Shake Shack Inc (SHAK) 2021 Q1 法說會逐字稿

Greetings, and welcome to the Shake Shack First Quarter 2021 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Rik Powell, Senior Vice President of Finance and Investor Relations. Thank you, Rik. You may begin.

Thank you, Paul, and good evening, everybody. Joining me for Shake Shack's conference call is our CEO, Randy Garutti; and President and CFO, Tara Comonte. 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 in 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 appendix to our supplemental materials.

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 26, 2021. 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 first quarter 2021 earnings release, which can be found at investor.shakeshack.com in the News section. Additionally, we have posted our first quarter 2021 supplemental earnings materials, which can be found in the Events & Presentation section on our site or as an exhibit to our 8-K for the quarter.

And with that, I'll turn the call over to Randy.

Thanks, Rik, and good evening, everyone. I'm really happy today to share the continued comeback and forward momentum here at Shake Shack. Spring has ushered in a great energy around the country and our hometown of New York City too. With COVID cases stabilizing and more regions steadily loosening restrictions, we're optimistic that improving trends can continue for our industry. As always, I want to start with a shout-out to our team members who worked through so much hardship. And now with a full year of the pandemic behind us, they're still leading the way back to our resuming growth. We move forward today with confidence with the opportunity we see ahead.

In the first quarter 2021 and so far through April, our financial performance continues on an upward trend. Total revenue was at $155.3 million in the first quarter, up 8.5% from last year, with average weekly sales improving to $64,000 compared to $62,000 in the fourth quarter. We exited the first quarter with March average weekly sales of $68,000, improving again to $69,000 in fiscal April. Same-Shack sales were up 5.7% in the first quarter and up 86% in fiscal April versus 2020. We'll also be sharing sales comparisons for the current comp base versus 2019, and this was down 14% and 15% in fiscal March and April, respectively.

Suburban Shacks continue to lead our recovery, with April nearly flat at down just 1% versus 2019. In terms of profitability, Shack-level margin was 15% for the first quarter, exiting with March at just under 19%. Let's move now to talk about our strategic focus and priorities. Because we moved through this period of continued sales and profit recovery and to the significant opportunity ahead, our team is focused on opening and operating great Shacks. We're executing on the evolution of our physical Shack formats and digital transformation while maintaining a critical focus on the creation of great products and an elevated guest experience, all culminating in an enhanced convenience and access for our guests and an expanding addressable market for Shake Shack.

Highlighting growth during the first quarter, we opened 10 domestic company-operated Shacks and have opened another 5 so far in Q2. We opened -- we expect to open between 1 and 3 more through the end of this quarter for a total 16 to 18 new Shacks by the midyear point, an incredible accomplishment by the team in what has continued to be a challenging operating environment. As we look to the back half of the year on the various state of permitting or construction of our '21 class, we expect the remaining Shack openings to be more weighted to the fourth quarter. Assuming no unforeseen COVID-related delays, we're on target to open between 35 and 40 new company-operated Shacks this year across both urban and suburban markets, although more weighted to suburban as we continue our market penetration strategy. We continue to guide to an accelerated development plan of 45 to 50 Shacks next year in '22.

Turning to the performance of the Shacks we've opened so far this year, we're really encouraged. Average weekly sales for our '21 class was over $79,000 in the first quarter, more than 20% higher than the system average. Some of our most recent openings in new markets such as Boulder, Indianapolis and Portland resembled the excitement previously seen before the pandemic, that lies around the block and strong sales out of the gate, encouraging indicators for the robust and accelerated development plan we've laid out.

Our newest Shack in Fishers, Indiana, just outside Indianapolis features our second Shack Track drive-up window. And we've also opened new Shacks in Santa Monica, L.A., Hoboken, New Jersey and more. Shack Track digital convenience leads with about 1/3 of the class featuring walk-up windows, about 10% with a drive-up window and many other Shacks featuring curbside and/or enhanced interior pickup experiences. Additionally, we're making a big commitment to testing drive-thrus, now with the potential for up to 8 of these planned through 2022. We expect to open our first at the end of this year.

Turning to the recovery and growth of our license business. We currently have 16 Shacks temporarily closed due to COVID impacts. However, during the first quarter, we opened 2 new international Shacks in the Middle East with 6 additional openings in the second quarter through fiscal April, mostly in Asia. We saw improvement in total weekly sales performance throughout the first quarter, increasing from $5.6 million in January to $6.3 million in March and $6.6 million in April. The recent increases have been driven by both our international and domestic license Shacks, especially in airports that are experiencing increases in TSA traffic.

We're also thrilled that all of our baseball stadium Shacks have now reopened, including our newest within the World Series champion, L.A. Dodger Stadium. With limited fans allowed at games, we don't expect to have a normal sales season, but we're delighted to be bringing Shack Burgers back to the ballpark. So far in the second quarter, our U.K. Shacks are gradually reopening as the country finally ended some of the most -- most of the lockdown restrictions for the first time in over 3 months. Our Shacks in China have seen strong sales throughout the second quarter so far. And our recent openings in Macau, Beijing and Singapore continue to extend our footprint in these key strategic regions.

As we look to the future and the importance of the Asia Pacific region, we'll soon be expanding within China's Southern region with our first Shack planned to open in Shenzhen later this quarter. We're targeting opening between 15 and 20 new license Shacks in '21, increasingly between 20 to 25 in '22. Our licensed operations are a critical component in how we will scale our business and our brand, and we expect them to grow substantially over the coming years.

Moving on to the pivotal transformation of our digital business, which continues to perform well. We're intensely focused on investments that we believe have been and will be critical to our growth, driving frequency in marketing opportunities, all leading towards greater convenience and accessibility to and for our guests. During the first quarter, we fully launched delivery from our own app and will be adding web later this year. Offering delivery within our own channels is a key step in our ongoing digital and sales growth strategy and allows us to build strong relationships with our guests and enable more personal and direct communication.

