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    Shake Shack Gears Up for Massive Growth in 2018

  • The fast casual is well on its way to 450 U.S. restaurants.

    flickr: Chelsea Nesvig
    Shake Shack average-unit volumes are north of $4 million, despite all the growth.

    Shake Shack’s exclusive, city-focused nature is quickly dissipating. The New York-born brand boosted its growth rate 41 percent in 2017, executives reported Thursday afternoon. However, that expansion, which included 26 company-operated domestic units and 19 net licensed restaurants in the fiscal calendar, was a mere knock on the door of what’s coming next.

    As of today, there are 162 Shake Shack’s total worldwide across 12 countries and 20 U.S. states, plus Washington, D.C. Randy Garutti, the chain’s chief executive officer, said Shake Shack is staring down its biggest class of planned restaurants in company history for 2018. The fast casual expects to end the year with 122–125 domestic company-operated units and 85–87 additional licensed stores. When Shake Shack went public three years ago, there were 31 and 32 restaurants in those respective categories.

    Garutti offered a broader vision as well: Shake Shack is targeting 450 domestic corporate restaurants—a goal the brand is only 20 percent complete with.

    By 2020, Shake Shack intends to more than double its base, Garutti added, and build the footprint to at least 200 domestic company-operated restaurants and 120 global licensed units. Along the way, Shake Shack wants to nearly double its total revenue to more than $700 million.

    “This is an ambitious and exciting time for Shake Shack with growth planned well beyond levels we imagined possible just a few short years ago,” Garutti said in a conference call. “We are both committed and confident in our ability to deliver both of those three-year targets, and our longer-term growth opportunity.”

    This accelerated growth is clouding the brand’s financial reports a bit. Shake Shack posted a total revenue increase of 31.2 percent in the fourth quarter to go along with same-store sales growth of 0.8 percent. The burger chain also posted fourth quarter net income at a loss of $14.4 million, or 55 cents per share, missing the year-ago total of $3.9 million, or 15 cents per share. On an adjusted basis, Shake Shack earned 10 cents per share, which topped Wall Street's consensus estimate of 6 cents per share, according to Thomson Reuters. The revenue of $96.1 million also beat Thomson Reuters’ expectation of $92.9 million. Shake Shack beat Wall Street on comps as well with 0.8 percent besting the predicted 1 percent drop.

    All of these numbers need to be measured against the brand’s growth, however, as chief financial officer Tara Comonte pointed out. That revenue jump can heavily be credited to the addition of 26 domestic restaurants since the fourth quarter of 2016. The brand opened 11 in the fourth quarter alone. Shake Shack only counted 43 restaurants in its comparable base since it keeps the measurement to stores open at least 24 full fiscal months, or roughly half the total of company-operated Shacks in the system, a majority of which are located in the Northeast region, including New York City.

    “As a result our same Shacks sales continue to be influenced by changes from a small number of Shacks. This will lessen over time as we increase both the number and location of Shacks in the base,” Comonte said in the call. “In the meantime, however, this metric will continue to show degree of volatility. In this case the fourth quarter results benefited from warmer than usual weather in the Northeast in October and the strength of the delivery pilots in many of our Shacks.”

    So what exactly will these numbers look like when the concrete settles? That’s a hard question to answer but there are some numbers that point to a very bright future for Shake Shack.

    One is average weekly sales. Shake Shack’s domestic corporate units earned $85,000 per week in the fourth quarter of 2017. Average-unit volumes for all domestic stores were a healthy $4.6 million. That’s not in that same stratosphere as the New York City units, which report AUVs north of $7 million, but it’s still an enviable base to grow a restaurant brand on.

    “This company started in New York City with industry leading average unit volumes and operating margins,” Comonte said. “As we open more Shacks at lower AUV and generally lower operating margins across the country we will see these percentage based metrics continue to come down, at the same time delivering extremely healthy returns and significant absolute dollar growth on both the top and bottom line.”

    The growth in 2017, Comonte said, will be heavily concentrated in the second half of the year. For fiscal 2018, Shake Shack expects to open between 32–35 domestic units, which would represent a unit growth rate of 36–39 percent. “We are opening more Shacks than we have in previous years, but the sales and profit impact of those openings will not be fully solved until 2019,” Comonte said.

    When 2018 closes, Shake Shack expects that AUV number to drop to $4.1–$4.2 million and flat same-store sales.

    This past year, Shake Shack expanded its footprint in New York City, the Mid-Atlantic, Midwest, and Texas, among others. The brand also entered new markets in Michigan, San Diego, St. Louis, and more. It was also the biggest licensing year yet, with 16 openings across Japan, Korea, the Middle East, and the U.K., as well as three domestic non-traditional stores at the LAX Airport, Minute Maid Park in Houston, and M&T Bank Stadium in Baltimore. Shake Shack also entered into agreements to open in Hong Kong, Macau, and Shanghai, with nearly 40 restaurants planned over the next decade. Shake Shack has Seattle, San Francisco, Denver, and Charlotte on its radar for 2018.

    Garutti also took time to explain how Shake Shack plans to grow this quickly and maintain its operational and sales success.

    One note is what he referred to as being “relentlessly focused on our continued digital innovation.”

    In January 2017, Shake Shack launched its iOS app followed by the Android version in July. He said the brand is “pleased with the level of repeat guests in the higher average check via the app in traditional in Shack tickets. The app will remain an increasingly important job for us, delivering a frictionless user experience and convenience for our guests as well as enabling more personalized and targeted marketing strategies in the future.”

    He said Shake Shack would continue to add functionality to the online experience with desktop and web ordering on the way.

    “We are going to build data management and analytics capabilities to deliver enhanced customer insights, critical to our ongoing digital product roadmap and our other strategic growth initiatives and deliver increasingly personalized marketing, allowing us to connect with our existing and potential guest and to increasingly focus on rewarding our best customers, and incentivizing more frequent visits,” he added.

    Additionally, Shake Shack conducted delivery pilots in the last four months of fiscal 2017 with Postmates, DoorDash, and Caviar, and is currently testing new packaging. Garutti said the brand would continue to evaluate the process before entering into a formal partnership.

    Shake Shack introduced self-serve kiosks in a couple of New York City locations in 2017 as well. The Astor Place location in cashless and was built with eight kiosks with a user experience designed around the app. Shake Shack is planning a few more kiosk test Shacks in the first half of 2018, Garutti said, including hybrid units that do both.

    Garutti said the kiosk format has received positive feedback but it also attractive due to labor issues facing the business.

    “… We've got labor headwinds,” he said. “We do believe that this will help us to redistribute our labor in the sales driving initiatives and save labor over the long-term and that’s what we’re still trying to learn. So it's going to open up a whole lot of fun opportunities for us, but [there’s still] lots of learning ahead.”