Categories Consumer, Earnings Call Transcripts

Shake Shack Inc Class A (SHAK) Q1 2023 Earnings Call Transcript

SHAK Earnings Call - Final Transcript

Shake Shack Inc Class A  (NYSE: SHAK) Q1 2023 earnings call dated May. 04, 2023

Corporate Participants:

Annalee Leggett — Director of Investor Relations and FP&A

Randy Garutti — Chief Executive Officer and Director

Katie Fogertey — Chief Financial Officer

Analysts:

Jeffrey Bernstein — Barclays — Analyst

Michael Tamas — Oppenheimer — Analyst

Jake Bartlett — Truist Securities — Analyst

Drew North — Baird — Analyst

Jim Sanderson — Northcoast Research Partners — Analyst

Maggie Juarez — Raymond James — Analyst

John Ivanko — J.P. Morgan — Analyst

Brian Harbour — Morgan Stanley — Analyst

Presentation:

Operator

Greetings, and welcome to the Shake Shacks First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Annalee Leggett, Director of Investor Relations and FP&A. Thank you. you may begin.

Annalee Leggett — Director of Investor Relations and FP&A

Thank you, and good morning, everyone. Joining me for Shake Shacks conference call is our CEO, Randy Garutti; and CFO, Katie Fogertey.

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. Reconciliation to comparable GAAP measures are available in our earnings release and the financial details section of hurdle 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 call filed on February 23, 2023. Any forward-looking statements represent our views only as of today and we assume no obligation to update any forward-looking statements if our views change. By now you should have access to our first-quarter 2023 shareholder letter, which can be found at investor.shakeshack.com, in the quarterly results section or as an exhibit to our 8-K for the quarter.

I will now turn the call over to Randy.

Randy Garutti — Chief Executive Officer and Director

Thanks, Annalee, and good morning, everyone. 2023 is off to a strong start with first-quarter results ahead of our expectations as we grew sales, expanded margins and remain disciplined on expenses across the company, including G&A and capex investments, as we execute against our strategic priorities. We generated total revenue of $253 million, up 25%. The average weekly sales of $73,000 [Phonetic] up by more than 7% year-over-year.

System-wide sales grew 28% year-over-year to nearly $395 million, as our licensed business globally posted our strongest quarter ever. Same-shack sales were up 10.3% with positive traffic of 4.8%. And as we’ve shared, the team has maintained an intense focus on growing profitability. We executed on that goal to bring restaurant margins up to 18.3%, a 310 basis point improvement over last year. We opened six company-operated and seven licensed Shacks in the quarter. We have 25 Shacks currently under construction, on our way to opening about 40 new company-operated Shacks this year. Based on our increased pipeline and strong execution in our domestic and international license business already this year, we’re raising guidance today to 30 to 35 Shacks expected to open throughout 2023. Quarter-to-date, solid momentum has continued with AWS in fiscal April rising to $77,000, Same-shack sales about 4% and tracking well towards increasing our Shack level margins back above 20%, which Katie will talk more about in a bit.

Now, I want to provide an update on how we’re executing our strategic plan. We’re really proud of the team’s progress in each of our priority areas. First, we’re focused on recruiting, rewarding and retaining a winning team. It’s been a challenging few years for staffing in our industry. In this quarter, our team showed solid progress. We believe the macro hiring environment while still demanding, has begun to improve. And with that backdrop and the new tactics of our people team, we’ve improved application flow, turnover and retention since last year. Our increased pay benefits and opportunities for leadership development at all levels are resonating with our teams. There is no question this will translate to better performance overall.

Each of these metrics contributes to better throughput, optimizing sales and increasing our operating profit, while building a bench of talented leaders to achieve our growth goals and provide real advancement for the lives of our team members. Our work here is never done and we plan to double down on these efforts to expand on this improvement.

Our second priority is our relentless focus on the guest experience. With the people improvements I just mentioned as a strong foundation, we can better execute our core operations focus, menu strategy and digital tools. This quarter, we captured, strong performance in guest satisfaction with our premium White Truffle menu. At our Innovation Kitchen and throughout our supply chain, we are constantly testing new and exciting menu items for our guests that highlight our commitment to premium ingredients and the kind of menu items that only happen at Shake Shacks. We have a strong lineup through the remainder of the year. We’re continuing on a path of leading with innovative culinary offerings that use premium ingredients to drive frequency and new guests.

This week, we launched our new Veggie Shack nationwide to delicious only at Shake Shack burger Patty packed with real food, full of mushrooms, sweet potatoes, carrots, farro, quinoa, topped with American cheese, crispy onions, pickles and Shack sauce. We also launched our non-dairy frozen custard Shake nationally. In addition to our long-time guest favorite shrimp burger, we believe these options can target current guest frequency and capture new guests over the long-term.

This summer, on top of the success of our premium lemonade category, we’ll will be launching caffeinated Shack lemonades for those guests looking for are classic lemonades with an extra zip. Stay-tuned for more to come this year. And just one more fun brand note. Our team continues to execute dynamic Chef collaborations, regional marketing programs in our local communities and attract valuable national media attention. Last month, we teamed up with Universal Studios as they took over our Brooklyn Shack for the launch of the Super Mario Brothers movie premiere. The event was emceed by Chance The Rapper and helped kick-off the extraordinary success of the movie. The team continues to target national media partnerships as we look to grow our brand and footprint.

Third, we’re executing on a targeted development strategy for growth. As we’ve discussed and you’re seeing around the industry, persistent inflation in construction costs, permit delays and equipment availability continue to impact openings and our near-term returns. But the team is making significant progress on accelerating pipeline, prototype design and new Shack openings. Year-to-date, we’ve opened nine Shacks with strong sites in Walnut Creek, Portland, Oregon, Jersey City and more.

