Amid talks of inflation and a potential recession, Shake Shack's profit is as high as it's been in years.
In the second quarter, the fast casual reached a 21 percent operating margin—a 240-basis-point increase year-over-year and the best mark since 2019. CEO Randy Garutti called it a level that "few restaurant companies in this country" have ever done. Also, the chain swung a record $37 million in adjusted EBITDA, good for a 370-basis-point improvement from 2022.
"I hope that's the note that people hear a lot going forward as we've grown sales, as we are materially growing this company," Garutti said during the brand's Q2 earnings call. "We are a profitable growth company and it's a really exciting time for us."
CFO Katie Fogertey said Shake Shack's margin outperformance began with strategic pricing and increasing the difference in prices across markets to align with regional and guest demographics. Overall, menu prices were up in the high-single digits in the second quarter. The plan will be to raise prices by 2 percent in select locations in the back half of the year.
"We've gotten better and better in our pricing," Garutti said. "When you think about the geographic disparity of our pricing and our ability to take price in our more expensive, but also higher brand awareness markets, we generally tend to take more price there and we're generally more cautious in those lower brand awareness [markets]. So, we think having the right price, having the right opportunity, is really important as we look across Shacks."
Another major factor is Shake Shack's kiosk rollout. The brand finished the second quarter with nearly 250 restaurants using the self-service technology and more than doubled the channel's sales year-over-year. The company is seeing an increase of almost 10 percent in average check compared to front-counter sales. Customers are buying more items per order and paying for higher-priced products. Also, because most of these orders are dine-in occasions, Shake Shack saves on packaging. For all of these reasons, kiosks are the chain's most profitable channel.
Right now, Shake Shack's priority is to drive adoption of kiosks. Fogertey says there's future opportunity around upselling and personalized marketing.
"What [average check lift is] coming from is really, I think, people being able to sit with the visual merchandising of our product," Fogertey said. "We see a higher instance of LTO sales on that. And I think that when you get to see the very exciting items that we're promoting up there, guests are interested in that. I think it comes across a little bit differently on the kiosk channel than on our traditional menu boards. You're also seeing greater instances of sales of our premium cold beverage as well and shakes, which has obviously very nice margin on that side."
Thanks to the technology, same-store sales and traffic for dine-in grew 10.7 percent and 4.7 percent, respectively, in the second quarter. To start Q3, Shake Shack earned record kiosk average weekly sales and continued to build in-store traffic. The machines will be in almost all U.S. restaurants by the end of Q3. That's a full quarter ahead of schedule. More than 30 stores underwent the kiosk retrofit in Q2, and there's about 15 locations left.
In addition to pricing and kiosks, Shake Shack is earning more profit by using fresh weekly sales forecasts and demand-generated labor schedules.
"You're able to be much more nimble and react much quicker to changes in consumer behavior, where we can staff up and staff down to reflect that change instead of being a little bit more lagged and delayed," Fogertey said.
Profit margin has also benefited from Shake Shack streamlining packaging, condiments, and utensils for to-go orders and rebuilding its training programs, which has had a positive impact on throughput and pre-opening expenses.
Shake Shack used 50 fewer labor hours per store in Q2 versus 2022 through a combination of labor budgeting, standardized scheduling practices, and kiosks. Second quarter labor and related expenses were $75.2 million, or a 28.7 percent of sales, down 80 basis points versus last year and down 170 basis points quarter-over-quarter. Garutti said the brand is experiencing the best turnover numbers it's seen in years.
With employees not as tied up with taking orders, they're now able to bring food to customers in the dining room instead of guests waiting for a text message and picking it up at the counter.
"We're adding that added level of service," Garutti said. "We've been doing that for about a year now. That's all part of the shift in the way we can optimize our labor instead of taking an order, where guests would prefer to do it themselves and our kiosks benefit in all the ways you heard. We can spend that time and effort and put our hospitality toward a different part of the experience. And we found that people are really enjoying that."
Systemwide same-store sales rose 3 percent versus last year and average weekly sales increased 1.3 percent to $77,000, or $4 million in annualized AUV. Shake Shack's White Truffle menu contributed to a strong April, but the lineup sold out early. As a result, same-store sales slowed in May before rebounding in June and strengthening even further in July.
Shake Shack ended Q2 with 471 restaurants around the world after opening 10 U.S. company-operated stores and 13 licensed units. That breaks down to 305 U.S. and 166 international locations.
Overall traffic declined 1.3 percent, which the fast casual attributed to a decrease in delivery caused by its fortressing strategy in California and the East Coast. The company noted that it's building out certain markets to realize better economies of scale over time, but it emphasized that it will take time to stabilize, acquire new guests, and drive more frequency.
The chain now has 18 drive-thru restaurants—some have hit cost budgets, while others have gone over. Shake Shack has meticulously worked to bring down the expenses of this higher-priced prototype; build-out costs were down 10 percent year-over-year in the second quarter. Next year, drive-thrus will be placed in strong coastal markets like Long Island, New Jersey, and California, which should bring higher AUVs and brand awareness.