Shake Shack, Inc. Class A Stock

Good morning. Welcome to Shake Shack's Third Quarter Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to Alison. Please go ahead.

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 our 8-K for the quarter.

I will now turn the call over to Rob.

Thanks, Alison, and good morning, everyone. I want to start by thanking our team members around the world who bring in light hospitality to life in our Shacks every single day. Your care for our guests is what makes this company special, and I'm 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'm so thankful to everyone in our organization for creating the type of company and culture that make 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. And I'm incredibly proud of how our 15,000 team members and our license 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 this by choice 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've 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 just excitement. Shakeshack 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 debt.

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 rig sandwich, which has been recognized as one of 2026 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 desk 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 figures 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 hotdog stand and proceeded to then launch burgers and shakes.

Innovation is in our DNA. As long as it improves our best experience, without materially disrupting our operations or supply chain. In September, we complemented the Wesco 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 we'll continue to bring new culinary forward shake offerings.

As we closed out Q3, we welcomed back our Black Truffle menu, our #1 requested LTO and are very excited about the continued positive response that we see from our guests when we feature this unique high-quality ingredients. Looking ahead, our innovation pipeline is strong and will continue to include premium shakes new burger 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 best 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 inject 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 the 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. Increased lifetime value and strengthen the foundation for loyalty and life cycle 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 to 65 this year, and we'll 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 a 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 3-year return expectations.

This performance reinforces our confidence in the long-term opportunity to scale Shake Shack and create shareholder value to renew 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 of 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 continue 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 a commitment to quality, hospitality and long-term brand stewardship.

We're also excited about the recent announcement of our entry into Brazil, one of the world's largest restaurant markets in a country with a vibrant food culture. Finally, an update on project catalysts. We continue to make meaningful progress on the technology foundation that will support Shake Shacks 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 use Shake Shack and easier for our teams to deliver great experiences.

We're taking a thoughtful phased approach as we can 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 a light hospitality at every touch point.

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'm thinking about the balance of the year. I recognized 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'm proud of the progress we're making in 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, this 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.

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 the 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% Shake Shack sales growth.

Licensing revenue was $15.3 million in the quarter, with licensing sales of $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 to 45 licensed Shack opening range in 2026.

We while also bringing Shake Shack to Panama, Vietnam and U.S. regional casinos with pet entertainment in the fourth quarter. In our company-operated business, Back 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 shifts continue to ramp towards a mature sales volume and represent a larger portion of the system.

We delivered 2.5% Shake 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 trigged 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 to 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 shares 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.

Funded 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. These 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 Shaft 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 share for staff 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 share growth over the coming years.

Other operating expenses were $65.8 million or 16.1% of Shaft 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 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 all year G&A to trend towards the low end of our 12% to 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. Preopening 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 resulted primarily from higher restaurant level profit, partially offset by higher preopening expenses. We continue to expect full year adjusted EBITDA to trend towards the low end of our $225 million to $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 and 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 135 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.

Thank you, Michelle. Before we open the call for questions, I want to thank our team 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 Instructions] Our first question is from Brian Vaccaro with Raymond James.

I 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 just 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? .

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.

So we are -- I think we've talked about it in the past, but our new units tend to open up somewhere in the $3 million to $3.5 million range, and they obviously open up with lower margins than our run rate Shacks because they require more training, they get off the ground, and they have lower AUVs to start.

So obviously, they don't get the flow-through in the leverage. So when you think about the path forward and this isn't any different than the than how we have operated the last couple of 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. And that's a function of our core Shacks and our top Shacks growing comps in the low single digits. That growth on those higher volume Shacks mitigate kind of the entry point for the newer Shacks leaving our AUVs right in that million range.

And then 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 -- and so that's a little bit of a drag on our holistic margin, but it's encouraging because that means our comp Shacks have margins higher than what our average that we reported is because that's blended across both comp and noncomp Shack.

So that's kind of the big impact on kind of 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 3. And we've been able to continue to do that.

Throughout this -- the development over the last decade, if you will. So we are -- our plan moving forward as well. So as we can -- we are growing the number of Shacks every year and that we build.

And so those headwinds are going to continue to be present and we're going to continue to track them very closely to make sure they're delivering on our returns. And we feel great about the impact that it's having on our revenue growth and our EBITDA growth, and we've been able to mitigate some of the margin and comp headwind that comes.

And I just want to call it a comp headwind. As I stated in the past, we have a lot of white space. So we're not building Shacks in close proximity to each other. It's not outside of Manhattan.

We're not building Shacks for mile or 2 miles away. Most of our projects are 10-plus miles away from our existing check. The cannibalization really comes from the delivery side of the business. We don't get to control the radius around each Shack that the delivery providers control. So when we open a new Shack that's 10 miles away, and the radius around the prior Shack with 7 miles, you're going to see some cannibalization of that delivery business, and that's primarily where it shows up.

So that's the model moving forward. We're going to open 60-plus units every year. and we're going to drive revenue and EBITDA growth with new Shacks but we're 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.

But that's not additive to what is already embedded in our business. the numbers we just reported already reflect all of that happening. So we have high confidence that we can continue to deliver our guide of low single-digit comps and 22% to 23% margins as we continue to grow.

All right. That's super helpful. And 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 4Q guide and maybe specifically what that reflects from a marketing perspective?

Yes. I mean we're 5 quarters into this marketing journey, right, where Q3 of last year was the first quarter where we materially upped our investment in marketing. And as I've stated in the sequential quarter since we continue to learn and optimize our marketing model.

And I feel I give a lot of credit to our marketing team under our new leadership and marketing of really optimizing our media mix and being more effective at targeting the right guest at the right time. And 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.

And I'm really proud of that in this environment, being able to go out and drive traffic while holding on to 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 in our marketing, right?

I mean our SMB 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 and where we invest in Q4 is one of our biggest quarters of the year from a volume standpoint.

We've got some big lapse in Q4. Last year, we launched 135 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. Michelle, would you like to add anything on G&A?

Now 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. So that's the only add I'd make.

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

You've driven 5 quarters in a row of positive traffic, and you lapped the positive traffic you started from the third quarter last year, what you think is a hurdle that market was kind of looking for.

So as we think about the path forward from here, your marketing is still going to grow with sales, but there won't be the big step-up that you've had over the last year.

So help us unpack how you're thinking about the same-store sales drivers into next year between maybe loyalty, its timing and impact? How are you going to get more dialed in on your targeted marketing and then the innovation calendar that you talked about?

Yes. Thank you for the question and the recognition of the 5 straight orders. Yes. 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.

And 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. So not only did we comp positively, we did it with less marketing versus a year ago.

And that is the biggest source of encouragement for me and our ability to continue to drive solid comp and traffic growth. So we are growing revenue almost as fast as anybody in the industry. So if we maintain the same rate of spend on marketing moving forward, that means our marketing budget is going to increase at the rate of revenue increases.

So this quarter, we grew 15.2%. And this year, we're planning to grow mid-teens and guided to mid-teens growth. So every year, if we continue to deliver that type of revenue growth, we're going to get that amount of increased marketing.

And that's -- a lot of brands aren't growing the revenues and market is usually spent as a function of revenue. So with one with mid-teens revenue or 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.

And when we talk about traffic, we all talk about comp traffic, and that's obviously the biggest KPI. So when you think about traffic as a whole, with the number of restaurants we're opening up every year and you think about the revenue growth this quarter of 15% revenue growth was only 1.7% check growth.

That revenue growth is coming from almost entirely from traffic as our company's footprint in these markets. So our traffic growth as a company is in the low teens. So we continue to take care.

Every time we go in and open up a Shack and it does $3.5 million out of the gate, that's coming from somewhere. So 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 is 23 straight quarters of comp sales growth.

And I've been here 2.5 years now, and it's always been a question of whether we can do that and can we do it with traffic and now 5 straight quarters of traffic growth. So we're building the engine that can replicate that year in and year out without needing a big additional infusion of marketing.

And then just on the margin, I know you're not giving guidance beyond '27 and you're reviewing the longer-term restaurant margin targets. I think the implication was that the new unit growth was pressuring margins which adjusted that your comp base units were growing margins.

This quarter, we saw a slight shift, I think labor delevered for the first time in about 4 years as you made some investments. So can you just help us qualitatively think about margins after '26. Are your comp base units going to be growing margins and that pressure is really from the new units? Or are you now in this investment cycle that started with labor here this quarter that we're going to see going into '27 as well.

So qualitatively, strategically, our #1 priority is team member and guest satisfaction. As a company, full stop. So 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. And those Shacks, the #1 limiting factor is having great people to go and open up those Shacks. So we are investing in our team member development, where we just had our GMs -- 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.

Like those are investments we're making and training and development. That's all going to affect the labor line. Now we don't see a material increase in our labor rate but it's 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.

So that's kind of the strategic component. Now in terms of the financial piece, I'll let Michelle speak to kind of what our financial outlook on labor looks like.

Yes. And I'll get back, Michael, to just the overall margins and your point on us assessing the 2020 or the long-range outlook. That's correct. We currently have out there, we're going to grow margins 50 basis points.

But as Rob mentioned earlier, our new Shacks don't come out of the gate doing the 22% to 23% that we're targeting this year in 2026. And so generally, right, those first couple of years, they were doing more high teens margins. And so that's the assessment we're making as we look forward and say, okay, how many new Shacks are coming into the portfolio, what is that margin drive?

Because there is a margin drag. There's a margin drag this year, there's 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're not going to compromise on labor in terms of investments and our team members and hospitality. But we've also talked about opportunities within supply chain and some of the initiatives that we're driving there to get efficiencies on that line item.

So as all of that comes together, there's puts and takes on both sides. And so that's the assessment that we're making. But for right now, all of that's embedded in our annual outlook of 22% to 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.

Our next question is from Gregory Francfort with Guggenheim Partners.

On the new stores, I mean, there's been a lot of talk on the margin impact. But can you maybe just remind us what the comp trajectory looks like as sort of they open up maybe lower margin, but are you seeing a difference in waterfall? And maybe what does that look like in year 1, year 2, year 3 on the comp side?

Yes, Greg. And so as you know, we don't enter Shacks into the comp base until after 24 months. So there -- the reason we do that is there is a honeymoon curve generally to new Shacks. And so rates are going to start out at a level of sales. We're going to see a little bit of a dip in year 2 and then the expectation is as they get into year 3, right, their comp and positive.

And 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.

Okay. And then just maybe on pricing and commodity inflation going forward. I mean beef, it seems like it's rolling, but you obviously have diesel and a bunch of upward pressures.

