Shake Shack Inc (SHAK) 2020 Q3 法說會逐字稿

Greetings and welcome to the Shake Shack Third Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Senior Vice President of Finance and Investor Relations, Rik Powell. 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 of 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 the Form 10-K filed on February 24, 2020, and Form 10-Q filed on July 31, 2020. 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 2020 earnings release which can be found at investor.shakeshack.com on the News section. Additionally, we have posted our third quarter 2020 supplemental earnings material which can be found in the Events and Presentations section on our site, or as an exhibit to our 8-K for the quarter.

With that, I will turn the call over to Randy.

Thanks, Rik, and good evening, everyone. We hope you, your families and our entire Shake Shack community are staying healthy and safe through these challenging times.

Burger by burger, Shake Shack continues to come back. Our business during this most recent quarter showed steady recovery, thanks to the hard work and dedication of our team, their agility in adapting new Shack protocols and models and an increasingly strong suite of digital capabilities.

As a result, guests have been able to enjoy their shack the way they want it with a choice of convenient and safe ordering and pickup options as we continue to expand and elevate the Shake Shack experience.

Since our last update at the end of July, forward momentum has continued, and we're encouraged to see a strong recovery in both sales and profitability, with many Shacks returning to or even exceeding last year's results, total year-over-year company-operated Shack sales declined 17% in the third quarter compared to a decline of 39% during the second quarter and further improved to a decline of just 5% in fiscal October.

Same-shack sales have also improved sequentially in every single one of the last 6 months. This is an encouraging path to recovery, considering the drag that our high-traffic urban locations continued to have on the business, while suburban Shacks are collectively getting close to full recovery. Importantly, we're almost back to a steady-state development schedule, and we are ramping up the opening of new locations through the remainder of the year and into 2021 and beyond.

As of the end of fiscal October, we've opened 33 Shacks during this challenging year, including 15 domestic company operated, of which 4 were opened in the third quarter. The consistency with which our sales have continued to recover gives us added confidence in the gradual return to a more normal operating environment. As expected, with urban locations still acutely impacted by the pandemic, our suburban Shacks continue to recover more quickly. But both have shown strong improvement in recent months, particularly due to increases in in-Shack ordering and higher levels of retention of our digital sales.

From a regional perspective, we continue to experience a broad range of performance when it comes to the speed and level of sales recovery. At times, this is based on the extent to which dining rooms are open and also the relative concentration of urban Shacks, which are understandably more impacted by office, tourists and high traffic. New York City, particularly Manhattan, continues to lag other regions, and we expect this to be an ongoing headwind for the business until the city fully recovers.

Throughout this pandemic, New York City has been hit especially hard. But despite that, we are pleased to see that our hometown is beginning to make real progress, showing sequential improvements in same-Shack sales from down 64% in the second quarter to down 49% in the third to down 40% in fiscal October. Manhattan, specifically, is also slowly improving to a year-on-year decline of 60% in same-Shack sales during the third quarter from 69% in the second quarter and showing further gradual improvement to down 51% in October. It's particularly challenging for Manhattan while some of our historically highest volume locations like Penn Station, the theater district, Herald Square and others remain deeply impacted at this time.

Following similar trends to our company-operated Shacks, our international Shacks are also recovering. Total license sales sequentially increased throughout the third quarter, averaging $5.3 million per week, nearly double the $2.7 million in the second quarter. The speed and scale of our licensing sales recovery has differed across the globe. In countries such as China and Korea, which were faster to contain the COVID-19 outbreak, are recovering more quickly than those experiencing prolonged lockdowns or resurgence of cases/china, for example, is showing a strong return on sales. Now back to above pre-COVID levers.

While just 3 of our international Shacks were closed as of the end of fiscal October due to COVID, the operating environment is changing on a regular basis. In August, we are excited to report the opening of our first Shack in Beijing, which has outperformed all expectations, with sales in the opening month among the highest of any international Shack opening, amazing when you consider the environment we're operating in and a testament to the continued strength of the Shake Shack brand across the globe.

The most deeply impacted part of our entire company does remain our licensed airport and stadium business. With travel still severely depressed and stadiums closed only 9 of our 22 domestic licensed Shacks are open as of the end of fiscal October, and we expect that to continue to be the case for the foreseeable future. This will hold back recovery in this highly profitable piece of our business.

