Same-store sales rose 10.1 percent in Q2 year-over-year, a significant step down from previous guidance of low-to-mid teens. Sales trajectory remained within projections through April and May, but similar to the rest of the industry, numbers softened in June. And in July, comps rose just 4.8 percent. Shake Shack attributed the slowdown to less traffic from the lower-end consumer, a sluggish comeback to urban-based offices, and a return to traditional seasonality.
Urban comps rose 19 percent year-over-year, and would’ve been stronger if not for a lack of consumer mobility (tourism, office work, transit, etc.). Manhattan same-store sales lifted 37 percent year-over-year, however, weekday, lunch, and dinner traffic is still down more than 40 percent on average versus 2019. Suburban same-store sales increased 3 percent, lapping 52 percent growth in the year-ago period.
Because of increased challenges with equipment and permitting delays, Shake Shack lowered its corporate unit development guidance to 35–40 restaurants in 2022, down from its initial 45-50 expectation. But, the chain now believes it will open 25-30 licensed locations this year, an increase from its 20–25 prediction. Next year, a majority of openings will be drive-thru and drive-up models, but Garutti said that doesn’t mean Shake Shack will abandon its legacy urban model.
“We're believers in the urban ecosystem,” he said. “We're believers in those high-volume shacks, that have led the company for so long, that continue to be deeply impacted. We think they're going to continue to get back over time.”
“ … We are going to build a lot of urban shacks next year,” Garutti added. “And otherwise, we're also going to go to some new markets next year. So as we target a really robust pipeline, it's going to be diverse, it's going to have a lot of formats. And it's going to take on lots of trends that will help balance that portfolio over time. The imbalance of our portfolio towards heavy urban centers, traditionally, has been the challenge for us.”
Shake Shack ended June with 395 units systemwide, including 257 in the U.S. On Wednesday, the brand opened its 400th restaurant worldwide. The fast casual’s long-term goal is to have 450 locations in the U.S. alone.
Although the brand saw weakened sales, operating profit margin came in at 18.8 percent—one of the best-performing quarters since the onset of COVID. Total operating profit dollars was $42 million, a company record. The profit margin was aided by sales leverage, lower-than-anticipated beef costs, and pricing. Food and paper costs were 29.6 percent, an improvement from 30.3 percent last year. The chain is expecting low-double-digit inflation through 2022 from chicken, dairy, paper and packaging, and potatoes. Labor expense was 29.5 percent, up 50 basis points from 2021. Starting wages have risen high-single digits year-over-year as Shake Shack looks to fill out staff rosters.
Shake Shack earned $352 million in systemwide sales in the second quarter, with 38 percent coming from digital channels; that's a decrease from 43 percent in the first quarter with more guests returning to the dining room.
The brand will implement 5–7 percent pricing in Q4. Same-store sales are expected to be in the mid-single digits for the third quarter, well below BTIG’s initial estimate of 12.5 percent. Operating profit margin is projected to be 16–18 percent, but BTIG believes this could be a conservative estimate.
“We view Shake Shack as a compelling fast-casual concept with ample development opportunity both domestically and overseas,” BTIG analyst Peter Saleh said in a note. “Shake Shack is the preeminent concept within the better burger category and the rare restaurant chain whose awareness and brand recognition exceed its actual size and sales base. While the brands' development outside of New York City and major urban areas has brought lower new unit returns, greater sales volatility and a weakening margin profile, we believe margins have bottomed and are set to inflect higher over the next 12-18 months.”