And I think you're going to carry 2% to the start of next year, but 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?

Yes. Correct on your -- what you stated, Greg, 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 in that 2%. Generally, we're not in the mindset that we want to take price to bolster margins, right?

We're looking at pulling that lever in terms of how we offset inflationary cost pressures. And not to, again, bolster mergers. And so 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.

So all those play a role as we go into next year as we think about the pricing lever. And so 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 our operating expenses, 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.

Our next question is from Margaret-May Binshtok with Wolfe Research.

I know you guys talked a little bit about some of the softness with that lower income gas, especially in your urban markets. I just want to understand, given a lot of your value sits in the app, how are you thinking about balancing value for that walking gas to visit in the app?

And then I just wanted to follow up to make our the time line of the loyalty launch is that something that we should still be expecting towards the end of this year.

Yes. So the majority of our orders in Shack are on kiosk at this point. And for anybody that is in our fat universe has signed up for our app or offers, able to execute those offers in our kiosks.

So it's not app only where the value shows up. It's also in the kiosk. And that's why we changed the definition of our digital platforms because we want to kind of reflect the work that we're doing to make sure that we're delivering value and we're delivering growth on our highest lifetime value guests on a run rate basis.

And so we pulled delivery out of digital and added our key open because we are able to deploy offers and track purchase behavior on our kiosks. So that's the whole reason why we made that definition change, and we're very focused on driving our digital business, both in Shack, with our kiosk as well as our app and web business.

Loyalty. We don't look at loyalty as like a short-term driver -- huge driver of sales or profit out of the gate. Loyalty programs tended by definition, be leveraged by your current guests. And so sometimes there's even in other instances a drag when you launch a loyalty program because you're launching it with your current guest is not necessarily a tool to go and attract new guests.

So we're being very thoughtful about loyalty because we want it to be a long-term value creator, like our vision for loyalty is being able to deliver enlightened hospitality in our digital footprint right, in our digital universe.

So we are really investing a lot of time and energy to make this more than just a point-based program. We want it to be an engagement tool, harkening back to Danny Meyer's Union Square Hospitality Group, when someone walks in and they know your name and they know what you've ordered in the past, they know that it's your anniversary or your birthday, like that's our aspiration.

So we are working very diligently and planfully to execute against that. And so we 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's going to be the representation of light hospitality that we aspire to.

And it's not really a financial implication because we don't expect loyalty to have an outsized comp or margin impact when we launch it, it's much more of a long-term investment to cultivate our highest lifetime value guests.

Our next question is from Chris Carril with KeyBanc Capital Markets.

So on the 4Q same track sales growth, is there anything else you can provide in terms of how we should think about the current quarter just given the wide range implied by the guidance. Michael, 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.

Yes, 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? And so 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 5 straight quarters of positive traffic growth. And we want to continue that trend. So 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.

And so but commenting on the quarter-to-date trends are something that we're not going to do at this point in time. And again, the low single digits for the full year is what we're guiding to.

Okay. Great. And then, Rob, I did want to ask you about just how you're feeling about LTO cadence maybe both from a Shack perspective, but then also what you're seeing across the industry?

Do you feel you have the right LTO cadence today? Or do you think that there's opportunity to kind of review that. And then any other further thoughts on just kind of LTO cadence and operational impact would be helpful.

Yes, great question. So I mean, we launched 4 big LTO windows here. So it's a lot less than maybe some of the fast-cycle innovation brands launch, but maybe more than some of the non kind of innovation-driven brand launch. So I feel like we're kind of like right in the middle.

And 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 can't. And so it's not just about bringing in traffic in one month to kind of juice the jam.

Like we bring in our LTOs and they're in for 3 months, sometimes 4 months or even longer if they're really performing and we want to extend them like we did truffle last year. So our -- it's not like a standard calendar.

It really is a thoughtful approach about how we can build the brand through the news that is generated in the on the culinary experience and then driving repeat with our most valuable guests.

I mean, we are seeing a huge awesome response to bring him back truffles. I mean this is the third time we've had truffled is like it's a new LTO that we've never launched. So we're going to strike a good balance between like new-to-the-world stuff like the baby back rib and stuff that's driving true like truffle, and we're going to do it in a way that is the least impactful on operations and supply chain.

We're 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 3 new shakes. We come with different flavors of some of our side items and chicken bites although we have 1 big LTO and that's what we focus on, there's other things there, too.

So we're exploring ways to kind of decrease some of the operating pressure not by doing less big not by moving from 4 to 3 or 2 LT of big LTOs, but also by optimizing kind of the portfolio of new items that we bring within the context of those 4 big windows.

I would call out, we're also doing some like not LTOs, but we're doing some collaborations right now that we're 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. And 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, like those are the kind of stories we won 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.

Great. And I definitely appreciate you bringing back the Black topple menu. It's amazing the love for that product. And when you really think about it, we get those couples literally from Italy.

I mean this is why one of the big reasons why I'm here at Shake Shack. I mean, this brand and this company is committed to doing things the right way and getting the highest quality ingredients we can possibly deliver. And the more we can just bring news about that.

It has a halo effect back on our core business. And so once again, we've got to do it in a way that doesn't disrupt operations and supply chain and negatively impact accuracy or fee of service, but there's a huge amount of like halo benefit from launching things like Truffle and the Mama's Too collaboration.

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

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 cost is roughly the same, maybe 200 basis points more price.

You help if you just talk about what the drivers were? Is that -- 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 246 versus 135 just as I think the articulated kind of view on margin has been more coming from cost of goods and maybe electron labor. I'm curious where you are in seeing that?

And then 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.

Yes, I'll take the margin question, Sara. So to your point, yes, we're definitely seeing a benefit from what I would characterize as price when you -- we came in with the 4% gross price. But then to your point, and going from 135 to 246 obviously, that is definitely going to provide a benefit to your point, on the gross profit.

And then when you look at our overall commodity basket in the third quarter, we were down low single digits. These were so up low single digits. But when you look at the rest of the basket, and I called out our bonds dairy and chicken being down in the quarter, definitely contributed.

And that's in the form of what we've 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.

So all those things contribute to what you saw on the gross profit side. And on the licensing side, Rob, if you want to take that one, I'll turn it over to you.

I mean licensing -- obviously, licensing sales are higher than revenue, and our revenue effectively is just the royalties minus G&A that we extend to derive those royalties. And there are inputs where sometimes we make investments in some of the partnerships or in some of the other infrastructure that we're building around the licensing business.

So that's really a reflection of just some investment that we made that flows through to that EBITDA line.

Yes. I would just add, Sara our royalty rates are generally in line. So there's nothing I'd call out there.

Yes, just more just the investments that we chose to make.

Our next question is from Chris O'Cull with Baird, please proceed.

Yes. I just had a follow-up on the supply chain questions or comments, Michelle. Can you help us understand the rough magnitude of the 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?

Yes, 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.

And so that's what I comment on in Q4. We don't expect to be materially different, but we do expect it to be down low single digits apology.

And then I apologize -- I'm talking about supply chain initiatives, like the efforts to kind of improve the supply chain not just the commodity inflation.

Got it. Okay. .

So I would say we're kind of in inning 3 or 4 of our supply chain journey. We've made a lot of progress. We're starting to derive some of those benefits. I mean, some of those savings that Michelle is talking about on dairy and buns and some of these other nonbeef items. Those aren't 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. So it's not just commodity prices. There's definitely benefit from some of the things that we've done internally.

And as we look forward, we have a lot of opportunity ahead, and we are actively working those opportunities. We've built an infrastructure, and that's where some of the G&A increases over the last year, 1.5 years have gone into our supply chain capabilities and the leadership there and the competencies there.

So we're really excited about our ability to continue to find savings there. Now 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.

So we're constantly working to strike that right balance on the margins while delivering the guide on top line revenue and EBITDA growth. So our margins we feel really good about 22.5%. Obviously, for them to move materially higher, there's 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 brings the margins that we're going to be able to continue to deliver these types of strong margins as the supply chain and operations.

Our next question is from Lauren Silberman with Deutsche Bank.

So Rob, I know you mentioned high consumers continue to outperform the lower income. As you move 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? .

Not dramatically. In fact, I've been a little bit surprised recently that we're actually seeing a higher items per check show up in our business. I know there's been a lot of industry discussion around this whole idea of GLP-1 and people having to cut back and they're not cutting back occasions, but they're cutting back on the items per check.

We've actually seen really some strength in our items project recently. I think that's a testament to the culinary that we have launched and particularly some of the shakes.

We're seeing people buy shakes. The Reeses peanut butter to shake has been a big win for us and similar to the way Dubai Chocolate shake was. So I think as long as we can continue to bring offerings that are new and unique and different, we're going to get people to want to try those things.

I mean when you go to Shake Shack, it's a different dynamic than when you go to traditional fast food. And so it's kind of an occasion, right? I mean we have really high attack beverage attachment rates. We have very high fry attachment rates.

Like we don't have to do a lot of like inject combing and stuff to sell beverages price People that come to Shake Shack once a full experience. So we just haven't seen as much pressure on items per check as maybe the QSR segment of the industry is seeing.

Great. Very helpful. And then on the cost side, any color you can provide on Cadence moving through the quarter. And I know you guys don't want to talk about quarter-to-date specifically. But given like the volatility in the industry, a lot of companies talking about a slowdown in early October, like anything you could at least share qualitatively on the consumer environment or how you're thinking about it broadly?

Yes. I'll just build on what Michelle said, we are absolutely focused on continuing to deliver positive comps and positive traffic. And we are really happy, as we called out in the call, really happy with the performance of Truffle it's doing really well.

And we're getting really efficient and effective with our marketing and media. So we have a lot of confidence, not just for Q4, but like moving forward, that we're going to continue this positive same Shack sales and traffic story.

Our next question is from Andrew Charles with TD Cowen.

I'm curious what your decision to take price in October. You guys have talked about macro pressures on the consumer. It's 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?

Look, we talked about the investments we want to make in our teams on the labor line. So we're making those investments. There's a cost to those investments. We also have talked about some of the OpEx that we are incremental OpEx costs that we're incurring because of our growth of our delivery business.

And 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 to $10 million in sales that we continue to invest in those Shacks through restaurant maintenance and make sure that they're a great experience for our guests.

Because they're delivering huge returns for our business. So there's other costs outside of the commodities, and we try to take pricing to reflect take pricing that mitigate those costs and maintain the margins.

And that's why you see in Q3 and Q2, Q3 and our guide for the year, like pretty consistent margins right? Regardless of kind of just the commodity up and downs, we're seeing pretty consistent margins, and that's by design, right? We're 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.