However, we continue to take a long view here. In normal times, these are some of the best Shack locations in the world, providing both high-traffic and high-brand visibility, and we're excited for the day, they will eventually reopen. In the meantime, we'll be working with our domestic license operating partners to support new openings as those opportunities arise, such as Salt Lake City Airport, for example, which opened in September. And as we look to the future of licensed Shacks, we expect to open 12 to 14 net licensed Shacks for the full year 2020, with 5 to 6 new licensed Shacks expecting to open in the fourth quarter as well as looking ahead to 15 to 20 new licensed Shacks for 2021.

Moving on the company-operated new development. Despite the necessary pause earlier in the year, we're back to growth, and we've been regaining momentum in recent months. We opened 12 Shacks at the end of the third quarter, and we're anticipating reaching a total of 18 to 20 new company-operated Shacks by the year-end. Both recent and upcoming Shacks are in fantastic locations, such as Valley Fair in Santa Clara, University Village in Seattle, a freestanding Shack in Pasadena and locations that continue our penetration of key markets across Texas, Salt Lake City and Colorado. We're pleased with the operating results of those opened so far, with the 2020 class average continuing to outperform the company average weekly sales during the third quarter.

Make no mistake, before and after COVID, our strategy is to win market by market, with a focus on top-tier real estate across the United States. And our evolving multi-Shack format model positions us to take advantage of current real estate opportunities emerging across the country, particularly as we look at openings in the next year and beyond. We're aggressively pursuing and developing sites where we can launch our new drive-through, our Shack Track drive-up and walk-up models as well as the continuation of core Shack formats that have generated compelling returns for years.

I do want to provide an update and direction for each of these new Shack malls. First, on the recent launch of our curbside pickup in place now at nearly 70 Shacks nationally. This model was created to solve the need for safe, contactless pickup, and we executed on this quickly in less than 3 months at the peak of COVID. Since launch, Shack's offering curbside have been experiencing about 1/3 of all eligible app orders in that format, and it's been with limited marketing. Given this level of adoption, we feel good that this is meeting a real guest need. We're excited and continue to evolve and improve this as we learn more and add this option to future Shacks wherever the layout allows for it.

Second, on our rollout of other versions of Shack Track, with the objective of adding convenience in preordering, combined with the fast and frictionless experience and pickup. As we look ahead, most Shacks in the pipeline will have some version of a Shack Track, either through an enhanced interior pickup model, an exterior walk-up window or a drive-up option, such as our upcoming retrofit in Vernon Hills, Illinois. And not only do these models aid in social distancing but we believe it'll be a favored option for guests looking for speed and convenience on the go in a post-COVID environment. Throughout the end of this year, we'll complete 7 to 9 Shack Track retrofits in existing Shacks. And next year, most new Shacks will have some version of a Shack Track. We expect roughly half the class to have either an exterior walk-up window or drive-up window as they open. It's too early to talk about results, but our goal will be to drive convenience, frequency and long-term sales growth through this model.

And finally, we're getting really excited to launch our first-ever drive-through location late next year. The Shake Shack drop will be a modern version of the traditional drive lane experience supported by technology-enabled hospitality and innovative design, all while maintaining our core tradition of building community gathering places. We view this model for us as an important step towards increasing our addressable market opportunity, and we're making a big commitment to this learning. And we'll be targeting between 5 and 8 drive-throughs over the next 24 months.

As we look to 2021, we intend to return to the full development schedule that was in place before COVID, and we're targeting between 35 and 40 new company-operated Shacks for next year. We'll be launching in new cities like Portland and Indianapolis, while going deeper in California, the Midwest and some of our other strong markets on the East Coast. Our approach will be to build a balanced set of formats across our portfolio and to continue to diversify across markets as we look to ramp up Shack unit development in 2022 and beyond.

And with this opportunity ahead, we're also investing in the future of the Shack digital experience. Influx of new and returning guests to our digital channels over the course of this year has given us a real opportunity to update and enhance our tools, enabling new ways to provide hospitality at the core of the Shack experience. And we're confident in our continued focus on our app and web channels as these allow us to connect with our guests more frequently, and they continue to perform with a higher average Shack.

As we mentioned on our last call, we're looking forward to offering delivery via our own channels. We're currently targeting limited testing of this functionality towards the end of this year, with broader testing and rollout over the first half of next year. This will be hugely positive for our digital strategy for a host of reasons, including the ability to create consistent and personal experiences with our guests across our own channels, combined with the additional data and insights that allow us to better understand those guests and connect with them more directly as part of our broader digital strategy.

Turning to the menu. The return of Hot Chicken has received a fiery welcome back by our fans. New this year, guests were able to order hot spicy fries and hot chicken bites, each with our new ranch salad. We've been offering 3 levels of spice, hot, extra hot fire and fire, the latter only available through our digital channels. And since launching this hot menu offering in September, we saw a significant step-up in our overall chicken sales, the 40% more chicken items sold versus the previous 2 months.

