Greetings. Welcome to Shake Shack's Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Alison Sternberg, Head of Investor Relations. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Joining me for Shake Shack's conference call is our CEO, Rob Lynch; and our Vice President of FP&A, Kerry Britton. 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 21, 2025, 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 fourth quarter 2025 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 Rob.

Thank you, Alison, and good morning, everyone. Before I begin discussing our 2025 results and our 2026 plans, I want to share why after almost 2 years in this role, I am so excited to be a part of this company. Firstly, I am thankful for the team that we have in place. My gratitude starts with all of the amazing people in our restaurants who welcome our guests every day with warm hospitality and amazing cooking that makes Shake Shack so special. I'm also grateful and excited for the executive team that we have built. We have so many talented people on our team, some who have been here from the beginning, who help our company stay focused on our North Star of enlightened hospitality. We've also added some remarkable new members to the team who bring a lot of external experience and best practices to bear on the foundation that we are building to support our lofty future aspirations. This is a balanced, experienced and very capable group of executives driving our company forward. I'm also energized by the roster of candidates that we have built for our CFO search, and I'm confident that our process for that search will be completed in the first half of 2026. Another reason I'm so excited and thankful to be here is because at Shake Shack, we truly believe that we have the best food in the industry, and we endeavor to give access to that food to an ever-growing number of communities throughout the world. In order to do that, we will need to continue to use the best ingredients in our freshly prepared food and conveniently deliver it with value to our guests in every community that we serve. Our company started as hotdog stand in a park, a…

Thank you, Rob, and good morning, everyone. Building on the strong foundation Rob outlined, 2025 was a highly successful year for Shake Shack. Through our continued focus on operational excellence, the effectiveness of our marketing and culinary initiatives and enhanced guest experience and supply chain optimization, we delivered 15.4% revenue growth to $1.45 billion, positive same-Shack sales of 2.3%, 120 basis points of restaurant-level margin expansion to 22.6% and 19.5% adjusted EBITDA growth to approximately $210 million. We have added nearly $80 million to adjusted EBITDA in the last 2 years, all while facing significant commodity inflation and a challenging macro environment. We are very pleased with our fourth quarter results, which reflects strong execution across both our company-operated and licensed businesses. The quarter marks our 20th consecutive quarter of positive same-Shack sales growth alongside continued strength in restaurant level margins and double-digit adjusted EBITDA growth. These results demonstrate solid momentum and the effectiveness of our initiatives. Fourth quarter total revenue was $400.5 million, up 21.9% year-over-year supported by the opening of 15 new company-operated Shacks and 17 new licensed Shacks, leading to 23.4% year-over-year growth in system-wide sales. Our licensing revenue reached $15.2 million in the fourth quarter with licensing sales of $232.7 million, up 26.4% year-over-year. In our company-operated business, we grew Shack sales 21.7% year-over-year to $385.3 million, we generated $77,000 in average weekly sales. We delivered 2.1% same-Shack sales growth with 0.5% positive traffic and 1.6% price/mix. Our same-Shack sales grew sequentially each month of the quarter. However, the last 6 weeks of the quarter did not meet our expectations due to inclement weather in some of our most heavily penetrated markets like the Northeast. Despite these short-term challenges, we delivered positive same-Shack sales and positive traffic for the quarter. In-Shack menu prices rose about 2%…

Thank you, Kerry. Building off of a strong 2025, we are excited about the opportunities ahead and look forward to making progress against our strategic priorities in 2026. Above all, I'm so grateful to our dedicated teams for bringing their hearts, minds and focus to their endeavors every single day. Thank you all for your time today. And with that, operator, please open up the call for questions.

[Operator Instructions] Our first question is from Brian Vaccaro with Raymond James.

I appreciate all those details. Just going to ask you about kitchen equipment. I believe you rolled the new fryers in the last several months. And could you just give us an update on where you are in terms of testing new ovens and grills and the shake machines as well? And are there any planned rollouts of any of that equipment in '26, we should be mindful of?

