Shake Shack Inc. (SHAK) Q3 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to Shake Shack Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Annalee Leggett, Senior Manager of Investor Relations and FP&A. Thank you, ma'am. You may begin.

Thank you, and good morning, everyone. Joining me for Shake Shack's conference call is our CEO, Randy Garutti; and CFO Katie Fogertey. 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 an 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 financial details section of our quarterly shareholder letter. Some of 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 Form 10-K, filed on February 18, 2022. 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 2022 shareholder letter, which can be found at investor.shakeshack.com in the Quarterly Results section, or as an exhibit to our 8-K for the quarter. I will now turn the call over to Randy.

Thanks, Annalee. Good morning everyone. We are pleased today with our third quarter results, especially noting stronger-than-expected sales exiting September, a trend that's continued into October. We delivered total revenue growth of over 17% year-over-year to nearly $228 million, with system-wide sales up more than 18% to over $353 million. Average weekly sales outperformed seasonality at 73,000, as we've maintained a trailing month AUV of $3.8 million. Same-Shack sales grew 6.3% year-over-year, driven by both traffic and price mix. And October's comp has accelerated more than 8%. We generated Shack level operating profit of $35.8 million at a 16.3% margin, up year-over-year, even with a material pickup in inflationary pressures. Our urban markets, performed well in the quarter. We saw strong momentum coming out of Labor Day, as mobility and back-to-office trends broadly improved. It's clear that our hometown in New York and other urban centers, things are improving, with more and more people moving about, and we remain cautiously optimistic on urban trends long term, as new patterns emerge, but it's good to see the momentum in the right direction. I recently visited our Shacks on the West Coast and you can feel the energy even in downtown San Francisco and the South Bay continuing to emerge. On the development side of the business, we've opened some great Shacks recently in places like Beverly Hills, the Meatpacking District in Jamaica Queens in New York City and in suburban Masschusetts and Florida. As you know, it's been a frustrating year of extended time lines to opening new Shacks and delayed openings have probably been our biggest headwind to overall sales growth. In the third quarter, we opened two company-operated Shacks, with four more so far in the fourth quarter, as we continue to face challenges from permitting and landlord construction delays, to availability of kitchen, electrical and HVAC equipment. However, I'm happy to report that the tide is slowly turning, and we currently have 35 new Shacks under construction with more to come. We still expect to open 35 to 40 new Shacks in fiscal '22, but looking more likely to come in at the low end of this range, with many of these opening towards the very end of the year. Unfortunately, we and many other retail and restaurant companies are seeing this trend, but it's one we've been preparing for and believe we can execute. That growth while behind our initial expectations still represents over 15% company-operated unit growth year-over-year. You can expect some additional Shack level costs in the coming quarters, as we work through this high growth and the extra support needed, given the compacted schedule. Despite these pressures, we remain focused on our long-term pipeline and building Shacks to stand the test of time. For 2023, we now expect to open approximately 40 domestic company-operated Shacks, which will represent 16% unit growth year-over-year. We think that's a solid number heading into an uncertain economic and still bumpy supply chain and staffing environment, allowing us to grow significantly, also focusing on our current Shack performance. I want to take a moment and talk about our bigger, total development opportunity. We're not updating any long-term guidance today, but we know we have much more white space potential than our existing targets and have been doing the work to quantitatively and qualitatively discuss that opportunity, as we assess over time. The high inflationary environment has impacted our historically high returns, with near-term profitability pressure, increased cost to build shacks, as well as disrupted sales patterns experienced in the recent years. We've historically targeted our blended AUV for new openings to be approximately $3 million. Clearly, we've outperformed that over the years and expect to continue to do so. We believe our plan to balance urban and suburban growth through a multi-format strategy including drive-thru has the potential to generate strong long-term AUVs. With the continued strength of our brand, the amount of new formats with which we can target a market, we believe our total addressable market continues to increase. On the profitability side, prior to the COVID inflationary impact of the last few years, we outperformed our long-term targets of 18% to 22% op profit at the Shack level. While many of our current shacks beat these targets, on average this is a number we're not consistently hitting today. But we continue to believe it's the right long-term target and one we can return to. We have much to do in this area and we'll be highlighting some of that work as we go. When we look at overall returns in our shacks, even against double-digit inflationary pressures and COVID recovery impacts our business has navigated in the past several years, our recent classes continue to show strong returns, but we aim to do better than our long-term guidance. Historically, as a company, we have done just that. We expect this will take a mix of targeting Shack level operating profit margin improvement, including an intense focus on our operations, cost pressures in our digital business and further rationalization of our build costs over the long term. We're focusing on improving on our design and construction to optimize sales, throughput and build costs, while streamlining Shack models that look and feel better than ever. Its early days, but we're excited for the near and long-term impacts this will have on our development plans in the coming years. Before I move on, just a quick update on drive-thru initiative. We now have six drive-thrus operating today and expect to open three to four more by the end of the year, with another 10 to 15 in the pipeline for 2023 and more identified for 2024 and beyond. Drive-thrus are a key step in the evolution of our company. We're encouraged by the early operational flow and performance to-date. We're optimizing for learning and building on our long-term goals. Initial drive-thru investments will be high, as these new units have larger footprints, more tech elements and continue to have a great in-Shack dining experience. This is the right place to focus additional capital right now, with the goal of unlocking a larger total addressable market. I believe in the next year, as we get a strong class of drive-thrus and we learn more about the real estate, design and operational decisions we've made, will have a much clearer view on the size of the prize. On our licensing business, where revenue grew over 20% year-over-year, even as we lapped a heavy opening schedule in 2021, faced COVID disruptions in China and have a new headwind from the strong US dollar. We opened six new shacks in the quarter, including a roadside location on the New Jersey Turnpike and our first-ever museum location at the Smithsonian Air and Space Museum in Virginia. We also opened our eighth Shack in Shanghai this quarter, which is our 28th Shack in the Greater China market. After a pause during COVID, we're happy to see our partners in Japan return to growth, with our newest Shack opening at the Universal Studios in Osaka last week. We're leaning into this important part of our revenue and profitability plans long term and are excited to deepen relationships in current and future markets. In Korea, after recently opening our 23rd Shack and nearing the early completion of our development schedule, we've extended and expanded our operating agreement to go even deeper in the market. We're looking ahead towards new markets of Thailand and Malaysia in 2023 and 2024 and we just announced that Shack will open in a premier location at the Atlantis in the Bahamas. Lastly, we've just opened our first ever roadside Shack on the New York Thruway as we look to unlock new format opportunities, both here and abroad. We have a robust pipeline worldwide next year and expect to open 25 to 30 new licensed shacks in 2023. A few more updates on the rest of our strategic plan. Above all else, we remain committed to elevating our people, a relentless focus on standing for something good with our people, with our guests is a key pillar of our culture and how we intend to grow our workforce. Staffing and retention have improved slightly, but remained challenging. There's no question, we have an opportunity to optimize throughput and total opening hours as staffing patterns improve over time. We're heavily focused on recruiting, retaining and developing our people and just graduate our sixth class of team members, looking to grow in the management through our new Shift Up program. It's a key pipeline for our hourly team members who receive the training required to elevate to a manager position. We're also proud to offer our teams competitive wages. In some of our shacks, with our new tipping availability, team members can at times be earning more than $20 an hour in pay on top of generous benefits and development opportunities. So, current and potential team members can see Shake Shack as a long-term career path. These are just a few examples of how we strive to be an industry-leading employer. When it comes to the all-important guest experience, we're focused in the shacks where most of our gains are happening. And while we're committing more than ever to our digital evolution and the continued strength of those channels, we're also working with a persistent attitude towards clean, welcoming and well-operating restaurants. In menu innovation, we continue to lead the way with dynamic and fund products providing our guests with elevated premium high-quality ingredients that they can't find a traditional fast food, other fast casual concepts or even casual dining. Currently, we're running a great LTO, partnering up with YouTube sensation Hot Ones on a collaboration of a spicy bacon burger, bacon chicken and bacon cheese for us. We even offered the option for our bravest guests to buy the extra spicy Last Dab hot sauce packet on digital channels only. The Last Dab was the Hot Ones menu's hottest sauce made from the Apollo Pepper California Reaper and Pepper X hybrid landing at 2.5 million on this global scale. This menu also had strong guest reception and satisfaction results and is particularly successful on our own digital channels. On beverage, we continue to see increasing demand and contribution to average check through our latest seasonal lemonades. We also just launched our Holiday Shake trio, which has historically been a fan favorite. This year we're offering Christmas cookie, chocolate milk and cookies, and chocolate peppermint shakes. Lastly, as we look to attract even more frequency long-term, we continue to test a new non-dairy chocolate shake and we'll be testing a new version of our Veggie Shack at about 30 shacks towards the end of this year. I'll now pass over to Katie to discuss our financial performance in more detail.

