Industry News | August 4, 2017 | By Danny Klein | QSR Exclusive Brief

Shake Shack: Don't Focus on Negative Sales

Same-store sales are declining at Shake Shack. But does that tell the entire story? flickr: Mike Mozart
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A continued slip in same-store sales, along with a weak outlook for 2017, sent shares of Shake Shack tumbling nearly 5 percent in after-hours trading Thursday afternoon. The second-quarter sales declines of 1.8 percent missed Wall Street estimates of flat growth and followed a first-quarter where comps dropped 2.5 percent. Shake Shack also reported a 4.3 percent decrease in traffic partially offset by a 2.5 percent increase in price and mix.

Additionally, Shake Shack revised its outlook for the year from flat sales growth to negative 2—3 percent.

While shares reflected the negative numbers and investor concern, CEO Randy Garutti said the true results tell a different story. First, the comparable Shack base only includes restaurants open at least 24 full fiscal months. That equates to just 37 of the chain’s 76 company-operated units.

“For the second quarter, Shacks outside of our comp base contributed $24.5 million to our year-over-year increase in revenue. Compare that with the $900,000 that the comp base 1.8 percent decline represents and you'll see why same-Shack sales is not a metric to be looked at in isolation nor overstated at a broader context,” Garutti said in a conference call.

These comps are also measured against 2016’s bullish performance, where sales increased 4.3 percent in the second quarter. Garutti said regional factors, “which can swing the base dramatically,” also disproportionally impacted sales. Similar to the first quarter, this included inclement weather in the Northeast, where increased rainfall slowed customer traffic.

Shake Shack’s rapid growth is shifting the scales as well. Total revenue rose 37.4 percent to $91.3 million versus $66.5 million in the prior-year period. Sales were $88 million compared to $64.4 million, or an increase of 36.6 percent. This can be credited to 24 new domestic company-operated Shacks year-over-year. In the quarter, four domestic stores and three net licensed units opened. Eleven company restaurants have debuted year-to-date. Garutti said the company remains on track to open 24 company-operated stores in 2017, and plans to introduce at least 15 net licensed restaurants. That measures out to company-operated unit growth of about 37 percent and license unit growth of 30 percent compared to last year. During the remainder of 2017, Garutti said Shake Shack will enter St. Louis and San Diego for the first time, while expanding in New York City, Washington D.C., Texas, Michigan, California, and more. In 2018, expect Shake Shack to join the Milwaukee, Cleveland, Charlotte, and Denver markets.

“In terms of future openings, we will continue to build Shacks where we have secured prime real estate sites and where we see clear and demonstrable growth opportunities,” he said.

The brand opened a location in Minute Maid Park in Houston and at the LAX Terminal during the quarter as well.

Shake Shack also continues to believe in its hometown, New York City. There are 10 Big Apple locations, which report average unit volume of more than $7 million and represent north of 40 percent of the aggregate comp sales in the brand’s base.

Garutti announced during the call that Shake Shack is opening two new New York City stores in the coming months—one at Astor Place and another near Columbia University on 116th and Broadway.

A question the brand faced in the first quarter and addressed again Thursday regarded a cluster strategy, and whether or not Shake Shack was cannibalizing its own stores in certain areas. Garutti used an example in Philadelphia to illustrate Shake Shack’s efforts.

In September, the brand opened a second store inside the King of Prussia mall after measuring the success of a nearby pad site location. He said the two stores should generate more than $6.5 million in sales this year, nearly doubling the revenue from this location.

“However, only the original Shack is in the comp base and as expected, its topline is impacted when we look at it on a stand-alone basis,” he says. “Let me say it again: Two Shacks within a square mile of each other, bringing in over $6.5 million, adding sales and profit yet creating noise within the comp. These are first and foremost great real estate opportunities for prime locations. Count on us to make that decision every time.”

“Look, we never want to see any Shacks have a decline in its sales,” he added later in the call. “But when we see that there's a clear operating profit, sales increase opportunity and a Shack may impact another one, if it's a great real estate opportunity—we're managing this company for a lot of dollars, not for percentages. We've talked about that since the beginning of time.”

Shake Shack’s international growth is ramping up. In the quarter, the brand added two stores in Seoul, South Korea, and has plans to construct 25 in the next 10 years. The fourth store opened in Tokyo and Shake Shack recently announced its plans to launch in Hong Kong with 14 total restaurants in the coming decade.

Digitally, Shake Shack remains in transition. In July, the Android version of the Shack app launched, and Garutti said average check reports higher with those users. Garutti also addressed the topic of delivery—a space Shack Shack has not infiltrated thus far. But it could be coming.

“We know, of course, that dialing up delivery availability is a growth opportunity for us, but we will continue to explore options in a thoughtful and considerate manner. What's most important to us in this moment is that we don't focus on short-term delivery dollars without ensuring the full Shack experience remains at its best,” he said. “First and foremost, quality is a key component of the Shake Shack value proposition, and it's critical that we maintain that fullest expression of the Shack experience in a delivery model. On that basis, packaging is critical to a high-quality food and hospitality experience. So right now we're testing new to-go and delivery packaging in a few of our Shacks.”

On Tuesday, the chain launched its chatbot throughFacebook Messenger and Twitter Direct Message via Conversable. “Now our guests can get immediate responses from the chatbot to learn about menu, featured items, nutritional info, hours and many of their favorite questions. It's early stages for sure, but we're having fun with it,” Garutti said.

The brand is also testing new renovated restaurants with improved kitchen flow later in the year. The Astor Place location is one spot. Garutti said the company will share results later in the year.