Shake Shack Inc. (SHAK) Q3 2026 Earnings Call Transcript

Operator: Good morning. Welcome to Shake Shack's third quarter earnings call. At this time, all participants have been placed in a listen-only mode. The floor will be opened to questions following management's prepared remarks. It is now my pleasure to turn the floor over to Alison. Please go ahead.

Alison Sternberg: Thank you, operator, and good morning, everyone. Joining me for Shake Shack's conference call is our CEO, Rob Lynch, and our CFO, Michelle Hook. 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 financial details section of our shareholder letter. 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, 2026, our other quarterly reports on Form 10-Q, and our other SEC filings. 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 2026 shareholder letter and our Q3 quarterly report on Form 10-Q, which can be found at investor.shakeshack.com in the quarterly results section and as an exhibit to our8-K for the quarter. I will now turn the call over to Rob.

Rob Lynch: Thanks, Alison, and good morning, everyone. I want to start by thanking our team members around the world who bring enlightened hospitality to life in our Shacks every single day. Your care for our guests is what makes this company special, and I am grateful for it. This week, we had the opportunity to host over 20 new restaurant GMs in our Atlanta offices for training and development. Their enthusiasm to be a part of Shake Shack was infectious, and I am so thankful to everyone in our organization for creating the type of company and culture that makes Shake Shack a great place to build a career. On to our third quarter results. In a tough environment, our team stayed focused on what matters most, taking care of each other and our guests. I am incredibly proud of how our 15,000 team members and our licensed partners showed up over the last few months and for the results they produced. Company-operated same-Shack sales grew 2.5%, including 0.8% traffic growth, which marks our fifth consecutive quarter of positive traffic and our 23rd consecutive quarter of positive comparable sales. These results were delivered against our toughest prior year comparison of the year, which included the debut of the Dubai Chocolate Shake and our initial significant investment in paid media. We lapped those investments with less marketing spend this quarter as we continue to improve our marketing productivity. Our continued comp sales and traffic growth while opening a large number of new Shacks gives us confidence in our ability to reach our long-term guidance of 1,500 company-operated Shacks. Our Shack-level margins remained healthy at 22.5%, and we grew adjusted EBITDA 16% versus the prior year. We delivered these results while absorbing elevated input costs across multiple line items, underscoring our disciplined cost management across the company and the excellence of execution throughout our company-run operations. The consumer backdrop remained challenging throughout the quarter. While higher-income guests continue to spend, lower-income guests remain under pressure. Our data tells a similar story, with traffic growth from higher-income guests offsetting softness among lower-income guests, particularly in our urban markets. As I have mentioned before, we have less exposure to the low-income segment due to our real estate portfolio and our premium positioning. However, we aspire to serve all guests, and while we continue to see pressure on the consumer, we remain focused on delivering a compelling value proposition while maintaining our premium positioning in the marketplace. In a highly competitive industry environment where every brand is competing for declining traffic, we know we have to earn every visit. Three primary components of our strategy continue to drive our consistent same-Shack sales growth: strong restaurant operations, distinctive culinary excellence that differentiates our brand, and targeted media and digital investments that productively drive awareness and engagement. First, our improvements in restaurant operations continue to elevate the guest experience while delivering strong margins. Our focus on using the highest quality ingredients delivered with operational excellence and Enlightened Hospitality continues to deliver a strong value proposition while supporting our premium positioning. Our labor attainment levels have continued to exceed our expectations, reducing our overtime and helping to maintain our strong margins. Our Shacks are clean, comfortable, and cared for, bringing pride to our teams and the communities that we serve. Second, culinary innovation continues to differentiate Shake Shack and drive guest excitement. Shake Shack is grounded in a history of culinary innovation. Our core menu of burgers, fries, and shakes is the foundation of everything we do, and we will continue to deliver excellence every day with abundant portions and the highest quality ingredients. We complement our core menu with premium innovation on a select number of LTOs. This strategy balances our core menu, which is what attracts most new guests, with premium LTOs that build the brand and aim to drive frequency and check among our current highest lifetime value guests. This approach allows us to reach more guests without compromising the soul of the brand or significantly discounting our core menus. Starting in Q2 and continuing into Q3, our barbecue platform drove strong trial, frequency, and check. This platform was anchored by the Baby Back Rib Sandwich, which has been recognized as one of 2026's best new culinary innovations. In July, we introduced our West Coast-inspired platform. The West Coast platform delivered strong guest satisfaction while generating a surprisingly strong organic social media response. Positive creator and guest reviews highlighted the quality of our ingredients and distinctive flavors, helping sustain momentum beyond the initial launch. This excitement and the brand buzz around new flavors and limited-time culinary experiences is why we offer them. This is not new at Shake Shack. We have always brought culinary innovation, beginning when we started as a hot dog stand and proceeded to then launch burgers and shakes. Innovation is in our DNA, as long as it improves our guest experience without materially disrupting our operations or supply chain. In September, we complemented the West Coast sandwich platform with the launch of our premium Reese's Peanut Butter Cup Shake. Similar to our Dubai Chocolate Pistachio Shake from 2025, this shake featured our signature chocolate crackable shell and was premium positioned in our lineup, which helps support comp and traffic growth. We are excited about our premium shake innovation and will continue to bring new culinary-forward shake offerings. As we closed out Q3, we welcomed back our Black Truffle menu, our number one requested LTO, and are very excited about the continued positive response that we see from our guests when we feature this unique, high-quality ingredient. Looking ahead, our innovation pipeline is strong and will continue to include premium shakes, new burger and sandwich offerings, and delicious side items that combine distinctive flavors with memorable culinary experiences. The continued quality of