We're also working to improve in-app communications, particularly to enhance the pickup notifications experience. And within our Shacks, we're testing screens that communicate order readiness to our guests. We've already seen guest experience scores move higher, where these initiatives have been rolled out. As in-person dining restrictions ease, we're excited to see our in-Shack guests return, all while we continue to strengthen, build upon and amplify the digital gains we've already made.

And finally, it's that time of the call where we start to get a little bit hungry. In Q1, we began the limited run of our Korean style chicken menu. And this launched with really high guest demand and a large amount of buzz, so much so that many of our Shacks actually sold out. And while this led a curtailed menu availability in February, we ended the promotion strong in March, having learned a lot that will help us prepare for more chicken LTOs later this year. Currently, we're running a new Avocado Bacon Burger and our ChickenShack topped with freshly sliced avocado and Niman Ranch applewood smoked bacon. This will be available for a limited time nationwide. And for the first time ever in addition to these items, guests can also have freshly sliced avocado added to any of their favorite burgers.

Over the past few months, we've increased focus on our shakes and cold beverage categories as well as our limited time offers here are proving to be increasingly popular. Our spring lemonade trio, for example, featuring strawberry salted lime, blackberry lychee and Mango Passionade contributes to an increase in beverage items per check since launching in early March. These have made up over 1/3 of total cold beverage sales, nearly doubling the sales contribution of previous beverage LTOs. We've got some fun additions in these categories coming in the coming months, and we'll continue to deliver an inspired LTO calendar featuring bold flavors and modern fun versions of the classics in an effort to continue to elevate every deal.

Finally, on the culinary front, during the first quarter, we launched a new chef collab series named Now Serving, which features a diverse group of local chefs and restaurants from across the United States to help us cook up exclusive limited time menu items. We've had lots of fun running successful culinary collabs in the past. But this year, coming out of the pandemic, we're using these events as an opportunity to feature and give back to our local restaurants, strengthen our brand and more deeply engage with our communities. And a portion of the net proceeds from each collab will go to nonprofit organizations helping local restaurant communities.

Finally, I want to highlight our recently published annual Stand for Something Good report, which highlights many of our ESG priorities in 2020 and beyond and includes, for the first time, the publishing our 5-year diversity goals for our company. We embody our mission Stand for Something Good by prioritizing the well-being of our team, sourcing premium ingredients from like-minded producers, committing to responsible crafts and design of our Shacks and actively engaging in community support, support through donations, events and volunteers. We know we can and must continue to do so much more to offset our impact on the world and make Shake Shack a leader in creating opportunities to drive positive change. I encourage you all to read the report, which can be found in the Investors section of our website.

Now I'll pass the call over to Tara for more detail on our financial performance.

Thanks, Randy, and thank you all for joining us this evening. With all the momentum you just heard, we continue to be encouraged by our ongoing recovery and resulting performance. First quarter total revenue was $155.3 million, representing year-on-year growth of 8.5%, of which Shack sales were $150.7 million delivering year-on-year growth of 9.1%, with trends continuing to be positive on all fronts.

When we look at the monthly breakdown of our sales performance so far this year, we saw a strong start in January. Fiscal February was heavily impacted by severe winter weather, then followed by a rebound in March, exiting the quarter with average weekly sales of $68,000. Sales continued to hold strong through April, increasing to $69,000, supported by the continued rebuild of in-Shack sales. As of the end of fiscal April, the vast majority of our Shacks were operating with open dining rooms albeit many under varying levels of capacity restrictions, particularly in urban Shacks.

Looking at same-Shack sales, we delivered 5.7% year-on-year growth in the first quarter and 86% in April. An additional compare that's helpful to gauge our recovery is to our 2019 sales level. When we compare the first quarter 2021 sales of our current comp base to their respective sales in the first quarter 2019, they were down 14.8%. When we do the same for fiscal April, we have a similar result, down 15% compared to 2019. When looking at our comp base, it's important to remember that it includes some of our previously highest volume Shacks in the country and is disproportionately impacted by their performance and the extent to which they've yet to recover with many and deeply impacted urban centers.

This is particularly true for certain Shacks in cities such as New York, Las Vegas, Chicago or L.A. where current performance is having a material impact on our still relatively small comp base. In fact, when we take the 126 Shacks in our comp base to date and remove the bottom 25 performing Shack of nearly all urban, our April comp versus 2019 improved from down 15% to down just under 3%. Within the first quarter same-Shack sales results, traffic declined 12.3%. It was offset by exclusive 18% price/mix, a combination of our year-end price increase taken in December, increased pricing on third-party delivery channels, which fall out over the early part of the year and a higher number of items per check, particularly in our digital channels.

A quick note before we move on as it relates to same-Shack sales. As outlined in our earnings supplemental materials last quarter, in order to normalize for the 53rd week in 2020, our compared periods for both 2020 and 2019 have been shifted forward a week from the fiscal calendar in order to show a more like-for-like comparison. We've included some detail around this in our supplemental materials posted earlier this afternoon to further clarify.

We continue to experience recovery across both our urban and suburban markets. However, many major urban markets, such as Manhattan, remain materially below pre-COVID levels, while office, events and tourism traffic returns. The split between urban and suburban Shacks as well as by region can be found on Pages 7 and 8 of our supplemental materials, where you'll see suburban Shacks nearly flat to 2019 levels in fiscal March and April and a slight increase in the recent speed of recovery in New York City. When compared to 2019, our urban Shacks were down 25% in fiscal March and 27% in April, with some of our highest volume Shacks in the most dense urban or tourism-related areas such as Las Vegas, New York, D.C., Chicago and L.A., each of which will take some time to fully recover.

Despite the positive momentum in the business, it remains challenging to provide an accurate outlook on sales. However, based on the current operating environment, we believe total revenue in the second quarter is likely to be in the range of $174 million and $183 million with Shack sales between $170 million and $178 million. This assumes a continued general recovery across the country, together with the benefit from new Shack openings. We expect our same-Shack sales to increase in the mid-40s to 50% range for the same period. We're anticipating license revenue to be between $4 million and $5 million based on recent trends and continued volatility across an uncertain international recovery climate.