During the third quarter, we also launched our Pumpkin shake for the third year in a row. Made with the highest-quality ingredients, we use real pumpkins, cinnamon, nutmeg and top it with delicious toasted pumpkin seeds. As winter approaches, we're looking forward to a return of another fan favorite, our trio of holiday shakes, bringing back Christmas Cookie and 2 new flavors: Chocolate Spice and Candy Cane Marshmallow.

In 2021, the team is excited to bring a regional favorite from our Korean Shacks to the U.S. a spicy Korean-style fried chicken sandwich featuring a gojuchang-glazed chicken breast, topped with roasted sesame seeds, served with white kimchi-slaw. A version of this menu item is running as an LTO right now in our South Korean Shacks, and it's a great example of the way our international presence can enhance and elevate our brand as we share exciting and innovative menu items across the world.

While COVID resulted in more of a focus and simplification in the short term, we're excited to be getting back to more regular cadence in our limited-time offerings in '21, with a culinary calendar that raises the bar with bold, new chickens flavors and the expanded testing of our exciting new Veggie Shack as well as innovation around our beverage and customer program.

Wrapping up, our progress in recent months is encouraging in nearly every corner of our business. We are certainly not out of the woods when it comes to the impacts from the pandemic, but each day brings us new momentum and confidence. We're on the way. With innovation and work taking place across the entire company, we remain squarely focused on the safety of our operations, the ongoing enhancement and expansion of access across formats and channels and a significant white space for growth globally that remains ahead of us.

We're incredibly grateful to each and every team member, both in the Shacks and our home office, who make this company the very special place that it is each and every day.

With that, Tara will take you through the financials.

Thanks, Randy.

As you've just heard, we're pleased with the steady and consistent progress in our top and bottom line recovery as well as the great work going on across the entire company. We're getting stronger every day, and we'll continue to diligently execute against our key strategic initiatives whilst focusing on the significant growth that lies ahead.

In terms of third quarter results, total revenue was $130.4 million, including $4.1 million in licensing revenue. This represented a total Shack sales decline of 17%, a licensing revenue decline of 24% versus the same period last year. However, when compared to the second quarter, total Shack sales and licensing revenue increased 41% and 81%, respectively.

At the end of the third quarter, our trailing 12-month average unit volume was $3 million as a significant portion of this trailing 12-month time period includes COVID-impacted months. Average weekly sales, a key top line metric to monitor as we move through this recovery, was $58,000 in the third quarter and increased sequentially throughout that period, ending with fiscal September at $61,000. We saw this improvement continue through our most recent fiscal period of October, with average weekly sales of $62,000, and we've included this data in more detail on Page 6 of our supplemental materials.

Same-Shack sales continued to show solid signs of recovery, declining 31.7% during the third quarter compared to the same period last year, improving from a decline of 49% in Q2. Consistent with our total sales trends, comp-based sales also improved in every fiscal month since April, with fiscal September same-Shack sales down 23% from fiscal October further improving to down 21% year-over-year.

Traffic declined 42% in the third quarter, offset partially by positive price/mix of 10.3%. This year-on-year price/mix growth was driven by a significant increase in average check, primarily from a higher digital sales mix, combined with an overall increase in net checks as we've seen higher items per order since the start of the pandemic.

As Randy mentioned, we're encouraged by the improvement in performance of both our suburban and urban Shacks. As a reminder, our comp base today is comprised of roughly 50-50 urban/suburban Shacks, although urban Shacks had a higher revenue contribution pre-COVID at approximately 60% of comp base sales compared to approximately 50% in the third quarter.

Same-Shack sales of our suburban comp-based Shacks were down 16% in the third quarter compared to the prior year, an improvement from the decline of 38% during the second quarter, and they again improved in fiscal October to down just 4%. Urban markets are also showing steady improvement, however, still impacted to a much greater degree by COVID. Urban comp based Shacks declined 43% in the third quarter compared to last year versus a decline of 57% in the second quarter, but also showed continued improved in fiscal October to a 33% year-on-year decline.

Same-Shack sales improved across all regions on a sequential basis, with performance driven by increases in in-Shack dining in both urban and suburban Shacks, combined with the continued strength of our digital channels. We do, however, continue to see levels of regional performance improvement differ based primarily upon the relative proportion of Shacks in the region. The comp-based Shacks at our southeast regions, for example, of which over 80% are suburban, were down 25% year-over-year in the third quarter, a significant rebound from being down to 41% in the second quarter and subsequently improving further to down 13% in fiscal October.