our core menu with the best ingredients possible, coupled with our unique culinary initiatives, build the brand, drive trial, frequency, and check growth. We do this while minimizing operational and supply chain complexity. We are delivering proven guest favorites alongside bold new flavors, all supported by disciplined testing to identify the strongest opportunities to bring to market. Third, our targeted media and digital investments continue to strengthen guest engagement and drive traffic growth. As we build out our loyalty program and focus on expanding our guest database and targeting capabilities, we now define our digital mix as the channels where we control our communication and interaction with our guests. Our own digital channels now include in-Shack kiosks, app and web platforms, and represented approximately 60% of Shack sales in Q3. As we have communicated in the past, our digital guests visit more frequently and spend more over the course of a year. Delivery, which we now view independently from our own digital channels, continues to be a healthy part of our business with strong growth as we partner with third-party providers to reach new guests. Throughout the quarter, we continued testing personalized marketing across all channels to identify efficient ways to drive traffic and sales while maintaining healthy margins. These efforts are helping us attract and retain guests, increase lifetime value, and strengthen the foundation for loyalty and lifecycle marketing, all while maintaining promotional and pricing discipline. Turning to margins, we delivered another quarter of healthy restaurant-level profitability despite a challenging operating environment. The work we have done over the past several years to strengthen our restaurant operations and supply chain have improved service levels and delivered productivity across the business. This allows us to balance margin expansion with investments that support traffic growth, strengthen our value proposition, and enhance the guest experience. We believe that this approach positions us to drive sustainable growth while continuing to build a strong, resilient business over time. This productivity also reduces our dependency on pricing to completely mitigate ongoing inflationary pressure. On the development front, this was our largest third quarter of unit growth ever. We opened 21 new company-operated Shacks, including our first South Carolina Shacks in Charleston and Greenville, bringing the year-to-date total to 54. We remain on track to open 60-65 this year, and we will continue to grow with a disciplined approach to ensure that we open new Shacks that will deliver on our expected returns over the long term. This planful pace of growth reflects our confidence in both the strength of our development pipeline and the significant white space opportunity we see ahead. As we continue to densify existing markets and enter new ones, we expect some near-term effects that naturally accompany this rate of expansion. Understandably, opening this number of new Shacks this year has had some negative impact on our comp sales, which makes our consistent positive comp performance that much more exciting. However, what is most important is that our new class of Shacks continue to perform well and are tracking in line with our three-year return expectations. This performance reinforces our confidence in the long-term opportunity to scale Shake Shack and create shareholder value through new Shack growth. We will remain focused on balancing the revenue and EBITDA growth contributed by new Shacks with the margin and comp headwinds that they create in the first couple years of their existence. Turning to our license business, our license partners delivered a solid quarter despite a challenging global backdrop. Licensing sales increased 8.3% to $236.8 million, while licensing revenue grew 4.7% to $15.3 million. While the conflict in the Middle East continued to impact results in the region, those pressures moderated relative to the first half of the year. At the same time, we saw strong performance from new Shacks in U.S. airports, in Canada, and the United Kingdom. During the quarter, we opened 16 new licensed Shacks, and we have now opened 32 new licensed Shacks year to date. We continue to see attractive opportunities to expand the brand through our licensing model, partnering with experienced operators who share our commitment to quality, hospitality, and long-term brand stewardship. We are also excited about the recent announcement of our entry into Brazil, one of the world's largest restaurant markets and a country with a vibrant food culture. Finally, an update on Project Catalyst. We continue to make meaningful progress on the technology foundation that will support Shake Shack's next chapter of growth. The work underway across our restaurant systems, digital platforms, loyalty capabilities, data infrastructure, and AI tools is all focused on a simple goal: making it easier for guests to choose Shake Shack and easier for our teams to deliver great experiences. We're taking a thoughtful phased approach as we introduce these capabilities, but we're excited about the opportunity ahead. Over time, we believe these investments will help us strengthen guest relationships, increase efficiency, enhance personalization, and support our ability to scale the brand while delivering Enlightened Hospitality at every touchpoint. These investments in our technology infrastructure are designed to support improved restaurant operations and help us leverage G&A moving forward. Before I turn the call over to Michelle, I want to share how I am thinking about the balance of the year. I recognize that we had a challenging start to 2026, as we opened more restaurants in Q1 than ever before and experienced an outsized drag on our margins. But I am proud of the progress we're making and the position we're in. We have learned a lot in 2026 about striking the right balance between new Shack growth, comp growth, and margin maintenance. I couldn't be more thankful to our corporate and restaurant teams for staying focused, working hard, and believing in our future. The perseverance, leadership, and the care for our teams that our managers have shown in 2026 inspires me every day, and I'm humbled to be a part of the Shake Shack team. The actions that this team has taken to strengthen restaurant operations, deliver culinary innovation, expand our development pipeline, and build scalable marketing and technology capabilities are the reasons that we delivered our 23rd consecutive quarter of same-Shack sales growth, fifth straight quarter of comp traffic growth, and continue to have strong operating margins and have confidence in our future. As we close out 2026, we will remain disciplined and focused on what we can control, delivering the highest quality food coupled with a commitment to Enlightened Hospitality that continues to drive consistent, dependable top and bottom line growth. We've built a resilient business with a differentiated brand, positive comp momentum, strong unit economics, and a significant runway for expansion. We remain committed to executing our strategies with excellence and creating sustainable long-term value for our shareholders. With that, I'll turn the call over to Michelle.

