Shake Shack entered 2023 with what CEO Randy Garutti called an "intense focus" on growing profitability. First-quarter results more than proved the plan is working.
In the first three months of the year, restaurant margins were 18.3 percent, a 310-basis-point improvement year-over-year and the highest Q1 profitability since COVID began. Shake Shack generated record quarterly profit dollars ($45 million) and adjusted EBITDA ($27.6 million, 164 percent increase year-over-year) during what's typically the softest sales quarter of the year.
Here's how Shake Shack's operating profit has trended since the start of 2022:
Q1 2022: $30 million, 15.2 percent margin
Q2 2022: $42 million, 19 percent margin
Q3 2022: $36 million, 16.4 percent margin
Q4 2022: $44 million, 19 percent margin
Q1 2023: $45 million, 18.3 percent margin
The fast casual accomplished this feat by implementing a mid-single-digit price increase, raising staffing levels, driving sales into first-party channels, and installing more self-order kiosks inside restaurants.
In April, Shake Shack benefited from a strong mix of sales in its own channels and felt a smaller impact from menu price than it did in the first quarter. The fast casual attracts customers to first-party channels by offering the lowest menu price, early access to LTOs, and value-added daypart promotions.
"We expect for that to continue to be a tailwind for us this year," CFO Katie Fogerty said during Shake Shack's Q1 earnings call. "We have key strategies in place to reward our guests to come into our restaurants, to come in and use our app, and to do delivery through us as well. So we want to see more of that throughout this year, and we think that's going to be a benefit."
In terms of staffing, Shake Shack has improved application flow, turnover, and retention since 2022, which Garutti owed to increased pay benefits and leadership development opportunities at all levels. The chain also started allowing tips for employees.
Shake Shack Lays Out Plan to Build Profitability
Shake Shack Offers More Insight on Drive-Thru Success
How Shake Shack Plans to Win the ‘Delivery Wars’
Shake Shack to Add Kiosks at Every Location
Several labor benefits are coming from kiosks, which double sales compared to 2022. In addition, the ordering channel helped in-store same-store sales jump more than 20 percent year-over-year (kiosks are counted as in-store transactions, not digital ones). Restaurants with kiosks run more efficiently at a time when staffing and retention are still a pain point, Fogerty said.
"While we made significant improvements in the first quarter in our staffing and retention, if I just look back to the third and fourth quarter where the industry was deeply impacted, we were able to leverage kiosks," Fogerty said. "Our operators were able to leverage kiosks as a key tool to let them operate when they were a little bit thin on staffing."
Last year, Shake Shack announced that it planned to implement kiosk ordering—its most profitable channel—in nearly all restaurants by the end of 2023. So far, the brand is ahead of schedule. Shake Shack has installed these machines in 90 restaurants since the beginning of 2022. Because kiosks visually display menu items, average check is higher, with customers more likely to include premium LTOs, burger add-ons, and cold beverages. Plus, these customers tend to stay in the restaurant, meaning Shake Shack saves on packaging costs.
"When you think about the guest experience and what our guests like to see, we still have a portion of guests that come in and they want to have that face-to-face human transaction communication connection with the cashier," Fogerty said. "But we have a ton of guests who come in and they want to just go right to the kiosk. They want to sit there and learn about the menu and see, build up their tray, kind of go from protein to fries to shake, cold beverage, and so forth. And so it's a really amazing experience. If you haven't used one, I highly encourage you to go."
In 2022, Shake Shack racked up nearly $500 million in combined digital and kiosk sales, mixing 57 percent. That's growth from $442 million (62 percent mix) in 2021, $329 million in 2020 (65 percent mix), and $147 million (26 percent mix) in 2019. In stores where kiosks are present, 75 percent of sales come via kiosks or digital orders.
Shake Shack's comps lifted 10.3 percent year-over-year, with traffic rising 4.8 percent. First-quarter average weekly sales per restaurant lifted 7.4 percent to $73,000 ($3.8 million in annualized AUV). That includes $72,000 in January, $71,000 in February, and $76,000 in March. In April, average weekly sales per unit were $77,000, a 4 percent bump year-over-year.
Shake Shack captured record profitability despite headwinds. Food and paper costs were $71.8 million, or 29.4 percent of sales—100 basis points below last year. Blended food and paper inflation increased high single digits compared to 2022, but that was offset by higher menu prices. Labor expenses were $74.3 million, or 30.4 percent of sales, down 30.7 percent year-over-year, but up 150 basis points quarter over quarter. Operating costs were $34.9 million, or 14.3 percent of sales. This decreased 100 basis points versus 2022, thanks to menu price, first-party channels, lower marketing costs, and better management of expenses, like R&M. Occupancy and related expenses were $18.6 million, of 7.6 percent of sales. This was 70 basis points lower than 2022, due to higher sales performance.
Another cost pressure came from 28 new store openings in the past six months, all of which are still working toward optimized staffing levels. But the chain said this is temporary; mature locations have shown an ability to capitalize on strong sales and flow through.
Shake Shack is guiding profit margins of 19-20 percent for fiscal 2023 and a return to plus 20 percent in the future.
"Our operating backdrop is not easy," Fogerty said. "Inflationary pressures still remain, and we believe we have the right plan in place to navigate and continue to show higher operating profitability despite these continued challenges."
The brand opened six company-operated stores and seven licensed units in the first quarter, and there are 25 restaurants under construction. The full-year goal is to open 40 corporate stores and 30-35 licensed locations, up from a previous guidance of 25-30 licensed units. Of those openings, 15 drive-thru stores are expected. Shake Shack plans to reduce drive-thru buildout costs by 10 percent via new and tighter prototypes.
The fast casual ended Q1 with 449 restaurants systemwide, including 295 in the U.S.