Regions which are more significantly comprised of urban locations continue to be the hardest hit, with New York City being the most acute example of this, and you heard some of those numbers from Randy a moment ago. All of our regional performance is clearly laid out on Pages 8 and 9 of our supplemental deck. We're happy to answer additional questions about it after the call.

Digital channels remain the leading order method, representing 60% of total Shack sales during the third quarter, broadly in line with the 62% we last reported for fiscal July. As you can see on Page 12 of our supplemental, this held relatively constant throughout the third quarter and through our most recent fiscal month, October, where digital sales mix was 58%. As in Shack sales improve, we've maintained a high level of digital retention, with more than 90% of digital sales retained in fiscal October compared to the high point in fiscal May.

During the third quarter and similar to second quarter trends, our native web and app channels when combined continue to be the fastest-growing channel on a year-on-year basis, with sales more than 3x that of the prior year. In our last call, we shared that we'd added over 800,000 first-time purchases to our app and web channels between early March and the end of July. We're pleased that this trend has continued through October, increasing to over 1.4 million first-time purchases on both channels since early March.

Looking forward and now a month into the fourth quarter, we're pleased with our ongoing progress but closely watching the performance of in-Shack sales, particularly in light of evolving city and state dining regulation. At the end of fiscal October, nearly all domestic company-operated Shacks were open, with approximately 80% of those with open dining rooms to varying capacity restrictions and the majority of Shacks also utilizing outdoor patio space. While we're confident in a full long-term recovery, we know the timing of that return to pre-COVID levels is highly dependent upon the return of the high-traffic areas that contributed to many of our strongest Shack sales, those most reliant on travel, schools, offices and major gathering as well as ultimately fully open dining rooms. The timing of that recovery remains unknown today.

With colder weather and the increasing number of reported COVID cases, we do expect sales over the coming months to be pressured. We do have the benefit of a 53rd week in this fiscal year which will be accretive on an absolute dollar basis, but the underlying business continues to face a very challenging and volatile operating environment, certainly, through the end of this year. And all of this continued uncertainty into consideration, we'll only be providing the earlier-mentioned unit guidance at this time.

Moving to the strong recovery of Shack-level operating profit for the third quarter. We're very pleased with the significant improvement here. As shared in our last earnings, we exited the second quarter with approximately 5% Shack-level operating profit in fiscal June and just above 2% for the second quarter. Since that time, the combination of sales improvement, the normalization of beef cost and continued disciplined expense management across the business have led to a significant recovery, with Shack-level operating profit margin in the third quarter improving to 14.8%. Performance improved sequentially throughout the quarter, with fiscal July, August and a 5-week fiscal September delivering Shack-level profitability of 12%, 14% and 17%, respectively.

In addition to the benefit from recovering sales throughout the quarter, we also saw a number of improvements across various Shack-level expenses. Food and paper costs in the quarter were 30% of Shack sales, higher than the same period last year by 100 basis points due to increased paper and packaging costs, with all orders packaged to go. On a sequential quarterly basis, we saw an improvement of 350 basis points compared to the second quarter, primarily due to the stabilization of beef costs. And although we don't anticipate any major food cost charges going into the fourth quarter, paper costs will remain elevated due to the continuation of those increased levels of packaging.

Labor and other related costs in the third quarter were 30% of Shack sales, an improvement of 460 basis points compared to the second quarter and an increase of 270 basis points compared to the prior year due primarily to the loss of sales leverage across fixed labor expenses. The sequential quarterly improvement was significant and due to improved sales performance as well as somewhat lessened COVID-specific headwinds on this line, such as pay during closures. We're pleased with the improvement here, but we'll continue to bear some level of labor inefficiency as we manage social distancing and safety protocols, together with open but limited capacity dining in.

We remain incredibly grateful for the resilience and the commitment shown by our teams in the Shack, and in recognition, we extended premium pay for our hourly team members through to the end of fiscal August and also guaranteed manager bonuses in the third quarter. In September, we've further extended this support for our Shack teams through the fourth quarter by introducing a year-end bonus for all our hourly team members. And we're pleased to be able to show our continued appreciation in this way. This investment in our team had a $2.1 million impact during the third quarter within the labor line and was in addition to the $2.4 million already paid in the second quarter.

Other operating expenses in the quarter were 14.8%, an improvement of 120 basis points compared to the second quarter and an increase of 240 basis points year-over-year due primarily to increased delivery commissions, combined with a loss of sales leverage on fixed expenses. Compared to the prior year, the increase in delivery commissions during the third quarter was partially offset by savings in reduced maintenance expenses within the Shacks which we do not expect to continue as we enter the fourth quarter.