Yes. And I would just add to that, Andrew, that when you look at the 4% gross pricing in the quarter and when you look at our net price mix at 1.7%. To Rob's point, we're making deliberate investments in those targeted offers, promotions, channel-specific marketing, right, but adding down that pricing impact.

And so even though you see 4% price is really a 1% or 1.7% net price mix. And so we do have pricing that's falling off in December as well. And so as we exit the quarter being up at 2%, we feel at 2% growth is a good range to be at, knowing that when you look at food away from home inflation and the most recent data, I think it was at like 3.5% price. So exiting the quarter at 2% growth with the October price action, you feel really good about that.

That's helpful. And then just a quick follow-up. You guys talked about sales transfer from delivery as you started development.

Obviously, we're still putting up positive traffic overall. But maybe 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 of you anticipate from this on 4Q relative to 3Q.

Yes. 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. And that once again, that's not a function of us going in and building Shacks right next to each other.

They have a ton of white space that 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 like 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 mitigating it.

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.

Yes. I just sincerely want to thank everybody for joining the call today. I know there's a lot of calls over the last couple of days. And so your time 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 like stayed focused on delivering the business model that we know we can deliver over the long term.

And we've learned a lot about some of these growing pains that we incurred in Q1 with opening 16 shacks versus 3 the year before. And we're building that into our plan moving forward, so we can have more consistent delivery of all while still delivering the growth and the shareholder value creation that we aspire to.

So 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. So thanks.

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

Good morning. Welcome to Shake Shack's Second Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to Alison. 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 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, or 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 second quarter 2026 shareholder letter and our Q2 quarterly report on Form 10-Q, which can be found at investor.shakeshack.com in the Quarterly Results section and as an exhibit to our 8-K for the quarter.

I will now turn the call over to Rob.

Good morning, everyone, and thank you for joining us. Our second quarter results reflect a business that continues to execute across sales, development and profitability despite operating in one of the most challenging cost environments we have faced in many years. While we still have a lot of work to do, I'm encouraged by our performance in the quarter and the resilience of the Shake Shack model. We remain laser-focused on executing our strategic priorities throughout the remainder of the year. The quarter unfolded largely as we anticipated following the business update we provided in early June. At that time, we revised our second quarter and full year outlook to reflect several developments that emerged during the quarter, including record high beef prices, higher fuel and distribution costs and uncertainty surrounding the potential impact from the World Cup. Today's results are consistent with that updated outlook and importantly, reflect our deliberate focus on guest value, traffic generation and long-term brand health.

Turning to sales performance. We continue to see encouraging momentum across the business. Our teams delivered another quarter of positive traffic growth, marking four consecutive quarters of positive traffic and extending our streak of positive comparable sales growth to 22 consecutive quarters. For the second quarter, Same-Shack sales grew 3.5%, including positive traffic of 2.0%. Comp sales, excluding any World Cup impact, landed within the range contemplated in our June update. These results reflect our ongoing investments across culinary innovation, targeted marketing and digital engagement, designed to drive guest acquisition and frequency. We continue to refine our paid media strategy to broaden awareness of the brand while also maintaining disciplined returns on our marketing spend. We will continue to make these investments to drive traffic growth in a challenging consumer sentiment environment.

Our marketing strategy remains disciplined, not reliant on broad-based discounting. Promotional investments are targeted by channel, whether through our app or digital ecosystem, with the goal of driving incremental demand and long-term guest value. Our digital ecosystem continues to deliver traffic growth. Comparable app channel sales grew nearly 30% year-over-year, and these guests are visiting more often and spending more annually. Delivery partnerships are also expanding our reach in markets where we have room to build awareness and trial. And over the summer, we are able to strategically leverage these partnerships and their World Cup initiatives to drive traffic for our brand. Importantly, these channels are not just driving individual transactions. They are introducing new guests to the brand, creating lifetime value. We are building the data and capabilities to better understand guest behavior and personalized engagement opportunities at scale, which is foundational to our upcoming loyalty platform launch.

In the second half of the year, we are expanding our life cycle marketing through the delivery of behavior-based communications, targeted offers and automated guest journeys designed to increase frequency, accelerate second visits and strengthen retention, all while maintaining our promotional discipline. Our 246 digital offers continue to drive app engagement and support frequency among existing guests. As I mentioned earlier, comparable app sales are up nearly 30%. Separately, our delivery channel performance improved as we continue to strategically partner with third-party providers, resulting in strong traffic gains. These channel-specific investments are designed to create value without compromising the integrity of our core menu or our premium positioning. Our strategy balances culinary innovation with digital value, widening our reach without compromising our premium positioning.

Our barbecue platform illustrated by Baby Back Rib Sandwich met our expectations and resonated strongly with guests. This product line reinforced our belief that Shake Shack will continue to lead with differentiated culinary innovation that drives excitement, traffic and check growth.

Looking at the second half, we're making the Big Shack a core menu item given its strong guest response. And in July, we launched a new West Coast inspired menu platform. We also brought back the Dubai Chocolate Pistachio Shake, which continues to resonate and gives us a differentiated platform for future premium shake LTOs. We are also testing new chicken offerings, building on the Korean chicken sandwiches performance and a smoked brisket platform as we continue balancing proven favorites with disciplined innovation testing.

Turning to margins. This quarter's results reflect the underlying strength of our model. As we discussed in June, beef inflation accelerated throughout the quarter and peaked in June, exceeding our original expectations and driving a majority of restaurant-level margin pressure that we saw. Rather than fully offsetting those costs through pricing, we chose to preserve our value positioning and guest proposition. At the same time, our teams made real progress operationally, continuing to optimize our labor model, maximizing labor attainment and using our technology to run efficient restaurants, while enhancing the guest and team member experience. Running better operations to improve the experience in our restaurants will always be job #1. We are also continuing to pursue supply chain opportunities that maintain or improve product quality, capture more competitive pricing, drive efficiencies across our business and mitigate commodity and distribution pressures over time. Together, these efforts allowed us to deliver healthy restaurant level margins despite a backdrop of significantly elevated beef costs.

On the development side, we continue to grow our footprint. During the quarter, we opened 16 new company-operated Shacks, bringing us to 33 openings year-to-date as of the end of the quarter, and we remain on track to open 60 to 65 company-operated Shacks this year, sustaining our strong development momentum. This quarter's openings were all in existing markets, reflecting the meaningful white space we continue to see across our current footprint. Our build costs remain consistent with the levels expected. Our confidence in the long-term opportunity to expand our footprint remains unchanged, and we are encouraged by the productivity of our newer Shacks as they track towards our expected cash-on-cash return targets.

Our licensed business also continued to perform well despite a challenged global environment. We opened 8 net new licensed Shacks in the quarter, led by strength in U.S.A. airports and Canada. Total licensing sales grew 7.6% year-over-year to $222.4 million and licensing revenue grew 7.1% to $14.2 million. The ongoing conflict in the Middle East continued to weigh most heavily on the UAE, historically our highest volume market in the region and one that has been especially dependent on tourism, partially offset by strong performance in markets such as Canada, the United Kingdom and parts of China. Our license pipeline remains on track to deliver 40 to 45 new Shacks this year.

Before I conclude, I would like to briefly touch on technology and our long-term strategic capabilities. Project Catalyst remains our foundation for scaling efficiently while improving the guest and team member experience, spanning our POS rollout, loyalty platform development and the integration of AI-enabled capabilities across the business. We are also evolving our unified data and analytics platform, bringing together operational performance and guest behavior, supporting faster, more accurate service, more personalized guest experiences and continued expansion of our AI capabilities at scale. These investments are not just technology projects. They are foundational to our growth strategy, decision-making and guest connection, which we anticipate will support our path to G&A leverage moving forward.

Before turning the call over to Michelle, I want to reinforce how we are thinking about the balance of the year. We know the back half carries real headwinds, tougher comparisons, beef inflation that we expect to remain elevated, continued competitive intensity and uncertain macro environment. We remain a premium brand with a proven unit economic model, positive traffic momentum, disciplined operators and structural margin resilience that has held up through one of the toughest input cost environments that we have seen. We are focused on our ability to deliver sustainable long-term growth, and we will continue to execute against our strategic priorities throughout the remainder of the year.

Finally, I would like to take a moment to welcome Michelle to our first earnings call as Chief Financial Officer. Since joining the company, Michelle has quickly established credibility across the organization. She has immersed herself in every aspect of the business, built strong relationships throughout the leadership team and finance organization and has already become a valuable contributor to our strategic and operational decision-making. We are thrilled to have Michelle on the team and excited about the leadership and perspective she brings to Shake Shack.

With that, I'll turn the call over to Michelle.

Thank you, Rob, and good morning, everyone. Before I get into the quarter, I want to say how thrilled I am to be here for my first earnings call at Shake Shack. Since joining, I have spent my time immersing myself in every part of this business and my enthusiasm for the opportunity ahead has only grown. What drew me to Shake Shack is clear, an iconic premium brand with a tremendous runway for growth, a proven unit economic model and a culture rooted in the enlightened hospitality that the company was built upon. Having spent the majority of my career in the restaurant industry, I have a deep appreciation for how rare this combination is, and it gives me great confidence in the future of this brand. I want to thank Rob and the entire team for the warm welcome, and I look forward to speaking with many of you in the quarters ahead.

Now turning to our results. Our second quarter results reflect the underlying strength of our business despite ongoing macro and cost pressures. We are encouraged by the top line momentum we have seen with four consecutive quarters of positive traffic and our 22nd consecutive quarter of positive Same-Shack sales growth, while executing on our growth plan. On June 2, we provided a business update, revising our second quarter and full year guidance to reflect incremental information at that point in the quarter. As Rob noted, this included escalating beef prices, higher fuel and distribution costs and uncertainty surrounding the potential impact from the World Cup. Our second quarter results delivered within the revised ranges we provided. Second quarter total revenue was $417.6 million, up 17.2% year-over-year, driven primarily by the opening of new company-operated Shacks and new licensed Shacks and 3.5% Same-Shack sales growth. Licensing revenue was $14.2 million in the quarter, with licensing sales of $222.4 million, up 7.6% year-over-year. Despite continued conflict in the Middle East, we saw strong sales in U.S. airports, Canada, the United Kingdom and parts of China.