As is evident in the strength of our digital sales over the last year, our digital transformation has been and will continue to be critical to our growth. Digital sales mix remained strong in the first quarter at 60% of sales decreasing to 51% in April as in-Shack sales increased. Even with this increase in in-Shack sales, the retention of our digital sales levels has been impressive, with 90% retained when we compare fiscal April to our digital sales period of fiscal January. In addition, when we annualize our first quarter digital sales, they equate to a digital-only AUV of $2 million, a clear measure of the strength and impact of digital across our business. And although we expect our digital sales mix to come down as in-Shack sales return, we feel confident in our ability to retain and acquire new guests through these digital channels.

We've welcomed almost 2.5 million new purchases through these channels since mid-March last year. And whether through our new digitally enabled order-ahead options such as curbside or delivery now available through our own app, these channels are proven to be effective as both acquisition and retention vehicles and with digital guests continuing to demonstrate higher levels of both (technical difficulty) and spend. We'll continue to build on this strong foundation with further enhancements to the digital guest experience, evolving and improving marketing tools and new product launches such as the website and new Android apps to built on.

Moving on to profitability. Shack-level operating margin was 15% in the first quarter, a 100 basis point decrease versus the fourth quarter, which had benefited from a onetime occupancy credit as well as the impact of the 53rd week. First quarter Shack-level operating profit margin strengthened into fiscal March, ending the quarter at just under 19%, albeit positively impacted by the 13th week, but a strong sign for our long-term ability to continue our recovery towards pre-COVID levels of profitability. However, the timing and scale of our margin recovery remains highly dependent on those previously highest volume Shacks fully recovering to prior sales levels.

Food and paper costs in the first quarter were 29.6% of Shack sales, a decrease from 30.1% in the fourth quarter, driven primarily by both our year-end and third-party delivery marketplace price increases, partially offset by some beef inflation in the second half of the quarter, which we expect to continue through Q2. Overall, we expect our total food and paper cost line to slightly increase in Q2 as these dynamics continue. Labor costs in the first quarter was 30.8% of Shack sales compared to 30.3% in the fourth quarter, driven by annual wage increases, higher payroll taxes at the state level and the building back of our team to support a continued sales recovery. As previously shared, we expect 2021 wage inflation to be in the mid-single-digit range and do not expect to see leverage in this area in the short term.

Other operating expenses remain elevated at 15.4% of Shack sales in the first quarter, an increase from 14.7% in the fourth quarter due to additional costs associated with operating during COVID and the return of in-Shack sales with the fourth quarter also having the benefit of the 53rd week. Occupancy cost from the first quarter were 9.2% of Shack sales, a slight increase from the fourth quarter, which benefited from a onetime adjustment due to the closure of our Penn Station Shack in addition to the 53rd fiscal week in the fourth quarter. The occupancy line continues to be impacted by sales deleverage, particularly in our previously high-volume urban Shacks.

Given recent trends and the outlook across those various Shack-level cost lines, at Shack sales of between $170 million and $178 million in the second quarter, we would expect our Shack-level operating margin to improve to between 15% and 17%. G&A expense in the first quarter was $19.6 million, including $1.9 million of equity-based compensation and other noncash item. As we invest across the business and plan to open our largest classes of Shacks this year and into 2022, we expect full year 2021 G&A to be between $83 million and $86 million, consistent with previously guided levels.

Preopening expense in the first quarter was $3.6 million, an increase from $2.8 million in the fourth quarter due to the increased 2021 development pipeline on those first half 2021 new Shack openings. We continue to expect full year 2021 preopening expense to be between $14 million and $15 million, consistent with prior guidance.

On an adjusted pro forma basis, we reported a net gain of $1.8 million or $0.04 per fully exchange and diluted share, which benefited from lower taxes related to option exercises and share vesting during the quarter, where we received a tax deduction for the value our employees receive upon option exercise or share vesting. Excluding the tax impact of stock-based compensation, our adjusted pro forma tax rate during the first quarter was 29.4%. And as usual, a full reconciliation of our tax rates can be found in the appendix of our supplemental materials.

Given the continued uncertainty around the outlook for the rest of this year, in particular, the timing of full sales recovery and the resulting impact on our taxable income, we're not issuing specific 2021 tax rate guidance at this time. However, in a normal operating environment, our adjusted pro forma tax rate, excluding the impact of stock-based compensation, is expected to be between 26% and 28%, in line with 2020 levels.

Moving to balance sheet. We're in an incredible position of strength as we look forward to the growth opportunity ahead of us with our cash and marketable securities balanced at the end of the first quarter at $416 million, a significant increase following our $250 million convertible debt issuance that we completed in March. For the purposes of calculating diluted EPS, our share count assumes that this debt has been fully converted to equity, resulting in an immaterial incremental addition of approximately 450,000 shares to our fully diluted share count.

In March, we completed an amendment to our revolving credit facility in order to update terms to reflect the convertible debt issuance and to extend the maturity of the credit facility, which remains undrawn. In connection with the amendment, we incurred a onetime interest expense in the first quarter of approximately $320,000, primarily related to the write-off of previously capitalized revolver costs. We also capitalized approximately $110,000 to deferred financing costs and will amortize these over the term of the revolver.

And finally, as we shared previously, tomorrow is my last day at Shake Shack. I'm at the end of a period of my career that I will look back on with extreme pride and sincere affection. I'd like to thank Randy, my friend and partner, and the entire Shake Shack family for an incredible 4 years. I am so proud of everything we've built together and excited for all that lies ahead as Shake Shack continues to take the world home. This is a great company full of amazing people, and one I will very much miss. Onwards, I'm looking forward to cheering on your every success.

And on that, I will hand you back to Randy.

Thanks so much, Tara. And as Tara just mentioned, tomorrow is going to be her last day here at the Shack, as she begins a new chapter as a CEO of a private life science company. And I want to take this opportunity to just once again thank Tara for her huge contribution over these past 4 years. She leaves us in such a strong position. And I'm thrilled to see her take on a CEO role, and I'm going to be rooting for her in every test. We will miss you, Tara, and know that you are always part of the Shack fam.