Michelle Hook: Thank you, Rob, and good morning, everyone. Our third quarter results demonstrate the continued resilience of our business and the progress we're making across our strategic priorities. We are energized by our fifth consecutive quarter of positive traffic growth and extending our streak of positive same-Shack sales growth to 23 consecutive quarters. Against a dynamic consumer backdrop, we remain focused on disciplined execution, profitable growth, and creating long-term shareholder value. Now, let me walk you through the quarter in more detail. Third quarter total revenue was $423.3 million, up 15.2% year-over-year, driven primarily by our new Shack openings, as well as 2.5% same-Shack sales growth. Licensing revenue was $15.3 million in the quarter, with licensing sales up $236.8 million, up 8.3% year-over-year. The growth in our licensing revenue was the result of a steady pace of new license openings. Given our strong development pipeline, we now expect to land at the high end of our 40-45 licensed Shack opening range in 2026, while also bringing Shake Shack to Panama, Vietnam, and U.S. regional casinos with PENN Entertainment in the fourth quarter. In our company-operated business, Shack sales grew 15.6% year-over-year to $408 million. We generated approximately $75,000 in average weekly sales compared to $78,000 last year. The decline in average weekly sales was primarily driven by the rapid expansion of our restaurant base, as newer Shacks continue to ramp toward a mature sales volume and represent a larger portion of the system. We delivered 2.5% same-Shack sales growth, including 0.8% positive traffic and 1.7% price mix. Traffic growth continues to be driven by strength in our third-party delivery and own digital channels, which, as Rob mentioned earlier, we now define as kiosk, app, and web. We have been intentionally investing in our own channels to acquire valuable guest data, deepen our understanding of guest behavior, and drive higher lifetime value through more personalized engagement. Gross pricing across all channels was approximately 4% for the quarter. Mix was pressured as we deliberately invested in guest engagement through targeted offers, promotions, and channel-specific marketing initiatives designed to drive traffic and strengthen value perception. in October, we implemented an additional 1% menu price increase to help offset inflationary pressures. Together, with continued supply chain savings and productivity initiatives, we remain focused on balancing margin protection with thoughtful pricing and targeted investments to drive traffic. We now expect to exit the year with approximately 2% gross pricing. We continue to advance our development pipeline with a Q3 record of 21 new openings, bringing us to 54 openings year to date as of the end of the quarter, versus 30 this time last year. We remain positioned to open 60-65 new company-operated Shacks in 2026. Our confidence in the long-term opportunity to expand our footprint remains unchanged, and we are encouraged by the productivity of our newer class of Shacks as they track towards our expected cash-on-cash returns. Third quarter restaurant level profit was $91.7 million, or 22.5% of Shack sales. Margins declined 30 basis points versus the prior year quarter, driven by increased operating expenses, primarily related to higher delivery commissions and investments in labor, partially offset by lower food and paper costs. Supply chain optimization remains a key opportunity, and continued progress will be important to mitigating cost pressures and supporting sustainable profitability. In the third quarter, food and paper costs were $115.3 million, or 28.3% of Shack sales, 100 basis points lower than last year. The percentage decrease year over year was mainly driven by menu pricing and lower commodity costs, partially offset by promotional activity during the quarter. Blended food and paper costs declined by low single digits in the third quarter as lower costs across our buns, chicken, and dairy more than offset continued beef inflation. Beef costs increased by low single digits year over year, but moderated sequentially while remaining elevated relative to historical levels. Our ongoing supply chain and procurement initiatives continue to help mitigate cost pressures. Labor and related expenses were $103.8 million, representing 25.4% of Shack sales, 50 basis points higher versus last year, primarily due to investments made in our team members. Our priority continues to be team member engagement and guest satisfaction. We therefore take a disciplined approach to labor, ensuring our Shacks are staffed to deliver the level of hospitality and execution our guests expect while continuing to drive productivity and efficiency. We are also making investments in our restaurant manager development to help support our rate of new Shack growth over the coming years. Other operating expenses were $65.8 million, or 16.1% of Shack sales, 90 basis points higher versus last year. The increase was driven primarily by higher delivery commissions, reflecting the continued growth of our delivery business and the impact of the expanded number of new Shack openings. Occupancy and related expenses were $31.4 million, or 7.7% of Shack sales, flat year-over-year. Third quarter G&A totaled $45 million, 10.6% of total revenue, an increase of $0.6 million compared to the prior year. The year-over-year increase primarily reflects investments in our team members and technology capabilities, partially offset by efficiencies in our marketing spend. We remain disciplined in our approach to G&A while investing in technology capabilities that we will leverage as we scale the business. We continue to expect full year G&A to trend toward the low end of our 12%-13% target range as a percentage of total revenue. Equity-based compensation was $5 million versus $4.4 million in Q3 of 2025, with $4.4 million hitting G&A. For fiscal 2026, we now expect equity-based compensation of approximately $20 million. Pre-opening costs were $7 million, $2.4 million, or 51% higher than the prior year, driven by our Q3 record number of new Shack openings in the quarter. Adjusted EBITDA of $62.8 million, or 14.8% of revenue, increased 16% year-over-year, resulting primarily from higher restaurant level profit, partially offset by higher pre-opening expenses. We continue to expect full year adjusted EBITDA to trend towards the low end of our $225 million-$235 million target range. Depreciation was $32.9 million. We continue to see an increase in depreciation year-over-year as a result of more company-operated Shack openings and new technology investments. Net income attributable to Shake Shack Inc. was $16.5 million, an increase of $4 million, or 31.9% versus prior year quarter. Our GAAP tax rate was 24%, and our adjusted pro forma tax rate, excluding the tax impact of equity-based compensation, was 24.2%. We ended the quarter with $319 million in cash and cash equivalents on our balance sheet, with $250 million in convertible notes outstanding. We have full availability under our revolving credit facility, leaving us well capitalized to fund our growth. We are encouraged by our results through the third quarter and the progress we continue to make across the business. We delivered positive traffic, our development pipeline is on track, and our operational and supply chain initiatives continue to create flexibility within the model. As we look to the fourth quarter, we remain mindful of the dynamic macro environment, including elevated fuel and other costs, and the lap of last year's successful value and media initiatives, including our 1-3-5 platform. We remain focused on disciplined execution, operational excellence, and sustainable long-term growth as we close out 2026 and in the years to come. Thank you for your time, and with that, I will turn it back to Rob.