Yes. Thanks for the question, Brian. We've actually implemented our fry hot-holding equipment into all of our Shacks at this point. And I can tell you, I've been out visiting Shacks really all quarter and our fries have never been better. I'll give you a data point. Fries cold or less than optimal fries used to represent over 30% of our guest complaints and after implementing the new equipment, they now represent less than 10% of our complaints. So a huge transformation in terms of improving the quality of our product through equipment innovation. We -- as you know, we have our equipment innovation center that we have built here in Atlanta. We have been bringing all of our operators through that innovation center and our license partners through that innovation center for the last 3 or 4 months. And some of those -- some of that innovation, not just new equipment, but the way we're laying out the format of our kitchens is already starting to show up, particularly in some of our license partner Shacks internationally where they can build -- they have not quite as big of a pipeline and they can build faster. So yes, there's a lot of progress, a lot of momentum that is coming to fruition from the innovation, both on the equipment side and the design and architecture side of our kitchen. So we are really hopeful that we will have an optimized standard kitchen that will last for years to come, really starting in 2027. We have to get through our pipeline. We have the longest pipeline of permitted restaurants in the company's history. So once we start getting through that pipeline, we will move to that model, which we anticipate being really transformational for us.

All right. Well, that's great to hear. And just a follow-up on new unit development, if I could. Could you elaborate on the sales volumes? You touched on it in your prepared remarks, but just elaborate on the sales volumes that you're seeing in the class of 2025? And you talked about really optimizing those build costs. What kind of build cost inflation do you expect for the class of '26?

Yes. We have -- I just can't give our team enough credit. I mean taking 20% out of build costs last year, given, I think anybody who has any interaction with the construction and materials industry and tariffs and everything else, like the costs have not gone down, and our team through their ingenuity and their hard work was able to take 20% of our build costs out. So we are incredibly excited about the opportunity to continue that momentum. Now I will tell you, the average build cost is a function of the mix of the restaurants that we build in any given year. And as we continue to increase the mix of drive-thrus, the average build cost will not see the same type of incremental decreases in costs simply because the drive-thrus cost more to build and they're going to be a bigger part. But the reason why we're so excited about that is we're starting to see our drive-thrus in 2025 outperform our core designs from a revenue standpoint. So we are seeing great returns there. So we're going to continue to build those. It's going to help us scale even faster. So there's a little bit of noise in kind of the average build cost as the mix evolves. So we'll be -- as we build that pipeline, we'll be more adept at being able to kind of break the cost down based on the type of Shack that we are building and not just report out on the aggregate. That's our intention as we move forward here probably in 2027.

Our next question is from Rahul Kro with JPMorgan.

Rob, I want to touch on the evolution of the loyalty program and how best you can communicate the value of the brand through this program as we move towards the year. And then the follow-up is on the New York City and the Northeast markets, that continue to be a headwind today. Are there any initiatives in 2026 that could potentially turn this into a tailwind?

Great questions, Rahul. I'll go with the first one on loyalty. So one of the biggest bright spots in our business right now is our decision to launch a targeted, strategic value platform in our app. As I called out in my comments, our app is up 50%. Our app downloads are up 50%, and we are seeing huge amounts of traffic growth as a result of that program with minimal sales or margin impact. So significant incremental sales and profit from that program. And it gives us a huge amount of confidence that when we are able to deliver targeted strategic value, it has an outsized impact on our ability to drive profitable growth. So as I've mentioned before, our app and the people coming into our app at such an accelerated rate will be the foundation for our loyalty program that we intend on launching by the end of this year. And the confidence in that loyalty program grows every day as we continue to see the engagement with our app that doesn't yet feature some of the added components and value that we will offer in the loyalty platform. So we're extremely excited about launching that and the ability for that to impact our business. Now I will tell you, our intention in launching loyalty is to launch it in an enlightened hospitality-driven way. So we are going to -- we're not going to rush in. We're going to launch it this year, but we're going to continue to optimize it as we scale it. We're going to continue to make sure that it is Shake Shack specific and deliver the same premium enlightened hospitality experience that we try to deliver in our restaurants. In regards to your second question surrounding the Northeast, there is no question…

Our next question is from Sharon Zackfia with William Blair.

I think I looked back in my model and your labor is the lowest as a percent of sales since I think, 2013 -- 2016, so a long time. I guess I'm curious, Rob, how low can you drive labor? And as we look at the future restaurant level margin expansion, particularly for this year, is labor a key component of that? Or is it really coming more from supply chain and cost of sales?