I want to take some time today to share some of the work the team is doing to improve our returns on Shack builds over the long-term. This year, we expect to open up 15 drive-throughs. And now with this higher mix of drive-throughs and ongoing inflation pressures, we do expect our build cost for the class of ’23 to be somewhat above last year’s average. While our core Shacks are impacted by inflation, most of that system average cost increase is due to our commitment to drive-throughs that cost more to build than our traditional core Shacks.

So what are we doing about it? Well, since the drive-through project has begun, we’ve learned a lot and we are honing in on cost-reduction elements of the design. We’re refining templates for efficient and more standardize operations. This year, we expect to reduce drive-through costs by about 10% versus 2022. And in future years, we’ll be rolling out new and tighter prototypes for drive-through and core Shacks, focused on combining the great Shack experience we’re known for at a reduced cost and ability to scale.

Long-term costs will vary depending on sites and geographies that we target. As an example, next year we may spend more on certain drive-throughs in the New York metro and California markets, but we correspondingly, expect a strong return on higher sales there as well. We’re working on our next-generation of designs with an aim to execute on additional cost saving measures and optimize the size of the Shack box, how seats we need, standardized kitchen designs and building materials that can reduce total cost of future Shack classes. But this work takes time to roll through the system. While you won’t see an immediate impact this year, this intense focus, balanced portfolio of Shack types and new next-generation prototypical designs will add up to more savings over-time on our cost to build and overall returns. We’re committed to further improve this part of our economic model and we’re really excited about what’s ahead.

Regarding the license business, we saw extraordinary growth and execution in the first-quarter and we expect that trend to continue. Our team has performed exceptionally well in China, and our domestic business continues to grow. We continue to expand our global footprint as only the Shack brand can do. We’re unlocking new regions and formats with the introduction of development agreements in Israel and Canada, as well as new Shacks opening in roadside travel plazas throughout the US.

I was fortunate to join our teams on a multi-country Asia trip this spring, and I had the privilege of welcoming our first Shack in Bangkok to an incredible crowd with strong sales since opening. I had the chance to connect with our teams in mature markets such as Singapore and Japan for our growth continues and the plan ahead for upcoming opening in Malaysia and potential other markets in Southeast Asia. There’s a lot that’s probably under-appreciated and undervalued about this part of the Shack story and our strategy. My hope is that our shareholders take the opportunity to visit some of our international sites. We take great pride in the amazing brand we share globally. And I’m really thankful for our team members around the world continuing to execute and standing for something good wherever Shack burgers are found.

Our fourth priority is being even more profitable in our Shacks. Ahead of know own expectations, we delivered 18.3% of Shack level op profit this quarter. We showed strong progress on our key initiatives, including driving sales, especially in our own channels, labor efficiencies, off-premise profitability and managing controllable supply chain and other operating expenses. There’s still much work to do, and there is risk around the macro-environment and continued cost inflation this year. But with the plan the team has put in place, we’re guiding Shack level op profit of 19% to 20% for the full-year, and we see the opportunity to return to over 20%. Katie will share more details on the work here in a bit.

Finally, the fifth pillar of our plan as we build an enduring business. We are committed to investing with discipline. We’re deploying capital towards stronger returns in four main areas. We’re going to build Shacks, update our current Shacks, invest in our digital infrastructure and structure our home office capabilities to further support our restaurants. We remain confident that we can meet or exceed our long-term unit cash-on-cash return targets over-time by growing sales and profitability and lowering development costs, all of which we emphasize in our strategic plan. We’ve got the right plan in place. We’re pleased to see progress taking root.

I’ll now hand it off to Katie to share more about the details of the quarter and expectations for the rest of the year.

Katie Fogertey — Chief Financial Officer

Great. Good morning, everyone. We are proud of our strong results this quarter that are a direct outcome of our team’s solid progress on our 2023 strategic plan. We grew revenue by 25% year-over-year as our teams executed well on recent openings and drove higher sales in our existing company-operated and licensed Shacks. We also showed strong improvement in our restaurant margin this quarter, expanding it by 310 basis points year-over-year to 18.3%. This is the highest first-quarter restaurant profitability margin we have posted since COVID, and we generated record high quarterly restaurant profit dollars and adjusted EBITDA in what is typically the softest sales quarter of the year.

We accomplished this despite the many profitability headwinds we faced, including the large number of Q4 and Q1 new Shack openings, ongoing inflationary pressures and mobility measures in key markets like New York City still deeply impacted from COVID. And we did this by executing on our plan with some important highlights and actions, including tactically increasing menu prices to protect margins against broad-based and persistent inflationary pressures, by driving sales into our own where profitable channels, by showing better cost controls over our other operating expenses and by bringing more kiosks into our Shacks, driving efficiencies and other benefit. We are reassured by these results and we look forward to showing continued progress through the rest of the year.

We understand that many macroeconomic risks that may further impact the restaurant sector and our results. However, our business has demonstrated a level of stability that now allows us to go back to our pre-COVID guidance practices and reintroduce full-year guidance for total revenue same-shack sales, our license business and Shack level operating profit. We are also providing a new guidance metric with full-year adjusted EBITDA. And as we continue to observe a normalization of our trends, we are reducing our urban, suburban disclosures as regions are now a stronger driver of our performance compared to just the level of urban city.

So now on to first-quarter results. Total revenue was $253.3 million, up 24.5% year-over-year. Shack sales grew 24.1% to $244.3 million. Licensing revenue grew 36.7% to $9 million. System-wide sales reached a record-high at $394.7 million, up 27.5% year-over-year. With stronger sales and flow-through as well as expense discipline, all points of our 2023 strategic plan, we grew adjusted EBITDA by 163.9% to $227.6 million. This quarter, we generated $73,000 in average weekly sales and grew same-shack sales by 10.3% versus 2022, with 4.8% higher traffic year-over-year.

Price was up high single-digit and our mix was driven by more guests returning to pre-COVID behaviors, including channel shift into in-Shack and smaller group sizes.

