A sales boost, and the evolution (and cost) of growth
Shake Shack closed fiscal 2018 on a high note from a top-line perspective. Its same-store sales gains of 2.3 percent were the best in more than two years. Comps climbed 0.8 percent in the year-ago period. Q4’s run was driven by a 2.6 percent increase in price and sales mix partially offset by decreased guest traffic of 0.3 percent. Traffic fell 2.7 percent for the full year. Average weekly sales for domestic company stores also dropped to $81,000 compared to $85,000. This has been a common theme during Shake Shack’s growth as it adds lower-volume stores into the base. While that might sound negative, opening in Virginia isn’t like opening in Manhattan. Sophomore restaurants in new markets also tend to generate lower volume than first-to-market locations in Year 1. AUVs for all domestic stores were $4.4 million this past year, down from $4.6 million in 2017. By the end of 2019, Shake Shack expects the number to decline to $4 million to $4.1 million.
The change is a reflection of Shake Shack’s broader growth, CFO Tara Comonte said, and one the company forecasted when the expansion really began.
Shake Shack also saw its operating profit margin dip to 22.5 percent in Q4, down 2.7 percent, year-over-year. The hit comes from costs related to growth, the company said, as well as accelerating labor pressure. Shake Shack expects similar impacts on operating profit in 2019 as it continues to expand and shoulder construction costs, and labor remains challenged.
But Comonte said Shake Shack would keep a long-term view on costs. The same is true of labor. “We believe in building the right way for the long term and you should expect to see us continue to deploy spend in our people, in our guest experience, and in our underlying technology that we believe will deliver both leverage and compelling long-term returns for our shareholders,” Comonte said.
Shake Shack created nearly 2,000 jobs last year and promoted upward of 1,100 employees internally. It's also issuing additional equity awards of $10,000 to each of its general managers in Q1 2019—the first time it’s done so since the IPO.
“You see us making continued new investments in general managers and all of our managers, frankly,” Garutti said. “But that will be something I would imagine will be the No. 1 challenge forever in our business. We’re in a people-led business. It’s also our sweet spot. It’s also what we do better than anyone and it’s how we’re going to continue to invest so that we have restaurants that are standing with great leaders decades from now. But it’s never going to be easy.”
What’s also worth considering is the evolution of Shake Shack’s multi-format real estate strategy. The brand’s portfolio is as varied by build and fit as they come in fast casual, similar in some ways to how Starbucks populated dense urban locations during its boom. There are freestanding pads, urban high street stores, and shopping centers, among others. Shake Shack even opened its first premium food court location in Miami recently and rolled out two food trucks in New Jersey and Atlanta. The first booking served Maroon 5 after the Super Bowl.