Greetings, and welcome to the Shake Shack Third Quarter 2020 Earnings Call. [Operator Instructions]. It is now my pleasure to introduce your host Senior Vice President of Finance and Investor Relations, Rik Powell. Thank you, Rik. You may begin.

Thank you, Paul, and good evening, everybody. Joining me for Shake Shack's conference call is our CEO, Randy Garutti; and President and CFO, Tara Comonte. During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release and the appendix of our supplemental materials. So much today's statements may be forward-looking, and actual results may differ materially due to a number of risks and uncertainties, including those discussed in our annual report on the Form 10-K filed on February 24, 2020 and form filed on July 31, 2020. Any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change. By now, you should have access to our third quarter 2020 earnings release, which can be found at investor.shakeshack.com on the News section. Additionally, our third quarter 2020 supplemental earnings material, which can be found in the Events and Presentations section on our site or as an exhibit to our 8-K for the quarter. With that, I will turn the call over to Randy.

Thanks, Rik, and good evening, everyone to you, your families and our entire Shake Shack community are staying healthy and safe through these challenging times. Quarter by quarter, Shake Shack continues to come back. Our business during this most recent quarter showed steady recovery, thanks to the hard work and dedication of our team, their agility in adapting new Shack protocols and models and an increasingly strong suite of digital capabilities. As a result, guests have been able to enjoy their shack the way they want it with a choice of convenient and safe ordering and pickup options as we continue to expand and elevate the Shake Shack experience. Since our last update at the end of July, forward momentum has continued, and we're encouraged to see a strong recovery in both sales and profitability, with many Shacks returning to or even exceeding last year's results, total year-over-year company-operated Shack sales declined 17% in the third quarter compared to a decline of 39% during the second quarter and further improved to a decline of just 5% in fiscal October. Same-shack sales have also improved sequentially in every single 1 of the last 6 months. This is an encouraging path to recovery, considering the drag that our high traffic urban locations continue to have on the business. While suburban Shacks are collectively getting close to full recovery. Importantly, we're almost back to a steady state development schedule, and we are ramping up the opening of new locations through the remainder of the year and into 2021 and beyond. As of the end of fiscal October, we've opened 33 Shacks during this challenging year, including 15 domestic company operated, of which 4 were opened in the third quarter. The consistency with which our sales have continued to recover, gives us added confidence…

Thanks, Randy. As you've just heard, we're pleased with the steady and consistent progress in our top and bottom line recovery as well as the great work going on across the entire company. We're getting stronger every day, and we'll continue to diligently execute against our key strategic initiatives whilst focusing on the significant growth that lies ahead. In terms of third quarter results, total revenue was $130.4 million, including $4.1 million in licensing revenue. This represented a total Shack sales decline of 17%, a licensing revenue decline of 24% versus the same period last year. However, when compared to the second quarter, total Shack sales and licensing revenue increased 41% and 81%, respectively. At the end of the third quarter, our trailing 12-month average unit volume was 3 million as a significant portion of this trailing 12-month time period includes COVID impacted month. Average weekly sales, the key top line metric to monitor as we move through this recovery was $58,000 in the third quarter and increased sequentially throughout that period, ending with fiscal September at $61,000. We saw this improvement continue through our most recent fiscal period of October with average weekly sales of $62,000, and we've included this data in more detail on Page 6 of our supplemental materials. Same-Shack sales continued to show solid signs of recovery, declining 31.7% during the third quarter compared to the same period last year, improving from a decline of 49% in Q2. Consistent with our total sales trends, comp-based sales also improved in every fiscal month since April. With fiscal September same-shack sales 28% in fiscal October, further improving to down 21% year-over-year. Traffic declined 42% in the third quarter, offset partially by positive price/mix of 10.3%. This year-on-year price/mix growth was driven by a significant increase in average check,…

Thanks, Tara. I do want to end today's call noting a milestone that none of us could have ever dreamed back in the first Shack in Madison Square Park. We recently opened our 300th Shack in the world. Of all places, Madison is in Wisconsin. I could not be more proud of the hard work we've seen from our teams over the last 16-year each of this occasion. Throughout this journey, we've had our share of trials and challenges. It's the perseverance of this team that got us where we are today. I also want to Shack -- I want to thank our loyal Shack fans that have stuck with us and are coming back to enjoy their Shack in more ways than they ever could before. Above all, count on us to always lean into our purpose is stand for something good while creating uplifting experiences, carrying first for our team members, inspiring them to provide hospitality to our guests community, suppliers and investors. You and your families stay safe, stay healthy. And with that, operator, we can go ahead and open up the call for questions.

[Operator Instructions]. Our first question comes from Michael Tamas from Oppenheimer & Company.