We have discussed that a key strategy for us to improve our restaurant profitability is to drive sales into our own channels where we are most profitable. We showed strong progress against that goal in the first-quarter as we grew in-Shack same-store sales by more than 20% year-over-year, and more than doubled our total kiosks sales versus last year. Putting kiosks into our Shack is another key way we have identified to improve our sales and profitability, and we shared a goal last year to rollout kiosks to nearly all Shacks by the end of 2023. We are proud to report that we are executing ahead of this timeline. Kiosk order values are higher than traditional cash year transactions. Kiosk is our highest-margin channel and we are pleased with our return on investment here.

We are also pleased with April same-shack sales of about 4% versus last year and average weekly sales of $77,000, up versus the $76,000 in March despite shift in the spring break calendar. In April, we benefited from driving a strong mix of sales into our own channels and had a lesser benefit from menu price than we did in the first-quarter. Our licensed Shacks also performed well this quarter as we grew sales 33.4% year-over-year to $150.5 million. We have had successful recent openings across the world and our partners have performed exceptionally well at serving the strong guest demand, in particular in the US with airports and our new roadside Shacks, as well as China and Mexico.

First-quarter Shack level operating profit was $44.7 million or 18.3% of Shack sales, 310 basis points higher versus last year despite margin pressure from a large number of recent Shack openings and persistent inflation. Our strong performance this quarter was a direct outcome of progress on our four key priorities to improve our restaurant profitability.

First, driving sales and prioritizing our channels where we are most profitable. We are leveraging targeted marketing strategies to drive awareness and visits. In addition, we are directing more business into our own channels by offering the lowest menu price there, early access to exciting LTOs, as well as value-added daypart promotions.

Second, targeting labor efficiencies and growing throughput. We’re seeing great benefits here from recruiting and retention tactics and better staffing is helping us to extend our operating hours and be more efficient. Kiosks are another important tool to help drive efficiencies in our Shacks.

Third, improving off-premise profitability and other strategies to low our control — lower our controllable expenses. From standards for condiments and lessening packaging and to go orders, to premium prices on third-party delivery, we continue to push forward opportunities to be more profitable in off-premise. We also showed strong progress here in the quarter with controlling additional elements of other operating expenses. As just an example, we were able to lower our repair and maintenance expenses that have been a meaningful headwind in prior quarters as we were able to secure additional needed supply for critical restaurant equipment.

And lastly, we will continue to take a strategic approach to menu pricing and supply chain opportunities. On this point, we are pleased with the guest reception to the price we’ve taken thus far and we will take approximately 2% price towards the end of the second quarter. This level is more in line with our historical annual price increases and is needed to help protect our profitability against persistent food and paper inflationary pressures. The bottom-line, we are encouraged by the margin expansion we delivered in the first-quarter. And despite the pressures we face, we have line-of-sight into further improvements throughout the year.

Now onto the components of restaurant profitability. Food and paper costs were $71.8 million or 29.4% of Shack sales, 100 basis points below last year. Our blended food and paper inflation increased by high single digits year-over-year, which was offset by the benefit from higher menu price. Additionally, with our focus on operations and investing in our people with training and retention programs, we were able to improve our waste impact versus last year. Our beef cost rose slightly versus last quarter levels and were down high single digits versus last year. Importantly, nearly every other item in our food basket showed accelerating cost pressures versus last year, including freight costs rising by more than 20%, and dairy and other costs increasing by double-digit percentages.

Labor and related expenses were $74.3 million or 30.4% of Shack sales, down from 30.7% in the first-quarter of 2022, and up 150 basis points quarter-over-quarter as we continue to make investments and our value teams needed to staff and operate our Shacks. As expected, we faced profitability pressures from the 28 new Shack openings over the past six months, still working their way up to optimize staffing levels. However, in our more mature Shacks, our team capitalized on strong sales and produced solid flow-through as we executed on our plan to improve our restaurant profitability.

Other operating expenses were $34.9 million or 14.3% of Shack sales, down 100 basis points from the first-quarter of 2022, with our improvement coming from our menu price, driving sales in our own channels, lower marketing expenses and better management of expenses like R&M. Occupancy and related expenses were $18.6 million or 7.6% of Shack sales, down 70 basis points from the first quarter of 2022 with the benefit really coming from higher sales performance. G&A was $31.3 million or 0.4% of total revenue. Excluding $1.6 million in legal settlements and professional fees, adjusted G&A was $29.7 million or 11.7% of total revenue, showing 90 basis points of leverage versus last year as we invest with discipline.

Preopening costs were $3.6 million in the quarter and depreciation was $21.3 million. We realized net loss attributable to Shake Shack, Inc of $1.5 million or $0.04 per share. We reported an adjusted pro-forma net loss of $290,000 or $0.01 per fully exchanged and diluted share. Our adjusted pro-forma tax rate excluding the tax impact of equity-based compensation was 17.2%. Finally, our balance sheet remains solid with $293.4 million in cash and cash equivalents at the end of the quarter.

Now on to guidance, which balances the strong underlying business factors we’ve seen so far in the first quarter with the degree of uncertainty around the consumer spending landscape and our current expectations for ongoing inflationary pressures. This range does not reflect any additional unknown delays to our development schedule. For the second quarter, we guide total revenue of $269.5 million to $274.8 million with $9.5 million to $9.8 million of license revenue. We guide for both our company-operated and our licensed partners to each open approximately 10 new Shacks and for same-shack sales to grow by low-to-mid single digits year-over-year with high single-digit price inclusive of the 2% price increase we plan to take at the end of the second quarter.

COVID has had a larger impact on our business than many of our competitors and it’s lingering impact on consumer mobility pattern including work-from-home trend has been a challenge for us. However, even with the pressures we face and persistent inflation, we guide second quarter Shack level operating profit margins to reach approximately 20%, marking the highest level of quarterly profitability that we have delivered since the onset of COVID.