Great. Thank you, Randy and good morning. We are pleased with the strong sales momentum we realized in the business led by our urban shacks coming out of Labor Day. This coincided with a positive inflection in return to work trends would still remain a potential driver of continued recovery in our business. Our third quarter total revenue grew 17.5% year-over-year to $227.8 million. Shack sales grew 17.4% to $219.5 million. Licensing revenue grew 20.1% to $8.3 million, marking the highest quarterly revenue for the license business on record. System-wide sales grew by 18.3% year-over-year to $353.2 million and we surpassed $1.3 billion in system-wide sales over the past 12 months. We generated Shack-level operating profit margin of 16.3% up 50 basis points year-over-year in the face of meaningful inflationary headwinds. Food and paper costs rose by high-single-digits year-over-year and we have made significant -- in wages and benefits for our team members and even utility costs are nearly 25% higher than last year. In the third quarter, we generated $73,000 in average weekly sales. We over-indexed to high income relative to traditional fast food and we continue to see better sales performance from these guests. Consumer mobility trends were consistent throughout July and August when AWS trends were stable at $75,000. We However in September, which is historically a lower sales month, consumer mobility in urban centers improved after Labor Day and we saw AWS outperform traditional seasonality, falling just 5% month-over-month to $71,000. We grew same-shack sales by 6.3% year-over-year led by double-digit growth in urban same-shack sales. Overall traffic grew 2.9% and we had 6% price inclusive of the March price increase and our different pricing premiums across channels. Our performance in the quarter was led by our in-shack channels that skew more to single orders versus larger groups. And across all channels, more guests are ordering in smaller groups and single orders compared to 2020 and 2021. So, adjusting for this dynamic, items for check trends and cold beverage price and shakes remained strong. Mix was positive in the quarter and our guests are trading up to the premium limited time offerings across burgers shakes and cold beverage showing us that they really embrace and value our elevated and premium approach to menu innovation. Urban same-shack sales grew 11% versus 2021 and urban traffic grew nearly 7%. Trends were notably positive coming out of Labor Day with New York City, Chicago and Washington D.C. all showing positive traffic inflections. We believe our recovery would have been stronger if mobility and namely return to office urban transit and urban tourism trends were stronger throughout the quarter. Manhattan same-Shack sales improved throughout the quarter and rose 23% year-over-year and stayed strong in October despite more challenging compares. Suburban same-Shack sales grew 2% year-over-year, lapping a positive 17% comp in the third quarter of 2021 even as we realized strong sales growth in our urban Shacks. In mid-October we raised our menu prices by 2% to 10% across price tiers to address these consistent inflationary pressures. We expect to recognize 5% to 7% of this price increase and maintain a blended high single-digit price across channels into 2023. As a reminder we raised our menu prices by approximately 3.5% in March 2022. Even with this price increase a Shack burger fries and beverage is on average under $14, well within and often priced below the cost of other lunch or dinner options nearby. Our value perception among guests remains unchanged and we continue to see strong demand for our premium LTOs. October same-Shack sales accelerated from September levels and rose 8.3% year-over-year, led by menu price and mid-single-digit traffic growth year-over-year in our urban Shacks. AWS was $73,000 up 3% from September levels. This is even as we lap the 2021 launch of Black Truffle in the middle of October and a challenging compare for our urban business. Black Truffle was one of our strongest performing LTOs that had strong guest reception right out of the gate. Additionally, in-Shack trends remained strong consistent with what we saw in September. When we adjust for price, the September to October progression was better than historical seasonality. Development and delays continue to be a headwind to our sales in the quarter as we opened two Shacks less than we had expected and later than we had expected. While our in-Shack business is showing strong signs of recovery we retained a large portion of our digital business. Our digital tools expand our reach with more convenient channels and occasions laying the groundwork for sustainable long-term growth. We continue to target acquiring new app users and driving more frequency within our expanding digital base. In the third quarter, we grew our digital app purchasers by 40% year-over-year. Since March of 2020, we now have gathered more than 4.5 million unique first-time digital app purchasers. We are building our digital base with successful marketing initiatives including offering our limited time hotlines menu to our digital users first and other promotions focusing on digital-only dayparts. It's still early days for our digital journey and we are encouraged by strong guest engagement and the new ways we are developing to reach and communicate with our guests. And more of our guests are enjoying us through our omnichannel experience finding us both digitally and in check. This is a good thing for the long-term growth of our business. Kiosk is an example of how we are bridging the in Jack and the digital world and we remain on track to roll out digital kiosks to nearly all Shacks by the end of next year. This is our most profitable channel. And when compared to our in-chat channels we see higher checks and better labor utilization. Now, on to our licensing business where sales of $133.7 million rose about 20% year-over-year. Our domestic Shacks and select international markets performed well. We faced headwinds from COVID lockdowns and intermittent market disruptions that impacted Mainland China Shacks and currency headwinds from the stronger dollar. These pressures remain in the fourth quarter. Total Shack level operating profit was $35.8 million or 16.3% of Shack sales. Our Shack level operating profit margin improved 50 basis points year-over-year despite inflationary pressures. As a reminder, the second quarter's Shack level operating profit margin had a 38 basis point benefit from onetime leadership retreat sponsorship credit in food and paper costs. Other operating expenses were impacted by an incremental 100 basis points from some near-term pressures to run our existing restaurants including elevated utilities and R&M costs as well as temporary support for some new openings. Food and paper costs were $67.8 million or 30.9% of Shack sales. These costs declined by high single-digit percent over year. This was slightly favorable versus our