Great question. So what I will tell you is we feel really good about where our labor is. And it's really a function of just hard core, disciplined, blocking and tackling operations. We have significantly reduced the amount of over time that our GMs employ in our restaurants. And that really is a key leading indicator. When you see a lot of overtime in your cost structure, it's a lack of strategic planning on scheduling. It's a function of team member retention issues because you have people calling off or getting terminated, all that stuff. As our operations have improved and our leadership across our operating footprint has continued to focus on all the KPIs that we put on the scorecard and measuring those every day and holding people accountable, but supporting them and our tech has improved to help us manage labor in a much more sophisticated way, we now have a lot less overtime. And we have more people in the Shacks at lunch and at dinner and less people in the shoulder hours because we're more capable. We can run those opening, we can open faster and better, we can close faster and better. So we don't need as many people during those lower-volume hours. And that's really been the primary drivers of our improvement on the labor line. Moving forward, I don't anticipate a significant amount of further labor rate reduction. We have now built a really strong operating model. The any leverage that will come in the labor line will primarily be from revenue increases. As we continue to grow comps, as we continue to drive sales, there may be some rate improvement there and leverage there just from a flow-through standpoint. I want to make it clear. We always want to get better. We always want to be -- we're laser focused on being best-in-class operators, which means labor management is a big part of that. But we have now really built the model that I think is going to be consistent with where we want to be moving forward. And lastly, we are really doubling down on hospitality. I hope it came through in the comments, but we have added a couple of KPIs onto the scorecard that are specific to hospitality around whether guests were greeted, whether guests receive a table touch. So some of the things that we needed to focus on from an ops metric standpoint in the past, we're going to keep focusing on those, but we're adding hospitality metrics to make sure that we are delivering the best hospitality in the industry. And that's going to keep our labor pretty constant with where it is today.

And then on that 6-minute wait time, is there any way to dimensionalize that between walk in and drive through? And is that a happy place for you 6 minutes? Or are you trying to further improve that?

So we're absolutely working to further improve that. There's been a bigger positive impact on wait times through the drive-thru as we've optimized a lot of our drive-thru back-of-house design and just the way we operate drive-thrus. But that -- there has been a decrease in every format and every daypart. So we've gotten better across every component of our business. We're definitely not satisfied with just under 6 minutes. We continue to strive to get more efficient. And some of that's going to come through process improvement. But a lot of that's going to come through, as I talked about on Brian's question, kitchen design. We have a significant improvement in our standard kitchen design that we'll be rolling out at the end of this year. We would roll it out tomorrow, but we have permits in place for a lot of Shacks. And don't get me wrong, those are going to great Shacks and there's optimizations that we can make. But really towards the tail end of this year, heading into 2027, we will be launching our optimized, standardized long-term kitchen design. And we are really excited about both the speed impact of that as well as other operating KPIs, including accuracy, and just overall team member satisfaction, just going to be easier to operate, faster to operate and deliver the food in a much more efficient way.

Our next question is from Jeff Bernstein with Barclays.

This is Anisha Datt on for Jeff Bernstein. I wanted to ask a question on promotions. Given the stronger January comp, can you break down what portion was driven by promotional activity, including app value initiatives versus baseline demand? And whether those customers are incremental visits or primarily trade up, trade down within existing guests?

Yes. So we don't necessarily disclose to that level of detail. But what I will tell you is that we consider our app part of our base business. I think the incentives that we offer inside of our app are strategic incentives on our highest-margin products. So we still make money on the things that we discount in there. And those things are particularly beverages and shakes -- or I'm sorry, beverages and fries, those things are the most comparable from a price point standpoint to our peer group, right? We sell the same Coca-Cola as everyone else. But -- so that is really a core driver of our growth right now. But our in-Shack business outside of the weather weeks that we've had to deal with, our in-Shack business has been really healthy. We've seen a lot of continued traffic and check benefit in our Shacks. I think it's a testament to the focus on hospitality that we're delivering in Shack. We've done a lot of work. Our tech team has done a lot of work on our kiosks to make sure that we are delivering a great kiosk experience. So we're focused on driving all channels of revenue, whether it's in-Shack, in-app, or delivery, they're all important growth drivers for us. And -- but right now, the app is definitely the highest traffic, most incremental channel that we are deriving benefit from.

Our next question is from Peter Saleh with BTIG.

And congrats on a strong start to the year. Rob, I wanted to come back to the $1, $3, $5 menu that you guys, I guess, recently rolled out again. I think you mentioned it's a powerful menu bringing in new guests. Can you talk a little bit about the profile of this guest that you're seeing with this $1, $3, $5? And are you able to retain this guest once the promo ends?

