Shake Shack Turns to Growth After Challenging Quarter

Even though Shake Shack ended the third quarter with same-store sales down 0.7 percent, the company remains positive as it looks toward the future. The chain said it still expects to end 2018 strong and is looking ahead to massive growth opportunities domestically and internationally over the near future.

With an aggressive expansion strategy, changing labor and operation costs, the decrease of about $500,000 during the third quarter is a small setback for the brand’s long-term growth strategy, it said. Also contributing to the decline in sales was a drop of 4 percent in guest traffic.

“Comparatively, in the third quarter we added $25 million in new sales while experiencing a decrease in same Shack sales of approximately $0.5 million or 0.7 percent,” Shake Shack’s chief financial officer Tara Comonte said during an November 1 conference call. “[While] none of us prefer to see a lower quarterly comp figure, we do believe this is a metric that will continue to show some degree of volatility for as long as we are aggressively expand and growing market share.”

“We believe in that overarching market growth strategy that continues to pay out solid top- and bottom-lines dividend and we remain squarely focused on building an extraordinary company for the long-term,” she said.

Shake Shack is in it for the long run. Shake Shack’s chief executive officer Randy Garutti said the fast casual would continue to grow, improve, and innovate as its footprint expands.

“We continue to build quality Shake Shacks in great size this community and experience at the heart of their design and location. That will drive our brand for decades to come,” Garutti said. “We are encouraged by the early performance of 2018 class Shacks and expect to deliver a largest class of Shacks to-date in 2019.”

New York City and the Northeast are two markets that make up two-thirds of the same-store sales base for the company. During the third quarter, these markets also experienced a large number of openings, increasing new sales overall.

“We want to meet that demand. We think that demand is only going to continue to increase in this next few years.” — Randy Garutti, Shake Shack CEO

Even with a negative quarter, the sales reported for the new restaurants in these markets is impressive, Garutti said.

“If you look over the course of the trailing 12, you know we have—over the course the last couple of years you know we have had slight ups and downs in the comp base and we have added a heck a lot of sales,” Garutti said. “So, I think that is really the point that we see, for our balanced approach to market share.”

Over the past year, the New York City and Northeast markets added $15 million to $21 million of new sales, Comonte said. For the company as a whole, Shake Shack added $93 million in total sales over the past 12 months, experiencing the overall increase in same-store sales as roughly 26 percent.

“We never want have a negative comps, not something we ever are happy with and we are always going to drive toward our strategies of having that be positive and we will not rest on that,” Garutti said. “That said, when we add nearly $35 million in this last 12 months in just those two regions and we looked a little bit on comp that may happen from time-to-time and we are still in its really early phase of filling some of these markets.”

Testing Tech

Convenience and overall guest experience are high up on the company’s priority list. Shake Shack is working to improve the brand’s digital footprint and experimenting with new menu items to make sure it stays competitive with other fast-casual brands.

The company has seen demand on the digital side from customers and is working on new technology to accommodate guests. A new online ordering platform, featuring mobile and desktop ordering capability, is currently being tested at 10 locations. By the end of the year, Shake Shack will test self-order kiosks in 20 additional restaurants.

The transition is a work in process, and by testing in different markets and locations the company is working out how to incorporate the new technology without disrupting the existing experience, Garutti said.

“We know convenience is more important than ever to our guests,” he said. “… We know that digital channels continue to grow as a percentage of our total sales and we know that they generally have a higher average check.”

“We continue to add complexity for already busy Shacks. These additional channels can at times complicate our kitchens and at peak times create certain flow issues in the front of that,” he added.

Learning how to optimize existing kitchens and restaurants to accommodate the new channels of ordering is a process of trial and error. However, with actual customer experience and feedback, Shake Shack is able to incorporate what is and isn’t working into the overall design of the brand, Garutti said.

“We know we have got a long way to go. We are excited about the opportunity and growth we believe continue digital expansion represents for our business,” he said.

Bryan Reesman

Shake Shack's Innovation Kitchen opened in October.

Diving into delivery

Delivery is a gray area for Shake Shack. The brand knows the demand is there for a fully functioning integrated delivery system, but it is currently evaluating how to do this without sacrificing the overall guest experience, Garutti said.

“We want to meet that demand,” Garutti said. “We think that demand is only going to continue to increase in this next few years.”

When it comes to menu innovation, Shake Shack recently opened a new test kitchen and named John Karangis as the brand’s new executive chef. The core menu is what draws customers in, but Shake Shack is hoping to keep guests returning with new and different menu items.

The new innovation kitchen, which is located at the West Village Shack in New York City, will help bring fresh menu items to fruition and refine the strategy to roll out new products across the brand.

“Our strategy is to deliver excellence across our core menu while testing and innovating around it,” Garutti said. “This new space is now home to our culinary team and serves as a hub for all the menu development and innovation across the company. We continue to innovate around the core menu, while testing new categories and menu items to draw our guest excitement engagement.”

Some of the new products Shake Shack is currently testing include a veggie stack and chicken bites. The brand has also seen success in LTO menu items like hot chicken, which was brought back after a successful first run in restaurants last year.

Looking toward the future

During the third quarter, the company expanded on the East Coast and in Colorado. Seven new units opened in New York, Denver, Nashville, and Birmingham. Going into the fourth quarter, expansion will continue with six more locations. In total, by the end of 2018, Shake Shack will have opened 33–34 new restaurants for a system of 123-124 units.

The first airport Shake Shack opened in Atlanta’s Hartfield-Jackson airport during the third quarter. Airport expansion will continue into 2019 with openings in Dallas, Cleveland, and Denver, Garutti said.

Looking toward future development throughout 2019, Shake Shack estimates it will open between 36–40 new restaurants in the U.S.

“We will be innovating for future growth and we do this by investing in our infrastructure, continuously refining how we operate, improving our product offerings, and identifying opportunities beyond today's future,” Garutti said. “All this while standing for something good, taking care of our team, and focusing many years down the road on the unique opportunity that Shake Shack has around the world.”