expectations. Other food and paper inflationary pressures were higher and in some instances, exceeded our expectations. Dairy costs were up nearly 30% year-over-year. This was led by butter, cheese, and custard. Fryer oil costs rose materially as did fries and paper and packaging costs grew nearly 20% year-over-year. We have more details on this on page 11 of our shareholder letter. Labor expense was $64.6 million or 29.4% of total Shack sales, down from 31.1% in the third quarter of 2021 and down 10 basis points quarter-over-quarter. Other operating expenses were $34 million or 15.5% of total Shack sales, up from 14.2% in the third quarter of 2021 as we are facing inflationary pressures and aspects needed to operate our in-Shack business includes energy repair and maintenance costs and costs to maintain the dining room. Also, in certain markets where we are facing staffing pressures or in markets where we're bringing lots of new openings at the same time, we're having to bring in management and hourly teams from other Shacks to support some new openings and build up the local team. We are planning for elevated T&E expense for the foreseeable future, as we support some new upcoming openings. But long-term, we are targeting more normalized travel costs to support openings and expect this expense line to reach more typical levels we have shown in prior years. Occupancy was $17.3 million or 7.9% of total Shack sales, up 10 basis points from the third quarter of 2021 and up 40 basis points quarter-over-quarter. G&A was $26.6 million or 11.7% of total revenue, down from 12.6% of total revenue in the prior quarter. This is reflective of a more measured approach to G&A investments, in light of a wide range of potential scenarios on our business and our development delays. Preopening expense was $3 million in the quarter as we opened two new Shacks and prepared for the busy fourth quarter opening schedule ahead. Depreciation was $18.6 million. We realized a net loss attributable to Shake Shack Inc. of $2 million or a negative $0.05 in earnings per share. On an adjusted pro forma basis, we reported a net loss of $2.3 million or negative $0.06 per fully exchanged and diluted share. Excluding the impact of stock-based compensation, our pro forma tax rate in the third quarter was 40%. Our balance sheet is strong as we ended the quarter with $330 million in cash and marketable securities, and our primary usage of cash remains opening new Shacks and supporting our other company-wide initiatives. Now on to guidance for the fourth quarter and full year 2022, as well as some initial thoughts on 2023. Our guidance assumes no new COVID or supply chain-related disruptions, additional unknown inflationary pressures or major shifts in consumer spending. We are assuming that urban and suburban consumer mobility trends remain consistent, with what we realized for much of the third quarter and are factoring in that we realized about 50% to 70% of our mid-October price increase. For the fourth quarter, we are guiding total Shack sales of $225 million to $230 million. We expect Shack sales to grow by mid-single-digit percent year-over-year to open and we expect to open approximately 21 new company-operated Shacks. We have opened up four so far this quarter and we are planning for many openings to occur at the end of the quarter. As such, they will have a limited impact on fourth quarter revenue. While recent sales trends are encouraging, risks include a wide range of unknown impacts to the consumer amidst the unearned macro backdrop. Uneven consumer mobility, operational disruptions as teams support many new openings and unforeseen continued development delays. We are also mindful that our recovery trends in New York City were really strong in the fourth quarter of 2021. Licensing revenue guidance of $8.2 million to $8.7 million is supported by strong performance in certain domestic and international markets as well as new Shack openings. We are anticipating macro pressures in certain markets, and broad-based currency headwinds to continue. This guidance range does not assume new COVID closures or pressures and reflects opening seven to 10 new licensed Shacks in the fourth quarter of 2022, to reach our raised 2022 licensing opening guidance of 27 to 30. We expect total revenue of $233.2 million to $238.7 million growing about 15% to 17% year-over-year, and Shack level operating profit margin of 16% to 18%. As a reminder pre-COVID, we had shown AWS and margin compression in the fourth quarter versus the third quarter. This fourth quarter we will have the benefit of nearly a full quarter, of new menu pricing to help address some inflationary pressures we are facing. We are planning for high single-digit, inflation in food and paper costs through the rest of the year, led by continued high inflation in dairy, accelerating cost pressures in fryer oil fries and ketchup and low double-digit inflation in paper and packaging. While the inflationary backdrop remains uncertain, we expect de cost the largest portion of our basket to decline by mid- to high single digits year-over-year. We expect other operating expense as a percent of Shack sales in the fourth quarter to be at a similar level to the third quarter. given inflationary pressures on cost to run our restaurants, including higher utilities and R&M expenses and elevated T&E to support new openings. We are committed to improving our profitability driving sales growth and investing ahead of our robust pipeline across the world. The operating environment is likely to remain challenging for some time and we believe we have the right plan in place to elevate our people and drive the long-term growth of Shake Shack as we navigate these uncertain waters. As it pertains to planning G&A and CapEx for the rest of 2022 and into 2023 we have a disciplined but growth minded approach to our investments taking into account a wide range of business scenarios. With consideration for development delays and the unknown macro impacts, we now expect to land towards the lower end of our tightened G&A guidance range of $111 million to $113 million, excluding the $6.8 million of legal expenses we incurred in the first half of 2022. We continue to expect full year depreciation of $70 million to $75 million and are updating pre-opening to $15 million to $17.5 million. We are accruing more rent than normal and pre-open expense given the level of delays that we're experiencing. We expect our adjusted pro forma tax rate excluding the impact of stock-based compensation to be 30% to 32%. Looking out to 2023, we expect to grow our system-wide Shack count by about 15% year-over-year as we plan to open 65 to 70 total Shacks across the entire system. We anticipate that around 40 will be company operated Shacks and 25 to 30 will be operated by our licensed partners. We will provide more detail on our expectations for 2023 and the beginning of the year. Thank you for your continued interest in our business. And with that I can turn it back to Randy.