And with more consistent trends we’re seeing in our business, we’re able to finally reintroduce full-year guidance for many metrics. For the full-year 2023, we got total revenue of $1.06 billion to $1.11 billion, representing 18% to 23% year-over-year growth with licensing revenue of $39 million to $41 million. We expect to grow our system-wide Shack count by approximately 70 to 75 units this year, about 40 of which will be domestic company-operated and 30 to 35 operated by our licensed partners. Our guidance for same-shack sales to grow by low-to-mid single digits with mid-to-high single-digit price and consistent trends in our mix.

Despite ongoing inflationary headwinds, we expect to deliver at least 150 to 250 basis points of restaurant margin expansion in 2023, and guide for a full-year Shack level operating profit margins to reach 19% to 20% as we continue to execute on our strategic priorities. While we are focused on exceeding this path, inflationary pressures are not abating, in this guidance we’re reflecting a great degree of impact from potential consumer softness as well as beef inflationary pressures above and beyond what we’re experiencing today, but all else equal. If both of these risks do not materialize, we see a path for our restaurant margin to surpass 20% this year.

We are planning for food and paper costs to rise by mid-to-high single digits year-over-year, led by beef costs rising by a similar degree. We do not hedge on many components of our basket, including beef, which is the largest single part of our basket and an area where we see a significant degree of uncertainty around the cost this year. In the first quarter, our beef costs were up just modestly versus the fourth quarter and were down year-over-year. However, we have recently started to see our beef cost increase with broad-based challenges across the supply chain and we anticipate this to be a material pressure throughout the year. We are also seeing signs of even further inflationary pressures for many other items in our basket, including fries that are likely to cost us approximately 20% more this year than last. But above all, we are also making continued investments in our people as we focus on building up and supporting our winning team. This is resulting in mid single-digit year-over-year wage pressures.

Taken together, our operating backdrop is not easy. Inflationary pressures still remain and we believe we have the right plan in place to navigate and continue to show higher operating profitability despite these continued challenge. In fact, even with the inflationary and potential macroeconomic pressures, we are planning to grow fiscal 2023 adjusted EBITDA by at least 50% to 70% this year to $110 million to $125 million, as we target achieving record profits this year. We have line-of-sight to exceeding this range. However, this will be dependent on the degree of pressures we face throughout the year. We reiterate that our 2023 G&A guidance of $125 million to $130 million, absent that $1.6 million in legal and professional fees that are excluded from adjusted EBITDA this quarter. At the midpoint, G&A would be 11.8% of total revenue, more than 80 basis points of leverage versus 2022 levels.

Other guidance points, equity-based compensation expense of approximately $17 [Phonetic] million preopening of $17 to $19 million, depreciation of $88 million to $93 million and adjusted pro-forma tax-rate excluding the impact of stock-based compensation to be 16% to 18%.

So thank you for your time. And with that, I can turn it back to Randy.

Randy Garutti — Chief Executive Officer and Director

Thanks a lot, Katie. We’re really proud of the team and the way they continue to execute our strategic plan, driving sales and better profitability across our restaurants. We’re going to keep our focus on recruiting, rewarding and retaining this team, relentless focus on the guest experience, opening great Shacks through a targeted development strategy, improving our margins and investing with discipline for strong returns.

I spent a lot of my time recently in our Shacks with our teams and visiting our partners around the country and around the world. We’ve been listening, learning and working collaboratively across our teams to run better Shacks that are great investments and stand the test of time. I can tell you confidently that our brand carries a weight well beyond our scale today, and we continue to execute a plan to scale our business for tomorrow. Hope we see you all soon for a Shack burger.

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

Questions and Answers:

Operator

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Jeffrey Bernstein with Barclays. Please proceed with your question.

Jeffrey Bernstein — Barclays — Analyst

Great. Thank you very much. One question, one follow-up. The question just on the — the near-term concerns, and Katie you mentioned the uncertain macro in the short-term. I think investors are concerned of slowing comps of late and your first quarter results beat expectations. I’m wondering if you could maybe share your thoughts on the trend through the quarter ex the noise, there has obviously been a lot of noise, but how do you read those first quarter results? And more importantly, in April with a 4% comp, it looks like it would be a deceleration from the first quarter, but hard to tell when pricing is being lapped and different shifts and whatnot. So I’m just trying to get your sense for how you think the consumer is behaving through the first quarter and through April, as that impacts your second quarter outlook. And then I had one follow-up.

Katie Fogertey — Chief Financial Officer

Great. Thank you. So overall I would describe the cadence of the first quarter, as you know, we started strong. We had a lot of you know good new Shack openings as well kind of helping us a tailwind at our back, but then really kind of in February and with the launch of White truffle, kind of COVID started about the same time, we did see above average sales performance in our more mature Shacks. We saw pretty healthy behavior from high-income consumers where we over index to, but kind of throughout income cohorts we were pretty pleased with what saw. We are taking a mindful approach though as we’re going throughout the year for all of the reasons that you just discussed and see — are baking in some views about how the back half of this year could play out. But from what we’re seeing right here, we are pleased with our performance.

I will say as it pertains to April, you’re right. We rolled off about 3.5% menu price and an additional 5% increase on DSP that we took in March. And so that is part of what you’re seeing right there. And there are also some spring break shift as well.

Jeffrey Bernstein — Barclays — Analyst

Understood. So it doesn’t seem like you’re seeing a material change in consumer behavior of late when you back out those unusuals or is April, would you say is somewhat of a deceleration?

Katie Fogertey — Chief Financial Officer

We’re very pleased with the trends that we we’ve seen in April, consistent with what we saw exiting the first quarter, but that’s just one month. So we’ll have to see how the rest of the quarter plays out.

Jeffrey Bernstein — Barclays — Analyst

Understood. And then my follow-up was just the restaurant margin outlook. I mean, very impressed with the 19% to 20% guidance. I think you even mentioned as potential upside to that 20%. I’m just wondering if you could maybe prioritize what you think ae the greatest drivers there? Or maybe more importantly, what’s the greatest risk to that? Because obviously that’s above expectations and it just seems like the environment, inflation is getting worse, pricing is easing and the consumer is just so uncertain, it would seem like that’s aggressive. So I’m wondering where you think there’s upside versus where there’s the greatest risk to that margin outlook? Thank you.