In our company-operated business, we grew Shack sales 17.5% year-over-year to $403.4 million. We generated roughly $78,000 in average weekly sales flat year-over-year. We delivered 3.5% Same-Shack sales growth comprised of 2% positive traffic and 1.5% price mix. Growth was driven by strength in our app and delivery channels, as Rob discussed, plus the June boost from the World Cup. Our estimated World Cup impact is approximately 90 basis points. In-Shack menu prices for the second quarter came in at 3.7%, while blended pricing across all channels increased 4.4%. This includes approximately 1% price taken in June, continuing our track record of driving positive Same-Shack sales with less reliance on price than in prior years. Our promotional offers weighed on pricing, but were a deliberate driver for traffic gains we saw, particularly in our highest lifetime value channels.

For pricing in the back half of the year, we have approximately 2% of pricing that rolls off in August and an additional 1.4% that rolls off in December. We will continue to evaluate the need for additional pricing this year as our cost structure continues to evolve. We delivered our strongest second quarter of unit growth on record with 16 new company-operated Shacks versus 13 in Q2 of last year. We are on pace towards 60 to 65 new company-operated Shacks planned for 2026. We will continue to invest in accelerating development. Our strong cash-on-cash returns are driven by low-cost builds, strong margins and our high AUVs. Second quarter restaurant level profit was $92.7 million or 23% of Shack sales. Our margins declined 90 basis points versus the prior year quarter, driven by higher food and paper costs and increased operating expenses, partially offset by the benefits from our continued labor management strategies.

The higher food and paper costs in Q2 reflect the record high beef costs we discussed in our June business update. We remain disciplined in our pricing approach to offset some of our cost pressures and are focused on driving continued traffic into our Shacks. In the second quarter, food and paper costs were $116.3 million or 28.8% of Shack sales, 60 basis points higher than last year. The increase year-over-year was mainly driven by higher commodity costs, primarily beef, promotional activity during the quarter and a shift in menu mix to higher cost items. Blended food and paper inflation was up low single digits in the second quarter with beef costs up mid-teens. Through proactive procurement and cost mitigation initiatives, our teams meaningfully offset continued beef inflation. In the second half of the year, we expect continued inflation from beef to pressure our restaurant level profit.

Labor and related expenses were $101.2 million, representing 25.1% of Shack sales and improving 60 basis points compared to last year, while continuing to uphold guest satisfaction metrics. By this time last year, we had fully rolled out our labor model supported by our performance scorecard, which provides Shack level visibility into labor performance. Since then, we have continued to refine our labor management approach, helping drive the efficiencies we achieved this quarter.

Other operating expenses were $63.1 million or 15.6% of Shack sales, 80 basis points higher versus last year, primarily driven by increased delivery commissions as we continue to leverage that channel to expand our reach, build awareness and grow engagement. Our digital sales mix increased to nearly 41% in the second quarter. The year-over-year increase also reflects higher professional service fees as well as travel and training costs associated with our elevated pace of new Shack openings.

Occupancy and related expenses were $30.2 million or 7.5% of Shack sales, flat year-over-year. Second quarter G&A totaled $48.3 million or 11.6% of total revenue. While our marketing plan for 2026 is more evenly distributed across the year, in Q2, we realized favorability versus Q1, primarily from lower equity-based compensation related to performance-based awards and forfeitures as well as lower short-term incentives. We continue to expect total G&A to fall within our guidance of 12% to 13% for the year. Our marketing spend in 2026 across G&A and restaurant-level profit is expected to remain in the 2% to 3% range of total revenue. Equity-based compensation was $3.9 million, 24.7% lower year-over-year with $3.2 million hitting G&A. Preopening costs were $6.6 million, which was $1.7 million or 34% higher than the prior year, driven by the increased number of new Shacks opened during the quarter and our growing pipeline to support future growth.

Adjusted EBITDA of $61.2 million or 14.7% of revenue increased 3.9% year-over-year, resulting primarily from higher restaurant level profit, partially offset by higher G&A and preopening expenses. Depreciation was $30.7 million. The increase in depreciation year-over-year is a result of more new company-operated openings, coupled with new technology investments. Net income attributable to Shake Shack, Inc. was $15.7 million, a decrease of $1.5 million or 8.6% versus prior year quarter. Our GAAP tax rate was 25.9% and our adjusted pro forma tax rate, excluding the tax impact of equity-based compensation, was 25%. We ended the quarter with $308 million in cash and cash equivalents on the balance sheet, including $250 million in convertible notes outstanding and have full availability under our revolving credit facility, leaving us well capitalized to fund our growth.

Before we discuss our outlook, I want to share a change to our guidance practice going forward. After reviewing our approach relative to the broader restaurant industry, we have made the decision to move away from providing quarterly guidance while continuing to provide annual guidance. We believe an annual outlook better reflects how we manage the business for the long term, aligns us with best-in-class practices across our industry and keeps the focus on the multiyear value we are building rather than quarter-to-quarter volatility. We remain committed to transparency, and we'll continue to provide meaningful color on the trends we are seeing as we move throughout the year.

For the full year 2026, our current outlook assumes no adjustments for our previously disclosed full year guidance. However, we do expect the back half of the year to look different from the first half with tougher comparisons and beef inflation that we expect to remain elevated above prior year levels. Given the continued headwinds in our cost structure, we do expect our adjusted EBITDA and net income to be at the low end of our ranges. We remain encouraged by the momentum in the business, a strong pipeline that's delivering returns, a robust innovation calendar, maturing marketing efficiency and our loyalty platform and Project Catalyst both progressing on schedule, and we remain focused on the long-term value that we are building.

Thank you for your time. And with that, I'll turn it back to Rob.

Thank you, Michelle. I want to thank our teams again for their hard work and passion for Shake Shack, which is the engine behind our ability to achieve our long-term goals. Thank you to everyone on the call today and for your interest in our company.

And with that, operator, please open up the call for questions.

[Operator Instructions] Our first question is from Sharon Zackfia with William Blair.

Rob, I think a lot of investors are wondering about the strategy as we enter the second half of the year. Clearly, some of the work you've done on menu innovation and marketing really resonated over the past year. We're starting to lap that now you alluded to some of this in your prepared comments. How do we think about your strategy kind of evolving as we move forward, particularly in marketing? And how do you frame kind of your ability to sustain positive traffic over the longer term?

Thanks for the question, Sharon. We continue to believe that delivering delicious premium quality burgers, fries and shakes with unwavering hospitality is the way that we will continue to thrive. I mean this is four straight quarters since we started investing marketing at scale, where we've delivered positive traffic growth in a tough traffic environment in the industry. So our strategy really isn't going to change. We're going to continue to bring great menu innovation that reinforces the premium nature of our food and our brand. We have stayed totally committed despite a lot of cost pressure to the quality of the ingredients. And we've stayed -- we've professionalized a lot of our operations so that we can make sure that we're delivering the best hospitality -- the best hospitable experience in the industry. So that's all going to stay in place. And we're balancing that with the right strategies, specific strategies and value orientation in each of the channels in which we compete. So we have a lot of continued momentum in our app despite going from 135 to 246. We continue to grow our digital components of our business. And we're going to continue opening great new Shacks that bring in a lot of new customers. And 17% revenue growth, the vast majority of that is new Shack growth. And every time we open up a new Shack and we're able to maintain our high AUV, that means that we are growing guests into the Shake Shack brand. So we feel great about the momentum on the business despite some of these challenges that we have continued to persevere through in 2026. So back half is going to be a lot more of the same, but we're going to continue to get better at execution and continue to improve the returns on every investment we make, whether it's technology or marketing.

And do you have any update on the timing of loyalty?

So we are still committed to the launch of loyalty in 2026. But as I've stated in the past, that -- the expectation should not be that, that's going to be a big contributor to revenue in 2026. There's going to be obviously a period where we're going to test and learn, and we're going to continue to optimize so that we can make sure that our loyalty platform is not just a points-based discounting program. It is really a representation of our commitment to enlightened hospitality across our digital platforms.

Our next question is from Brian Vaccaro with Raymond James.

Rob, I've got kind of a similar follow-up as Sharon there to start. But you obviously continue to see strong growth in digital, and you noted some successful promotions in the period. Can you provide a little more color on where you're seeing the most traction on some of those promotions, whether it be in-Shack or in delivery channels? And maybe touch on how the 246 is performing after raising the price there?

Yes. I mean we're continuing to strike the right balance between traffic growth and margin maintenance as we continue to move through these headwinds that we're facing on the cost side. So the ability to deliver 23% restaurant margins while continuing to invest in incentives that drive new guests and increase our frequency is really working for us, and we're going to continue to do that. And the majority of our incentives are deployed across our digital footprint, both in the delivery channel as well as in our app, less so in our kiosks and in-Shack. So that's really worked for us. It provides us with traffic growth with minimized cannibalization. So that's going to continue to be our strategy. In regards to the LTOs and the culinary promotions, we're seeing demand across every channel. It's obviously something that we want to make sure shows up with the hospitality in in-Shack, but we also are seeing a high rate of guest satisfaction when we're delivering both our LTOs and our core menu through our digital platforms.

All right. That's helpful. And then a quick follow-up. Michelle, just a question on the store margins. Can you provide more color on some of the moving pieces within your second half outlook? Maybe just what are you expecting in terms of commodity inflation, sources of leverage, maybe labor, there might be some leverage, but offsets maybe in the other OpEx line. Can you just kind of walk us through that second half after, obviously, the second half margins were down, followed by up margins in Q1. Just curious if you could provide more color there.

Yes. No problem, Brian. So we definitely saw the pronounced beef inflation in the first half. We're still going to see inflation in the back half in beef year-over-year, but it's going to -- it will be a little bit less pronounced, but we do expect that to continue to pressure the P&L when you look at year-over-year. I think from a labor standpoint, I think we've talked about the efficiencies that we drove over the last 18-plus months. And so we continue to get as efficient as we can, but I don't look at labor as a significant margin benefit as we move forward. But again, we're always looking for opportunities to continue to refine our labor strategies. But I think we will continue to see a little bit of pressure on the commodity side, labor up a little bit when you look at the low single-digit labor inflation that we saw in the first half of the year. I expect that, that's going to continue at the same clip in the back half of the year. But yes, we still expect to have pressures in both the food area as well as I mentioned, operating expenses, Brian, on the broader call, we expect that to still be a little bit of pressure as well.

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

Your second quarter same-store sales were pretty solid, considering everything that went down during the quarter, I mean, mid-2% comp when you take out the World Cup benefit, you talked about solid momentum in the business. So as you mentioned and as we can all see, your comparisons do tough in the back half of the year. So can you maybe help us understand how you're thinking about the shape of the rest of the year? Maybe touch on the confidence you have in those strategies as it seems like some of your burger peers may be getting more aggressive on the value side.