Our search process is well underway, and we look forward to strengthening our executive team through this transition. In the interim, Tara's responsibilities will be well transitioned to other existing members of our Shake Shack leadership team. We still have a considerable way to go until we reach full recovery. But every day, we're seeing positive signs and increased confidence in Shake Shack's opportunity moving forward. To you and your families, stay safe and stay healthy.

And with that, operator, Please go ahead and open up the call for questions.

(Operator Instructions) Our first question comes from Nicole Miller with Piper Sandler.

Appreciate the update and certainly a look at how things are going currently. I wanted to understand the pipeline in terms of how stores have opened. So when I reflect on pre-pandemic levels, I think open at just record revenues, at honeymoon and probably were a little disruptive or distorted to comp. And I wanted to understand how the stores have opened during this past year during the pandemic. And I'm wondering if they opened at more, maybe you call it normalized, maybe you could share a percentage or an AUV they opened at or percentage of mature volume because I'm starting to think maybe they entered the comp base and produced a comp lift. And while this is how we've been about dollar sales growth, it seems like this could turn into a comp story. Is there anything you can share on that thought?

Yes. Thanks, Nicole. Some of the numbers we shared in the first quarter, just taking those 10 plus that we've opened, since we're opening at that $79,000 a week average, and that's an over $4 million AUV, right? Really a strong start. If you look at going back, call it, 18 months or a little bit less maybe, pandemic entries, it's good mix, right? We've talked a little bit about it. Generally, our Shacks have opened pretty strong, but obviously nowhere near what they would have done pre-pandemic. So it's mixed. As you think about that, yes, it certainly could be something down the road that we expect all of these Shacks, both new and current, to be growing well out of this.

I mean you see us over 80% comp in the comp base versus last year, which was the hardest hit time. We also are comping against '19, where interestingly, in the beginning of '19, some of those new Shacks entering the base were some pretty busy Shacks. We had opened our first in the San Francisco area near Stanford. Palo Alto, that was a really big start. That now comes into the comp base in Q1. So it's just another -- I thought I talked a lot about this, but the comp base for Shake Shack has always been small relative to everything else going on in the company. It's always been something that we watch, but you have to understand it. And we called that out specifically as we talked about some of the 2019 compares and you look at -- it's a small amount of Shacks that are causing the negative, when you really look at it.

And I can tell you, walking around New York City myself today, we had a collab today with a great chef, Madison Square Park Shake Shack was packed. It felt incredible. But if you walked over to the Theater District or Herald Square, 2 of our busiest Shacks we've ever had, they are a fraction of themselves still today. Our Grand Central Shack, one of the best we've ever had, is still closed. These are Shacks that will absolutely come back. It's just a matter of time. And when they're comping against 2019 strength, it's pretty noisy. And that's part of why we wanted to share the 2019, and I hope everybody understand what that looks like. So long way back question, we're really excited about the Shacks we've opened. Our first one in the Portland area as well as Indianapolis, Hoboken, some super starts. We're really excited about it.

That's a lot to think about and digest, and I appreciate it. And of course, Tara, congratulations to you. You'll be missed by our community as well, but good luck out there.

Thank you, Nicole.

Our next question comes from Jared Garber with Goldman Sachs.

I wanted to get a sense of -- if you give any color on the labor environment, what you're seeing there. Obviously, we've heard about the supply challenges on the hiring side. And I even noticed anecdotally some restaurant concepts in the area locally here kind of throttling the in-store dining and going back and forth between having open restaurants and just doing digital-only orders. So I just wanted to get a sense of what you're seeing there and how you're viewing the market right now.

Yes. Thanks, Jared. Yes, I mean I'll walk around my own neighborhood and I'll see some restaurants that will have a closing early due to staffing. That's something you rarely saw in the world. Look, you can read any article today and understand what that pressure looks like. It's obvious. It's clear. We're not immune to that. Look, Shake Shack has -- challenging staffing has always been part of the restaurant business, always will be. But we're certainly at a particular moment where it's hard, right? It's hard. I think our teams have done extraordinary work in hiring, keeping and developing many people in the leadership positions, but it's not an easy time. That's for sure.

We've not seen material impact in any way, but there's moments where we certainly -- and in certain Shacks, too, this is a countrywide, every region from time to time. You'll have moments where you'd like to hire a few more people and make sure that we are fully staffed up. So look, we gave the majority of our Shacks raises last year, the entry-level wages throughout the country, most places. That's part of the pressure on our labor line that you've seen and that we are proud to invest in our team. And there's no doubt, there's a lot of call for great people right now. So we'll be looking to keep strengthening our teams, and it will be a challenge.

Appreciate that. And just one more quick one. Is there anything that we should think about in terms of the urban Shacks decelerating on a 2-year trend from March to April? So it seem that mobility data looks to be getting better in a lot of these urban environments. So just curious why maybe you're seeing a deceleration there.

Well, there's a couple of things. First of all, it's minor, right? I mean if you look at the numbers, they're nearly the same, right, when you look March, April, but slight deceleration. This is, Jared, why I'm going to keep saying how small the base is and how wildly impacted it is. So like let me give you a great example. When you look versus 2019, you might have Las Vegas Strip, one of the busiest Shacks in the world, is actually not in the 2020 comp base because at this time in 2020, it was closed, okay? So it's not helping us where it should be. And versus 2019, it's hurting us because it was super busy in 2019. And that 1 Shack has the opportunity to balance things around. And you got to understand, and this is where we ask our shareholders and you all to really understand how impacted it can be by just a few Shacks. There's also some spring break movement in those March numbers, and versus '19 is another thing that impacts it.

But look, I think as we look at it, we are excited by the year-over-year compares. We've got work to do. And it's very clear. I've said this a couple of times, and I'll use this language again. When we look at the Shacks that are down, we ask ourselves, "Does it make sense that they're down?" And you say, "Yes, I understand why the Theater District in New York is way down and impacting us." If you look at the Shacks that are up, you say, "Does it makes sense that they're up." And we say, "Yes, you know what, for the most part, it does." And that's where we are encouraged by the signs and we know we've got a lot of work to do. And we need -- look, we need offices to fill back up. We need cities to fill back up. We need Broadway and other things like it, events and games and all the things that will be energetic. We're on the right track. We'll continue to improve, I think, and we'll be impacted a little bit versus '19 individuals from time to time.