Thanks Katie. I wanted to I end today's call with just some quick remarks on the macro landscape. The next economic fees remains uncertain. And here at Shake Shack we're planning for a wide range of scenarios as we think about the business in the coming quarters with a focus on growing sales Shack level profitability and overall adjusted EBITDA. We're also squarely focused on the bigger opportunity ahead with a strong pipeline of Shacks and varied formats that can increase our addressable market and drive solid returns. None of this would be possible without the continued strength and resilience of our team members around the globe. Over the last few weeks I've spent a lot of time in our Shacks and I've been witnessed to a number of real-time promotions of leaders who began as team members have seen what can happen for people in this company when hard work meets preparation and opportunity. That's the opportunity we're building and plan to keep investing in as we build the road ahead. Hope we see you all soon for a hot ones chicken. And with that operator, please open up the call for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Nicole Miller with Piper Sandler. Please proceed with your question.

Thank you so much, and good morning. I wanted to ask about the pipeline for next year. And if you could give a little context around the stores I suppose on the company-owned side that are identified maybe under LOIs or even under signed leases and then the cadence. But with that could you talk about -- and you did, but a little bit more color on the people side. So where do you bench these managers if the stores are a little delayed, what do they do in the interim? How do you hold on to them? And how material is that in the G&A right now? Thank you so much.

Thanks Nicole. Let's start with the class for next year. We think it's about 40 Shacks roughly company-owned. Right now the thing that we feel better about than last year this time is we have nearly all of those 40 in signed leases. And a number of them are coming and we feel like we're much further ahead. That said, we're still experiencing the same kind of challenges in permitting construction, the cost and just the general time line. So that's part of why we're thinking 40 is a really good number for us for total next year. We hope they're better dispersed than this year. We don't have such a fourth quarter crunch. But you know what that seems to be a challenge every year. But as I said in my remarks, we have 35 Shacks under construction today. That's the largest number we've ever had being built at one time. And that bodes well for hopefully a stronger start to the first half of next year and we'll see how things go with that. Within that class we've got 10 to 15 drive thrus. We've got a number of different formats. So you'll see some elevated costs in that build with the drive thrus. You'll see some core Shacks that we know and love that's built this company. You'll see some drive up models. You'll see a food court or two. You've got a really, really deliberate intentional mix and we think it's the right way to think it. Now how the heck do we staff these shacks this is the hardest thing going on right now. Some of the costs that Katie and I called out in our remarks are actually hitting Shack-level op profit right now and that's part of the new pressure that we have. Now let me be clear. I don't think that's a pressure that exists forever. This is new to us. And what does that mean? Well, we've got a Shack opening in Baton Rouge, okay? Coming up in the fourth quarter here. That's a new market for us. We're building out our brand there, building out our employee brand. We've got to fly people in and keep them there for a while. We've got some Shacks in the Bay Area where we need to build up our management bench. We have to bring some people into -- from other regions to help. That hits us in the Shack-level op profit. And that's part of our guide for -- as part of our what happened this quarter, its part of our guide for Q4 and its part of what will happen certainly in the early part of next year. With the challenges of staffing it's just harder right now at all levels. And we've got to kind of move our talented teams around a little bit more. With all of that, we have never been more innovative when it comes to our commitment to our people. We are thinking about all new ways starting at the recruiting application process, starting in the first 30 days of employment. In this moment they're in an industry that feels fully staffed and certainly not in our industry. We know that's where we need to do better and we're making really big improvements. And by the way there is some -- that is where some G&A is going to increasing the size of our recruiting teams, our recruiting spend on advertising and the way that we're going to build up those teams. So we have a lot of work to do. None of it's been easy and it's been compounded by macro challenges. But we feel like this is what Shake Shack does. We're in a good place. We're going to execute this plan.

Our next question comes from Jared Garber with Goldman Sachs. Please proceed with your question.

Good morning. This is Ben on for Jared. You mentioned in your prepared remarks that you've been seeing new urban trends emerging. I was wondering if you could provide a bit more detail on these new trends? Is this related to day of the week day part? And then I guess to follow up what changes if any are you making operationally to adapt to these new trends? Thanks.

Yes. I mean what we saw really throughout the quarter was mobility trends were pretty consistent with what we saw in the second quarter in July and August. And then really when Labor Day hit, our urban market mobility and traffic inflected positively even more so than it was prior to Labor Day. And it was mostly, kind of, -- in the weekday lunch and dinner that we saw the greatest impact. But there's still a number of Shacks in particular in Midtown Manhattan, and kind of, those more workplace centric locations that still have a pretty big impact here pre-COVID. And there's a great opportunity for us to continue to recover in lunch and dinner there as well. So while the trends were encouraging, we saw particular strength in our urban transit in New York City and Manhattan in particular we're still on the road to recovery.

And this is a good thing for Shake Shack, right? As we've talked about like we have this kind of really nice mix now of urban and suburban. We've seen it. I spent last Friday going around to a bunch of Shacks and just trying to think about and understand kind of what is Friday going to look like in cities. And I was pretty encouraged by what I saw even in Midtown Manhattan on that day. It's just seeing people moving about. And look we're going to adjust I think new trends emerge daily, but it's clear that the momentum in an urban setting is going in the right direction for us.

Our next question comes from Michael Tamas with Oppenheimer. Please proceed with your question.

Hi. Thanks. Good morning. I'm one of those great customers. You mentioned getting the last step and I can confirm it lives up to its name.

Thank you, Michael. It’s be okay.

