Shake Shack 4Q16 Earnings Call Notes

Randy Garutti

Grew sales 20% though comps just 1.6%

“Looking at the fourth quarter, we grew total revenue over last year by 43%, driven mostly by 20 new domestic company-operated Shacks and Same-Shack sales growth of 1.6%. While trends were strong throughout October and November, Same-Shack sales performance softened in December; and this was driven by various factors, primarily the holiday shift contributing approximately 80 Bips of pressure, as well as comparatively colder weather in the Northeast region which makes up a high percentage of sales in our still very limited comp base of just 30 Shacks.

Rethink the restaurant w/ mobile pre-ordering

“Now let’s get to the Shack App. As we look into the future of Shake Shack, we know our business will continue to evolve as our guests’ expectations change. I’m fairly certain that my own young children will experience retail and restaurants in a very different way than I did. When we look at the digital landscape, our future is focused on removing those constraints and friction points that previous generations have accepted as a way of life, knowing that future generations just won’t accept it. For Shake Shack, that evolution begins now with our Shack App. Today, it’s focused on mobile pre-ordering.”

Push promotions through the app

“In mid-January, we turned on the gas and for the first time in Shack history, we chose to reward guests with a free Shack burger anytime they downloaded the app. Through February, the Shack App has been downloaded over 200,000 times and we’ve given away nearly 90,000 free Shack burgers which has translated into approximately 6% of our total orders nationwide. We do expect that percentage to decline now that the free burger promotion has ended and as we’ve set on to a more normal user rhythm.”

Don’t anticipate price increase, but labor is an issue

“No, we do not intend another price increase but as we said, labor is quite a Q4 and we’ve gathered that life really — that levers going to that we have a lot of minimum wage increases here in 2017 we are going to have them again in 2018 and 2019. We do business and the majority of our business will be in the highest minimum wage areas. Will also continue pay our managers better and necessary or play conference. With the best team we can to continue to ramp up growth”

JEff Utzz

Beef and dairy costs down

“Our beef costs have decreased both sequentially quarter-over-quarter and on a year-over-year basis. Beef was down approximately 8% over the prior-year fourth quarter. Our outlook for next year is that beef and dairy will continue to be down slightly on a year-over-year basis for the first half, but up on a sequential basis, with prices remaining flat in the back half of the year. ”

Andrew Sohn Notes: KORS, SHAK, M

Andrew Sohn, a junior at Columbia University, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Andrew has read this week.

 

KORS

 

Cannibalization of mall traffic

“In North America, we experienced a high-single-digit comp decline, reflecting a channel shift to online purchases and the continuation of reduced mall traffic.” –Michael Kors (KORS)

 

Store traffic future looks bleak

“Near term, we expect continued pressure from macroeconomic headwinds, including currency fluctuation, lower store traffic due to channel shift, reduced tourism in select markets and geopolitical issues.” –Michael Kors (KORS)

 

Ready to pivot for new tastes, newness is key

“Newness is without a question what is driving her interest, and I just might add, on that point, if you look at what’s happening, there’s some really good things starting to happen in the handbag business. Backpacks are starting to trend, and I think we’re a leader in that category. I think we’ve caught it pretty early on. There’s a very big shift towards smaller handbags and then crossbodies and small leather goods, particularly the millennial customer. It’s the way that she’s shopping. It’s the way that she’s wearing the product.” –Michael Kors (KORS)

 

Luxury companies should have strong balance sheets

“We believe that having a company that operates with a strong balance sheet is the right way to build a luxury company. Other companies don’t run their businesses that way, but we think a luxury company should be run with a strong balance sheet, of which we’ve done from the date that we really went public.” –Michael Kors (KORS)

 

Reducing inventories for department stores

“as we see the department store channel in North America slowing down because you know that, you know the department stores here are not posting robust results. We’ve decided to reduce the amount of inventory that we’re starting to put into that channel because we don’t want to have a lot of markdowns showing up inside the channel.” –Michael Kors (KORS)

 

Odd things happening in Europe

“You know, it’s so funny because while Greece doesn’t mean anything, while that was going on, all of a sudden business softened up. And the minute that that kind of got past whatever was in the consumer’s mind, our business in this quarter has really accelerated. So there’s some funny stuff going on over there.” –Michael Kors (KORS)

 

 

SHAK

 

Pursuing cluster growth

 

“We continue to execute our strategy to cluster growth in existing markets, opening our third Shack in New Jersey, at the village of Bridgewater Commons; and our second Shack in Chicago, on Michigan Avenue, on the ground floor of the impeccably restored Chicago Athletic Association, a boutique hotel overlooking Millennium Park.” -Shake Shak (SHAK)