Rob Lynch: Thank you, Michelle. Before we open the call for questions, I want to thank our teams once again for their hard work, dedication, and passion for Shake Shack. Their commitment to our guests, to each other, and to our culture is what continues to power our progress and gives us confidence in our long-term growth opportunity. I also want to thank our investors. We appreciate everyone joining us today and for your continued interest in Shake Shack. With that, operator, please open up the call for questions.

Operator: Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit to one question and one follow-up question. Our first question is from Brian Vaccaro with Raymond James. Please proceed.

Brian Vaccaro: Hi, thanks, and good morning. Just wanted to ask about the new unit sales performance that you mentioned, Rob. I think you said you're densifying more markets. Could you just elaborate on the impact you're seeing there, and are there any differences in the type of units or markets that you're opening that's also worth highlighting?

Rob Lynch: Hi, Brian. It's pretty consistent with what we've seen in the past. We obviously are in more markets at this point than we were a few years back, so a larger proportion of our new units are in existing markets versus kind of greenfield markets. I think we've talked about it in the past, but our new units tend to open up somewhere in the $3 million-$3.5 million range, and they obviously open up with lower margins than our run rate Shacks because they require more training to get off the ground, and they have lower AUVs to start, so obviously they don't get the flow-through and the leverage. When you think about the path forward, and this isn't any different than how we have operated the last couple years, but we just want to make it really clear on the path forward. Our AUVs have remained at $4 million, despite a larger number of new Shacks coming in at lower initial sales volumes. That is a function of our core Shacks and our comp Shacks growing comps in the low single digits. That growth on those higher volume Shacks mitigates the entry point for the newer Shacks, leaving our AUVs right in that $4 million range. On the margin side, the new Shacks come in, and like I mentioned, they come in in the high teens on margin because they require extra investment to open and launch. That is a little bit of a drag on our holistic margin, but it is encouraging because that means our comp Shacks have margins higher than what our average that we reported is, because that is blended across both comp and non-comp Shacks. That is kind of the big impact on the run rate of the business. Our objective when we approve any project, regardless of which market or which format, is always to deliver 30% cash on cash in year three. We have been able to continue to do that throughout the development over the last decade, if you will. That is our plan moving forward as well. We are growing the number of Shacks every year that we build, and so those headwinds are going to continue to be present, and we are going to continue to track them very closely to make sure they are delivering on our returns. We feel great about the impact that it is having on our revenue growth and our EBITDA growth, and we have been able to mitigate some of the margin and comp headwind that comes. I just want to call it a comp headwind. I have stated in the past, we have a lot of white space, so we are not building Shacks in close proximity to each other. Outside of Manhattan, we are not building Shacks a mile or 2 mi away. Most of our projects are 10+ mi away from our existing Shacks. The cannibalization really comes from the delivery side of the business. We do not get to control the radius around each Shack that the delivery providers control. When we open a new Shack that is 10 mi away and the radius around the prior Shack was 7 mi, you are going to see some cannibalization of that delivery business, and that is primarily where it shows up. That is the model moving forward. We are going to open 60+ units every year, and we are going to drive revenue and EBITDA growth with new Shacks, but we are also going to have to continue to drive comps and be productive to mitigate the short-term margin and comp implications from those new Shack openings. That is not additive to what is already embedded in our business. The numbers we just reported already reflect all of that happening. We have high confidence that we can continue to deliver our guide of low single-digit comps and 22%-23% margins as we continue to grow.

Brian Vaccaro: All right, that's super helpful. Thanks, Rob. Just a quick follow-up, if I could, on G&A. Your third quarter dollars were flat year-on-year, driving pretty significant leverage, and then I think your guide embeds maybe a bump back into the low $50 million kind of plus range. Could you just unpack what we're seeing in both Q3 and within that Q4 guide, and maybe specifically what that reflects from a marketing perspective? Thank you.

Rob Lynch: Yeah. I mean, we're five quarters into this marketing journey, right? Q3 of last year was the first quarter where we materially upped our investment in marketing. As I've stated in the sequential quarters since, we continue to learn and optimize our marketing model. I feel I give a lot of credit to our marketing team under our new leadership in marketing of really optimizing our media mix and being more effective at targeting the right guests at the right time. We've also optimized kind of our own channel digital offers. So, we are reaching the right people to drive trial and the right people to drive frequency, and we're doing it in a more efficient and effective way. So, despite the investments in some of the promotions that are a bit of a drag on mix, we've still been able to maintain our margins. I'm really proud of that in this environment, being able to go out and drive traffic while holding onto our margins, where a lot of our competitors have had some margin degradation. So, that's really a function of the effectiveness of our marketing coupled with the operations. So, marketing is a big part of our G&A, and the flow of that is really going to be driven by where we choose to invest our marketing, right? Our S&B and our other investments in G&A kind of stable throughout the year. So, the fluctuations throughout the year in G&A are really driven by our decisions on marketing, and we're being very strategic in where we invest. Q4 is one of our biggest quarters of the year from a volume standpoint. We've got some big laps in Q4. Last year, we launched 1-3-5 in Q4, and we launched the Big Shack in Q4. So, we are making bigger investments in Q4 than we felt were needed in Q3 to deliver the results we just reported. So, that's why the G&A changes quarter to quarter and why we're maintaining kind of our guide on EBITDA despite a lower spend on G&A in Q3. Michelle, would you like to add anything on G&A?

Michelle Hook: No. Just to reiterate, Brian, that we do see it sequentially stepping up in Q4, to Rob's point, because of the higher marketing spend and then our continued investments in our team members and our technology initiatives. That is the only add I would make.

Operator: Our next question is from Michael Tamas with Oppenheimer & Company. Please proceed.

Michael Tamas: Hi. Good morning. Thank you. You have driven five quarters in a row of positive traffic, and you lapped the positive traffic you started from the third quarter of last year, which I think is a hurdle the market was kind of looking for. As we think about the path forward from here, your marketing is still going to grow with sales, but there will not be the big step-up that you have had over the last year. Help us unpack how you are thinking about the same-store sales of drivers into next year between maybe loyalty, its timing and impact, how you are going to get more dialed in on your targeted marketing, and then the innovation calendar that you talked about. Thank you.