I'm getting better over the last couple of weeks. It was pretty hot. Randy, you talked about getting back to the historical 18% to 20% restaurant margins as a target you believe you can still achieve over time. And you called out potential for operational improvements and a tighter focus on cost. So can you either bucket or like rank order where you think the most impactful opportunities are? And what are maybe those nearer-term opportunities versus some of those things that might take a little bit longer to unfold? Thanks.

Thanks, Michael. Yes look we believe we're going to continue to increase this over time. There's a few things going to happen. Let's just start with macro factors impacting our company and our restaurants and our world. We need some of those to go our way okay? And we're not going to wait around for that but it is a fact. When we have double-digit inflation in almost everything we buy whether it's french fries for oil paper packaging. These things are tough to increase and we're not yet taking the same price to offset that fully. So we need a couple of things to go our way. After that what are we doing about it? Well, we're obviously being a little bit more aggressive on price. And we've done that. We've just taken this kind of wide range between 2% and 10% that we think settles out in the 5 to 7 range just a couple of weeks ago and we think that will help and we're going to keep our eyes on future price raises. If we continue to see this inflationary pressure we will have to take more price. And that's more aggressive than we've been in the past. So that's part of it. We've got to get staffed up. we've got to continue to do that. There's absolutely missing opportunity in our company just on not being staffed. We have not optimized our total hours open and we have not optimized our throughput during peak hours. And that has been a challenge for the last few years. It remains a challenge. So, we are putting massive efforts towards staffing and bulking up our teams to be able to handle this. None of that's easy. And then you look at little things. We will continue to evolve our packaging continue to evolve the packaging the way that we package things as less and less orders happen preordering and we see more return to in-shack those are more profitable channels for us. These are trends we need to see. And then there are some near-term things that Katie called out that we're going to get hit on right? Utilities are up. It's happening in the world. Those things are up. Hopefully that's not up forever. The travel that we talked about the support openings is up. That is an impact we don't believe last forever. So, when you think about us clearly seeing the root there it's going to take some time. There's going to be work to do, but we believe in the long term we can continue to get back to those targets and returns.

One more thing just to add on there is on kiosks. So kiosk is our highest margin channel. It also has our highest in check channel. We're going to be rolling out kiosks to nearly all Shacks by the end of next year and that's another way that we're leaning in here. to help drive performance and margin performance and address some of the labor challenges that we've had.

And we'll have I think by the end of this year about 20 to 30 existing Shacks convert kiosks or excuse me add kiosks before the end of this year. And then we'll continue that rollout. There's about 60 70 left after that. That will take through next year.

Our next question comes from Sharon Zackfia with William Blair. Please proceed with you question.

Sorry for my voice. It wasn't the hot sauce. I just think I have a cold. So, I guess I want to delve a little bit more into the labor and the thoughts on streamlining and kiosks. I mean you've had kiosks for a while at locations. I guess I'm curious in locations where you have the kiosks like what percent of the business is going through those kiosks. And how do you then manage labor? Is it more reallocating labor to more maybe value-added tasks than taking orders, or do you actually just see incremental labor leverage is throughput better because people are working more on that. Just help us think about that. And then are there other opportunities? I know other companies are looking at like robotics and automation. I know your menu may not lend itself as much to that but are those potential avenues?

Sharon yes I mean broad speaking broad-based kiosk is a really great lever for us to lean on here to help streamline labor in the Shacks. And it's really about addressing that front-of-house opportunity. In the Shacks where we have kiosks right now actually a good portion of the guests do prefer that channel. We're in many locations we'll have five or six kiosks and maybe one maybe two cash registers. And you see a number of people kind of instantly go towards that kiosk. If you haven't used one before I highly encourage you to do. So it's a really great opportunity for our guests to sit with the menu within the Shack to be able to page through and we see that just translate through their order where they're adding on more premium things. They see our LTOs they the whole entire order flow of we're having a burger we're going to have our shake and our fry and our lemonade and they can visually see all that. So from both a labor perspective and a check perspective it's definitely accretive. And you really kind of hit the nail on the head there with what we're seeing as far as how we're benefiting from that. So in some instances, we're able just to run a little bit leaner. But also, we're able to take that extra labor and kind of dedicate it to other more value-added tasks like if it's at Expo helping out just expedite some orders there, it's greeting guests in the dining room as well. So we're really excited by what we've seen and looking forward to rolling out these kiosks in short order.

Thanks. And then on the robotics or automation is that something you explore?

Yeah. Nothing yet. I don't think it's the best use of our time. I think we think about automation in terms of digital ordering and the way we just talked about kiosks and our other app and web channels. Today, I'm excited for it in the future. I don't think it's the best use of our time to be frontrunners on that and we're watching closely. We continue to meet with interesting companies who are doing that work and seeing how it could impact us. But I think we're a little ways away from seeing something like that in a Shack right now.

Thank you.

Our next question is from Jake Bartlett with Truist Securities. Please proceed with your question.

Great. Thanks for taking the question. My first is on the October average weekly sales. And I'm hoping you can just put into context the seasonality of October versus November and December. What typically happens in a pre-COVID world to average weekly sales from October into the coming months?

Yeah. Well, part of us being a little bit of a younger company, we don't have that much history to talk about and our comp base has changed dramatically. And as you remember, I'm sure in 2019, we faced some headwinds in the fourth quarter of 2019 which makes seasonality a little bit more lumpy. But just broadly speaking kind of looking back, you tend to see more of a little bit of a softer fourth quarter than third quarter.

Got it. So just in terms of -- you don't have kind of holiday traffic or something like that that would make -- is December typically going back years stronger than October. I'm just trying to put cover in the context of seasonality?

You just have a seasonal increase in December. However, November has been kind of depending on where holidays fall it can be a little bit more flattish.

Great. Got it. and then I wanted to just dig in a little bit more on the on the development expectations for 2023, it is less than what you're originally expecting on the lower end in 2022. I understand the macro headwinds. I just want to -- is this a change in philosophy you mentioned kind of focusing -- spending more of your energy on the existing base and that's maybe part of why you're getting less aggressive on development. Or is this just really a reflection of the current environment the lower growth in 2023? I'm just trying to kind of understand long-term whether this is maybe just a step back to focusing a little bit less on really fast growth or if this is just more of a temporary kind of pause in that?