And just to add to -- just to add what Randy just said as he said the spring breaks fell in a different month between the 2 years, which is the noise that he alluded to, fell in April in 2019 and March 2021. So creating a bit of noise when you look at such a short time period between just 2 single months.

Our next question comes from Lauren Silberman with Crédit Suisse.

Tara, congrats on the role. You'll certainly be missed. On the 2Q, just a quick one, comp guide of mid-40% to 50%. Can you help us understand what that implies for average weekly sales and/or the recovery relative to 2019, just given all the noise in the comp base?

No. I mean, Lauren, we're not breaking it down any further at this point. I mean I think suffice to say, as we said in the prepared remarks, it's really hard, honestly, to give any kind of forward-looking guidance right now at all with a high degree of confidence. So not breaking it down any further than that range right now, and we'll keep you up to date if we see any major changes in that, but not giving AWS guidance.

And Lauren, I want to add too. In addition to the examples I already gave, which are challenging, you have to -- we went through in Q2 of last year numerous and various closures from time to time, whether they were protest in a city where Shack had closed and then comes out of the comp base. And the bouncing back and forth of that, just very hard for you to model certainly, but it was all -- it's all baked into that 45% to 50% comp expectation that we have.

Okay. Appreciate that. And then just on digital, retaining 90% of January digital sales. It looks like digital weekly sales seems to be running in line or above what you saw for most of 2020. So at this point, together with all the enhancements you've made to your digital ecosystem, is your expectation that you'll be able to hold on to or even grow digital weekly sales as on-premise continues to rebuild, understanding the mix might come down or is expected to?

Yes. I think it's really hard to say. I'm sorry to answer without an answer. But right now, I think we know how important digital has been through the last 12 months. We knew how digital -- how important digital was going to be to our business for the long term. And yes, we're really encouraged by some of these metrics that we're sharing. I think we do expect digital mix to continue to come down as in-Shack comes back. But as I mentioned in the prepared remarks, we're also really bullish around digital as an acquisition tool, as a frequency tool, as an engagement tool. So I think without being able to give specifics as to weekly sales levels or mix numbers, digital is going to stay a very important part of our business, and we'll continue to be investing in the team and in marketing tools to continue to use what's really just a foundation at this point in terms of some of these relatively newly launched products.

Our next question comes from Michael Tamas with Oppenheimer & Company.

Your average weekly sales in April are a little bit above what you saw in March. But your guidance for margins for the second quarter of 15% to 17% is well below the 19% exit rate you guys were talking about for March. So can you maybe walk through what's changing between March and what you're expecting for the second quarter? And then I know you're not providing guidance beyond the second quarter, but is that a good base to think about as we build through the rest of the year? And what are some of the things that we should be keeping in mind, either headwinds or tailwinds to those numbers?

Michael, it's Rik here. I can take the margin question. So yes, as Tara mentioned, and I think Randy in his prepared remarks too, we were -- in Q1, we're about 15% in terms of our Shack-level margin. We exited pretty strongly at 19% of Shack-level margin in mid-March. So that gives us a bit of confidence sort of going forward that we can get back to those sort of pre-COVID levels of margin. But having said that, and this is where I think sort of the answer to your question lies, there's still a huge amount of moving parts within the various line items. Tara went through a bunch of them, but I'll cover a few of them on here.

One, we've got some -- we've got line of sight to some beef inflation in the second half of the first quarter. We're starting to staff up. We're starting to staff up for the ongoing sales recovery, particularly in the in-Shack dining room opening, those types of things. And I think also the headwinds around some of the large Shacks that we've got that have really -- to sort of reduce levels of sales that will be really sort of relying on those to recover before we can recover those types of margin. So I think there's a lot of good signs in terms of how we're sort of managing the cost of the business as the sales recover.

But there's a bit of a lag. We want to staff up. We want to be prepared. We want to give our guests a great experience when they walk in the Shack. And so we're staffing up slightly in advance for those sales level. But I think -- as I say, that's really what's driving the 15% to 17%, which would still be an improvement on our Q1 levels, which is about the 15% range. So I think we're comfortable with where the margins are lying right now. We're pleased with the exit, 19% in March, and we'll continue to manage that very, very closely as we move through the next quarter and the rest of the year. And then if you remind me on the second part of your question, Michael, that would be helpful. Sorry.

No, that was it. You answered it going in the second half of the year, so I appreciate it.

Our next question comes from John Glass with Morgan Stanley.

Tara, congratulations and best of luck. We'll miss you, for sure. Randy, just reflecting on your suburban Shack performance in March and April, and I don't want to beat this. But obviously every restaurant has seen a pretty massive acceleration in -- obviously, most restaurants are seeing sales levels well above '19 levels. There's stimulus spending. There's pent-up demand. There's just a lot of reasons. Why do you think that's not the case for Shack then? Because I would think that you would get the same benefits.

Well, if you look -- I mean, John, if you look at it, we're basically flat. So given where we've been, if you follow that trend line, that's certainly an improvement. It's certainly an upward trajectory that we have been on. So -- and I won't speak to other more casual dining. But again, I'll keep speaking to the small and volatile comp base. This is on a comp base of half of our restaurants, is a little bit over that. And we've gotten to basically flat in the suburban versus '19. So look, we certainly think we benefited a bit from stimulus. It's hard to always quantify exactly how much and how that works. But that's probably been good for us, too.

But look, we're continuing to rebuild. We've got -- we're in a lot of places, whether suburban or otherwise, that don't act like anyone else in your coverage book. That's just what it is. If you look at the Shake Shack locations, even the suburbans, they are generally put in places where people gather. And that's taking time to come back. People are gathering differently. And again, if you look at everything that's continuing on the upward trajectory, it's good news, and we want to get it further, and we'll be working on that. But we definitely need the patterns of how people move to keep improving. Just a note, our suburban average weekly sales has also continued to increase over time. So that's a good sign as well.

