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…

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…

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.…

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.