As we look back to the fourth quarter and as I mentioned, our expectation is that sales will face pressure due to the challenges of the ongoing COVID environment as well as the onset of colder weather across a significant number of our regions. With the continued recovery of Shack-level operating profit, highly correlated to sales performance in terms of leverage on fixed costs, combined with the continuation of certain elevated costs in the P&L specific to the pandemic, we also expect any ongoing improvement in Shack-level operating margin in the fourth quarter to face pressure. Strong cost management will continue, with the safety of our teams and our guests, however, always being our first priority.

Moving on to G&A, which, in the third quarter was $15 million, including $1.7 million related to noncash items. With our continued recovery through the third quarter and a strong balance sheet, we've gradually increased investments in key areas across the business while slowly bringing back our team in preparation for the growth ahead, in particular, across digital initiatives, but also in marketing, recruiting and development, as we focus on that significant long-term growth opportunity. We remain bullish on the size of the opportunity we have ahead, and we're committed to investing in order to reap those benefits quickly and meaningfully. As we look out through the remainder of this year, we expect our fourth quarter total G&A spend to approach the same level of spend as the fourth quarter 2019.

Preopening expense for the third quarter was $1.8 million, with $500,000 in noncash deferred rent expense related to Shack locations we're in possession of but have not yet opened. Now that development is back to a full opening schedule, this spend will increase meaningful and is expected to more than double sequentially through the fourth quarter as we complete this year's opening schedule and ramp back up to those 35 to 40 units we mentioned for 2021, a number of which should open in the first half of the year.

Finally, despite the challenges of operating within a global pandemic, work has continued to complete the successful final phase of Project Concrete, which centers around our Shack-level supply, inventory and invoice management system, with a focus on automation and time savings for our Shack team. We're pleased to confirm that this is now all fully rolled out, and I'd like to thank the entire Project Concrete team for their incredible achievement in such challenging conditions.

On an adjusted pro forma basis, we had a net loss of $4.4 million or $0.11 per fully exchanged and diluted share. Excluding the tax impact of stock-based compensation, our adjusted pro forma tax rate in the third quarter was 29.3%, slightly higher than guidance given earlier in the year due primarily to a combination of state mix and lower tax credits. Year-to-date, that rate is approximately 28% and is in line with our full year expectations at this time.

Similar to prior quarters, a full reconciliation of our tax rate is included in the appendix of our supplemental materials.

Our cash and marketable securities balance at the end of the quarter was $191.8 million, and we're pleased to have generated positive free cash flow for the quarter. We do expect an increase in cash use during the fourth quarter as our capital expenditure for new Shack construction ramps back up with a robust 2021 development schedule ahead of us.

We're very pleased with the significant improvements in performance across the company from our recovering sales and profitability to the strong performance of our digital business. We do, however, remain in challenging and volatile time, but our foundation is strong, as is our balance sheet, and we're focused on that clear road map for growth ahead of us.

And with that, I'll turn you back to Randy.

Thanks, Tara.

I do want to end today's call noting a milestone that none of us could have ever dreamed back in the first Shack in Madison Square Park. We recently opened our 300th Shack in the world, and of all places, Madison, Wisconsin. I could not be more proud of the hard work we've seen from our teams over the last 16 years to reach of this occasion. Throughout this journey, we've had our share of triumphs and challenges, and it's the perseverance of this team that got us where we are today.

I also want to Shack -- excuse me. I want to thank our loyal Shack fans that have stuck with us and are coming back to enjoy their Shack in more ways than they ever could before. Above all, count on us to always lean into our purpose, to stand for something good while creating uplifting experiences, caring, first, for our team members and inspiring them to provide boundless hospitality to our guests, community, suppliers and investors.

You and your families stay safe, stay healthy. And with that, operator, we can go ahead and open up the call for questions.

(Operator Instructions) Our first question comes from Michael Tamas from Oppenheimer & Company.

I hope everyone is well. Obviously, you gave us the October numbers, but you sound pretty cautious on sales over the next several months. So can you just kind of talk about that in general? Is there anything you're seeing right now? Or is that just what you think is going to happen? And maybe can you parse that out between your urban locations and suburban locations, where clearly some of the off-premise strategies are driving nice sales improvement for your suburban locations? So just trying to understand a couple of those differences.

Yes. Thanks, Michael. I'll start. I mean, first of all, we've given everything but the previous 7 days of sales, so you have basically everything mid-quarter. So you're seeing exactly where that stands, October having been our best month, obviously, throughout COVID, with tremendous improvement everywhere, right?

