourly employees in the field for their normally scheduled hours shortened or cancelled by recent closures and reduced operating hours stemming from protests and curfews.

    It’s continued to pay all health benefit premiums for furloughed employees and covered pay for two weeks for anybody diagnosed with COVID-19.

    On the licensed side, 95 of 121 restaurants are currently open. In the week ended April 29, it was just 59.

    (Dollar amounts in millions)

    Q2

    Four-week period ended April 22

    • Weekly licensed sales: $2.0
    • Total year-over-year licensed sales growth: –65 percent
    • Number of open licensed stores: 56

     

    Four-week period ended May 20

    • Weekly licensed sales: $2.3
    • Total year-over-year licensed sales growth: –59 percent
    • Number of open licensed stores: 59

     

    Five-week period ended June 24

    • Weekly licensed sales: $3.5
    • Total year-over-year licensed sales growth: –47 percent
    • Number of open licensed stores: 91

     

    Q3 week ended July 1

    • Weekly licensed sales: $4.3
    • Total year-over-year licensed sales growth: –39 percent
    • Number of open licensed stores: 95

     

    Shake Shack opened two licensed restaurants post Q1 in Shanghai, China—the first May 28 at the Hongqiao Airport and subsequently on June 28 at the Grand Gateway Plaza.

    In late June, the brand also announced an expansion of its existing partnership with Maxim’s Caterers Limited to open a minimum of 15 additional units across South China by 2030, including locations in Shenzhen, Guangzhou, Fuzhou and Xiamen. This will increase the total number of planned venues for mainland China to 55 by 2030, of which five are open at this time.

    Shake Shack said cash flow is positive at the store level with current sales levels. Enterprise-level weekly cash burn improved to about $200,000 per week, excluding the temporary premium pay increase for employees and new capital expenditures. That's compared to $800,000 per week in early May. It had $184 million in cash and marketable securities as of July 6.