Rob Lynch: Yeah. Thank you for the question and the recognition of the five straight quarters. Yeah, I mean, look, this was a big quarter for us. I think there was a lot of question marks on whether or not we could lap the 5% comp we delivered last Q3 without a big infusion of marketing. The team has just continued to improve our go-to-market model and our media purchasing and the way we implement our offers across our own digital channels and the way we work with our delivery partners. Not only did we comp positively, we did it with less marketing versus year ago. That is the biggest source of encouragement for me in our ability to continue to drive solid comp and traffic growth. We are growing revenue almost as fast as anybody in the industry. If we maintain the same rate of spend on marketing moving forward, that means our marketing budget is going to increase at the rate our revenue increases. This quarter, we grew 15.2%. This year, we are planning to grow mid-teens and guided to mid-teens growth. Every year, if we continue to deliver that type of revenue growth, we are going to get that amount of increased marketing. A lot of brands are not growing their revenues, and marketing is usually spent as a function of revenue. With mid-teens marketing investment growth every year, coupled with the continued productivity that we see in every channel of our marketing mix, we have a lot of confidence in our ability to continue to drive traffic. When we talk about traffic, we all talk about comp traffic, and that is obviously the biggest KPI. When you think about traffic as a whole, with the number of restaurants we are opening up every year, and you think about the revenue growth this quarter of 15% revenue growth with only 1.7% check growth, that revenue growth is coming from almost entirely from traffic, as our company footprint in these markets. Our traffic growth as a company is in the low teens. We continue to take share. Every time we go in and open up a Shack and it does $3.5 million out of the gate, that is coming from somewhere. We have been able to go in and build restaurants and be very successful building new restaurants that make a lot of money right out of the gate, while being able to maintain that comp growth. It is 23 straight quarters of comp sales growth. I have been here two-and-a-half years now, and it has always been a question of whether we can do that, and can we do it with traffic? Now five straight quarters of traffic growth. We are building the engine that can replicate that year in and year out without needing a big additional infusion of marketing.

Michael Tamas: Thanks. Just on the margin side, I know you are not giving guidance beyond 2027, and you are reviewing the longer-term restaurant margin targets. I think the implication was that the new unit growth was pressuring margins, which suggested that your comp base units were growing margins. This quarter, we saw a slight shift. I think labor delivered for the first time in about four years as you made some investments. Can you just help us qualitatively think about margins after 2026? Are your comp base units going to be growing margins, and that pressure is really from the new units? Are you now in this investment cycle that started with labor here this quarter that we are going to see going into 2027 as well? Thanks.

Rob Lynch: Qualitatively, strategically, our number one priority is team member and guest satisfaction as a company, full stop. We did a ton of work on the labor line over the last few years to get the operating procedures and the labor modeling and the scheduling and everything in place that we can run as effective as possible. We feel great about that accomplishment and where we are, but we are not going to continue to try to leverage the labor line. We are really focused on investing in our team members to support our rate of new unit growth, right? We are opening up more Shacks than we have ever opened up. Those Shacks, the number one limiting factor is having great people to go and open up those Shacks. We are investing in our team member development. We just had our first GM capstone event here in Atlanta this week with over 20 new GMs, teaching them, coaching them on how to open up and run restaurants effectively. Those are investments we are making, and training and development, that is all going to affect the labor line. We do not see a material increase in our labor rate, but it is definitely not a source for us to continue to drive increased productivity. We do not want to be a brand that has to make their EBITDA number by cutting labor that negatively impacts our team member or guest satisfaction. That is kind of the strategic component. In terms of the financial piece, I will let Michelle speak to kind of what our financial outlook on labor looks like.

Michelle Hook: Yeah. I will get back, Michael, to just the overall margins and your point on us assessing the 2020 or the long-range outlook. That is correct. We currently have out there, we are going to grow margins 50 basis points. But as Rob mentioned earlier, our new Shacks do not come out of the gate doing the 22%-23% that we are targeting this year in 2026. Generally, right, those first couple years, they are doing more high teens margins. That is the assessment we are making as we look forward and say, "Okay, how many new Shacks are coming into the portfolio? What is that margin drag?" Because there is a margin drag. There is a margin drag this year. There is going to be a margin drag next year. But how are we mitigating against that with other things going on in the business? Rob mentioned, we are not going to compromise on labor in terms of investments and our team members and hospitality. But we have also talked about opportunities within supply chain and some of the initiatives that we are driving there to get efficiencies on that line item. As all of that comes together, there are puts and takes on both sides. That is the assessment that we are making. But for right now, all of that is embedded in our annual outlook of 22%-23%, and so we feel good about that. More to come as we enter 2027 on what that long-term algo looks like, as we continue to assess that.

Operator: Our next question is from Gregory Francfort with Guggenheim Securities. Please proceed.

Gregory Francfort: Hey. Thanks. On the new stores, there's been a lot of talk on the margin impact, but can you maybe just remind us what the comp trajectory looks like? Those stores, they open up maybe lower margin, but are you seeing a difference in waterfall? And maybe what does that look like in year one, year two, year three on the comp side? Thanks.

Michelle Hook: Yeah, Greg. As you know, we don't enter Shacks into the comp base until after 24 months. The reason we do that is there is a honeymoon curve generally to new Shacks. They're going to start out at X level of sales. We're going to see a little bit of a dip in year two, and then the expectation is as they get into year three, they're comping positive. Along that journey, as we mentioned, we expect to see margin expansion over the course of those years, but there is a honeymoon curve to that, Greg.

Gregory Francfort: Okay. Just maybe on pricing and commodity inflation going forward. Beef, it seems like it's rolling, but you obviously have diesel and a bunch of upward pressures. I think you're going to carry 2% to the start of next year is what you said. What are your thoughts in terms of how much coverage you need to do and kind of what level of pricing you need to run? Thanks.