Yes. I mean I think our burger peers have been aggressive for the last 18 months. We've battled up against some really deep discounting, $5 meal deals and what have you. So we feel like our business model has been able to be resilient in the face of some of that competitive activity. As I've mentioned in the past, our footprint insulates us a little bit from the segments of the marketplace that have decreased their spending the most. We're a premium positioned brand. And so we have been able to deliver the right types of incentives and promotions to our target guests and still drive traffic despite a lot of that competitive activity. So as I look to the back half of the year, we're going to continue to launch great new culinary innovation. We're going to continue to get even better at executing against our marketing initiatives. And the fact that we're lapping in Q3, we're already lapping the onset of kind of our $1 drink promotion last year in our app, which was our first big scaled price pointed promotion, and we're encouraged by what we're seeing there to date. So we feel confident that we're going to be able to continue to focus on driving traffic with the right promotions and the right incentives, while maintaining restaurant margins despite some of the cost headwinds.

And then my follow-up is on the 3-year targets through 2027 that were not in this quarter's press release. You hinted that those were under review before. So can you just help us understand maybe how you're thinking about that outlook, particularly like the prior goals for at least 50 basis points of restaurant margin expansion and that low teens unit growth?

Yes, absolutely, Michael. And so we're continuing to review those long-term targets. As you know, that guidance is out there -- has been out there for the time period of 2025 to 2027. So as we go into our planning process for 2027, we're going to look at those targets. And any updates that we have, we'll provide those to you. But for now, there's no updates to that as we sit here today. But again, as we said before, we're going to continue to assess those and review those as part of the process moving into next year.

Our next question is from Margaret-May Binshtok with Wolfe Research.

I just wanted to ask, I know you guys mentioned just being a little bit more insulated from the broader QSR environment, but are you seeing anything to call out in terms of either frequency or check management between the different income cohorts? And then I just wanted to follow up as well on the Good Fit Menu. Are you guys seeing any -- you've been out for a while now, like strong uptick. And are you seeing that kind of helping you navigate the uptick in GLP-1s that we're seeing out there?

Yes. I would tell you that the growth of our digital channels, particularly our app has definitely improved our frequency. We have -- our team has done a really good job of delivering targeted incentives to bring our guests back more often and making sure that we're delivering a great value equation on our premium items. So our frequency has been really healthy, has been a contributor to our traffic growth, and we expect that to continue, and we expect that to get even better as we optimize our loyalty platform heading into 2027. In terms of the Good Fit Menu, we've been able to sustain that business. We haven't made a huge marketing push on the Good Fit Menu. We've been focused on barbecue and Korean so far this year, but that's definitely a great option for us to make sure that we can deliver lower calorie options with a lot of high-quality protein, which is what a lot of those -- the guests who look for those options. We feel like we can deliver them as well as anybody.

Our next question is from Steve McManus with BNP Paribas.

So on the innovation calendar, it looks like Big checks Shack's back. Can you just walk us through the rationale? How do we think about like the potential cannibalization? And how will that be priced just given the check drag when it was previously at $9.99?

Yes. So Big Shack is already back. It's on the menu, and we did decide to price it more consistent with our doubles. If you recall back in Q4 of last year, we were excited about launching a great value at a $10 Big Shack burger with 8 ounces of high-quality beef. We did see some cannibalization of our doubles business, which was a bit revenue and margin dilutive. So we have priced it more consistently with our Doubles platform. We still anticipate getting some trade-up from singles, but now when people trade over from doubles or other premium burgers, we won't see as much revenue or margin dilution. And the reason why we brought it back is because guests were -- it was in high demand. Guests were asking for it. We were -- we're very attentive to listening to guest requests and guest feedback on our social and guest response channels, and that was one of the items that folks were really excited about us bringing back. So we decided to do that.

Got it. And I had a follow-up. Looking at the regional comps, the New York market was flat kind of in line with last quarter. I would have expected some uplift from the World Cup. So should we interpret that as like underlying trends in the market are deteriorating or compares anything on that front would be helpful.

Yes, I wouldn't say they're deteriorating. I mean even when you take out the World Cup benefit, kind of the run rate has improved year-over-year in New York City. It's still not a significant driver of the growth on the business, as you would expect, it's a more mature market with a lot of competitors coming into metro New York area. But we're excited about the restaurants there. As I've said in the past, they're not huge comp growth restaurants, but they are huge restaurants. I mean a large number of our highest AUV -- highest sales restaurants are located in this market, and they deliver both high revenue and high margin. So they're great restaurants. We'll continue to support. We even continue to develop here when we find great real estate that we think makes sense and minimizes cannibalization. But the comp growth is coming from other markets where we have not been there quite as long. And we have lower AUVs in every other market. And so there's just more upside potential on a comp basis and in places like Florida and Texas and the Southeast and even in California, where we've seen a lot of strong growth over the last six months. So New York will always be super important to us and deliver a lot of strategic value even if it's not growing at the comp rate that the balance of our newer markets are growing at.

Our next question is from Gregory Francfort with Guggenheim Securities.

I just maybe want to touch on unit growth. I know you guys are going through the long-term planning process. But -- and I don't know if the question is for Rob or Michelle, but just as you kind of take a look at new store productivity this year and just returns, I think you spoke pretty confidently in the prepared remarks, but do you think unit growth needs to come down at all as you look in the process?

Yes. I don't think it needs to come down. In fact, we have every intention of maintaining kind of the rate of growth, which will imply even a higher number of units on an ever-growing base. We've been really happy with our development. I mean if you're a long-term investor and you're underwriting this business, that's the biggest value creation opportunity. Obviously, comps are really important, and we're really proud of our comps. But we are getting a great return on our invested capital from our new units. And we delivered 16 this quarter. It's the highest Q2 number. Last quarter was 17, which was by far the highest Q1 number. So we are really committed to delivering the 60 to 65 this year and anticipate that number continuing to grow in 2027.

Yes. And Greg, I'll just add on. We're happy with the returns that we're generating with our new -- recent new classes of Shacks, over 30% cash-on-cash returns. And when we talk about assessing the long-term guidance, just to be clear, getting back to the point we made earlier, it's not as much the unit growth. So right now, we're saying in the long-term guidance, unit growth is going to be in the low teens with low teens revenue growth. So that's not the issue with the long-term guidance. It's more the assessment of the restaurant level margins and growing that by 50 basis points a year. So to Rob's point, to be clear, we're happy with the returns that we're generating on the new units. And there's no anticipation that as part of that long-term algorithm that, that's going to change the growth that we've talked about historically or the growth that we plan to do moving forward.

Yes. And I would also say something we don't talk about very often that I'm excited about is the performance of our license business and the units that aren't company-owned. Obviously, this is a challenging year with some of the dynamics in the global environment, and we anticipated having a bit more of a holistic challenging year on our license business, but we've seen so much success in some of these markets. I would call out Canada -- the performance of our partners there has just been amazing as they open up great Shacks with great operations. So I definitely see the license business also becoming an EBITDA, not as much a revenue growth, obviously, as our core business, but definitely becoming kind of an EBITDA growth accelerator as we continue to increase the number of licensed units in markets that we open up globally.

Our next question is from Lauren Silberman with Deutsche Bank.

I guess this is on the comp side. Can you talk about the cadence of comps as you move through the quarter? And I know you guys want to move away from quarter-to-date commentary, and I understand, but there's concern amongst the investment community that the business materially slowed exiting the quarter into July. So can you just help like level set qualitatively even whether you see changes in consumer behavior or momentum?

Yes. So I mean, I can speak directly to Q2. I mean I think everyone is aware that April was a minus 0.6% on comp. So we delivered 3.5%. So that -- whatever that assessment is of a decelerating comp is actually completely inaccurate. I don't know where that data is coming from. We saw June is our best period in the quarter. So we had just the opposite, accelerating comps. And now as we disclosed in our comments in the script, we had -- definitely had some tailwind from the World Cup, which we called out as something that was an opportunity for us early on in the quarter. In fact, when we delivered the May earnings -- May 7 earnings, we called that out. And so we had really strong acceleration throughout the quarter. And we're not obviously giving in-quarter updates at this point. But I can tell you that we're -- that in Q3, we're also continuing to work on all the things that drove the strong Q2 results that we delivered.

And Lauren, the only thing I'd add is even when you take out the World Cup benefit in June, to Rob's point, June would have been the highest comp period within Q2 even when you pull out World Cup. So the idea that we decelerated exiting the quarter to Rob's point, is not correct.

Great. I appreciate that color. And then if I could just touch on like the menu innovation. And can you just talk about the performance of the new menu innovation items relative to expectations, whether it's bringing in new guests, driving incremental transactions with existing guests? And do you see similar performance across markets?

Yes. I wouldn't say that we have a huge disparity across markets on the mix that LTOs and innovation represents. It's relatively consistent. And obviously, you have some markets that perform a little bit better and some maybe a little bit worse. But on the whole, we don't really talk about a big disparity and the pickup on the innovation. And I can tell you that the innovation that we had last quarter around the barbecue menu, I mean, we started off extremely strong on the Baby Back Rib sandwich. And we had some concerns around our ability to even supply Baby Back Rib throughout the planned period. And we were able to meet those demands and meet our expectations on the performance of that LTO. And our LTOs, it depends on what the strategic intention is behind the LTO, right? We have LTOs that we launch. Mac & Cheese is one where -- it's not going to be a traffic driver, maybe a frequency driver long term as we have a lot of guests who love it, but it really is a check builder. And when we launched $13.99 Barbecue Baby Back Rib sandwich, that's going to drive some initial traffic and trial, but it's also a check builder. Those super premium LTOs are definitely -- there's intentionality around trading guests up from either single or double cheeseburgers into those LTOs. So every innovation that we have, the true goal is just to deliver guest satisfaction. The financial goals, whether it be traffic or check will be driven by the strategic intention of that specific LTO.

Our next question is from Jim Sanderson with Northcoast Research.

I wanted to go back to your comment about life cycle marketing. If you could provide a little bit more color on how that's going to be used, if that includes pricing and discounts, and how that's going to roll out in the second half? And then I have a quick follow-up on adjusted EBITDA forecast.

Yes. The life cycle marketing is really around kind of just how we're managing our relationships with our guests, right? We have had a lot of new guest acquisition. We've also had a pretty significant increase in frequency. And so as we grow our digital channels disproportionately and as we build the data analytics capabilities that are going to support our loyalty platform, we're going to be able to leverage those capabilities in an even bigger way to make sure that we are driving frequency. We want to -- we're grounded in enlightened hospitality. We believe that when folks come to our Shacks, they're going to get a fast casual experience that they really can't get anywhere else. We aspire to deliver that in our digital channels as well and know our guests better than anybody and be able to deliver the right incentives at the right times to trigger the highest level of response, which will bring our guests back more and drive frequency ongoing.

