New York City is seen as a fast-paced metropolis whose people have little patience and hate having their time wasted, but that’s not really the case for Shake Shack, the chain’s new CEO, Rob Lynch, told investors in a conference call announcing its earnings for the second quarter, ended June 26.
Shake Shack started 20 years ago as a hot dog stand in Madison Square Park in Manhattan, and developed a cult following of people who happily waited in line for the food.
“As you move from all of your Shacks being in Manhattan … where a lot of folks are walking up to the Shacks and they're used to waiting in line … and we start to compete against other brands in other markets, in Ohio and Georgia and Texas and all these other places, speed becomes something that’s part of the overall guest experience … especially as you move into a more drive-thru format.”
Chief financial officer Katie Fogertey said that during the past quarter the company added speed of service as a key performance indicator for the restaurants.
Improving throughput at the chain, without compromising on food quality and its made-to-order approach, is one of Lynch’s key priorities and an important strategy for improving unit economics.
Those economics are already pretty good, and getting better: Restaurant-level profit margins were 22% in the quarter, up from 21% in the second quarter of 2023 and the highest margins since 2019.
Same-store sales were up by 4% compared to a year earlier — the 14th consecutive quarter of improved comps — and net income was $10.4 million, compared to $7.2 million a year ago. Earnings were $9.7 million, or 23 cents per share.
Lynch said the chain was largely unaffected by the “value wars” happening down-market, in part, he acknowledged in responding to a question, because Shake Shack customers skew relatively wealthy. But in his prepared remarks he said the chain’s premium positioning was a strength.
“Our team has been nimble and begun to employ strategic promotions to earn more than our fair share of transactions,” he said.
Those promotions included an April marketing initiative highlighting the fact that it used proteins never treated with antibiotics — a dig at Chick-fil-A, which at the time announced it was dialing back its commitment to using such products.
That was followed around Memorial Day with new burgers and fries topped with two choices of barbecue sauce.
“It is remarkable that we've been able to do this while also growing our restaurant-level profit margins.” Lynch added. “Our teams have truly struck the right balance between product innovation, pricing to mitigate inflation, technology implementations, and strategic promotions. This is the model that we will leverage moving forward regardless of the macroeconomic environment, and given results so far I have a lot of confidence in this team's ability to keep the momentum going.”
One key addition to that team is the company’s new chief operating officer, Stephanie Sentell, with whom Lynch worked previously when the two were at Arby’s, and he said she’ll be working on improving efficiencies, particularly at drive-thus.
“Our drive-thru times are exceedingly too long,” Lynch said, about twice what they should be.
“You talk about success at the drive-thru. We really haven’t had that yet,” he said, adding that Shake Shack was primarily a dine-in experience when the pandemic hit, and the company moved quickly to adapt to the new realities.
It was at that time that Lynch’s predecessor, Randy Garutti, spearheaded the opening of restaurants in suburbs and the addition of drive-thru locations, of which Lynch said the chain now has “30 to 35.”
Part of the slowness comes from the ordering process, he said, noting that the drive-thru menu looks the same as the dining room menu.
“We don’t have tools like combos and other things … that can improve the speed of ordering.
“We don’t have standardized linear lines across all of our drive-thrus,” he added. “So people are moving around; there’s a lot of steps to get to the drive-thru window.”
The kitchens also need to get faster, he added.
“We execute pretty good accuracy. The team does a good job making food fresh and making it right. We’ve got to get faster. And we will.”
Lynch later added: “I don’t know that there is another brand that has more upside opportunity on throughput than we do.”
He said Sentell, the new COO, has hit the ground assessing operations in individual restaurants. “I probably get about five texts from her every day about opportunities for us to get better,” he said, adding that they wouldn’t compromise on quality.
Lynch also pointed to initiatives that leverage the chain’s loyal customer base, including building a loyalty program, which he said was currently in the works.
The company said same-store sales for July were up 7.1%.
For the third quarter, Shake Shack said it would open six to seven company-owned restaurants and around seven licensed locations. Revenue is projected at $311.6 million to $317 million, with same-store sales in the low single digits and restaurant-level profit margin at 20% to 20.5%.
For the full year it projected opening a total of 40 company-owned and 40 licensed restaurants with revenue of $1.24 billion to $1.25 billion. Comps are expected to be in the low single digits and restaurant-level margins are projected to be 20.6% to 21%.
Shake Shack’s Q2 by the numbers:
Revenue: $316.5 million, up 16.4%
Systemwide sales: $483.7 million, up 13.5%
Same-store sales: up 4%
New restaurants: 12 company-owned, including three with drive-thrus, and 11 licensed locations
Traffic: down 0.8%, but turned positive in July
Contact Bret Thorn at [email protected]