Well, thanks, Jake. There's a few things in that. First of all, that's the numbers we guided that would be the largest class of Shacks ever. So we're not slowing anything down. I think when we think about how many is the right number for next year, we have to work with the environment that we're working in. And we got to make sure that we can open some really great Shacks. We're also committed to a lot of new formats with a significant approach to drive-thru. We're also spending more capital, right? These Shacks cost more to build. At an inflationary time here, we think there's no reason to race to spending a lot more capital, when we hope that over a longer-term period some of those costs to build can come down. But we're certainly going to live next year in an increased cost environment. Within all that, we've still got work to do on margin, on our current 250-ish Shacks that we own and operate in this country, while still showing significant growth I think I said of 15%, 16% expectations for next year in our comparator. That's a strong, strong growth. Well, as I've said for 10 years on this subject, as we absorb each class, we'll continue to think about what the next class is should look like. And we feel really good about the class of restaurants that that we're building. Now look if things can go our way and we can pull some things up, we'll certainly look to do that. But this year the opposite happened because the factors out of our control and we want to make sure that we are preparing and guiding appropriately for what the right amount of growth should be. And that's a great class of 65 to 70 worldwide Shacks next year.

Great. That’s helpful. I appreciate it.

Our next question comes from Jeff Farmer with Gordon Haskett. Please proceed with your question.

Good morning. Just wanted to quickly follow up on staffing. So I guess it was last week it was interesting to hear us fully indicate that – they recently raised the starting hourly wage by about $1 to $3 across roughly 20% of the system. They did that simply to ensure that they could staff those restaurants. So I'm just curious if you've seen a similar potential need in some of your markets meaning a bump in the wage rate to ensure staffing levels are appropriately met.

Yes. That's absolutely happening likely at a similar cadence to what you heard them talking about, right? We've already been doing that mid this year even this quarter. There are some markets we continue to bump up some certain Shacks, who we need to bump up. So yes, you can expect that. Our starting wages have continued to increase for our teams and we expect that's going to continue into next year. There's no doubt about it. The inflationary pressure and finding great team members is going to cost more. In addition as we've said for a little while now, our guests have for a long time asked for the opportunity to tip our teams. With that added functionality, our teams are doing really well making a few dollars more per hour depending on the Shack and really jumping up their total earnings opportunity to be competitive and above competitive in a lot of ways. So hopefully, that will help turn the tide. It is still a challenging environment out there. There's no doubt about it. And we've got to keep investing in new and different ways. So you can expect continued pressure on our payroll as we look at that into the Shacks next year.

That's helpful. And just one quick follow-up. So in terms of your initial drive-thru openings you've provided some color, but I'm just curious what the sort of the key learnings are from those restaurants and how potentially those learnings might influence the future drive-thru development that you already have planned? So just again, it would be interesting to hear in terms of the surprises you've seen or good or bad as you've seen sort of six months of operations from these restaurants?

Yes I think it's going to take a while and a lot more drive-thrus to really hone in on the best format and that's exactly why we're investing the way we are. Of the first six that are open we have multiple different kitchen flows, external and internal design and ways that we just kind of move the food through. Not to mention very different real estate decisions. So what we're excited about as I keep using the term we're optimized for learning, we're spending that capital learned because there's a much, much bigger prize as we learn and get it right. So with the next three or four that opened by the end of this year, we're going to learn all new things. We've got one opening in Michigan next week we hope. We've got some others coming that we're super excited about in Ohio, in the Baltimore area and more. And in the next year with another 10% to 15%, I think that learning is going to just accelerate. So what are we learning? We're learning about how much space we need for cars on learning what peak hours look like. We're learning how best to take orders, when is it best to have people outside, when do you not need people outside. We are honing in a lot better on how we think the kitchen flow should work so we can protect and maintain the premium ingredients that we serve every way. We're learning what menu boards should look like. How big they should be and what kind of things sell, when we put shakes up there they sell, right? So what should we do about that? So it's vast and it's really a totally different model. So I think what we continue to try to share with everyone is it's going to take time. It's super exciting. We think we have a dynamic really cool product out there with our drive-thru. We think there can be lots of them but we've got a lot of work to do to optimize that and that's going to happen over these next few years.

Thank you. Appreciate it.

Our next question comes from Andy Barish with Jefferies. Please proceed with your question.

Hey, good morning, guys. Just a couple of expense items, if you could. First on utilities, I mean that's been fine this earnings season. I mean is there anything that can be done there? Is there differences between urban and suburban or regulated unregulated markets? And then just if you're willing to kind of quantify the new restaurant opening inefficiencies that you're expecting here over the next few quarters? That would be helpful. Thanks.

Sure. Yeah, I mean utilities expenses do vary by market. Some of our Shacks are busier than others. Some of them have more utility demand just based on where they're located and zoning requirements. But overall I mean I think the theme that's been very consistent is just higher energy costs overall. And that's really what we're seeing here. We expect that will be cyclical but that is hitting us and it is a portion of the 100 basis points in added other OpEx that we highlighted. On the T&D to support the new opening side, look we're expecting a handful, several of openings to require this added support level, but there's a wide range of uncertainty there. So we've talked about when you're thinking about other OpEx it's probably going to be about the same level as a percentage of total Shack sales is what we realized in the third quarter.

Excellent. Thanks for the color team.

Yeah.

Our next question comes from Chris O'Cull with Stifel. Please proceed with your question.

Thanks. Good morning guys. Katie suburban locations seem to be experiencing more normalized comp growth? And I'm just wondering, how does the average weekly sales at these stores compare to 2019? And maybe how does the labor cost or other operating costs, or some of these costs that are probably going to be more permanent in nature? How do those look as a percentage of sales compared to 2019 in those suburban locations?

Yeah. It just really depends on each of the markets and the locations. There's not always just a very consistent trend on that front to call out. But what I would say is that with the staffing pressures that we've discussed, we are seeing more of an impact in our suburban locations and our urban locations to help contextualize that a little bit.

Which is interesting, right, because that may or may not be intuitive for you, but like you have to remember part of the challenge and the gift of the Shake Shack brand and real estate decisions that we've made is we generally tend to be in more higher income areas. We have -- generally have a higher income guest. That's been part of what we shared especially as we head in a more recessionary environment. That actually makes it harder to staff in many of the decisions we've made especially in suburban. So where some of our most acute challenges in hiring are in some of our, I call them “best” locations when it comes to higher income guess. So that is different than some of our traditional urban environments. Again some everyone has got its own challenges. Some urban environments are very hard. Some are much easier. So it's an interesting mix Chris that causes that pressure. And as Katie said it's just a mix of volumes and just because it's suburban doesn't mean it always acts the same. And that's where -- why we're building out these different formats continue to learn, which is the best for which type of sites we can target all kinds of sites.

