Shake Shack sees macro challenges as temporary

Shake Shack’s summer barbecue menu was promoted with disposable T-shirts, destined for sauce drips. | Photo courtesy of Shake Shack.

Expect to see more menu news—particularly beverage innovation—at Shake Shack.

Shake Shack’s traffic dropped 4.6% in the first quarter, largely on bad weather and macroeconomic pressures in major markets, like Los Angeles and New York City, the company said Thursday 

But the New York-based fast-casual chain raised guidance on projected restaurant-level margin growth, saying operational improvements are taking hold. CEO Rob Lynch is gung-ho on growth as the chain looks to quadruple its unit count, including at least 1,500 company-operated units.

Lynch believes the macro headwinds are largely temporary, and the chain is staying focused on things they can control, including menu innovation that will drive traffic. 

“We talk a lot about the challenges that we’re all facing and the uncertainty that’s out there,” he said. “But we’re mitigating that. We’re staying focused on the foundation of Shake Shack. That’s operations. It’s supply chain. It’s culinary innovation. It’s development.”

Same-store sales were up 0.2% for the March 26-ended quarter, largely on an average check increase of 4.8% resulting from higher prices. The chain also blamed the traffic decline on the long duration of a truffle burger promotion that ran for seven months. 

While popular, Lynch said the brand needs more “new news,” and promotions are coming on burgers, sandwiches, side items, shakes and beverages—the latter being a category that’s somewhat new for Shake Shack.

In April, for example, Shake Shack introduce a Dubai Chocolate Pistachio Shake at 30 restaurants in New York City, Los Angeles and Miami. Lynch said the response was phenomenal, with lines out the door and some units selling out in minutes. 

It was a limited promotion in part because the kataifi, or phyllo dough, had to be grilled, which caused some operational challenges. But it’s the type of innovation that is attracting guests, he said.

This week, the chain is bringing barbecue back to the summer menu with a Smoky Classic BBQ Burger (and chicken) and the Carolina BBQ Burger (and chicken), as well as an Oreo Cookie Funnel Cake Shake, a Banana Pudding Shake and a Campfire S’mores Shake.

Shake Shack’s focus on its drive-thrus is also paying off, he said. Drive-thru performance has been a challenge because Shake Shack makes food to order, and that takes longer.

The chain has been testing in the past month offering combo meals on digital menu boards in eight restaurant drive-thrus. The move has resulted in faster service, better accuracy and improved guest satisfaction, he said, and it will be implemented in 40 restaurants by the end of this month.

Now the chain is looking at deploying the combo meal strategy in other channels, potentially on kiosks and in-restaurant ordering.

Shake Shack’s restaurant-level margins reached 20.7% in the first quarter, which Lynch said was the highest rate since 2019 and a 120-basis point increase year over year, despite the macro environment. The company raised its guidance on margins, saying they expect margins of about 22.5%, up from earlier guidance of 22%. Lynch said he expects to see at least a 50-basis point improvement in restaurant-level profit margins annually over the next three years.

“It’s remarkable performance from our team, especially considering the traffic headwinds, elevated beef costs that were up mid-single digits and 3% to 4% wage inflation,” he said. “This makes me especially excited about what this business can look like when macro tailwinds are once again at our backs.”

The company is projecting a same-store sales increase in low single digits for the year, with only moderate pricing of about 3%.

Shake Shack expects to open 45 to 50 company units, as well as 35 to 40 licensed units this year.

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