Katie Fogertey — Chief Financial Officer

Yeah. Thank you. So as we’re thinking about the margin progression throughout this year and what really helped us in the first quarter achieve that 310, which actually is closer to 360 basis-points of improvement versus last year when you adjust for the gift card benefit we had in the first quarter of 2022, let’s talk about what we did. We drove sales and we drove sales into our own channels and we expect for that to continue to be a tailwind for us this year. We have key strategies in place to reward our guests to come into our restaurants, to come in and use our app and to do delivery through access cloud. So we want to see more of that throughout this year and we think that’s going to be a benefit.

And we’re also really encouraged by the work that we’ve done around staffing and improving retention around our team members, and I think we’re just really kind of early days in seeing that benefit. Randy talked about the big increases that we saw in retention in the first quarter. We’re seeing some lower waste here on the back of it, and we were able to be open longer hours. These are all things that you want to see to help us be more profitable. But conversely, we have some of this in our guidance. I would say one of the biggest risks to achieving that range is if we had macroeconomic uncertainty outside of what we’re expecting today, we had a more significant fall-off in the consumer. And then beef. Beef, we continue to say beef is the largest part of uncertainty in our basket this year. We’re starting to see it pick up here. We’ve baked-in our views right now as to what that is. But if you’re asking me, where the biggest part of uncertainty is on the cost side, to me its beef.

Operator

Our next question comes from Michael Tamas with Oppenheimer and Company. Please proceed with your question.

Michael Tamas — Oppenheimer — Analyst

Hi, thank you, good morning. I wanted to follow-up on the consumer softness comment within your guidance. Can you talk about what you’re assuming on the sales side of things? You mentioned margins could exceed 20% if there was no softness, but how much of a headwind to sales that you sort of thinking about right now? Thank you.

Katie Fogertey — Chief Financial Officer

We have reflected a modest degree of slowing into our guidance at the midpoint. If the consumer remains healthy, there is a path to exceed that. However, if there is more material macroeconomic contraction than what we’re pricing in our guidance, we may miss that. So that’s kind of how I would think about the guide on that side. We over-indexed to higher income consumers. We were really encouraged by that 4.8% traffic we generated in the first quarter. And I really have to just really kind of talk about White truffle was the most expensive LTO that we’ve ever launched and we’ve had very strong success with that.

So what we’re seeing today is that we’re kind of that at [Indecipherable] luxury. We’re definitely gaining share at the high-end, and we hope that that continues. But for planning the business, we think it’s prudent to take a balanced approach through the rest of the year.

Michael Tamas — Oppenheimer — Analyst

Got you. Thank you. And then can you talk about what you’re seeing from consumer habit in your drive-throughs or maybe kiosks versus sort of like your traditional stores? Do consumers use your drive-throughs differently, maybe less beverage attach or less Shake attach or something like that. And more importantly, how does it sort of shape the way you’re thinking about that drive-through business as you’re building new units and going forward? Thanks.

Katie Fogertey — Chief Financial Officer

So on drive-through, we’re still very early here to really report on key trends, but I will talk about kiosks because we’ve had those in our system for longer and we feel better about talking about those trends. So what we see in kiosk and we continue to see even with doubling the sales year-over-year and having a substantial more — higher number of restaurants in our system with them is that when a guest goes to our kiosk and they see the visual merchandising of our menu, we see that they have higher checks than a traditional cashier order. We see that they add-on more premium and higher-margin items. And so that together really makes that our highest-margin channel. We’re ahead of plan here with rolling out kiosks to nearly every Shack by the end of this year and we’re very pleased with the returns on that investment.

Michael Tamas — Oppenheimer — Analyst

Thank you.

Operator

Our next question comes from Jake Bartlett with Truist Securities. Please proceed with your question.

Jake Bartlett — Truist Securities — Analyst

Thank you. I mean, it’s Jake. But thanks for taking the question. So the first is on the sales drivers. My sense is that is that improved staffing in turnovers and maybe hours is one of the biggest drivers of that. Can you give us any metrics around that? Maybe how turnover might be improving? Maybe average hours now versus last year. Anything that kind of just can demonstrate the improvement that you’re seeing on the — on the staffing and the productivity levels.

Randy Garutti — Chief Executive Officer and Director

Thanks, Jake. And this is why it’s the number-one part of our strategic plan, because when we see what we reported here, which is a lower turnover higher retention and a lot more people applying for jobs at Shake Shack in the first, kind of year-to-date here, that’s just a huge win in every way. Turnover is expensive. It is hard to train people and mostly because you’re just not up to the reps, you’re just not up to speed, throughput. That’s where the most gains are going to come from. And I think that was a part of our — the strength of Q1. It’s also a part of our confidence in the op profit guide for this year. And it’s a huge part of how we think we can get there.

Now we need to see that trend continue, obviously this last few years has been incredibly challenging on that front. We’ll see with the consumer softening, who knows where that will go, but we expect those trends to continue. It’s also the work that our team has done to make that better. So I think you see it on Kind of hidden costs of all throughout the P&L, especially just on the opportunity to optimize throughput.

On hours, we’ve been able to — it’s not like we all of a sudden magically just increased salaries across all the Shacks. This is really just recapturing some of the hours that we had — had given up when staffing challenges were more challenging over the last couple of years. So we’re starting to be able to get some of those back in the first-quarter. There’s a little bit more probably to go on that depending on the Shacks and generally seasonally our strongest quarters are the second and third quarter. Generally you can look at some of that expansion of hours. But taking care of our team, having them to stay is a huge win every part of it.

Jake Bartlett — Truist Securities — Analyst

Great. I appreciate that. And then as a follow-up or actually a question. I saw in the release and you mentioned your target of ROI — new store ROI of over 30% or over 30%. I was little surprised to see that, that’s what the recent store class has achieved given the margin pressure that we’ve seen over the last couple of years, elevated costs. So maybe if you could kind of break that down, how does the store — the recent store classes have performed? Was achieving that 30% or over 30% ROI truly is driven by strong new store openings or any other metrics to kind of help us understand where that 30% is driven by?