Okay. That's helpful. And then I apologize if I missed this, but the company came in at the high end of the third quarter revenue guidance, but at the low end of the Shack margin guidance. So I'm just curious what caused or what caused surprised you the most during the quarter?

Sure. I mean, really it's 100 basis points of added other OpEx that we called out. So that was the higher energy cost R&M is running higher here just with equipment availability issues, which we think we'll be able to work through over time and then to support a couple of the new openings. We're expecting all of that to persist into the fourth quarter. And then on COGS, we had a little bit slightly more than we had anticipated beef deflation, but there's just a number of line items that are up sharply like dairy, up 30% fryer oil, fries, ketchup. These are all rising at a pretty fast clip here and really to address these inflationary pressures that's why we took additional price in October.

Perfect. Thanks guys.

Yeah.

Our next question is from Andrew Charles with Cowen and Co. Please proceed with your question.

Hi. Thank you for the question. This is Zack [ph] on for Andrew. My question is also on kiosk. Can you talk about what the impact is to operating expenses and CapEx in 2023? Thank you.

Yeah. We're not going to break it out to that level of granularity at this time. But I'll reiterate the comments that I said on kiosk before and that is we do see a higher check with kiosk orders. And we -- where we have kiosk is a meaningful part of our in-Shack sales and guests really do like to use it. And then finally we're able to utilize labor better. We're able to run more efficient in the Shacks where we have kiosks and where we don't.

Great. Thank you.

Yeah.

Our next question comes from Brian Vaccaro with Raymond James. Please proceed with your question.

Hi. Good morning, and thanks for taking my question. I wanted to circle back on the topic of relative value proposition. And you noted the average price of burger fries and drink is below $14. And I'm curious what that looks like if you break that out between urban and suburban markets. And maybe you could comment more broadly or maybe even quantify a little bit, how you view the brand's relative value proposition across different types of markets and consumers that you're reaching as you move into the suburbs?

Yeah. I think we've gotten better and better over the years at pricing tiers and understanding our guests generally in each market. And that's we shared our pricing strategy in this recent raise, everything from a 2% raise and where we see that we're in a good range and we don't need to come up too much more. Two opportunities to maybe a 10% raise. By the way, some of those may be strong urban, some of them may be very high-income suburban. And we're doing it in a way where we think we have demand and we think we have opportunity. And we also look around at our competitors and it's kind of more important than ever. We haven't had to spend a lot of time thinking about this. But in this inflationary environment everybody is in the same boat of taking that price. So yeah, you might see it below 14%, you might see it up in the 15% range, when you look at some of our more expensive larger price takes places. But the point we're making with that is, I think that's a pretty good value deal. Shack burger fries and a drink in that 14-plus range that's pretty solid, when you think about who we compare to who you might choose to go after. Now, are we going to compete on that with traditional fast food bundles? No we're not. And honestly, like, we're not going to we can't that's not never been our brand. We're serving a totally different level of premium ingredients and experience in our restaurants and that costs money, and we're going to charge the right amount for that. And we're going to keep going. And we'll see. Look, we're in a new time for all of us with the highest inflation, we've all seen in our lifetimes. We're going to have to keep measuring watching and being sure that consumers feel that great value. That's the work.

There's also – while we talk about the average below 14% there are a number of facts that are below that. As Randy talked about, we've taken a very cleared approach here to menu pricing. And we look at the signs of we have positive mix here with price increase. We're seeing guests trade up and adjusting for the fact that more people are just kind of returning to their normal habits and coming in, in single orders or smaller groups will attempt to like the COVID times. We're seeing people add on more to their check. We're seeing great strength in cold beverage. All these things leave us encouraged that our guests, really does value our elevated premium and differentiated approach to menu innovation.

Okay. Thanks. And one follow-up, if I could. Katie on the labor line, it came in a little better than expected. I guess, you can look at it as a percent of sales. It was down a little bit versus the second quarter even with lower average weekly sales, I guess is one way to look at it. But could you just elaborate on, is there anything specific that's driving sort of a more favorable trend in that line? Is kiosk starting to show up? Are there any onetime or moving pieces that are worth highlighting? And then could you also just comment on year-on-year wage inflation. I understand, labor is tight still, and you're investing in that line. But is year-on-year wage inflation starting to moderate at all on a year-over-year basis?

Yeah. So we – on the labor line for the quarter, broadly speaking, we did see that nice – we were not down as much as we seasonally would be in September. So that was a little bit of an offset. But really we're understaffed and we're running more efficient than we have historically run. And we – that's a good thing and also an opportunity for us to continue to step up and drive more sales. As far as wage inflation is concerned, we talked – we made big investments in our teams last year. We talked about that $10 million investment. A lot of that was higher wages that happened in July. So we're lapping that a little bit here, but we're continuing to invest in our team members. We're raising wages where we think it's appropriate. And our teams are definitely seeing the benefit of tips here with some of – there are some markets where they're making over $20 an hour.

Our next question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.

Great. Thank you very much. Question on broader sales trends. Randy, Shake Shack and broader fine or fast casual versus QSRs. I mean, the gap has always been clear. But at the same time we never thought we'd see drive-thru units for Shake Shack, or I think you said highway units and food courts. Obviously, you're embracing demand wherever the consumer is looking for it. But what's the potential for further evolution? I know you mentioned, you're not going to have value meals, but seemingly offering some sort of bundle to attract perhaps a lower income consumer or national television. I mean, where do you see the lines may be blurring further between your segment and traditional QSR? And then, I had one follow-up.

Yes. Well, whoever said we wouldn't do a drive to our food court. We never say never around here. And I think, we're constantly evolving, right? I think, we want to go and do the things that other brands are unwilling or unable to do. That doesn't mean that just -- here's how I think about places like, oh, a road side. Yes, you wouldn't see traditionally a brand or an ingredient to the level that Shake Shack does there. But that's what people want. And when I pull over and get gas on a long ride, I'm elated when I see something that has a better quality than I was expecting from my whole lifetime. We think there's huge opportunity to disrupt those type of environments, whether it's a baseball stadium and by the way, we have both World Series teams are selling Shack burgers in their stadiums. I don't think it's an accident that those teams made the World Series because of their healthy diet of Shake Shack in their stadiums. But these are the things that we got to keep doing, whether it's in Korea or Malaysia or all the places we expand. So to your question I think it's a huge opportunity for us to keep being who we are in traditional places where the opportunity is vast. That is what drive-thru is about. It's what our expansion of these categories can be all about. And I think, we can continue to do it so that, the next generation of burger leaders, like my kids, has a higher expectation of what they should get. This doesn't mean people are going to abandon fast food. It's a -- fast food has a place. It's great. It's a great deal and there's a place for that. We're -- we've never been that and we're trying to continue to do this at an elevated premium. Sorry, go ahead on your second question.