I hope everyone as well. Obviously, you gave us the October numbers, but you sound pretty cautious on sales over the next several months. So can you just kind of talk about that in general? Is there anything you're seeing right now? Or is that just what you think is going to happen? And maybe can you parse that out between your urban locations and suburban locations, where clearly some of the off-premise strategies are driving a nice sales improvement for your suburban locations. So just trying to understand a couple of those differences?

Yes. Thanks, Michael. I'll start. I mean, first of all, we've given everything but the previous 7 days of sales. So you have basically everything mid-quarter, so you're seeing exactly where that stands. October having been our best month obviously throughout COVID with tremendous improvement everywhere, right? If you look at every single region has gotten better through the quarter, sequentially and through October. So basically, quarter-to-date, year up to date, I think you have to be cautious. As you look out at COVID cases increasing. Volatility, we have an election coming up. I think there's a lot of unknowns in our country right now and globally. You look at case in Europe and how that may impact their economy. I think we just have to be cautious. We're really, really happy with how the team has continued our recovery and that momentum has moved us forward to -- I mean, recapturing, as you've seen, nearly 3/4 of our profit at the Shack level, which I think is extraordinary work. So coming back, feeling really good about the momentum, but being cautious, being cautious as we head into a new season, spiking cases and why we're prudent in our preparations. We're disciplined in our approach and our cost management, and we make sure we're set up for success, no outer what comes our way in these next few months.

Great. And then can you just talk about margins a little bit, the relationship between sales and margins? I mean, doing a 15% margin when your sales are down almost 30% seems pretty solid. So just trying to understand, is there anything in this quarter that's maybe unique as dining rooms kind of continue to reopen and get back to full strength? Is that something that could potentially create a little bit of choppiness in the margins here. And just sort of longer term, as you get back to a full sales recovery, think some others in the industry have talked about their margins getting back above pre-COVID level. So is that something you think that you guys can achieve? Is there a path to that? Or how are you guys thinking about margins sort of on the other side of COVID?

Yes, Michael, yes, I mean, we're really pleased with the improvement in the third quarter up to that 14.8%. The teams are doing an incredible job in the Shacks and making obviously, a good progress at getting back to that pre-COVID number also with improving performance on that line throughout the quarter. I mean I think as we alluded to in the prepared remarks, and margin does follow sales. And you can see that with these patterns. And so that's why we're equally as cautious on sort of further improvements of that line item as we head into winter in this type of an environment. And there's nothing I would specifically call out in the quarter that made those margins than they are reported. It was great work across the company. If anything, we've still got some headwinds in those numbers, particularly when it comes to higher paper packaging in the food and paper line. And also in the labor line, as we extended that premium pay, as we've put in the yearend bonus, as we continue to really focus on tanking and looking after our teams. So to the extent that those start to then outside of sales, those will help margins improve. And longer term, when it comes to margin expansion, we're not updating any of those target numbers at today, we're more focused on the path back to recovery. But we've got -- we're obviously still a pretty small company. And in the long term, we're very focused on getting back to the healthy top and bottom line growth that we were delivering before and continuing to expand opportunities to even improve those due to some of the format looking at and are very successful to date and growing digital business. But right now, not updating anything long term.

Our next question comes from Jake Bartlett with Truist.

And congrats on all the hard work out there and the progress you're making. My question was really about the inflection in sales in September and October. And I'm wondering if you can frame what you think the biggest drivers to that, whether it's just increasing demand, whether it's increasing indoor dining or just being available maybe the curbside additions and then also the hot chicken sandwich. How would you frame, which are the kind of the biggest drivers to the improvement from August to September and October?

Yes. Jake, I think they've all been really important. Obviously, we've had an economic continued gradual recovery through the third quarter in a macro sense, people are returning. We've had many more dining rooms open. We had around 3/4 of our dining rooms open at this point. So that obviously always helps. And you're just seeing it everywhere, right? You're seeing it across the regions. And Hot Chicken, obviously, helps. That it was a fun one. People love that, and they come back for it. That's a really great menu item. But I think the biggest thing would be our continued commitment and work towards digital. If you really look at how people are using Shake Shacks, still roughly 60% of our sales are coming from digital. And we've held on to its important statistic that we said earlier, we felt on to 90% the sales as in Shack has continued to return. That's a really good sign of our business and something we'll be continuing to work towards. Both our channels keep getting better and better. We're making deep investments in that. We're excited to launch delivery through our app, I hope, in a limited basis through the end of this year and continue to partner with a great third-party delivery service providers that are out there. So it's a combination of everything, including our teams really just the ability to keep pivoting. And we hope that continues, right? That trend has been a very clear trend for 6 straight months. And our goal is to keep that going. And we'll see how it goes. There's a lot of moving parts, but a lot of positivity and reasons to be positive and forward-looking right now.