Katie Fogertey — Chief Financial Officer

That’s — so our return metrics that we use here, cash-on-cash return, we measure in the third year of operation. So really we are talking about the Shacks that were impacted by COVID pressures where our returns were impacted. We’re talking about our 2017 class came into its third year of measurement in 2020. That was a year of deep impacts here at Shake Shack and for the restaurant industry. No surprise there that sales have improved a lot for the 2017 class as they have for the rest of our company, and our profitability trends have done better too.

So same story can be said with the class of 2018 that comes into its third year in 2021, and to a little bit more lesser extent the class of 2019. So with our expectations here to generate about 19% to 20% Shack level operating profit for the overall company and the recovery that we have seen in the class of 2020 Shacks and the rest of our overall base, kind of with the targets to hit $110 million to a $125 million in adjusted EBITDA this year, on the build costs for the Class 2020 we expect that to exceed our long-term guidance range of at least 30%

Jake Bartlett — Truist Securities — Analyst

Great. Thank you very much. Appreciate it.

Katie Fogertey — Chief Financial Officer

Thank you.

Operator

Our next question comes from Drew North with Baird. Please proceed with your question.

Drew North — Baird — Analyst

Great. Thanks for taking the question. I just had a quick follow-up on labor. Randy, you mentioned the lower turnover is providing confidence in the op profit guide for the year. But maybe this is for Katie. I guess how are you thinking about the magnitude of leverage on the labor line in the context of your guidance for the year?

Katie Fogertey — Chief Financial Officer

Yeah, so we’re expecting — we’re kind of — in our guidance range for 19% to 20%, we’re kind of expecting everything to kind of hold here from what we’re seeing. It’s possible that we do better than that. It’s possible that we have more pressures on that side, but we think that right now kind of assuming that we hold the current level is appropriate for guidance. There’s also some — some things that are helping us on the labor side, probably with retention end up actually costing us a little bit more as well. So let’s talk about tips.

We offer tips to our team members in basically every channel right now and our guests have been stepping up and rewarding our team members for such excellent service, there’s a cost to that, that we also face in our restaurant P&L on the labor side as well. So that’s just something to think of it, jut thinking about this year versus last year and prior years.

Drew North — Baird — Analyst

Okay, thank you. And one other. It looked like the shareholder letter mentioned lower marketing expense benefitting the other opex line. Sounds as though you’re being more targeted there. I guess perhaps you could just expand on your plans for marketing this year relative to prior years? Thanks.

Randy Garutti — Chief Executive Officer and Director

Well, I think what you’re seeing there is a change in classification for marketing programs that used to hit the Shack level that are more national in nature. So that’s we’re talking about. And when it comes to marketing, we’re only committing more this year. You’ll see that in G&A. You will see some of that in Shacks when it’s direct marketing to that specific restaurant. So that’s not a that’s not a call out on any kind of less marketing. That is we’re going to do more nationally and we’re going to do more regionally as well.

Katie Fogertey — Chief Financial Officer

And then in the first quarter we did have a little bit of shift in some of our Shack level of marketing projects which we expect to kind of realize later this year.

Drew North — Baird — Analyst

Okay. Thanks for the clarification there. Helpful.

Operator

Our next question comes from Jim Sanderson with Northcoast Research. Please proceed with your question.

Jim Sanderson — Northcoast Research Partners — Analyst

Great. Thanks for the question and congratulations on a great first quarter. Wondering if you can walk-through how pricing will impact same-store sales on a quarterly basis. I think you’ve got 3.5% that’s rolling-off in March and then you’re going to take an additional 2%. So just kind of level-set that for us, so we can understand how that’s going to flow-through for the next three quarters.

Katie Fogertey — Chief Financial Officer

Great. Thanks, Jim. So starting off — the year we had very-high single-digit pricing, that’s what I would kind of describe that as. And then you’re right, we rolled off in March. We rolled-out 3.5% menu pricing and 5% additional DSP pricing. We’re kind of now trending at the lower-end of that high-single-digit range. And depending on menu mix and other channel mix, kind of expect to have that be the case for most of the quarter. Then we’re gonna be taking the 2% late in the second quarter.

We’re going to be holding that and then in October we’re going to be rolling off that, we said — we said between 2% to 10% across channels, sorry, across a variety of different price tiers. So that will come off. So we’ll end the year at basically 2% price. We haven’t made any announcements on any additional price increases.

Jim Sanderson — Northcoast Research Partners — Analyst

All right. No, understood. Thank you very much. Just wanted to follow-up too a little bit on the discussion on kiosk. You talked a lot about what you’ve observed as far as higher average check, but I’m wondering if those kiosks, once you have those in all of your stores in the United States, is that’s going to unlock some lower labor costs in the form of fewer budgeted hours or anything you can tell us about how that could enhance store labor productivity?

Katie Fogertey — Chief Financial Officer

It’s a great point and we’re really excited about kiosks. And I think we’re just really early days here on both that point. We’re certainly seeing some signs of labor efficiency in Shacks with kiosk. But then also just on unlocking additional capabilities with the kiosk. So I’m really excited by what this enables our team members to accomplish in Shacks, how it enables us to better target the labor in the Shacks and provide hopefully a better guest experience and the natural check lift that you see from kiosk orders relative to cashier check, helping people to understand our menu and our offerings better. And I think we’re just really scratching the surface as to what we can do here.

Jim Sanderson — Northcoast Research Partners — Analyst

All right. I’ll pass the line. Thank you very much.

Operator

Our next question comes from Maggie Juarez with Raymond James. Please proceed with your question.