All right. And I just had a quick follow-up on your EBITDA guidance. I think you went to the lower range of the $225 million to $235 million, and that was back in June. So what's changed to get you more comfortable with the lower range of the $225 million to $235 million since June?

Yes. I mean I think that stayed consistent. It's still the low range of $225 million to $235 million. And once again, that we're opening up the number of restaurants that we want to open up. We're seeing the results that we want with those restaurants. And when you look at the first half of the year, first 6 months, about a 4% comp. That's actually better than we thought we were going to do in the first half of the year. So the revenue generation on this business is as good or better than we had anticipated. The challenge, obviously, is the cost structure that we didn't anticipate. We had seen some relief in beef at this point in the year, which -- we forecasted relief in beef at this point in the year, which we have not realized. We also have seen higher utility and distribution costs as a function of the cost of energy. So some of those cost inputs have driven some of the EBITDA and margin discussions that we've had. So very confident, very excited about our revenues, just trying to be very transparent and very -- and transparent on the cost side of the business.

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

I wanted to ask about the digital sales mix. You mentioned, I think, 41%. I'm not sure if you have or if you could share kind of app-based sales, but maybe directionally, what share of the total they account for? And I guess I asked because you said comparable app sales were up 30%. So I'm just trying to understand kind of what they might have contributed, in particular, the incrementality. I understand that those are high lifetime value channels and you get higher frequency there. But as I think about kind of the app-based sales and maybe having a little bit more of those attractive price points associated with them, thinking about, again, the sort of incrementality from a sales and margin perspective. And then I do have a quick follow-up, please.

Yes. When you think about our channel mix, Sara, so the digital channels include delivery, app and web. And so app is just over -- our total channel mix. It's going to be just over 10% of our total channel mix. So that should give you a sense of how that mix is in. But just -- again, our digital channels are going to be delivery app and web, but app is just over 10% of our channel mix.

Yes. And I can tell you, from an incrementality standpoint, that is the largest driver of frequency and new guest acquisition. So that's where we are seeing a lot of the growth in the traffic is coming from the app channel. So that is highly incremental to our core business and our run rate of our base business.

And it's also our fastest-growing channel presently. So to Rob's point, the frequency there is higher than any other channel.

Okay. Got it. And then the follow-up is just as you think about the margin pressure, obviously, beef was some of it, but you've done, I think, a good job of offsetting that with supply chain. I think the bigger piece maybe is some of these sharp price points. I mean mix was pretty negative, I think, in the quarter. Do you envision kind of lapping that as you maybe -- as you anniversary some of the app-based value menu? I guess, is there a scenario where a quarter or two from now, some of that pressure moderates on the mix and the COGS perspective?

Yes. I mean we're already lapping some of those initiatives from last year. So when you look at the things that we are lapping and the question marks around the ability to comp the comp and lap these things, I mean, we're lapping the labor model change that we made in 2025. And so we've continued to be able to drive more productivity with better execution. The model isn't changing. We're just getting better at executing it. I would say that, that is the same model that we aspire to on the revenue side. We are -- we learn every day how to get better at delivering incentives, that deliver traffic growth with less margin dilution or cannibalization of other sales items. So we look at the back half of this year as an opportunity to continue to leverage app even though we're lapping it. And then obviously, as we look to 2027, the loyalty platform should give us a whole another -- an entirely additional tool for us to get even better at delivering targeted incentives that allow us to drive the rate of traffic growth that we aspire to with less mix degradation.

Our next question is from Andrew Charles with TD Cowen.

Michelle, you left the door open to future price increases in 2026. And I'm curious what you're monitoring for around potential contemplation of future pricing. If I heard you right, you believe that beef prices have peaked, but it remain high. Labor inflation is expected to remain consistent in the back half. But any other key items that you're monitoring for on the price?

Yes. Definitely, Andrew, beef as we head into July continues to be elevated in the month of July. So we're continuing to monitor that. Obviously, as we've talked at length about traffic and us continuing to focus on traffic-driving initiatives within our business, we're monitoring that as well. And as we think about future price increases, definitely taking a surgical approach to what the competition is doing, how that looks like within each of our markets and pricing tiers. So we're going to be mindful of all that, but looking at primarily the cost structure, what that's going to do and then traffic as well and what we're seeing in our different channels. So those are the two primary things we'll be monitoring.

Okay. And then, Rob, you talked about digital sales up 30%. You talked about the in-app promotions. But you also mentioned there was going to be -- there was some strategic partnership with third-party providers that led to some traffic gains in the quarter. Can you talk more about that?

Yes. I mean we had great strategic alignment with our delivery partners. Obviously, they have access to a huge audience, and they leverage their platforms to drive a lot of excitement around delivery and the World Cup. I mean a lot of -- when we talk about the World Cup earlier in the year, we talked about our markets and the markets that were hosting the World Cup games and the infusion of incremental traffic into those markets as a result of those games. But we also coupled that with strategic partnerships with our delivery partners so that we could leverage the World Cup excitement across all of our markets even if there weren't games being held in those markets. So it was really a holistic go-to-market strategy. And that was very beneficial. And we saw, as we already mentioned, June and into July with the World Cup, we partnered with those delivery partners to drive strong traffic growth.

Our Next question is from Brian Mullan with Piper Sandler.

Back to development, just wanted to get your current assessment of the go-forward drive-thru opportunity. Do you feel like that you have that format fully figured out in terms of the right layout and the right operating model, or maybe are there still a few things the team is trying to sort out with the existing assets before you really want to ramp up the drive-thru component of your development moving forward? Just would love to get your current assessment.

Yes. I mean I think drive-thru presents an opportunity for us when we have great real estate that supports a great drive-thru restaurant. I would tell you strategically, we have done a lot to optimize the drive-thrus. We have significantly improved the flow in our restaurants. We've improved the ordering process. We've improved a lot at the drive-thru. The fact that we make all of our food fresh to order, it creates kind of a cap on how fast we can get. And at Shake Shack, we're about delivering premium quality food with great hospitality. And so I don't know that drive-thru is going to ever be the primary format for Shake Shack. I think there are opportunities for us to -- there's a huge amount of real estate for us to go out and build great restaurants that allow us to deliver a great digital experience and an even better in-Shack experience. And so I just want to make sure like we don't aspire to be fast food. We don't aspire to be QSR. So we will have drive-thrus or pickup windows, but that is not kind of the big strategic push for us over the next 3 to 5 years. Obviously, we can execute it. And when we find great real estate, we can do it. But we want to make sure that our enlightened hospitality comes through in the most compelling and differentiating way possible.

Our next question is from Rahul Krotthapalli with JPMorgan.

Rob, I wanted to ask about how you are thinking about the square footage growth relative to the overall development or unit growth. I'm trying to reconcile the comments you talked about the digital sales, which I understand includes kiosks, but even excluding that, the app and third-party channels seem to be growing a lot faster. Is there an opportunity to reduce the new build square footage and perhaps less in-store seating and more pickup and delivery areas as we go forward?

I do think that, that's an opportunity. I think as we come next year, and we work to deliver our long-term strategic plan, I do think there's an opportunity for us to talk about how we can continue to grow by leveraging different formats. We just answered a question on drive-thru. I do think that there's an opportunity for us to explore some smaller formats with less seating, less build cost, potentially different labor model, even more of a streamlined menu so that we can maintain margins even if we -- those formats have lower rate of sales. So the different formats provide us access to different real estate. When we talk about our TAM of 1,500 company restaurants, that can be 1,500 core units, that can be 1,500 units of varying formats. And I think the more we prove out the different formats, the more TAM opportunity we have. So I do believe there's an opportunity for us to explore markets that might not support some of our big footprint, big Shacks that we could go into and put a smaller Shack with a different operating model that can still deliver great returns with lower cost structure and great margins.

That's helpful. The follow-up is on the traffic and mix. Like as I look into -- from 1Q to 2Q and into back half, we see a dip in traffic and mix combined. How should we think about the dynamic in second half versus first half in the year?

Yes. I mean the back half of last year was the first couple of quarters where we were investing to drive traffic with marketing. And so we employed a lot of different levers, and we were really successful in both quarters in leveraging different models. In Q3, we had dollar beverages only in the app. In Q4, we had 135. We also did different marketing investments in media across different channels and different markets. So there's a lot of things that happened in the back half of last year, but I believe that we are much smarter and much better at understanding how our activities impact our business than we were a year ago. So obviously, our objective is to continue to drive traffic while maintaining strong margins. And so that's -- even though we're lapping some higher comp quarters in the back half, we believe that we have the appropriate amount of investment. We have the right product innovation, to deliver -- the work to deliver strong comp growth. Now I will point to the fact that we had reiterated our single digit -- low single digits for the year. So we're not taking that guide up. We obviously recognize that we have tougher comparables in the back half, but our aspiration is to continue to drive positive traffic.

Thank you. We have reached the end of our question-and-answer session. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

Greetings. Welcome to Shake Shack's First Quarter 2026 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. 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, 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 first quarter 2026 shareholder letter, which can be found at investor.shakeshack.com in the Quarterly Results section and as an exhibit to our 8-K for the quarter.

I will now turn the call over to Rob.

Thanks, Alison, and good morning, everyone. I want to start by thanking our incredible team members across the globe who continue to bring enlightened hospitality to life every single day. Your dedication to serving our guests with care and kindness is what makes Shake Shack special. I'm grateful for everything that you do.

Turning to our results. I'm pleased to report that our first quarter performance showcases continued sales momentum in our company-operated Shacks and meaningful progress against our 6 strategic priorities for 2026, which are building a culture of leaders, optimizing restaurant and supply chain operations, driving comp sales behind culinary marketing and digital innovation, building and operating our Shacks with best-in-class returns, accelerating our license business and investing in long-term strategic capabilities.

For the first quarter, we grew total revenue by more than 14%, much of this growth came from same-Shack sales growth of 4.6%, including a 1.4% traffic growth. These strong sales and continued traffic growth were achieved despite significant weather impacts that contributed 240 basis points of negative comp in the quarter, negatively impacting our EBITDA for the quarter.

Despite these headwinds, our sales and traffic momentum continued, and we have now delivered 3 straight quarters of traffic growth. At the core of our sales performance is, first and foremost, strong restaurant operations that deliver guest satisfaction. Secondly, is culinary innovation that differentiates our brand. And lastly, our investments in targeted digital media to create awareness of our guest value proposition.