Michelle Hook: Yeah. Correct on what you stated, Gregory Francfort, which is exiting the year, we'll be at about 2% pricing. We have some pricing that rolls off in December of this year, putting us at that 2%. Generally, we're not in the mindset that we want to take price to bolster margins. We're looking at pulling that lever in terms of how we offset inflationary cost pressures and not to, again, bolster margins. As we enter next year, being mindful of that and also being mindful, right, of where we sit in terms of value perception in the marketplace. All those play a role as we go into next year as we think about the pricing lever. As we get into that time period, we're going to look at all those input costs, whether it's on, to your point, on the commodities, on our OpEx, labor, et cetera, and make the decisions on when and where we're going to take price. But we're definitely very mindful about where we sit and then also the consumer environment that we're heading into next year.

Operator: Our next question is from Margaret Binshtok with Wolfe Research. Please proceed.

Margaret Binshtok: Good morning, guys. Thanks for taking my question. I know you guys talked a little bit about some of the softness with that lower-income guest, especially in your urban markets. I just wanted to understand, given a lot of your value sits in the app, how are you thinking about balancing value for that walk-in guest who isn't in the app? Then I just wanted to follow up to make sure, the timeline of the loyalty launch, is that something that we should still be expecting towards the end of this year? Thank you.

Rob Lynch: Yeah, the majority of our orders in Shack are on kiosk at this point. For anybody that is in our Shack universe, has signed up for our app or our offers, they are able to execute those offers in our kiosks. It is not app only where the value shows up. It is also in the kiosk. That is why we changed the definition of our digital platforms, because we want to reflect the work that we are doing to make sure that we are delivering value and we are delivering growth on our highest lifetime value guests on a run rate basis. We pulled delivery out of digital and added our kiosks in because we are able to deploy offers and track purchase behavior on our kiosks. That is the whole reason why we made that definition change, and we are very focused on driving our digital business both in Shack with our kiosks as well as our app and web business. Loyalty, we do not look at loyalty as a short-term driver, huge driver of sales or profit out of the gate. Loyalty programs tend to, by definition, be leveraged by your current guests. Sometimes there is even, in other instances, a drag when you launch a loyalty program because you are launching it with your current guests. It is not necessarily a tool to go and attract new guests. We are being very thoughtful about loyalty because we want it to be a long-term value creator. Our vision for loyalty is being able to deliver Enlightened Hospitality in our digital footprint, in our digital universe. We are really investing a lot of time and energy to make this more than just a points-based program. We want it to be an engagement tool, hearkening back to Danny Meyer's Union Square Hospitality Group, when someone walks in and they know your name and they know what you have ordered in the past and they know that it is your anniversary or your birthday. That is our aspiration. We are working very diligently and planfully to execute against that. We have talked about launching loyalty in some beta form in Q4 this year, Q1 next year. That may still happen, but only if we have confidence that it is going to be the representation of Enlightened Hospitality that we aspire to. It is not really a financial implication because we do not expect loyalty to have an outsized comp or margin impact when we launch it. It is much more of a long-term investment to cultivate our highest lifetime value guests.

Margaret Binshtok: Thank you.

Operator: Our next question is from Chris Carril with KeyBanc Capital Markets. Please proceed.

Chris Carril: Hi. Thanks for the question here. On the 4Q same Shack sales growth, is there anything else you could provide in terms of how we should think about the current quarter, just given the wide range implied by the guidance. Michelle, I know you mentioned some of the dynamics to consider, but any additional detail, including what you're seeing quarter to date, would be helpful.

Michelle Hook: Yeah, Chris, we're not going to comment on quarter-to-date trends. Obviously, we know there's a range of outcomes because there is a range of outcomes, right. I'll just refer you back to our annual guide, which is the low single-digit comp for the full year. But as Rob talked about, we've had 23 straight quarters of positive comp growth and five straight quarters of positive traffic growth, and we want to continue that trend. Our goal is obviously to continue that trend, but we feel we have the strategies in place, based on everything that we've talked about today, to continue that trend. But commenting on the quarter-to-date trends is something that we're not going to do at this point in time. Again, the low single digits for the full year is what we're guiding to.

Chris Carril: Okay, great. Thank you. Rob, I did want to ask you about just how you are feeling about LTO cadence, maybe both from a Shack perspective, but then also what you are seeing across the industry. Do you feel like you have the right LTO cadence today, or do you think that there is opportunity to kind of review that. Any other further thoughts on just kind of LTO cadence and operational impact would be helpful. Thank you.

Rob Lynch: Yeah, great question. We launch four big LTO windows a year. It is a lot less than maybe some of the fast-cycle innovation brands launch, but maybe more than some of the non-innovation-driven brands launch. I feel like we are kind of right in the middle. The reason why we choose that kind of model is we believe that our food is differentiated in the space. We believe that we can deliver culinary that other folks cannot. It is not just about bringing in traffic in one month to kind of juice the jam. We bring in our LTOs, and they are in for three months, sometimes four months or even longer if they are really performing and we want to extend them, like we did truffle last year. It is not like a standard calendar. It really is a thoughtful approach about how we can build the brand through the news that is generated on the culinary experience, and then driving repeat with our most valuable guests. We are seeing a huge, awesome response to bringing back truffle. This is the third time we have had truffle, and it is like it is a new LTO that we have never launched. We are going to strike a good balance between new-to-the-world stuff, like the Baby Back Rib Sandwich, and stuff that is tried and true, like truffle. We are going to do it in a way that is the least impactful on operations and supply chain. We are trying to limit the number of unique ingredients in our LTOs, which can create some supply chain and operating issues. We also have an opportunity, I think, to get a little bit more refined on some of the ancillary items that we bring in some of these windows. We come with three new shakes. We come with different flavors of some of our side items and Chicken Bites. Although we have one big LTO, and that is what we focus on, there are other things there too. We are exploring ways to kind of decrease some of the operating pressure, not by doing less big, not by moving from four to three or two big LTOs, but also by optimizing kind of the portfolio of new items that we bring within the context of those four big windows. I would call out, we are also doing some, not LTOs, but we are doing some collaborations right now that we are really excited about. In the news right now, there's a collaboration with Mama's Too, which is one of the best pizza restaurants in New York City. This isn't going to generate a bunch of system-wide sales, but the social media discussions about it and the excitement and brand buzz of Shake Shack collaborating with this amazing cult-like following pizza restaurant, those are the kind of stories we want out in the world to reinforce our culinary prowess and our connectivity into some of these great chefs and some of these great restaurants. So, there's as much brand building and news and buzz that we're trying to drive with some of this culinary innovation as it is kind of a comp sales story.