The only thing I would add -- a couple of things I'd have to add to that is, one, we mentioned that the bottom 25 performing Shacks -- I mean they were mostly urban, but there are from suburban in there, some large sort of shopping malls and things that are getting hurt sort of equally as hard. So I think to your point, we've seen some really, really strong performances on the suburban side of things, like Randy said, and they all grow on an AWS basis, but on a comp basis staying relatively flat.

Our next question comes from Jeffrey Bernstein with Barclays.

Great. I had one question and just a quick follow-up. The question, Randy, just as you think about '21 and '22 unit openings, primarily, I guess, U.S. company operated, but ramping up next year to 45 to 50. Now you're approaching, I guess, 1 a week, which would still be, I guess, 20% or more unit growth year-on-year. So I'm just wondering if you can offer some confidence in terms of the people, the real estate. People are talking about slowdown in terms of getting people to actually build these sites. I'm just wondering your confidence in accelerating and the system being able to handle that level of growth on what is now becoming a larger and larger base. And then I had one follow-up.

That's a great question. I think it's -- we have a lot of confidence in that. The sites are there. We remain a premier brand and tenant for developers and all kinds of sites. So the sites, we are very confident in. The openings of people, that's where we're working, right? As we said earlier, none of that is easy. It's never been easy, and it certainly won't be easy, but we feel really good about our company and our team's ability to meet those targets. That is something that we have continued to do over years. The thing we'll be watching a little bit is cost to build, right? You're seeing this in lumber and steel prices. We know that as we look ahead at contract that are moving ahead into later this year and into next year, that will be built.

We'll probably expect some cost inflation in some of those raw materials and the overall build cost. Hard to say whether that will stick. We all know you can see lumber and steel are just up dramatically. We got to build things, right? So that costs real money. So we're confident we're going to build. But we're watching that as we take a look to keep an eye on the overall investment that we expect to tick up a bit, and we'll talk to that more later as we start to see those prices start to come in. It hasn't really hit us yet. but we expect it to come.

Got you. And then just on the follow-up, and it kind of ties in with my congratulations to Tara. But as you think about the search for the -- to fill in the role, Tara, obviously, now was CFO and President. It seemed like you gave her the President role to give you more time to focus on the future growth and vision of the brands. I'm just wondering whether you're thinking about hiring a CFO and a separate President or whether there are other opportunities to expand in the C-suite or whether you think one person might be able to fill that void.

That's a great question. It's -- we're going to hire a great person. And that person is then going to fit their skill set into who we are as a company, as an executive team and a leadership team. We have some incredible candidates that want to be here. At this time, we're not assuming we will fill the President role that Tara grew into over time. And she did amazing work in that role. And in the meantime, she also lifted her team, and she lifted the entire executive team to a point where we're really operating well as a leadership team in this company right now. And we want to bring a CFO, who will be focused on those tasks mostly and contribute to every bit of the strategy. So we're excited to eventually find and hire the next right person. We'll keep you posted when that happens.

Best of luck, Tara.

Thank you.

Our next question comes from Andrew Charles with Cowen.

Great. Tara, best of luck for your next role. I'm sure it was a tough decision, but wish you the best and good luck. Two questions for me. Just I know there's been a lot of questions around the underlying March-April performance. But if I look at the overall 2Q guidance, it does imply underlying trends decelerate further in the combined May and June period. And just trying to get a better sense of why that is. I know the reopening is something that we're all pretty excited about. But why does the guidance imply a bit more deceleration looking forward?

Andrew, yes, it's Rik here Yes, yes, yes. Can you hear me? Yes. So I mean, I think -- look, we -- as we've guided, we've guided forward through Q2 with some -- it's generally a relatively flat seasonal period when you take sort of the last sort of part of the first quarter and the second quarter. We're pleased -- we're focused on driving average weekly sales up and to the right. But there's still a lot of uncertainty out there. And so I think we're taking what I think is the right approach, which is a cautious approach to look at this point in time, even though as Randy started spring kind of big initiatives to New York City, there's still a lot of recovery that we need out of those urban Shacks. And so we want to be cautious to that fact at this point.

Okay. Great. And then follow-up question was a few years ago, the concept tested breakfast. I know it's pretty popular in travel centers. And right now, obviously, those are mentioned as some of the high-volume locations that are closed, given transit is obviously down significantly. But looking ahead, just with the reopening, is breakfast something you're looking to look more into? I know it's offered at the Madison Square Park location. Is this something you guys are taking another look at, take advantage of increased mobility for a daypart that's probably the most sensitive to mobility?

It's not a focus today, Andrew, but one of the exciting things that we look at when we start talking about drive-thru, drive-ups, Shack Track, windows and that curbside convenience is it starts to open up that question a little bit more, right? If you look traditionally at Shack sites, there are certain ones that could certainly be great for a breakfast opportunity. But we think that functionality of the format shift for the long term could create a better reality for moments like that. So something we're looking at, not an immediate focus. Our immediate focus is most of the Shacks that serve breakfast are the airports and transit centers that are either closed or still trying to figure out their sales. So we'll get back to that, for sure. We're actually going to be testing some new breakfast items not too far from now, add some of those airport Shacks, learning a little bit, and we'll see. But it's definitely something we've got our eyes on for something down the road, not an immediate focus.

Our next question comes from David Tarantino with Baird.

Congrats, Tara, on your new role, very exciting. We'll miss you. On the -- I first have a clarification question on how you're viewing the sales trends. And I just -- I want to maybe use Q4 as the starting point. And if I look at what you're running in March and April on that kind of 2-year comp, it doesn't look like there's been a lot of progress on the recovery. And specifically, again, looking at some of the suburban sites, it looks like it actually ticked down a little bit. So I guess the clarification question is, are you saying that, that is a function of what's happening underneath the surface in the comp base? Or is there something else in your mind that's maybe causing that trend to stall out a bit?