In Q1, we increased investments in delivering guest satisfaction, driving comp and opening new Shacks. And despite elevated beef costs that continue to persist, we were able to expand our restaurant-level profit margin by 50 basis points year-over-year to 21.2%. We continue to show our ability to grow both top line sales and operating margin, primarily through ongoing traffic driving programs and operational and supply chain productivity.

We also delivered our largest first quarter of new units ever with 17 new Shacks. We continue to successfully bring Shake Shack to new and underpenetrated markets, many outside of our historical footprint. Given our strong current cash-on-cash returns and expected future returns, we will continue to accelerate our company-operated development efforts.

Consistent with this strategy, we are now guiding to 60 to 65 new company-operated Shacks for 2026, an increase from our prior guidance of 55 to 60 Shacks. I would call out that opening this higher number of new Shacks in Q1 did increase our total preopening costs, which weighed on our adjusted EBITDA for the quarter.

Throughout the quarter, we made strategic investments to support our sales driving initiatives and new unit openings, both of which support our multiyear growth plans. These investments allow us to bring Shake Shack to more communities and create awareness of what makes our food and hospitality so special. These investments continue to enhance our strong value proposition and drive traffic in this value-oriented environment.

As we work to continue to enhance our value equation in a very competitive marketplace, we're focused on making the right investments in our food, our assets, our team members and our traffic-driving strategy. As a result of the weather headwinds that we experienced and our investments in additional new store openings, our first quarter adjusted EBITDA did not meet our short-term quarterly expectations.

That being said, we are confident that the foundation that we are building today positions us for long-term growth, and we remain confident in our long-term strategic plan. Still, given the volatility in the global and domestic marketplace, we are broadening our 2026 adjusted EBITDA guidance to a range of $230 million to $245 million.

Despite that volatility, I am excited to share that our sales momentum is building in Q2 and that we are reiterating our 2026 guidance for same-Shack sales, restaurant level margins and our long-term financial targets. After making the strategic decision to focus our traffic-driving investments in May and June, we're excited to see very strong performance to start May, behind the launch of our Baby Back Ribs Sandwich and anticipate strong sales growth in June as we expect to leverage the incremental traffic in some of our largest markets driven by the World Cup.

And despite a slower start in April, driven in part by the shift in spring break timing associated with the Easter holiday, we're confident in our guidance for Q2 at 3% to 5% comp growth.

Over the last 2 years, we have built a best-in-class executive team. A performance-driven restaurant operating model, a sales engine that can consistently drive transaction growth, a supply chain that is increasing productivity and a domestic development capability that is profitably accelerating the growth of our restaurant count on our way to 1,500 company-operated Shacks. Shake Shack is well positioned for the balance of 2026 and beyond.

Now I will discuss our progress against our strategic priorities. At Shake Shack, our performance is directly correlated to the quality of our team members. I've invested a significant amount of my time over my first 2 years cultivating an executive team that is uniquely positioned to achieve our ambitious aspirations.

Today, I'm excited to announce the newest member of our executive team. Michelle Hook will be joining Shake Shack as our new CFO next week. When we set out on this search, I thought that it would be very difficult to find a new CFO that met every criterion that was important to us. I'm ecstatic that we found a candidate that does.

Michelle comes to Shake Shack with over 25 years of public company restaurant experience, including the last 5.5 years where she has served as the CFO of Portillo's. Michelle's experience leading FP&A, accounting, treasury and IR, coupled with her long track record of leading teams with a commitment to building a strong culture will allow her to hit the ground running and make an immediate positive impact on our organization. I look forward to introducing her to our investment community over the coming weeks.

As we look to the balance of 2026, our focus will be on delivering significant value to our guests, leveraging both the numerator and the denominator of the value equation to accomplish this objective. We will employ a balanced approach leveraging premium core ingredients, culinary forward LTOs and a focus on guest satisfaction through enlightened hospitality to drive the numerator of the value equation.

For the denominator, we will continue to focus on decreasing our reliance on base pricing and employ strategic focused price pointed offerings like our 135 platform to profitably grow our transactions in a value-oriented macro environment.

We continue to make strategic investments in marketing to drive traffic and frequency. These investments have been primarily focused on creating a foundation for long-term revenue growth as opposed to short-term traffic burst. We are accomplishing this by motivating new guests to enter into our app and digital channels.

We have also seen a frequency increase amongst our current guests in these channels. This increase in the population of our digital community will support the launch of our loyalty program towards the end of this year, and the results of these investments have exceeded our expectations. We have grown both our digital channel guest count and app downloads by over 35% year-over-year.

Even more importantly, the lifetime value of our digital channel guests has grown by approximately 20%, driven by an increase in frequency from this highly engaged group. These guests visit us more often and spend more on an annual basis. With these strategic platforms, we are offering an improved value equation across all household incomes, which we believe will result in a broader guest base, sustained loyalty and greater lifetime value. These are long-term benefits from our current investments.

On the brand building front, our We Really Cook campaign is resonating. We are seeing significant quarter-over-quarter increases in guest engagement on key media platforms as we refine our targeting and creative execution. This campaign reinforces what sets us apart, our commitment to fresh premium ingredients, cook-to-order and true culinary craftsmanship.

Our culinary team continues to deliver bold flavor forward innovation. Adding to our successful return of the Korean-inspired menu launch in January, we introduced our Clubhouse Pimento Cheeseburger and Pimento Chicken Sandwich in March, which was inspired by a Southern Classic and reimagined with a Shake Shack Twist. These items performed strong nationwide and contributed to our sales growth in Q1.

In late April, we announced the return of our Smoky BBQ menu platform, anchored by a first-of-its-kind BBQ Boneless Baby Back Rib Sandwich, along with a new Mac & Cheese side. This premium protein innovation is indicative of our ability to successfully deliver more than just the best burgers in the business.

The BBQ Rib Sandwich is made with 100% Baby Back pork ribs that are hand deboned, slow cooked for 9 hours and marinated in a proprietary BBQ spice blend with apple cider vinegar. It's a perfect example of our ability to develop and execute innovative Shake Shack-only recipes at scale without disrupting our operations. I'm happy to report that both the Baby Back Rib Sandwich and the Mac & Cheese have significantly exceeded our expectations and are driving outpaced traffic and ticket growth in May.

We're also expanding into new beverage occasions intended to increase relevancy in all dayparts. Our new sparkling cucumber basil lemonade, our first sparkling lemonade, provides a delicious refreshing offering to complement lunch and dinner, but also gives us a platform to drive more afternoon beverage occasions with expected strong guest satisfaction and strong margins.

All of this innovation is supported by our disciplined stage-gate process that has resulted in a 12- to 18-month pipeline of innovation, which positions us to deliver a consistent cadence of high-impact menu items.

Our innovation strategy is driving both near-term performance and long-term brand relevance as we continue to differentiate Shake Shack through culinary leadership. We will continue to drive sales and traffic growth while improving our productivity across the company, and we are confident in our ability to drive continued margin improvement in a competitive inflationary environment. Foundational to those objectives is the recently announced Project Catalyst. Our comprehensive technology initiative designed to make us more productive across our company, which will be critical to creating long-term G&A leverage.

Through strengthening our digital, data and operational framework, we expect to improve restaurant execution, deepen guest engagement and unlock enterprise productivity, all while enhancing our ability to deliver enlightened hospitality.

Let me walk you through the key components. First, we're modernizing our restaurant systems. We've partnered with Qu, a cloud-native unified commerce platform to upgrade our point-of-sale and kitchen display systems. These new systems will improve throughput, order accuracy and consistency, particularly during peak periods. They'll also enable better orchestration across digital and in-Shack ordering channels, giving our team members faster, more reliable tools so they can stay focused on what matters most, delivering hospitality to our guests.

Second, we're building Shake Shack's first-ever loyalty platform. This will be a very meaningful platform for our brand. Our objectives in launching this new platform are to drive frequency, retention and lifetime value while enabling more personalized guest communication and enlightened hospitality. It's not just about points and discounts. This capability supports our continued journey towards data-driven targeted engagement that resonates with our guests and creates deeper connection with the Shake Shack brand. It will help us to reinforce the core principles of enlightened hospitality that launched Shake Shack as a company and continue to differentiate us in the marketplace.

Third, we're investing in a new generation of proprietary AI capabilities, embedded directly into daily operations. These AI tools will provide real-time operational insights, alerts and recommendations at the Shack level and for our above Shack operational leaders, enabling faster and better informed decision-making for our restaurant operators and support teams. This intelligent operating layer will deliver measurable productivity gains and form the foundation for ongoing performance enhancement over time.

Finally, we're advancing a unified data and analytics platform that brings together operational performance, guest behavior and advanced analytics. This data backbone will support improved service speed and accuracy, more personalized guest experiences and the continued expansion of AI-driven capabilities at scale.

We expect to begin rolling out these systems in the second half of 2026, and these investments position us to deliver an even better experience for our guests and team members.

Turning to operations. Our operations have never been stronger, and I couldn't be prouder of our team. In March, we hosted our first ever Operations Leadership Summit, where we celebrated an outstanding 2025, recognized best-in-class leaders across our company and outlined our vision to meet both our short- and long-term goals.

Our operational focus in 2026 centers on 2 things our guests value every single time they visit us, our hospitality and the accuracy of the order that we deliver. Over the past 2 years, we've driven meaningful gains in speed of service, and we are now averaging under 6 minutes on ticket times of cook-to-order food, a significant improvement. However, speed cannot come at the expense of accuracy, food quality or hospitality. With the tools that we are putting in place, we expect to not only get faster, but to also get better, delighting our guests, which will in turn drive frequency and loyalty over the long term.

Our operations performance scorecard continues to serve as the backbone of how we drive continuous improvement, and we've updated the metrics to reflect the sharpened focus on hospitality and accuracy. Even as a growing share of orders flow through our kiosks and digital platforms, we refuse to let efficiency come at the expense of connection. We've intentionally redeployed labor toward guest engagement through our front-of-house hospitality champion role. It's a deliberate investment to ensure there's a human touch point in every Shack, regardless of how the order was placed.

I'm also happy to report that our team member tenure and retention has continued to steadily increase. You might think that more rigor and operating discipline would create more turnover, but it's just the opposite. Our team members are experiencing a high-performance environment, seeing opportunities to advance their careers and they're staying longer. That tenure builds experience, which makes them better able to serve our guests, and that makes us a better operating company.