Our next question comes from Chris O'Cull of Stifel.

This is actually Alec on for Chris. Your resumption of a full development schedule next year, it seems to suggest you're pretty pleased with recent opening performance. Can you help kind of frame up how these openings will perform relative to kind of years past? Are we talking sales volumes, 60%, 70% at prior levels? And have you seen any sort of shortening in the?

Well, are different this time around, right? We're not doing the same kind of huge openings that we're doing in terms of press. We actually barely market them at all by strategy. We really try to open pretty quietly right now. I think the last -- we've talked about it before, this class has opened surprisingly well given COVID impact, right? We've got some great shacks that we've opened this year. And as of late, some of the ones that I mentioned, when you look at university village in Seattle, that's one of the country's great outdoor shopping destinations. We've got this new free standard in Pasadena. Upcoming, we're going to be doing a real flagship Shack in Cherry Creek in Colorado and the Denver area. So we're excited about how we've been performing. The class, as I noted, this year, is continuing to perform above the company average, which is exciting. And I think we hope there will be a different kind of growth, right, without the kind of usual craziness that we allow. So many of these restaurants, by the way, when we open, we open them in a limited digital sense. And with limited or no dining works. So those are things that we've been adding on, adding on over time. And as we look ahead at the 35 to 40 for next year and really just returning to our the previous growth that we had seen, we're super excited to get back to work. We had to pause, but we've called out. We're going to get 18 to 20 shacks in this country, continuing to open internationally. We just opened a restaurant today in the Philippines. And that's really exciting, and we've got more to come. So we barely scratch the surface of our unit opportunity. And I think all the models we're looking towards the goal is to increase that opportunity and keep going. And we're getting back at it for next year.

[Operator Instructions]. Our next question comes from Jeffrey Bernstein with Barclays.

This is actually Jeff Priester on for Jeff Bernstein. Just wanted to dig into the higher average Shacks a little bit. Just kind of over the pandemic, how have the number of entrees for order trended just trying to dig into whether it is an increase in the number of customers per order or if it's just each individual customers ordering more if it's a latter, kind of what parts of the mine are they maybe adding on or exploring or any additional learnings from the digital side of things they may not have added on in the restaurant?

This is Tara. Yes, I mean, we haven't broken down the average Shack by sort of ITO entree. But when we look back on digital average check, was always higher than our other channels. And what we've seen through the pandemic is that continues to be the case and some. So it was higher before, and it's increased significantly through the pandemic as well as representing a much higher percentage of overall sales, as that mix has increased. And so really, that that's the sort of shift force. I'm sorry about that strange is that kind of. So that's a sort of shift that's really impacted that 10.3% price/mix. And it's always hard to tell what a true customer is when you're looking at these checks. But we certainly see that when we look at the items per check and we look at sort of consumer behavior through the last 6 months of this pandemic, that it's generally more people per order. But it's always going to be the case. So the marketing team is doing a really nice job using a whole host of tools when we have long LTOs and things like that. But generally speaking, we think it's increased items for check through larger group orders.

Our next question comes from James Sanderson with Northcoast Research.

I wanted to dig into a little bit more detail about store margins. As I understand that you your average weekly sales, if they stay at October levels, can I assume that the store margin would remain about 17% like we saw in September? And then I have a follow-up on the drive through.

Well, we're not giving any forward-looking statements today at all around margins. So the best we can do, I think, in a world that is as volatile and trust changing as this 1 is just keep you up-to-date with the results as they are. So you can look at each of our line items in that P&L through this pandemic, and each one of them has had a fair degree of volatility. So it wouldn't be -- I think it would be helpful today to make forward-looking statements on that basis. But hopefully, we're giving you enough color to understand where the big levers are. And we're pleased that base has stabilized, for example, but paper and packaging will continue to be elevated. As I mentioned, the teams have done a great job on labor, but we're still headwinds there as it just relates to the broader environment with COVID and COVID and the other OpEx line will continue to be impacted by potentially things like marketing coming back in, the delivery mix and various other things. So hopefully, the data we've given gives you some color, but nothing additional to sort of talk to today.

And James, just 1 other thing is generally, you got to understand that the 13-week period in the third month can contribute off into a higher Shack-level op profit in that month, which you saw in September. So generally, it's not comparable to compare a 12-week to a 13-week when you're thinking about that.

Very good. Now just a quick follow-up on the drive-through prototype. I'm not sure if you've described any of the maybe digital technology that will link up to the drive-throughs you're looking at, whether you'll have digital menu boards payment processing at the drive-through window or other things like that, that will accelerate throughput, other technology enhancements.