Chris Carril: Great. Thanks so much. Definitely appreciate you bringing back the Black Truffle menu.

Rob Lynch: Thanks. It's amazing the love for that product. When you really think about it, we get those truffles literally from Italy. It's one of the big reasons why I'm here at Shake Shack. This brand and this company is committed to doing things the right way and getting the highest quality ingredients we can possibly deliver. The more we can just bring news about that, it has a halo effect back on our core business. So, once again, we got to do it in a way that doesn't disrupt operations and supply chain and negatively impact accuracy or speed of service, but there's a huge amount of halo benefit from launching things like truffle and the Mama's Too collaboration.

Operator: Our next question is from Sara Senatore with Bank of America. Please proceed.

Sara Senatore: Thank you very much. Just maybe a question on the margin and then a quick modeling question. Gross margin performance was better this quarter, even though I think the gap between pricing and input costs is roughly the same, maybe 200 basis points more price. Michelle Hook, could you just talk about what the drivers were? Are you starting to see the benefits of some of the supply chain initiatives? Is this more to do with kind of a full quarter of two, four, six versus one, three, five? Just as I think the articulated kind of view on margin has been more coming from cost of goods and maybe less from labor, I am curious where you are in seeing that. The modeling question was just about royalty rates on licensing. I guess your licensing revenue grew more slowly than licensing sales. Is that just a difference between higher royalty rates outside the U.S.? Thanks.

Michelle Hook: Yeah, I will take the margin question, Sara. To your point, yeah, we are definitely seeing a benefit from what I would characterize as price. We came in with the 4% gross price, but then to your point on going from one, three, five to two, four, six, obviously that is definitely going to provide a benefit to your point on the gross profit. When you look at our overall commodity basket in the third quarter, we were down low single digits. Beef was still up low single digits, but when you look at the rest of the basket, and I called out our buns, dairy, and chicken being down in the quarter, definitely contributed. That is in the form of what we have been talking about, which is our supply chain team going after certain categories and finding ways that we can buy more efficiently within our supply chain. All those things contributed to what you saw on the gross profit side. On the licensing side, Rob, if you want to take that one, I will turn it over to you.

Rob Lynch: Yeah, I mean, obviously, licensing sales were higher than revenue, and our revenue effectively is just the royalties minus G&A that we expend to derive those royalties. There are instances where sometimes we make investments in some of the partnerships or in some of the other infrastructure that we are building around the licensing business. So, that is really a reflection of just some investment that we made that flows through to that EBITDA line.

Michelle Hook: Yeah, I would just add, Sara, royalty rates are generally in line, so there is nothing I would call out there.

Rob Lynch: Yeah, it is more just the investments that we chose to make.

Michelle Hook: Yeah.

Operator: Our next question is from Chris O'Cull with Baird. Please proceed.

Chris O'Cull: Yeah. I just had a follow-up on the supply chain questions or comments, Michelle. Can you help us understand the rough magnitude of supply chain initiatives that contributed to this quarter, and then how we should think about that dynamic over maybe the remainder of this year and into next year?

Michelle Hook: Yeah, Chris. I'll point to what I called out, which is we definitely saw some slight inflation on beef, lower on the other categories. Paper and packaging was also down in the quarter. As we go into Q4, we do expect quarter-over-quarter beef to actually become deflationary. We've seen that come down into Q4, but we still expect generally our basket to still be down in that low single-digit range when you look at all the categories combined. That's what I'd comment on Q4. We don't expect to be materially different, but we do expect it to be down low single digits in Q4, similar to Q3.

Chris O'Cull: No, I apologize. I'm talking about supply chain initiatives, like the efforts to kind of improve the supply chain.

Michelle Hook: Got it.

Chris O'Cull: Not just the commodity inflation.

Michelle Hook: Got it. Okay.

Rob Lynch: Yeah. We are kind of in inning three or four of our supply chain journey. We have made a lot of progress. We are starting to derive some of those benefits. Some of those savings that Michelle Hook is talking about on dairy and buns and some of these other non-beef items, those are not just macro prices. Those are a result of some of the work that our team has done to RFP those businesses and optimize the way we make and distribute those ingredients. It is not just commodity prices. There is definitely benefit from some of the things that we have done internally. As we look forward, we have a lot of opportunity ahead, and we are actively working those opportunities. We have built an infrastructure, and that is where some of the G&A increases over the last year and a half have gone into our supply chain capabilities and the leadership there and the competencies there. We are really excited about our ability to continue to find savings there. That being said, some of those savings are going to be mitigated by some of the margin pressure from our new Shack openings, like we talked about. We are constantly working to strike that right balance on the margins while delivering the guides on top-line revenue and EBITDA growth. Our margins, we feel really good about, 22.5%. Obviously, for them to move materially higher, there are things that would have to happen that are kind of outside our control. But we feel confident that even with the rate of openings we're having and the drag that that brings to margins, that we're going to be able to continue to deliver these types of strong margins because of supply chain and operations.

Chris O'Cull: Okay. Great. Thanks, guys.