Yes. I mean what I would tell you is these guests look a lot like our normal guests. And our normal guests are taking advantage of the $1, $3, $5 program as well. So it is not significantly changing the profile relative to like household income and those types of things. It really is something that I think just affords everyone the opportunity to come in and improve the value that they are perceiving from our brand. We want to continue to launch premium, high-end differentiating culinary LTOs. We're continuing to work on improving our core menu. We've invested in our beverages this year, we've invested in our sandwiches this year, we've invested in our fries this year. So we're making substantive investments in the quality of all of our food. We want to make sure that we're competitive. In this environment, we want to make sure that we are continuing to improve our value. Now what I will tell you is that we spend a lot less discounting than the fast food industry. Our percent sold on discount is less than half the average in QSR. So we are not out there giving away our food, trying to bring in customers from profiles that may not retain -- we may not be able to retain as things evolve. We're out there being strategic and targeted. And the only way you get $1, $3, $5 is in our app. And the acquisition cost of getting an app user used to be significantly higher than it is today with this promotion. So if you think about the holistic value creation, lifetime value of an app user, the decreased cost of acquisition in addition to the incrementality of the revenue at a relative -- at a slightly lower margin than our core items, but not significantly lower, I mean, all in all, it's a home run for us. And so this is not something that we see as a temporary model. We see this as a continued driver of incremental traffic in our model and it's only going to accelerate and expand once we launch an even more premium loyalty experience that offers these types of value-driving programs.

Great. And then can I just ask on the marketing for 2026? Can you just talk a little bit about how it may be different than 2025? Are you targeting any different channels? Or I know that cadence is going to be a little bit more evenly distributed. But any other details you can provide would be helpful.

Yes. I mean we're going to continue to drive awareness of $1, $3, $5. So we're going to continue to drive that program. It is a huge value creation opportunity for us while also delivering value to our guests in a value-oriented environment. But we launched our today's special, and We Really Cook campaign here in Q1. We're going to continue to leverage that platform to launch our LTOs moving forward. And a lot of that is top funnel media. I think in the past, what Shake Shack has done is we have invested a lot in the bottom of the funnel, a lot in conversion, right? So a lot of paid search, a lot of e-mail and other campaigns offering BOGOs and other types of discounts to get that conversion. We're still going to do the right amount of lower funnel conversion marketing but $1, $3, $5 helps us a lot with that. That drives a lot of conversion when we get people into our universe. We have an opportunity to expand our aperture top of funnel. And specifically, as we go into and build our footprint outside of our core Northeastern, West Coast, South Florida, historical markets, there's a big opportunity to create awareness of what makes Shake Shack so special. So we're striking a bit more of a balance between top funnel and lower funnel marketing and the top funnel is going to just increase the population size. And then if we're still as adept at conversion as we have been with $1, $3, $5 and our other programs, then that's -- a lot more of that top funnel should flow through to the bottom line. So that's really how we're thinking about marketing moving forward. It's not necessarily a demographic push or a household income push or anything like that. We truly believe that our brand can meet the needs of every stratification of guests in the industry from the teens with the least amount of discretionary income all the way up to the highest household income. So we want to make sure that we're offering solutions for all of them.

Our next question is from Sara Senatore with Bank of America.

Can I just go back to sort of the app -- in-app traffic as a traffic driver. I wanted to sort of understand, clearly it looks like the right trade-off, but it looks like negative mix in the fourth quarter was maybe about 2%. And I wanted to know if that was from the sort of app and -- because it sounded like more attach is happening there, but perhaps there's also just some lower ticket transactions. And I think last quarter, you said that in-app traffic was up 85% and then total traffic was up maybe 400 basis points. So am I right in thinking that as it stands now, app traffic had been at the time maybe 5% of total, just as I'm thinking about kind of where the opportunity is and how much incrementality you might get from that? So you know there's a lot in there, but just sort of quantifying traffic lift or the contribution and how we should think about perhaps mix in the future?

Great question, Sara. So one of the biggest drivers of the mix impact, particularly in P12 was our decision to price our Big Shack at $10. So there was intentionality around trading guests from single Shack burgers at $8 up to the Big Shack at $10. And what we found and it's not rocket science, and we definitely have learned this lesson for the last time moving forward will be much more optimized. But what we found is we sold Big Shack to a lot of doubles buyers. So the double price points range anywhere from $10 up to $14, depending on whether you're buying an avocado bacon burger or just a plain double Shack burger. And so the mix impact, negative mix impact that we saw in P12 was less about any type of app traffic shift and much more about our LTO cannibalizing some of our higher-priced double burger volume. Moving forward, the app presents a bit of a mix headwind. Like I said, it's not as significant as you might think given $1 drinks and $3 fries. And that's because when they come in, everybody -- we have -- we don't have $3 checks. I mean everybody that comes in is buying a sandwich, sometimes you have multiple party size people. And so the checks are not as mix -- negative mix as you might think. And the incremental traffic that we're seeing from that program is tenfold any of the mix benefit. So we'll take that trade-off all day long. And as we move forward and plan our LTOs, particularly in 2026, we're making sure that we have a very clear understanding of where we think that the volume is going to be sourced from, whether it's incremental guests or coming from guests that were purchasing either singles or doubles, so that we can mitigate any type of mix impact moving forward from that.

