The first California location for Shake Shack Inc. has drawn such long lines and strong sales that the chain is increasing its expectations for new unit sales and bolstering its unit growth plans in California.
Randy Garutti, the chain’s CEO, said that the West Hollywood opening was “one of the strongest openings in our 12-year history.”
The New York City-based chain is now planning four additional locations in Southern California through 2017, with units planned for Glendale, Hollywood, Century City and downtown Los Angeles.
Executives said on the company’s earnings call late Thursday that lines at the West Hollywood location were over an hour long since early March.
“L.A. is performing well above expectations,” Garutti said. “We’re beyond excited about the acceptance of Shake Shack.”
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The strong opening in Los Angeles, along with two locations in Arizona, give the company more confidence that its new units outside of its home market on Manhattan will open to stronger volumes than previously expected.
New locations had previously opened with first-year volumes of $3.3 million. The company now expects that to be $3.6 million this year.
And the company is opening more locations this year than it initially expected. Shake Shack originally planned to open 13 locations. It is now opening 16, plus at least 16 locations next year.
The growth chain is coming off of a strong first quarter, in which its same-store sales rose 9.9 percent on top of an 11.7 percent increase in same-store sales a year ago.
But the company is also small. It operates 47 domestic company operated locations, and 88 units overall; plus, Shake Shack only measures sales in 20 locations to calculate its same-store sales number — a small base of units that makes the number more prone to large changes at one or two locations.
Still, executives were excited about the results. So were investors, who drove Shake Shack’s shares more than 6 percent higher on Friday.
Executives gave some credit for their strong sales in the quarter. But they gave much of the credit to the chain’s new Chick’n Shack sandwich.
“We believe this item could be a long-term game changer for Shake Shack,” Garutti said. “Chick’n Shack is driving excitement among current fans. And it gives guests another opportunity to come back to Shack.”
It also could help the chain’s long-term exposure to commodities, because it won’t be so beef centric.
At this point, the beef-centric commodity basket is helping the company. Beef costs fell 11 percent in the first quarter. Food and paper cost as a percentage of revenue fell 170 basis points to 28.8 percent.
But the company also views the sandwich as a potential base for limited-time offers and localized sandwiches. The chain offered a Crispy Peking Chicken sandwich in the Washington DC market last month for 10 days.
“It’s really early, but our culinary team is really excited about what other kinds of things we can do with chicken,” Garutti said. “Our test kitchen is constantly kicking out fun ideas.”
Executives said the chicken sandwich had a bigger impact on the company’s same-store sales in the quarter than the other big move the chain made: Higher pay for employees.
Team members now start between $10.50 and $12 an hour. And team leaders and trainers make between $12 and $15 an hour. That’s resulting in higher labor costs, but those costs have been offset by strong sales growth — Shake Shack expects labor costs as a percent of sales to fall 75 basis points this year.
“We’ve people raises across the country,” Garutti said. “We believe our team is more excited and more motivated than ever. They’re just doing a better job. And every year we get a little better at operating and at throughput.
“But it was really all about chicken this quarter.”
Contact Jonathan Maze at [email protected]
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