Yes. It's a little bit of a mix. I mean, again, it's not -- it is sort of straightforward. But if you look at some of these Shacks and these huge Shacks, it's hard to improve. I'm going to keep using the Theater District as a perfect example of a large swinging Shack versus '19. So yes, I mean we've got recovery to go. It is our numbers in the comp base are wildly swung by large urban restaurants. And that's why we're looking at average weekly sales to focus on that has continued to see an upward trend, not percentages. And we know that, that's part of it. We know that's some of the noise there, and we're looking forward to that continuing to improve over time.

Okay. Got it. And then my real question, Randy, you have over $400 million in cash on the balance sheet now, which is probably more than you'll ever need to grow the business. I guess, what are your thoughts on why you're having -- or sort of having that much cash on the balance sheet? And what are your specific thoughts on how you deploy it, including whether you would be interested in making an acquisition or something more transformational?

Yes. Well, there were 2 critical fundraising moments that happened this year. And you know what, we're really thankful for them. If you go way back last year, it was at a moment where no company was unsinkable, and we wanted to make sure we ensured our future, and we did that with an equity transaction, and that was -- that brought in a significant sum. And then we were prepared as we saw the convertible debt market reaching incredible opportunities. It needs to be clear for everyone who doesn't know, we were able to issue debt for $250 million at a 0% coupon for 7 years. We may never see numbers like that in our lifetime. So we took that opportunity. And we took that opportunity to focus this balance sheet in a way that we've never had at Shake Shack and very few restaurants, companies or companies of our type have it.

So what are we going to do it? We're going to open more restaurants. We're going to accelerate growth as we told you. We're going to look to make digital investments and people investments that allow for growth. Take a look at our actual size versus anyone else in your coverage universe, and you see the opportunity and how big and huge it can be when we get things going. And that's what our plan has been, to invest in digital, drive-thru, other opportunities that accelerate and open that funnel. We are wide open to other things, but it's not our focus today. And we'll look at it. We're going to look at things that are exciting and can continue to drive this company forward, and we're thrilled to have that basis of cash to do that. It gives us a really infinite playbook and mindset with which we can operate.

Our next question comes from Peter Saleh with BTIG.

Great. And Tara, best of luck you in the future. I want to come back at that last question maybe in a different way with capital allocation. Randy, how are you thinking about maybe development costs per unit as we go through this year and into next year, given all the inflation on labor and building materials? Is there an opportunity for you maybe to deploy more of that capital on a per unit basis? And I don't recall how much TI allowances you guys received, but is there an opportunity to maybe reduce those allowances a little bit and take a little bit of a lower rent on a go forward basis?

Yes. With each Shack -- I mentioned this just a few moments ago, but we definitely do think there's going to be some cost pressure on the total cost to build for some period of time. It's really beginning now. You're seeing it in lumber and steel and other build-out costs, some labor costs as well, depending on the market. So we do expect that overall cost to build a Shack will increase for some period of time. We'll see. Nobody knows if this will be a long or short-term deal. There's obviously a lot of demand for growth and limited supply on some of these items.

So we feel prepared for that. We feel ready. And at the same time, we do in every build look at TI. We're fortunate from a lot of landlords we get some very significant TI. And we do measure with each time whether it's best to have the cash or to have potentially lower rent. And with each one, we calculate. With each one we think about for that site, what makes the most sense from an ROI perspective, and we look at IRR and NPV in every decision on that and try to make the best possible approach to hit our long-term targets.

And we do that as a class. We look at the 40 Shacks as a class and say, "How do we want to balance that out?" So -- and again, as we do more with these bigger formats, especially in the early days of drive-thru, we're going to invest money in drive-thru, in these formats and pad sites that we think will be a lot of our future. They're going to require initially at least an additional investment, and we'll balance that out with some easier to build such as a food court that might be less in build and still have a very strong return and some other balance urban and some core format shacks. So we want to do a little bit of everything. We believe now is the time to ramp that up and we've got our eyes on the cost.

Great. And then just lastly, how are you guys thinking about commodity inflation? I don't recall hearing a commodity inflation number expectation for the year.

Yes. We didn't give a full commodity inflation number. What we did say was that we've seen some recent inflation on the beef side of things, nothing to the degree that we saw in the middle of last year. Of course, there's something we're monitoring closely and sort of waiting to see sort of exactly how that sort of pans out from a timing perspective. But we didn't actually give an updated commodity guidance for the year.

But we do expect that beef inflation is likely to carry on through Q2 to some degree. So may have a bit of an uptick on that food line as a result.

Our next question comes from Brett Levy with MKM Partners.

Tara, enjoyed the time. Best of luck to you. Randy, you just mentioned drive-through. So I guess I'll just continue on your store base. If you think about what you're seeing now with all your different iterations on Shack Track, what kind of learnings are you seeing in terms of sales, margins, makeup of the transactions, how your consumers are differing, just all of the insights that you might have from the different iterations of the track. Any color on that would really be appreciated.

Yes. It's so much learning and it's so fast and exciting. I did a tour with our team this week in New Jersey, right? And we were looking at all types of sites, both current and future. Drive-thru, drive-up and Shack Track all -- and some that are more urban. And it's really exciting. I think what we love about it is creating a new level of convenience and ease of use for the guests. With each one, they present different opportunities. So some might really lean in the curbside. There are Shacks where curbside delivery has really taken off, and it's great. There are Shacks where -- we just opened in Indiana, for instance, with our first -- our second, excuse me, Shack Track drive-up, and people are choosing it, are figuring it out already. They go into our app. They know they can preorder. They know they can choose, "Hey, I don't have to get out of my car, boom, I go around."

On margins, look, margins are noisy right now given the recovery period. So hard to answer that. Our goal with all of this is to drive average check. We believe we can do that with these formats, with digital especially, to drive ultimately strong AUVs and strong profits. That is our goal. We're on that road to rebuilding that, and we've got a lot to learn and a lot to build. And that's why we're doing these formats because we think each one of them in their own way will point to different ways to capture some of that opportunity.

Our next question comes from Jim Sanderson with Northcoast Research.

Tara, congratulations on your new opportunity. I wish you well as you pursue that. I wanted to ask a little bit more about some of the pain points you're seeing for margin recovery, going forward. And I want to understand, is it primarily just recapturing? And could you maybe give us a sense of how those 25 bottom performing stores are impacting or pulling down store margin or operating margin to give us a sense of perhaps what the margins could look like? Have we excluded...