Our next question is from Andy Barish with Jefferies.

Just wondering on an example or 2 maybe on the supply chain saves for this year, I mean, the implied benefits are quite significant and impressive at like 500 basis points. Just maybe an example for us. And then is it like first half weighted? Or do those saves kind of ratably show up as we move through the year?

On the supply chain, there's definitely significant savings yet to be to unfold. I mean, I think we talked about it in Q4 as we are just scratching the surface. Well, I would say we're kind of into the surface right now and really excited about the work that the team has done. And when we talk about supply chain, I think I've reinforced it a couple of times. It's not just about cost. Like our ingredients are not always the same as the rest of the industry. Like we buy different ingredients. We're a 100% Angus, no antibiotic, no hormone beef. The supply of that is not the same as the supply of the beef that everyone else is using. So by going out and qualifying and diversifying our supplier base, not only has it improved our cost structure, it's also secured our supply to the point where if there is a beef challenge in terms of the amount of supply, we can make sure that we have enough moving forward. And we put 20% brisket into our grind, like we got to be always thinking about the brisket supply. So our supply chain work is we're -- I would say we're probably in the fourth and fifth innings of that work, and we should benefit from that really significantly here in 2026, but there's still a lot of work to do on our distribution and some of the logistics of our business. So we're going to continue to derive some pretty substantive benefit moving forward. And I'll just close by saying, I mean, we grew restaurant-level margin 120 basis points last year with unprecedented beef costs and beef inflation. Like this team, I just can't -- I can't reinforce enough how amazing the work this team has done, particularly in the restaurant operations and the supply chain. Like if we had normalized beef costs last year, we would have expanded restaurant margins astronomically, and that would have flowed through to the bottom line. So as we look, I know that beef markets right now are very unpredictable and there are some -- lots of things going into what we think the beef is going to look like over the next year. But when we do see a return to normalized beef pricing, like all of this work that this team has done in operations and supply chain is going to flow through at a dramatically improved rate. So I just can't -- I mean, I just want to make sure that everyone recognizes that it is unbelievable heavy lifting by a very competent and hard-working group of people.

Our next question is from [ Samantha Chen ] with Goldman Sachs.

This is Samantha on for Christine Cho. You highlighted a development pipeline tilted away from the Northeast with same-Shack sales growth in the Southwest and Midwest outpacing New York City and the Northeast during the quarter. How does the margin and cash-on-cash return profile of these growth regions compare to the legacy Coastal core? And how should that regional mix shift influence system-wide margins over the next 3 to 5 years?

Well, that's a great question. It's an interesting question. What I would tell you is -- as we penetrate some of these markets, they're just -- they're going to be smaller populations and they're smaller tourists, so tourist numbers. So the revenues that we forecast for some of these markets are less than the revenues than when we open up a Shack in New York City. So in that model, you may think, well, there's AUV compression and we're doing everything we can to mitigate that compression by opening drive-thrus which tend to have higher revenues. So the balance in geography should be, to a certain extent, mitigated by the format. In terms of the flow-through and the margins, I got to tell you, there's not a lot of franchise systems who are opening restaurants in New York City and Los Angeles because there's a lot of challenging business dynamics there. We do really well there. That's where we grew up. So we know how to operate in those markets. But the reason why people develop in places like Oklahoma City and Florida and Tennessee is because the real estate is less and the labor costs are less. So if we can hold on to our AUVs through an improvement in the mix of our formats and have lower real estate costs and lower labor costs, we should see continued margin expansion. And we've guided to 50 basis points a year. We haven't pulled that despite a lot of our peers coming in with margin dilution last year and looking forward, being concerned about margins, like we continue to believe that we can expand margins through continued operating excellence, supply chain optimization and the diversification that we get from our footprint should also help us from a margin standpoint.

Our final question is from Nick Setyan with Mizuho Securities.

The January comp of over 4%, obviously, I think you guys said that includes a 400 basis point headwind...

Yes. I lost you, Nick, but yes, it does include the 400 basis points of headwind. Did we lose the call? Or did we just lose Nick?

We just lost Nick. And we will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.