Operations

Shake Shack beats Q1 estimates, warns on beef prices

May 5, 2020

Shake Shack CEO Randy Garutti said that although COVID-19 has rocked the chain, total revenue increased 8% during Q1, which ended March 25. Same-Shack sales, however, decreased 12.8% for the fiscal first quarter of 2020 versus an increase of 3.6% in the first quarter last year, primarily driven by reduced traffic caused by COVID-19.

"Our message across the company has been consistent — to lead with hope, while acting on reality, and to make the necessary choices today to ensure our strength and growth continue for many years to come."

That strategy includes pausing growth to conserve cash, but Garutti said the company has a number of locations across various levels construction and will resume development as the operating and construction environments stabilize.

In March, Shake Shack closed all dining rooms and temporarily shifted to a "to-go" only operating model in all of its domestic company-operated Shacks. As mandated shutdowns and stay-at-home orders went into effect across the country, it experienced a drastic reduction in sales levels compared to the prior year, Garutti said.  As of April 29, 17 domestic company-operated Shacks were temporarily closed and the majority of Shacks were operating with reduced hours and in a limited capacity. Also, 61 of the 120 licensed Shacks were temporarily closed, including all Shacks within Japan and domestic stadium venues. U.S. airport locations have also either fully closed or significantly slowed as air travel has diminished to a near standstill.

Despite the challenges, some positive signs have begun to emerge, Garutti said, including a steady increase in domestic sales driven by growth in its own digital channels and the expansion of integrated delivery partnerships. The company's licensed business is also starting to experience small signs of recovery with dining rooms re-opening in Korea, Hong Kong and mainland China in a limited capacity. However, there is no assurance as to the time required to fully recover operations and sales to pre-pandemic levels. 

"By doubling down on our digital strategies and with increasing engagement through both our own, and third-party delivery channels, we have continued to see week-over-week improvement in sales in all regions, since the lowest point at the end of March," Garutti said.

The team will continue to make adjustments to its cost structure based on reduced operations but has started the rehiring process for some furloughed team members

"It’s difficult to predict when and how quickly we will fully rebound once stay-at-home regulations are lifted, but our first priority will continue to be to keep our teams and our guests safe, as we carefully re-open Shacks," Garutti said. "Given the actions we’ve taken to bolster our balance sheet, we are in a strong position to resume execution of our long-term strategic growth plan as we continue to come through the other side of COVID-19."

As the company moves through this transition and sales ramp up, it expects to incur some labor inefficiencies as it adjusts to new protocols and operating models and will also incur additional costs necessary to keep teams and guests safe, such as face coverings, gloves and additional secure packaging for all orders, directional signage and cleaning supplies, which are all expected to be ongoing for a period of time, Garutti said.

On a conference call with analysts, Shake Shack executives said they have seen a surge in beef prices in recent weeks linked ot the shut down in meat facilities amid COVID-19 exposure.

"The plants that we use have not been impacted, although many plants you've seen across the country are working at reduced schedules," he told analysts on the call.

Financial Highlights for the First Quarter 2020 compared to the First Quarter 2019:

• Total revenue increased 8.0% to $143.2 million.
• Shack sales increased 7.4% to $138.0 million.
• Same-Shack sales decreased 12.8%, with approximately 2% decrease in fiscal February year-to-date, and approximately 29% decrease in fiscal March.
• Licensed revenue increased 26.8% to $5.1 million.
• Shack system-wide sales increased 13.5% to $221.6 million.
•  Shack-level operating profit, a non-GAAP measure, decreased 2.4% to $26.4 million, or 19.1% of Shack sales.
•  Net loss attributable to Shake Shack was $1.0 million and adjusted pro forma net income was $0.8 million, or $0.02 per fully exchanged and diluted share.
• 12 system-wide Shack openings, comprised of four domestic company-operated Shacks and eight net licensed Shacks.