Jim, I think we lost you for a couple of seconds. I think you were asking, correct me if I'm wrong, a couple of things. One, about some of the pressures we've seen on the margin line?

es, that's right. And trying to...

Yes, and how the bottom 25 Shacks were impacted that.

That's right.

Yes As Tara covered a number of times in the prepared remarks, I think we've touched on a few of them. But I think from margin perspective, Q1 was 15%. We exited the quarter with margin at 19%, albeit had the benefit of the 13th week. Some of the pressures are ones that we are taking, right, which are we want to be fully staffed and fully prepared for the service recovery, right? So we're starting up in advance of that. We want to make sure the Shacks are ready for people to come in and enjoy their food. So there's a bit of us sort of preempting the sales recovery and making sure that we're correctly staffed.

I think on the other side of the things, there are some headwinds that have been around through COVID such as the delivery levels, right? The delivery levels around -- the elevated sort of delivery levels we've been seeing throughout that, which albeit in-Shack is coming back, the retention has been high in our digital trends, which we're really, really pleased about. From a commodity perspective, we've touched on beef, which we've seen in the second half of -- really the first quarter, we've got a line of sight to that, and we expect that to be slightly inflated through the second quarter.

And then I think as we look at the bottom 25 Shacks, I mean they tend to be in the higher cost, in high urban areas, right? And they are the Shacks that drive pretty high leverage across their cost base. So the route to sales recovery is going to be dependent on those Shacks and the route to our full margin recovery is also going to be dependent to a degree on those Shacks, whilst we're sort of maintaining and really managing costs around the remainder of the Shacks that are performing well.

So a number of things, a number of -- a lot of sort of moving parts across all of those line items. which we're managing on an individual basis to make sure we're making the right decisions. I mean it's still tough operating a restaurant right now in terms of distancing and those types of things. There's still some costs that are elevated around PPE, right? That's still a thing. And so we're managing those, and these costs are coming into the Shacks and moving out of the Shacks as we make those decisions very, very carefully each step of the way.

Understood. Just a quick follow-up question. As you've seen your digital sales slightly slip, is there any noticeable change in mix? Meaning are pickup orders slipping more rapidly? Is it delivery? Anything that would change that mix between consumers picking up versus using the delivery service.

Yes. I would -- we don't like to think of it as digital thing. The mix is changing. But we're maintaining a lot of those digital sales, right? But we've not broken down that level. We know our customers move between all of our channels -- I guess move between all of our channels. So we don't manage it sort of on a channel-by-channel basis. We want to make sure that all of our channels are sort of reflective of the customer depending on their need for that particular day.

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

This is actually Alec Estrada on for Chris. Looking at the regional breakout of same-Shack sales, the Southeast was the only region to comp positively in April relative to '19, presumably with dine-in still depressed. Should the off-premise volumes there kind of remain sticky, do you have a sense for how much higher those AUVs could be in the region? And does that make it an increased focal point for future development plans?

Yes. Sorry, just trying to -- I'm looking at the suburban opportunity there. I mean we've got -- every region got better on that chart, as you look at it and versus '19, as you said, Southeast starts to pop up. As we look at development plans, we think every region has great opportunity, including our hardest hit, which includes Manhattan and New York City. But if you look at it versus 2020, every region is significantly up all on the right trajectory, including our hardest hit, including Manhattan. So when we think about development, we really think we can be everywhere. I mean we've got a big opportunity here in every 1 of those major regions of the United States. We're obviously pretty focused on California, some of the other major regions in the Northeast that we've been strong. But we're not going to let the pandemic dictate the growth plan solely. There's a lot of learning that's happened this year, and we're going to add that to our already robust development plan.

Our next question comes from Brian Vaccaro with Raymond James.

I appreciate the AWS disclosures. It really helps cut through the comp noise, the 1-year, the 2-year, taking into account the relatively small base of the comp base. But I guess I was hoping to get beyond the comp and maybe think about the 192 company units in total. And could you give us a sense of average weekly sales in suburban versus urban markets sort of including all class years in the portfolio? And maybe comment on store margins cut across those same lines.

Yes, that's...

Brian, no -- go on, Rik.

So yes. Sorry about that. No, that's -- I mean that's something we haven't disclosed. And I think there's reasons for that. Those -- I mean those are going to change significantly over time, right as our guests move around the countries, around that sort of environment in between the cities and then suburban areas. So that's not information that we've shared at this point.

Okay. And maybe we could take a step back, sticking with weekly sales. I guess I wanted to ask few questions. What did the full recovery in average weekly sales look like in your view? I guess I'm trying to level set expectations versus where you were pre-COVID. I think by our math, you were doing something just under $80,000 a week in '19, but there's sort of this natural decline in average weekly sales as you layer in new units. Does a reasonable recovery get you back to maybe the low to mid-70s? Just curious, given all the moving pieces pre and post-COVID.

It's not a number, Brian, that we've guided to, obviously. It's certainly going to continue to go up from here on average for weekly sales. As you said, we had about a $4 million AUV roughly pre-COVID, a little bit over that, I think, in that $80,000 range, let's call it. And as we've opened a lot of Shacks, as we've said, we expect that number to come down slightly as we add these classes in the $3 million Shack average range. So I think we all need to see COVID shake out a little bit in the world, come back to a little bit more of a normal operating environment where all of our Shacks start to settle in to where they belong. But it's not a number we've given. We expect it to continue to go up over time from where it is today though.

All right. Fair enough. And last one, if I could. Sorry, if I missed it. How many company unit openings do you expect in the third quarter and fourth quarter?

Well, we think we have between 16 and 18 in the first half, added to 35 to 40 for the year. And we do think that will be heavily fourth quarter weighted. So the third quarter will be a lighter development quarter as was the second quarter. So most of the development this year is going to be in the first and then the fourth quarter.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Randy for any closing comments.

Thanks, everybody. Really appreciate everyone who dialed in tonight, and thanks for following us. I look forward to seeing you soon at the Shack. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.