If you look at -- every single region has gotten better through the quarter sequentially and through October. So basically, quarter-to-date, year up to date. I think you have to be cautious, as you look out at COVID cases increasing. Volatility, we have an election coming up. I think there's a lot of unknowns in our country right now and globally.

You look at the cases in Europe and how that may impact their economy. I think we just have to be cautious. We're really, really happy with how the team has continued our recovery, and that momentum has moved us forward to -- I mean, recapturing, as you've seen, nearly 3/4 of our profit at the Shack level, which I think is extraordinary work.

So coming back, feeling really good about the momentum, but being cautious, being cautious as we head into a new season, with spiking cases and (inaudible). We're prudent in our preparations. We're disciplined in our approach and our cost management, and we make sure we're set up for success no matter what comes our way in these next few months.

Great. And then can you just talk about margins a little bit, the relationship between sales and margins? I mean, doing a 15% margin when your sales are down almost 30% seems pretty solid. So just trying to understand, is there anything in this quarter that's maybe unique as dining rooms kind of continue to reopen and get back to full strength? Is that something that could potentially create a little bit of choppiness in the margins here?

And just sort of longer term, as you get back to a full sales recovery, think some others in the industry have talked about their margins getting back above pre-COVID level. So is that something you think that you guys can achieve? Is there a path to that? Or how are you guys thinking about margins sort of on the other side of COVID?

Yes, Michael, yes, I mean, we're really pleased with the improvement in the third quarter up to that 14.8%, and the teams are doing an incredible job in the Shacks and making, obviously, good progress at getting back to that pre-COVID number, also with improving performance on that line throughout the quarter.

I mean, I think as we alluded to in the prepared remarks, margin does follow sales, and you can see that with these patterns. And so that's why we're equally as cautious on sort of further improvements to that line item as we head into winter in this type of an environment.

And there's nothing I would specifically call out in the quarter that made those margins higher than they are reported. It was great work across the company. If anything, we've still got some headwinds in those numbers, particularly when it comes to higher paper and packaging in the food and paper line, and also in the labor line, as we extended that premium pay, as we've put in the year-end bonus, as we continue to really focus on thanking and looking after our teams. So to the extent that those start to normalize outside of sales, those will help margins improve.

And longer term, when it comes to margin expansion, we're not updating any of those target numbers today. We're more focused on the path back to recovery, but we've got -- we're obviously still a pretty small company, and in the long term, we're very focused on getting back to the healthy top and bottom line growth that we were delivering before and continuing to expand opportunities to even improve those through some of these formats that we're looking at and are very successful to date and growing the digital business. But right now, not updating anything long term.

Our next question comes from Jake Bartlett with Truist.

Congrats on all the hard work out there and the progress you're making. My question was really about the inflection in sales in September and October. And I'm wondering if you can frame what you think the biggest drivers to that, whether it's just increasing demand, whether it's increasing indoor dining just being available, maybe the curbside additions, and then also the Hot Chicken sandwich. How would you frame which are the kind of the biggest drivers to the improvement from August to September and October?

Yes. Jake, I think they've all been really important. Obviously, we've had an economic continued gradual recovery through the third quarter in a macro sense. People are returning. We've had many more dining rooms open. We had around 3/4 of our dining rooms open at this point, so that obviously always helps. And you're just seeing it everywhere, right? You're seeing it across the regions. And Hot Chicken obviously helps. That it was a fun one. People love that, and they come back for it. That's a really great menu item.

But I think the biggest thing would be our continued commitment and work towards digital. If you really look at how people are using Shake Shack, still roughly 60% of our sales are coming from digital. And we've held on to -- this important statistic that we said earlier, we've held on to 90% of that digital sales as in Shack has continued to return. That's a really good sign of our business and something we'll be continuing to work towards. Both our channels keep getting better and better. We're making deep investments in that. We're excited to launch delivery through our app, I hope, in a limited basis through the end of this year, and continue to partner with the great third-party delivery service providers that are out there.

So it's a combination of everything, including our teams really just the ability to keep pivoting. And we hope that continues, right? That trend has been a very clear trend for 6 straight months, and our goal is to keep that going. And we'll see how it goes. There's a lot of moving parts, but a lot of positivity and reasons to be positive and forward-looking right now.

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

This is actually Alec on for Chris. Your resumption of a full development schedule next year seems to suggest you're pretty pleased with recent opening performance. Can you help kind of frame up how these openings will perform relative to kind of years past? Are we talking sales volumes, 60%, 70% of prior levels, and have you seen any sort of shortening on the honeymoon?