Maggie Juarez — Raymond James — Analyst

Hi, and thank you question question. I’m Maggie Juarez [Indecipherable] We just had a question on the other opex line. Could you quantify the benefit you saw in R&M in 1Q ’23? Do you expect a similar year-on year tailwind for the year? I know there could be a difference in comparison there, so any perspective there would be helpful. Thank you.

Katie Fogertey — Chief Financial Officer

Yeah, so what happened in other opex this quarter, if you look at kind of where we’ve been focused on our strategic priorities, it’s really on addressing what the controllable expenses that we have. And the supply chain challenges that we faced in general which have been a pressure to our ability to open restaurants, we’ve also talked about that being a pressure for our ability to replace equipment and it was resulting in higher service costs for that equipment.

Our team did a really good job identifying a lot of opportunities to upgrade and replace much needed equipment in our restaurants, and we’re expecting them to continue to act on that plan throughout the rest of this year. So that’s kind of the benefit we’re seeing there. I would say the other pretty pretty important benefit though that you’re seeing on other operating expenses is really just pushing more and more sales into our own channels. That’s helping us leverage a lot of expenses on that line.

Maggie Juarez — Raymond James — Analyst

Thank you. And then could you also go over what the geo mix was in the quarter and maybe provide on some color what kind of trends you’re seeing in those off-premise channels?

Katie Fogertey — Chief Financial Officer

Sure. We added 36% digital mix in the quarter. Now that includes app, web and delivery. That does not include kiosk. And really the story there is that we’re seeing our gains come back in Shack, we doubled our kiosks sales year-over-year, which — that’s not part of the digital mix. That’s part of our in-Shack transaction and our same-shack sales for in-Shack grew over 20% year-over-year. So we’re seeing more and more guests come back to the kind of normal pre-pandemic purchasing habits. But at the same time, we’re also driving more adoption and usage of our app.

Maggie Juarez — Raymond James — Analyst

Very helpful. Thank you.

Operator

Our next question comes from John Ivanko [Phonetic] with J.P. Morgan. Please proceed with your question.

John Ivanko — J.P. Morgan — Analyst

Hi, thank you. I know that the industry actually did show net unit growth. I mean, at least according — just some industry numbers, ’22 over ’21. And I was curious and I think that could go both ways, both closures and openings. How maybe you see your trade area competitive dynamics change? I mean, I think we all know there’s not exactly another Shake Shack, but there certainly are many competitors that are going after at least your type of customer and probably the dayparts of which they use it, maybe even the channels in which they use it. So can you talk about how the competitive environment might be evolving, even if it isn’t specific markets where when we really take a step back and look everything or we pretty status quo, ’23 over ’19 and your success is really going to be dependent on what happens within your four walls. Thanks so much.

Randy Garutti — Chief Executive Officer and Director

John, that’s a great question. I’ll start with how you ended, like, there’s no question our success is going to be how we run our restaurants. That said, you’re absolutely right in hitting on the changes of dynamic of how real estate and sites are working. So, broadly I would say that the toughest competition out there is for great drive-through pad sites right now, right? You’re seeing that with everybody. Everybody is looking for that. Fortunately, we have such a good brand. There’s a lot of landlords who really want us to take that space, but that’s probably the hottest. I think you’re seeing some easing in kind of the regional mall type and some of the urban, but again urban is a big — is a big word and there’s lots of places in urban centers that we’re gonna continue to go that we think are great.

So our strategy within all that is balance. We’ve made a big commitment to drive-through as you know. We think it’s a huge potential part of our business and we have a lot to learn on the kinds of sites we need. We’re going to learn a lot more this year as we add another 15 and more than double the size of our drive-through template. We’re also going to learn a lot more even next year in drive-through as we do more of our Shacks kind of on the coast, in some of the some of the markets where we’ve traditionally had some of our higher AUV, so I think there could be a lot of learning there. But we’re also going be cautious. I want balance. I want balance of core Shacks, some drive-through, smaller format and within all of that, that’s where you heard someone I know it’s earlier talking about making sure that we can better templatized prototype design, save money over the long-term. So its not going to happen tomorrow. You’re going to see this year. But you will see it over the long-term and our ability to just do a better job as we’ve now gotten to a scale where we can grow upon to take those learnings and bring down costs over-time for drive-through for core and for all those. So, there’s a lot happening out there. We think 40 is a great number for this year and we’ll keep — we’ll keep growing in the years to come.

John Ivanko — J.P. Morgan — Analyst

I like how you described urban as a big word. I mean, can you maybe talk about that cohort specifically? I mean, is it — is it a more open competitive opportunity? I mean, certainly a lot of people are kind of being scared off from near offices and maybe even in certain cities themselves, but there’s still a lot of people that need to eat lunch and dinner that they have money and its like — I mean, some of the the actual migration trends out of the cities at least permanently might be overstated, at least in some of the press. So how would you see your competitive positioning just within urban itself? I mean, have more customers left in restaurants. I mean, have more restaurants lifting customers, just talk about where you think that, excuse me, that balances is and how you’re positioned within cities themselves?

Randy Garutti — Chief Executive Officer and Director

Yeah. I don’t think it’s landed yet, is the answer. I think there’s a lot of great headlines you read and for the most part, urban centers are really doing great. But as we’ve shared, even some of our highest-volume Shacks in some of our deepest urban communities, New York, downtown San Francisco, some others are still impacted — still impacted. And when you lose some portion of workers, whether it’s on Monday or a Friday or some shifting, that’s going to have impact. We still have that impact as a lag on our business as part of this drag that we’ve seen. But again, we continue to see those trends improving, which is all part of our guide for this year. But that’s why I said urban is a big word because, and part of why we’re not going to continue to show that urban, suburban breakdown is because these things are stabilizing and also is urban is not equal and all urban is not equal. There’s lots of different types within there.

