Shake Shack same-store sales driven by chicken sandwiches

Shake Shack same-store sales driven by chicken sandwiches

Chain tests app with mobile ordering, plots unit growth

Chicken sandwiches helped boost same-store sales at Shake Shack Inc. in the third quarter, the company said Wednesday, and the chain plans to expand its chicken offerings next year.

The New York-based fast-casual burger operator will debut a barbecue chicken sandwich to go along with its Barbecue ShackMeister burger, which will be introduced late in the first quarter of 2017.

The chain is currently testing a Salt & Pepper Honey Chick’n sandwich at three locations in Brooklyn, N.Y. The sandwich features a fried chicken breast topped with salted honey and ground black pepper.

“Chick’n Shack has maintained its position as a top-three selling menu item through the summer, and will be an important lever in diversifying our long-term protein risk, and allows us an entirely new canvas on which to innovate,” Shake Shack CEO Randy Garutti said during the company’s third-quarter earnings call Wednesday.

Meanwhile, Shake Shack’s current burger limited-time offer, the Bacon CheddarShack, is “still performing well.” Garutti said the company plans to start offering burger and chicken limited-time offers at the same time starting early next year.

Executives said they are able to add the new menu items without making operations overly complex.

“Our core menu has really remained almost exactly the same outside the addition of Chick’n Shack earlier this year,” Garutti said. “So, when we do a burger LTO, something else comes off. So we generally don’t tap the kitchen and hurt our throughput while we do that.”

Shake Shack’s new chicken sandwich and its plans to offer new items routinely are helping to drive sales at a time when comparisons with the past year are difficult and the overall industry is struggling.

Same-store sales rose 2.9 percent in the third quarter ended Sept. 28. Earnings and revenue growth each bested analyst expectations, and the company’s stock surged, rising 16 percent in Thursday morning trading.

The strong trading day took Shake Shack from down 14 percent on the year to up slightly.

The stock performance and improving sales masked some margin deterioration at Shake Shack restaurants. Restaurant margins were 28.8 percent of sales, which is remarkably strong in the restaurant industry, but they were 160 basis points lower than the 30.4 percent mark reached a year ago.

Andrew Charles, analyst with Cowen and Company, wrote in a note that it’s the first instance of margin deterioration since Shake Shack’s 2015 initial public offering.

Margins fell due largely to labor costs, which rose 160 basis points, to 25.3 percent of sales. This year, Shake Shack increased wages companywide, which is the main reason for the higher costs.

On the other hand, beef costs fell 12 percent.

Executives don’t expect labor pressure to end, either for Shake Shack or for the industry as a whole.

“This is the story of our time and the challenge our business faces into the next few years,” Shake Shack CFO Jeffrey Uttz said during the earnings call.

Shake Shack recently launched a Shack App, which includes a test of mobile ordering at a single location in New York. Executives said they would tweak the app to “ensure that we build a great experience.” They also hinted that it could be expanded.

“The app opens the door for endless future opportunities,” Garutti said. “But today, we’re focused on what we believe is most important, and that is the ability to pre-order and capture all those guests who, over the years, just haven’t been able to commit the time to wait in line. We’ve got a lot to learn about what the app means for Shake Shack, how it might impact our guests and how it influences their behavior.”

Executives indicated that they would develop more locations this year than anticipated. The 105-unit chain will open 19 locations this year, instead of 18. The company expects to open 21 or 22 locations next year, and already has leases signed. Executives said Shake Shack is getting a strong advantage from landlords.

“We are well-positioned to secure premium A sites around the country,” Garutti said. “We’re confident that this real estate advantage will continue to support our growth for the long term.”

Another area where Shake Shack plans to take its locations: Non-traditional areas. The company recently opened a licensed location at the Wells Fargo Center in Philadelphia. And Shake Shack recently signed a deal with HMSHost to open locations in airports.

“We’re really excited about the opportunity for the Shack brand to grow in unique locations around the country,” Garutti said.

On Election Night, the chain partnered with DoorDash to feature Shake Shack for delivery. Garutti said the chain had “an extraordinary response on an opportunity night.”

“We’re excited about delivery, but we’re not jumping in with one partner at this time,” he said. “We’re still discovering. There are many great players out there that are disrupting the market every day. I believe over the long term, we’ll continue to do more and more delivery through third parties.”

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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