Well, honeymoons are different this time around, right? We're not doing the same kind of huge openings that we're doing in terms of press. We actually barely market them at all. By strategy, we really try to open pretty quietly right now. I think the last -- we've talked about it before. This class has opened surprisingly well given COVID's impact, right? We've got some great Shacks that we've opened this year. And as of late, some of the ones that I mentioned, when you look at University Village in Seattle, that's one of the country's great outdoor shopping destinations, we've got this new freestanding in Pasadena, upcoming, we're going to be doing a real flagship Shack in Cherry Creek in Colorado in the Denver area. So we're excited about how we've been performing.

The class, as I noted, this year, is continuing to perform above the company average, which is exciting. And I think -- we hope there will be a different kind of growth, right, without the kind of usual craziness that we allow. Some of these restaurants, by the way, when we open them, we open them in a limited digital sense and with limited or no dining rooms. So those are things that we've been adding on, adding on over time. And as we look ahead at the 35 to 40 for next year and really just returning to our -- the previous growth that we had seen, we're super excited to get back to work. We had to pause, but we've caught up. We're going to get 18 to 20 Shacks in this country, continuing to open internationally. We just opened a restaurant today in the Philippines, and that's really exciting. And we've got more to come.

So Shake Shack is a growth company. We've barely scratched the surface of our unit opportunity. I think all the models we're looking towards, the goal is to increase that opportunity and keep going. And we're getting back at it for next year.

(Operator Instructions) Our next question comes from Jeffrey Bernstein with Barclays.

This is actually Jeff Priester on for Jeff Bernstein. Just wanted to dig into the higher average check a little bit. Just kind of over the pandemic, how have the number of entrees per order trended, just trying to dig into whether it is an increase in the number of customers per order or if it's just each individual customers ordering more. If it's a latter, kind of what parts of the menu are they maybe adding on or exploring? Or any additional learnings from the digital side of things they may not have added on in the restaurant?

Okay, this is Tara. Yes, I mean, we haven't broken down the average check by sort of item or entree. But when we look back, on digital average check, it was always higher than our other channels. And what we've seen through the pandemic is that continues to be the case and some. So it was higher before, and it's increased significantly through the pandemic as well as representing a much higher percentage of overall sales as that mix has increased. And so really, that's the sort of shifted -- I've got an echo here. I'm sorry about that one. Strange noises in the background.

So that's a sort of shift that's really impacted that 10.3% price/mix. And it's always hard to tell what a true customer's behavior is when you're looking at these checks. But we certainly believe that when we look at the items per check and we look at sort of consumer behavior through the last 6 months of this pandemic that it's generally more people per order. But it's always going to be the case. So the marketing team is doing a really nice job using a whole host of tools when we have long LTOs and things like that. But generally speaking, we think it's increased items per check through larger group orders.

Our next question comes from James Sanderson with Northcoast Research.

I wanted to dig into a little bit more detail about store margins. As I understand that your average weekly sales, if they stay at October levels, can I assume that the store margin would remain about 17% like we saw in September? And then I have a follow-up on the drive through.

Well, we're not giving any forward-looking statements today at all around margin. So the best we can do, I think, in a world that is as volatile and fast-changing as this one is just keep you up-to-date with the results as they are. So you can look at each of our line items in that P&L throughout this pandemic, and each one of them has had a fair degree of volatility. So it wouldn't be -- I think it wouldn't be helpful today to make forward-looking statements on that basis. But hopefully, we've given you enough color to understand where the big levers are.

And we're pleased that beef has stabilized, for example, but paper and packaging will continue to be elevated. As I mentioned, the teams have done a great job on labor, but we still have some headwinds there as it just relates to the broader environment with COVID. And the other OpEx line will continue to be impacted by potentially things like marketing coming back in, the delivery mix and various other things. So hopefully, the data we've given you gives you some color, but nothing additional to sort of talk to you today.

And James, just one other thing is generally, you got to understand that the 13-week period in the third month can contribute off into a higher Shack-level op profit in that month, which you saw in September. So generally, it's not comparable to compare a 12-week to a 13-week when you're thinking about that.

Very good. Now just a quick follow-up on the drive-through prototype. I'm not sure if you've described any of the maybe digital technology that will link up to the drive-throughs you're looking at, whether you'll have digital menu boards, payment processing at the drive-through window or other things like that, that will accelerate throughput or other technology enhancements.

We haven't yet. I think, for us, we're not going to make our KPI the fastest drive-through in the world, right? We want to -- we still cook things to order. We're going to continue to do that, and the drive-through operations of that will take time. So we will not -- we're not going for the fastest. We're going for the highest-quality, most premium burger that we've always done.