 

Increasing pace of growth due to favorable environment

 

“Development conditions remain favorable for Shake Shack. And as a result, our team has been able to increase our pace of openings to exceed our originally stated guidance of at least 10 new domestic company-operated Shacks in 2015. We are confident that we will now open 12 new domestic company-operated Shacks in 2015.” -Shake Shak (SHAK)

 

Commodity prices going to be a problem for the foreseeable future

 

“As you know, we follow the market in our major baskets of beef and dairy. So beef is still up, high-single digits from last year for us, even in Q2. So we’re being conservative about what that means for the rest of the year. And we just don’t see the light at the end of the tunnel there just yet for sometime. We’ve been winning on dairy as of late, but then as Jeff noted starting to get a little more expense. Eggs are up. Our dairy costs have gone up” -Shake Shak (SHAK)

 

 

M

 

Consumer spending restricted to certain categories

“The overall growth in the economy is modest at best and we are seeing customers gravitating to restaurants, recreational services, healthcare, and electronics rather than to traditional general merchandize apparel and furnishing category.” -Macy’s (M)

 

Cautious expansion in China

“Our game plan is to start small and use a test and learn approach as we move forward. We also believe that by increasing the presence of Macy’s in China, we will actually help our business here as well both with the Chinese tourists as well as Chinese residents.” -Macy’s (M)

 

Must maintain financial flexibility

“the key here is maintaining financial flexibility, so that if the business hits a bump, we would still have the access to the financial markets that we need to operate the business as a proxy for that. That is why we talk about remaining investment grade as being so important to the company because we want to be a strong retailer for many years to come, and so we do need to have that flexibility for the speed bumps that do happen or the cyclical nature of retail.” -Macy’s (M)

 

Shake Shack 2Q15 Earnings Call Notes

Revenue at 48.5m

“Total revenue grew 74.7% to $48.5 million, including a 12.9% increase in same same-Shack sales on a calendar basis. Shack-level operating profit, a non-GAAP measure, increased 110.9% to $14.1 million, a 30.3% Shack-level operating profit margin.”

Opening shacks in the UK and Moscow

“On the international front, during the quarter we opened our second Shack in the U.K., located on the Street, in the heart of the bustling Westfield Stratford City shopping centre; as well as our third Shack in Moscow, Russia, located in Avia Park, Moscow’s newest premier shopping and dining complex.”

Average weekly sales per location $102k

“Average weekly sales for domestic company-operated Shacks increased 7.4% to $102,000 for the second quarter of 2015 from $95,000 in the same quarter last year, primarily driven by menu price increases, positive shifts in mix from menu innovation and strong performance from several Shacks opened in the second half of 2014, including those Shacks in Las Vegas and Chicago.”

Targeting 2.8-3.2m unit economics for Shacks

“We remain proud of the strength of our current Shack of economics. However, long term we’re still targeting AUVs in the $2.8 million to $3.2 million range for new Shacks. And given some of the cost pressures, I mentioned earlier, Shack-level operating profit margins in the 18% to 22% range. ”

Fine dining heritage

“Our team continues to embrace our fine dining heritage, as we develop new products around the core menu.”

Labor increase can take a toll on the whole industry

” the first price increase will come in December — the first labor increase will come in December. There’s no doubt it can take a toll on the entire industry. We’ve always paid above minimum wage and we’re well-positioned to increase that as we need to. And we’re going to always, as we said, lead with taking care of our team. We do believe, as we’ve said, when you look at the results certainly of this first half of the year that have been so strong, we do expect deleverage on the labor line over these coming years as minimum wage goes up.”

We’ve taken 6% price this year

“we’ve taken 6% price this year. And our traffic is up, our sales are up, we’ve continued to find ways to menu innovation to drive sales. And that’s going to be our focus. ”

Long term goal of 450 restaurants domestically

“as we head towards our goal of domestic Shacks of 450 restaurants over the long-term”

Next year we may not have that IPO hype when we open a restaurant

“Something I think you should also think about too is the IPO lift that we talked about at the existing Shack could have an impact on some of the new Shacks we’re opening now as well. People have never heard of it. Maybe it’s another region and now they’re saying, gosh, I’ve heard the news on Shake Shack and it could be probably over there. So we think its conservative to go with the $2.8 million to $3.2 million that we’ve always talked, because next year we may not have IPO hype. We won’t have that IPO hype”