Operator: Our next question is from Lauren Silberman with Deutsche Bank. Please proceed.

Lauren Silberman: Hi. Thanks. Rob, I know you mentioned high-income consumers continue to outperform the lower income. As you've moved through the year, have you seen any change in performance across low, middle, or high-income cohorts? Any signs of check management that you're seeing?

Rob Lynch: Not dramatically. In fact, I have been a little bit surprised recently that we are actually seeing a higher items per check show up in our business. I know there has been a lot of industry discussion around this whole idea of GLP-1s and people having to cut back, and they are not cutting back occasions, but they are cutting back on the items per check. We have actually seen really some strength in our items per check recently. I think that is a testament to the culinary that we have launched, and particularly some of the shakes. We are seeing people buy shakes. The Reese's Peanut Butter Cup Shake has been a big win for us, and similar to the way Dubai Chocolate Shake was. I think as long as we can continue to bring offerings that are new and unique and different, we are going to get people to want to try those things. I mean, when you go to Shake Shack, it is a different dynamic than when you go to traditional fast food. It is kind of an occasion, right? I mean, we have really high beverage attachment rates. We have very high fry attachment rates. We do not have to do a lot of in-Shack comboing and stuff to sell beverages and fries. People that come to Shake Shack want the full experience, so we just have not seen as much pressure on items per check as maybe the QSR segment of the industry is seeing.

Lauren Silberman: Great. Very helpful. Then on the comp side, any color you could provide on cadence moving through the quarter? I know you guys do not want to talk about quarter-to-date specifically, but just given the volatility in the industry, a lot of companies talking about a slowdown in early October, anything you could at least share qualitatively on the consumer environment, or how you are thinking about it broadly?

Rob Lynch: Yeah, I would just build on what Michelle Hook said. We are absolutely focused on continuing to deliver positive comps and positive traffic. We are really happy, as we called out in the call, really happy with the performance of Truffle. It is doing really well, and we are getting really efficient and effective with our marketing and media. So, we have a lot of confidence, not just for Q4, but moving forward, that we are going to continue this positive same-Shack sales and traffic story.

Lauren Silberman: Great. Thank you so much.

Rob Lynch: Got it.

Operator: Our next question is from Andrew Charles with TD Cowen. Please proceed.

Andrew Charles: Great. Thank you. I am curious what drove the decision to take price in October. You guys have talked about macro pressures on the consumer. It has obviously been a favorable 3Q and 4Q commodity backdrop, as well as the productivity efforts in the supply chain. So, what was the rationale for the price increase?

Rob Lynch: Look, we talked about the investments we want to make in our teams on the labor line, so we are making those investments. There is a cost to those investments. We also talked about some of the OpEx, that we are incremental OpEx costs that we are incurring because of our growth of our delivery business. We want to make sure that our Shacks, that our legacy Shacks that are now 20 years old, and some of them doing $8 million-$10 million in sales, that we continue to invest in those Shacks through restaurant maintenance and make sure that they are a great experience for our guests, because they are delivering huge returns for our business. So, there are other costs outside of the commodities, and we try to take pricing to reflect, take pricing that mitigates those costs and maintains the margins. That is why you see in Q3 and Q2, Q3, and our guide for the year, pretty consistent margins, right? Regardless of kind of just the commodity up and downs, we are seeing pretty consistent margins, and that is by design, right? We are making investments where we think we need to make investments, and some of those investments are funded through pricing, and some of those are funded through revenue growth, and some of those are funded through productivity.

Michelle Hook: Yeah, I would just add to that, Andrew, that when you look at the 4% gross pricing in the quarter, then you look at our net price mix at 1.7%, to Rob's point, we are making deliberate investments in those targeted offers, promotions, channel-specific marketing, right, that is netting down that pricing impact. So, even though you see 4% price, it is really that 1% or 1.7% net price mix. So, we do have pricing that is falling off in December as well. So, as we exit the quarter, being at that 2%, we feel at 2% gross is a good range to be at, knowing that when you look at food-away-from-home inflation in the most recent data, I think it was at like 3.5% price. So, exiting the quarter at 2% gross with the October price action, we feel really good about that.

Andrew Charles: That is helpful. Then, just a quick follow-up. You guys talked about the sales transfer from delivery as you accelerated development. Obviously, we are still putting up positive traffic overall, but maybe you could just expand a bit on how much impact you saw in 3Q traffic from that intentional sales transfer, and how should we think about the magnitude that you anticipate from this on 4Q relative to 3Q?

Rob Lynch: Yeah, I mean, I think it's been really consistent. I mean, we tend to see between 20 and 50 basis points of headwind to our traffic from our new Shack openings. That, once again, that's not a function of us going in and building Shacks right next to each other. We have a ton of white space, so we can be really choiceful on where we're building our Shacks. It really comes down to just kind of this delivery transfer that we have very little control over. I'd love to be able to go and strategically build the concentric circles around our Shacks and make sure there's no overlap, but that's just the way the 3PD model works. So, we've been able to recognize that. We know that that happens, and we're building our strategic plans around optimizing for that and mitigating it.

Andrew Charles: That's helpful. Thank you.

Rob Lynch: Got it.

Operator: We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Rob Lynch: Yeah, I just sincerely want to thank everybody for joining the call today. I know there's a lot of calls over these last couple days, and so your time's valuable, and we appreciate your participation. I would just say, reiterate what we talked about a lot here today. I couldn't be more thankful to our teams. We had a tough start to the year, and everyone in this organization has stayed focused on delivering the business model that we know we can deliver over the long term. We've learned a lot about some of these growing pains that we incurred in Q1 with opening 16 Shacks versus three the year before, and we're building that into our plan moving forward so we can have more consistent delivery of all the KPIs, while still delivering the growth and the shareholder value creation that we aspire to. I thank you for joining and really look forward to the follow-up calls and going into more detail about what's going on at Shake Shack. Thanks.

Operator: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for joining.