So we'll likely have some really good digital technology involved in that. We'll also keep it pretty simple. We want this to be a someone's option, if you want to order it that way. If you like to preorder, we'll have that option available for you through Shack Track, and really just engaging more and more people in however they want to travel and get their Shack.

So we're excited about it. A lot of questions to be answered. We'll be building this first track this year, and as I noted, we're going to make commitment to a number of them. We really want to see where this can go, and we've got some great sights lined up for most of it.

Our next question comes from Brian Vieten with Cowen & Co.

Just another follow-up on the drive-thru. Appreciate that it's kind of a smaller mix of next couple of years. Presumably, will build over time. But just, Tara, as you've talked to developers and landlords, are you finding the opportunity to secure some of these sites for, I think, it was around $2 million in the past for what these restaurants historically cost.

And I guess just in the context of drive-thru, one of your competitors have spoken to sort of a 10% higher development cost. Are the savings may be offset there for the drive-thrus with the nondrive-thrus maybe a little bit lower than that $2 million?

I think all of this is learning that we have ahead of us. We haven't built a drive-thru yet. As Randy mentioned, that's scheduled for late next year. So I think we will reserve the right to come back to you once we have some of those data points. Some of these new formats -- drive-thru, is one of them. Some of these new formats may result in a touch higher CapEx spend to build them, but we'll see.

We're excited about them. And even if they do -- we as Randy mentioned in our prepared remarks, we're very focused on really expanding that addressable market and expanding those AUV opportunities for us. But it's early days. One is not yet built, so we'll come back to you when we've got some of those learnings.

Our next question comes from Drew North of Baird.

I think you mentioned earlier in the prepared remarks or on prior conference calls that you've been attracting a lot of new customers to the brand or first-time purchasing on your app. So I guess I was wondering if there's any perspective you can share on the demographics of that customer, maybe now that you've been collecting more data, how the newer customers are engaging with your brand relative to legacy customers?

Yes. Yes, we're really pleased with the continued very strong numbers that we have when it comes to new purchases on those digital channels, as you rightly point out. So nothing to share specific today in terms of both behaviors of those demographics. And really, we're still in the very early stages of that. We've been very pleased with those acquisition numbers, and now, we'll continue to build out that digital and marketing infrastructure, that digital tech infrastructure to make sure that we can continue to really leverage it now that they're on our channels.

We're focused on bringing delivery as a service into our own channels. It doesn't currently exist today. App and web is -- you have to come and pick up your order, so bringing that in will be almost a final piece of the puzzle, where we can really focus on offering everything that anyone else could within that -- within the sort of Shake Shack ecosystem. And that allows us to build on those relationships and to better segment those customers, and to your point, understand demographics and behavior and talk to them more holistically across all those channels to start to sort of focus on referrals and frequency and so on and so forth.

So we're right at the beginning of that journey. We feel really good about the progress so far. We're very excited about the progress behind the scenes as we have been building out those tools. And that -- particularly that data infrastructure, but a lot to learn. So early days.

Our next question comes from Dan Docherty with Raymond James.

It's Dan Docherty on for Brian. Thinking about closing out the year, could you perhaps provide some color on average weekly sales volumes in the fourth quarter? How has that seasonality typically played out through the quarter, say, pre-COVID or last year?

Yes. I mean, nothing really specific that we would want to give you today, honestly, as it relates to fourth quarter expectations. I think we're waiting to see even whether seasonality is something that's relevant in an environment as volatile as this, honestly. And we talked about the fact that we've still got states and cities changing dining and COVID and capacity restrictions.

For a step forward, sometimes you go a step back. And a significant portion of our regions are about to enter a colder weather period where we've got a majority of our Shacks today using outdoor patios to help with some of those capacity issues.

So seasonality is something that we think is sort of less relevant in an environment as volatile as this, hence, sort of not giving a specific outlook and specific guidance for the fourth quarter.

Yes. And you can see, if you just look at years past in our in our quarters, generally, you do see the fourth quarter is slower seasonally, right? We have very strong third quarter average weekly sales, generally. So generally, that's the trend, and then as Tara said, this is a different kind of year.

So we'll see. We'll see. We're keeping an eye on that. It's been -- as you can see, through October, it has increased sequentially every month since COVID began, so that's really good news. We'll see if that same seasonality plays out now.

(Operator Instructions) At this time, there are no further questions. I would like to turn the floor back over to management for closing comments.

Thanks so much. I really appreciate everybody taking the time. I know it's a busy night and a busy time. Appreciate your support for the Shack and our team. Look forward to seeing you soon. Take care.

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