We haven't yet. I think for us, we're not going to make our KPI the fastest drive-through in the world, right? We want to -- we still cook things to order. We're going to continue to do that. And the drive-through operations of that will take time. So we will not -- we're not going for the fastest. We're going for the highest quality, most premium burger that we've always done. So we'll likely have some really good digital technology involved in that. We'll also keep it pretty simple. We want this to be a someone's option, if you want to order that way. If you like to preorder, we'll have that option available for you through Shack Track and really just engaging more and more people in however they want to travel and get their Shack. So we're excited about it. A lot of questions to be answered. We'll be building this first this year. And as I noted, we're going to make commitment to a number of them. We really want to see where this can go. And we've got some rate

Our next question comes from Brian Vieten with Cowen & Co.

Okay. Just another follow-up on the drive-. Appreciate that it's kind of a smaller mix of next couple of years, presumably will build over time. But just Tara, as you've talked to developers and landlords, are you finding the opportunity to secure some of these sites for I think it was around $2 million in the past for what these restaurants historically cost. And I guess just in the context of drive-thru, one of your competitors have spoken to sort of a 10% higher development cost. Are the savings maybe offset there for the drive-thrus with the non drive-throus, maybe a little bit lower than that $2 million?

I think all of this, all of this is learning that we have ahead of us. We haven't built a drive-thru yet. As Randy mentioned, that is the late next year. So I think we will reserve the right to come back to you once we have some of those data points. Some of these new formats drive through is 1 of them. Some of these new formats may result in a touch higher CapEx spend to build them, but we'll see. We're excited about them. And even if they do, we as Randy mentioned in our prepared remarks, we're very focused on really expanding that addressable market and expanding those AUV opportunities for us. But it's early days 1 is not yet built. So we'll come back to you when we've got some of those learnings.

Our next question comes from Drew North of Baird.

I think you mentioned earlier in the prepared remarks or on prior conference calls that you've been attracting a lot of new customers to the brand or first time purchasing on your app. So I guess I was wondering if there's any perspective you can share on the demographics of that customer, maybe now that you've been collecting more data, how the newer customers are engaging with your brand relative to legacy customers?

Yes. Yes, we're really we're really pleased with the continued very strong numbers that we have when it comes to new purchases on those digital channels, as you rightly point out. So nothing to share specific today in terms of both behaviors of those demographics. And really, we're still in the very early stages of that. We've been very pleased with those acquisition numbers. And now we'll continue to build out that digital and marketing infrastructure, that digital tech infrastructure to make sure that we can continue to really leverage it. Now that they're on our channels. We're focused on bringing delivery as a service into our own channels. It doesn't currently exist today Apple Webs have to come and pick up your order. So bringing that in will be almost a final piece of the puzzle where we can really focus on offering everything that anyone else could within that -- within the sort of Shake Shack ecosystem. And that allows us to build on those relationships and to better segment those customers. And to your point, on demographics and behavior, you talk to them more holistically across all those across all these channels to start to sort of focus on referrals and frequency and so on and so forth. So we're right at the beginning of that journey. We feel really good about the progress so far. We're very excited about the progress behind the scenes. As we have been building out those tools and that -- particularly that data infrastructure, but a lot to learn. So early days.

Our next question comes from Dan with Raymond James.

It's Dan Docherty on for Brian. Thinking about closing out the year, could you perhaps provide some color on average weekly sales volumes in the fourth quarter? How has that seasonality typically played out through the quarter, say, pre-COVID last year?

Yes. I mean, nothing really specific that we would want to give you today. Honestly, as it relates to fourth quarter expectations. I think we're waiting to see even whether seasonality is something that's relevant in an environment as volatile as this, honestly. And we talked about the fact that we've still got states and city changing dining and COVID and capacity restrictions for a step forward, sometimes you go a step back and a significant portion of our regions are about to enter a colder weather period where we've got a majority of our Shacks today using outdoor patios to help with some of those capacity issues. So seasonality, something that we think is sort of less relevant in an environment as volatile as this. Hence sort of not giving a specific outlook and specific guidance for the fourth quarter.

Yes. And you can see if you just look at years past in our in our quarters. Generally, you do see the fourth quarter is slower seasonally, right? We have very strong third quarter average weekly sales generally. So generally, that's the trend. And then as Tara said, this is a different kind of year. So we'll see. We're keeping an eye on that. It's been -- as you can see through October, it has increased sequentially every month since COVID began. So that's really good news. We'll see if that same seasonality plays out now.

[Operator Instructions]. At this time, there are no further questions. I would like to turn the floor back over to management for closing comments.

Thanks so much. I really appreciate everybody taking the time. I know it's a busy night and a busy time. Appreciate your support for the Shack and our team. Look forward to seeing you soon. Take care.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.