I was just going to follow up, just because clearly impressive to see the comps accelerate through the third quarter and into October, seems like its counter to all the challenges everyone talks about from a macro standpoint. Just wondering whether you think it's more that you guys are unique, because the acceleration could be led by, like you talked about, the post Labor Day return to office. I mean, clearly. you're somewhat different than a traditional restaurant. I mean, are there any signs of a slowing macro on traffic or mix? I mean, what are you looking for to see, some consigns of a slowing macro, again, relative to what seems like an accelerating trend, but maybe that's distorted by just the wave of return to office in some major markets. Thank you.

Well, I think, it's -- rather than distorted, I'd say, it's certainly supported by that return to office. There's no question. That's a little bit more of a wind at our back. But, again, we -- as we've said, we generally trend a little bit higher income guest that tends to be stronger right now than our lower-income guests and people who shop that way. But, I think, we got to be careful, because there's going to be lower income weakness. There's going to be trade-outs. People are going to have to make these decisions. And I think we've got to prepare for a lot of scenarios in this next few quarters. So our guidance assumes kind of a blend of that continued return to the tailwinds of urban mobility, balanced with -- there's got to be some trade down. Also, in some of our places that require more travel related to destination, the strong dollar isn't helping us, right? And you'll see that balance. So I think it's a measured puts and takes on both of those things happening that led to our kind of mid-single-digit comp guidance for Q4 that we feel good about. And believe it or not, Q4 last year, people forget, before Omicron hit there was an accelerating trend in our business and many others in that November-December time frame. We're actually up against some really strong comps in November and December of last year. And then, as we all know, right around Christmas and the New Year, it kind of fell off with Omicron and everybody you knew was testing positive, right? That's the trend. But that is actually a headwind for us in the comp line as we look at PE 11 and 12.

Thank you.

Our next question is with Drew North from Baird. Please proceed with your question.

Great. Thanks for taking the question. I had a follow-up on the margin outlook. Given the current sales trajectory and cost outlook and the inflammation of the latest price increase, I was hoping you could provide some perspective, how you're thinking about the annualized margin rate exit 2022. Not asking about Q4 specifically, that guidance is clear, but maybe how we should be thinking about 2023, based on what you're seeing right now? And maybe any early indication of how you're thinking about commodity or labor inflation into next year? Thanks.

Yes. So we're not going to be giving any outlook on 2023 specifically today. The puts and takes of our 4Q margin guidance were 16% to 18%. Look some of that will come where we fall on sales, and how much price realization we capture with the most recent price increase. We've taken an appropriately conservative approach assuming that we have about 50% to 70% of that price increase, and how urban mobility trends play out. I also have to just mention, we have 17 new Shacks that we're opening between now we expect to open, between now and the end of the year. And we are taking a more conservative approach to thinking about how that can contribute to our revenue and our profits, but it's possible that some of those could come in ahead of expectations. And then finally, the overarching had a question about where our T&E ends up landing, as we're supporting all of these openings as well, and the impact to our overall system just from having to borrow some teams to support those open. So that's how I would be thinking about kind of the bottom end to the top end of that range on that front. And then we do expect inflationary pressures to persist. We're going to probably be investing more in our team members into 2023. And there's likely to be some puts and takes on the inflation line for our food and paper cost, but is probably going to be more inflationary next year.

Our next question is from John Ivankoe with JPMorgan. Please proceed with your question.

Hi. Thank you. Randy at the beginning of the call you mentioned a goal to, I guess, have an intense operational focus. And if you haven't already addressed it on the call, and I'm sorry, if you maybe touched on various parts of it. Could you talk about what exactly that means? I heard maybe your staffing levels are a little bit less than what you'd like and you'd want to increase hours in certain stores. But what are the major opportunities that you see operationally for the brand in the near term? And is that something that you're hearing from customers? I mean, I don't know exactly what that would be maybe what the service or food quality is not as consistent. Things that I don't think really have changed in the past couple of years, but I just wanted to see what would have driven that comment from your perspective.

Thanks John. Yes, let's start with this. As I said, most of our gains are coming in the Shack, right? Our -- the last couple of quarters, we've started to return to more of --obviously, our digital is retaining and really strong, but our gains are coming in the restaurant. It tells you people are coming back. People want to hang out of Shake Shack and want to come in there and hang out. With that you've got just a return to increased foot traffic and how things work in the Shacks. On top of the digital channels that never existed a few years ago, right? So we've got to get better. It starts with what you said with staffing. We're not staffed everywhere all the time where we want to be. Now there's some Shacks out there, that I'm incredibly proud of day in, day out, that are just crushing it on every aspect of those goals. And there are some that are not, and we need to do better on that. And where we are, we are very self aware and a lot of it begins and almost always ends with being fully staffed. That's what it's about. But it's also about clean restaurants. It's about making sure we're keeping up with R&M. You saw that be a little elevated this quarter. You're going to see that as we continue to keep our restaurants clean, working and going. And as our restaurants some of them get a little bit older. It's about flow. It's about how do we move food? How do we continue to evolve from all of these kind of ups and downs of COVID-related operational decisions, whether it's in packaging, or flow, or digital pickup with delivery drivers and all of these things that are in a flow, and they're evolving. And we've just got to keep that focus. And so much of our focus has been on digital and will remain there, but as people return, it's another call to action for us to just get in our restaurant and be relentless about how we execute. So to your question about guess expectations, our likelihood to recommend or kind of scores that we measure have only improved over time. So we feel really good about that. And -- but we will not satisfied. We still need to be better. That's where we're going to be spending a lot of our time.

Helpful. Thank you.

We have now reached the end of our question-and-answer session. And I would now like to turn the call back over to Randy Garutti, CEO for closing comments. End of Q&A:

Thanks so much everybody. We appreciate all your time and I hope to see you the Shacks soon. Be well. Take care.

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