When we think about our strategy, we will go — continue to go to urban environments where we think there’s great opportunity. Let’s just take a second on, because I know sometimes we over do New York and its impact on this company. But when we think about what we’ve just opened in New York, in the last year we’ve opened a great site in the meat packing district. We’ve opened one in Brooklyn in Kings Plaza. We’ve opened one in Jamaica, Queens. And you’ll see us open on the lower east side. These are neighborhoods we haven’t gone to yet. These are neighborhoods much less impacted by any kind of urban shift. So that’s the way we’re thinking about urban is making sure we’re going into the best type of sites when we go to cities, and we think there’s a big opportunity there. We’re going to — we’re going to bet. We’re going to continue to bet that there some great long-term returns in urban markets and probably more of our Shacks in this next couple of classes will be kind of more suburban type.

John Ivanko — J.P. Morgan — Analyst

Thank you.

Operator

[Operator Instructions] Our next question comes from Brian Harbour with Morgan Stanley. Please proceed with your question.

Brian Harbour — Morgan Stanley — Analyst

Yeah. Thank you. Good morning. I had another question about the kiosks to — besides kind of the the check benefits that you mentioned, are there other things that you see in terms of — I don’t know if there any labor hours savings or maybe you can just redeploy some of those labor hours. Do you see better throughput in the units that really have higher kiosk order volume or warehouse. Could you quantify that?

Katie Fogertey — Chief Financial Officer

Hi, Brian. So with our kiosk orders — or kiosks Shacks, what we tend to see is we’re able to run them a little bit more efficiently than Shacks without kiosk. And while we made significant improvements in the first quarter in our staffing and retention. If I just look-back to the third and fourth quarter where the industry was deeply impacted, we were able to leverage kiosk — our operators were able to leverage kiosks as a key tool to let them operate when they were a little bit thin on staffing. So that we continue to be really pleased with having that tool at their fingertips.

But really when you think about the guest experience and what our guests like to see, we still have a portion of guest that come in and they want to have that face-to-face human transaction communication and connection with the cashier, but we have a ton of gas who come in and they want to just go right to the kiosk. They want to sit there and learn about the menu and see buildup their tray, kind of go from protein to fries to Shake, cold beverage and so forth. And so it’s a really amazing experience. If you haven’t used one, I highly encourage you to go. And what we see is we have higher checks. We have people adding both more premium LTOs, more add-ons on their existing. Burgers and maybe the Shack burger and more likely to have some more premium add-ons on it. We have a higher attach rate for cold beverage. Those are great margin additions to our check as well. And a number of our guests eat in our restaurants, stay in our restaurants and so we get a little bit of a save on packaging as well. So overall very pleased with what we’re seeing on kiosk. I think — I said it earlier, but I think we’re early days here and learning what the true potential for visual merchandising and other ways to connect with our guests.

Brian Harbour — Morgan Stanley — Analyst

Okay, thanks. And then could you just talk to us about your food supply chain a bit? Because as I recall, you have a — you have a different spec of some products, may be more like specialty distribution. For those of us that can more just see kind of spot commodity prices, do you typically — or versus some of your large peers, do you typically see less volatility in some of those key items, like beef or fries. How does it move differently than what we might see for some of your peers?

Randy Garutti — Chief Executive Officer and Director

Well I think. I think it really depends on the item and the year. It’s not an easy question to answer. So, yeah, generally commodity prices are going to be directionally where we head. But again, we’re not just buying commodity beef or buying especially all muscle blend. This is really good, are all premium, no hormone, no antibiotic, beef for instance. Same with our our baked. So we generally ride the market and when the market is up, it’s generally up for us as well. So that’s part of what Katie is talking about beef probably being the thing we’re looking at most for this year.

But when it comes to other things. I mean, yes, we’ve got some pretty premium ingredients, but I don’t think there’s anything necessarily more specialized about what we do generally. I think if you’re going to continue to see inflation up, which we do, it’s going to continue to impact Shake Shack. And then when you see one thing that might be down, those things lag as well. And just because, for instance, the cost of chicken might be down. That doesn’t mean the cost of processing, chicken is down. And there’s a lot of other things that are going into supply chain, expensive inflation right now. I think the market is not talking about enough and most of that is labor cost. A lot of it continues to be shipping and logistics costs that are expensive and more expensive. And those things are not going to ever go down even if the cost of the commodity might temporarily be down. So look, long-term, we think we’ve got some opportunity, hopefully if inflation cools. But this year, we’re still expecting moderate inflation on most of the things that we will serve.

Brian Harbour — Morgan Stanley — Analyst

Thank you.

Operator

Our next question comes from Jake Bartlett with Truist Securities. Please proceed with your question.

Jake Bartlett — Truist Securities — Analyst

Great. Thanks for taking the quick follow-up here. My question was on COGS and your expectations. It sounds like like food cost inflation and menu price are going to be pretty similar. So the question is, do you expect COGS to be lower as a percentage of sales in ’23? Maybe driven by some of the packaging changes, maybe some supply chain and issues that you have. Trying to understand — just better understand what we should think about for COGS in ’23?

Katie Fogertey — Chief Financial Officer

Yeah. So we guided for COGS inflation to be mid to-high single digits. We’re seeing inflationary pressures pretty much across-the-board. And beef is kind of the biggest unknown at this point, where we’re guiding for our mid-to-high single-digit outlook on that side. Now, what are the other things that are going to impact where the COGS level is. Well, part of it is waste. And certainly we are encouraged by the trends that we saw year-over-year in the first quarter, staffing and training our team members and that retention. That’s helpful. And it also has to do with menu mix. The more cold beverage we sell, the greater the attach rate on that side that tends to be a benefit for us. So we’ll kind of have to see how the rest of the year unfolds. But with that kind of mid-to-high single-digit COGS inflation, you’re looking at probably kind of a high-single-digit price for the year. That should kind of help triangulate where that might land.

Jake Bartlett — Truist Securities — Analyst

Great, thank you so much.

Operator

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Mr. Garutti for closing comments.

Randy Garutti — Chief Executive Officer and Director

Just want to thank everybody for taking time with us this morning and we look-forward to seeing you soon at the Shack. Thanks. Take care.

Operator

[Operator Closing Remarks]

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