It also allows us to develop the leaders of tomorrow, which will support our continued new Shack growth. This culture has led to improved guest satisfaction across restaurant cleanliness, friendliness and overall experience. And we're delivering these results by making sure that we have the right labor in the right Shacks at the right time.

Supply chain optimization continues to deliver the highest quality ingredients in a more productive way. We've restructured our internal teams to unlock productivity across every node of the supply chain model. And we've built a strategic sourcing capability that is fully connected end-to-end, delivering the cost visibility that we need to make smarter, faster decisions.

We're partnering in new ways with both new and current suppliers, optimizing our distribution network and leveraging our scale to drive efficiencies, all while maintaining the quality standards that define our brand. In Q1, we realized cost savings through strategic sourcing initiatives, successfully transitioning key ingredients to new suppliers who meet our rigorous specifications while providing better economics.

Before making any changes, our culinary, quality assurance and operations teams test and validate that if there is any change in taste or guest experience, it is for the better. These improvements are flowing through to better unit economics and directly supporting our priority of building and operating our Shacks with best-in-class returns as we scale.

Turning to our license business. Our license business continues to be a long-term strategic engine for EBITDA growth. However, the short-term results have been and will continue to be impacted by the ongoing conflict in the Middle East, driving some of our rationale for a broader adjusted EBITDA guide in 2026. The conflict has led to business disruptions ranging from temporary closures to reduced operating hours and delivery-only operations for periods of time.

Beyond these impacts, inbound tourism has slowed substantially, which has further pressured sales, particularly at high-traffic locations. Despite these near-term headwinds, we stand side-by-side with our license partners and the long-term opportunity in these markets. We've seen some delays in opening time lines, but as of now, we still plan to achieve our target of 40 to 45 licensed unit openings in 2026. We will continue to monitor the situation closely and provide additional updates as we move through the year.

Domestically, our company-operated development pipeline remains robust. As I mentioned, we had a momentous first quarter with a record 17 openings compared to 4 openings in the first quarter last year. We also opened new markets, such as Naples, Florida; Tucson, Arizona; Athens, Georgia and East Lansing, Michigan. This is the start of a record year of growth for Shake Shack as we march toward opening 60 to 65 new company-operated Shacks.

We continue to see strong results from our cost containment strategies and see similar build costs for the class of 2026 as compared to last year. We also continue to invest in our existing Shack base through targeted remodels and refreshes that enhance the guest experience and improve operational efficiency. I'm energized by the momentum in our business and the opportunities that lie ahead.

We have a clear strategy focused on driving same-Shack sales growth and transactions, expanding our footprint with disciplined development and improving profitability across the enterprise. Project Catalyst will provide the technological scaffolding that we need to scale efficiently while enhancing the experience for our guests and team members. Our marketing investments are building brand strength and driving consistent traffic growth.

Our culinary innovation is creating excitement and brand affinity, which differentiates us in the marketplace. And our operational improvements are delivering better guest experiences and stronger unit economics. Most importantly, we have an exceptional team executing with discipline and passion.

From our restaurant team members who serve our guests every day to our leadership team driving strategy and innovation, we have the right people focused on the right priorities. I've never been more confident in our ability to build Shake Shack into the best restaurant company in the world. Our premium quality, enlightened hospitality and a focus on supporting our team members drives prosperity for Shake Shack and our shareholders.

And with that, I'll turn it over to Alison to provide more details on the quarter.

Thank you, Rob, and good morning, everyone. Our first quarter results showed the resilience of our business in the face of a challenging macro environment and inclement weather. The quarter marks our 21st consecutive quarter of positive same-Shack sales growth alongside continued year-over-year restaurant level margin expansion.

First quarter total revenue reached $366.7 million, up 14.3% year-over-year, supported by the opening of 17 new company-operated Shacks and 5 new licensed Shacks, leading to 14.1% year-over-year growth in system-wide sales.

Our licensing revenue was $12.7 million in the quarter, with licensing sales of $204.3 million, up 13.8% year-over-year, driven by continued strength in Asia, U.S. airports and the United Kingdom. Sales growth was partially offset by the ongoing conflict in the Middle East, where we had temporary closures in 17 licensed Shacks in Q1 with 3 locations at airports and a transit center remaining closed from the onset of the conflict through the end of the quarter.

In our company-operated business, we grew Shack sales 14.3% year-over-year to $354 million. We generated roughly $72,000 in average weekly sales, flat year-over-year. We delivered 4.6% same-Shack sales growth with 1.4% positive traffic and 3.2% price/mix. Our same-Shack sales growth was driven by the success of our culinary and marketing initiatives despite a 240 basis point headwind due to inclement weather in Q1.

Our pricing remained disciplined. And in March, we rolled off the price we took on our delivery channels last year, an approximate 1% impact. In-Shack menu prices for the first quarter came in at about 3%, while blended pricing across all channels increased approximately 4%. This compares to approximately 5% last year, demonstrating our ability to deliver positive same-Shack sales with less dependence on price increases. April AWS was $75,000, down 2.6% year-over-year and same-Shack sales decreased by 0.6%.

The month same-Shack sales were negatively impacted by approximately 200 basis points, largely due to the shift of Easter weekend spring breaks into March this year compared to last. Additionally, we continue to see declines in tourism in our largest urban markets, particularly in New York City.

First quarter unit development was strong with 17 new company-operated Shacks ahead of our guidance for 12 to 14 new Shack openings. As a result of these Shacks opening earlier than planned, preopening costs were higher in the first quarter to support our strong opening schedule for 60 to 65 new Shacks in 2026.

First quarter restaurant level profit was $75.1 million or 21.2% of Shack sales, expanding 50 basis points versus last year. Strong benefits from our labor management strategies alongside procurement-driven cost improvements and other items in our commodity basket helped offset higher beef costs and demonstrate our ability to sustain profitability despite beef headwinds.

That said, restaurant level margins came in slightly below our expectations for the quarter due to higher other operating expenses, mainly due to the timing of investments in repairs and maintenance expenses to support our Shacks and some mix impact of our marketing initiatives.

In the first quarter, food and paper costs were $100 million or 28.3% of Shack sales, 50 basis points higher versus last year. The increase year-over-year was mainly driven by the mix of promotional activities to support our culinary innovations during the quarter.

Blended food and paper inflation was down low single digits with beef costs up low teens and paper and packaging costs down low single digits year-over-year. Through proactive procurement and cost mitigation initiatives, our teams meaningfully offset continued beef inflation without taking additional price.

Labor and related expenses totaled $92.7 million or 26.2% of Shack sales, representing a 180 basis point improvement year-over-year, driven by more efficient scheduling and deployment through our labor management strategies. As we move through the year and fully lap the benefits of the implementation of our new labor model, the year-over-year improvement in the labor line will be more muted with our supply chain initiatives driving restaurant level margin expansion going forward.

Other operating expenses were $57.5 million, or 16.2% of Shack sales, 60 basis points higher versus last year, largely driven by the timing of repairs and maintenance expense and the growth of third-party delivery. Our digital sales mix increased to 39.9% in the first quarter. Occupancy and related expenses were $28.7 million or 8.1% of Shack sales, 20 basis points higher year-over-year.

First quarter G&A totaled $53.6 million or 14.6% of total revenue, reflecting incremental investments in marketing and technology as well as continued investments in our people to support growth and strategic initiatives. As we mentioned on our fourth quarter call, our marketing plan for 2026 is more evenly distributed across the year.

As a result, our quarterly G&A expense is expected to remain relatively steady from an absolute dollar standpoint each quarter of 2026 and will be relatively consistent with what we spent each of the last 2 quarters to land within 12% and 13% for the year. This results in a higher year-over-year G&A step-up in the first half, tapering off in the back half of the year.

As we discussed last quarter, we plan to deliver G&A leverage in 2027. Equity-based compensation was $5.2 million, 13.6% higher year-over-year with $4.6 million hitting G&A.

Preopening costs were $6.9 million, up 113.5% year-over-year, reflecting 17 new Shack openings in Q1 2026 versus 4 in Q1 2025. We have approximately 37 Shacks under construction and the largest pipeline of new Shacks that we've had in our company history.

Adjusted EBITDA of $37 million or 10.1% of total revenue declined 9.3% year-over-year, resulting from sales underperformance due to weather and macroeconomic factors alongside strategic investments to support our multiyear growth plans. Depreciation was $29.1 million. The increase in depreciation year-over-year, both in the first quarter and throughout 2026 is a result of more new company-operated openings, coupled with new technology investments.

Net loss attributable to Shake Shack, Inc. was $290,000 or a loss of $0.01 per diluted share. Adjusted pro forma net income was $88,000 or earnings of $0 per fully exchanged and diluted share. Our GAAP tax rate was 33% and our adjusted pro forma tax rate, excluding the tax impact of equity-based compensation, was 25.5%. We ended the quarter with $313.7 million in cash and cash equivalents on our balance sheet.

Now on to guidance for the second quarter and full year 2026. Our outlook assumes no major changes to the macro or geopolitical environment. For the second quarter of 2026, we expect system-wide unit openings of 24 to 27 with 16 to 19 company-operated openings and approximately 8 license openings. Total revenue of $424 million to $428 million with same-Shack sales up 3% to 5% licensing revenue of $13.5 million to $13.7 million and restaurant-level profit margin of 24% to 24.5%.

Our pricing plans for this year remain modest, assuming no outsized macro changes. We plan to exit the second quarter with approximately 4% overall price and continue to expect price across all channels to be up approximately 3% for the full year. We will continue to evaluate the need for pricing as our dynamic cost structure continues to evolve, but our intention is to take a limited amount of pricing.

On to our full year 2026 outlook. Given the impacts that we've seen in the first quarter, we now expect to open 60 to 65 company-operated Shacks this year as our new Shack openings are tracking ahead of plan and more heavily weighted to the first 3 quarters of the year. We continue to expect total revenue of approximately $1.6 billion to $1.7 billion, driven by low single-digit same-Shack sales growth year-over-year.

Given headwinds in the Middle East, we now expect licensing revenue of $57 million to $59 million. We still plan to open 40 to 45 licensed Shacks this year. We expect restaurant level profit margin of 23% to 23.5%. We are planning for food and paper inflation to be down low single digit year-over-year after accounting for our own supply chain strategies. Beef inflation is expected to continue at the high single-digit levels. We expect labor inflation to be in the low single-digit range. G&A investments are expected to be toward the higher end of our guided range of approximately 12% to 13% of total revenue to support our strategic investments in growing the business and driving greater brand awareness.

We continue to expect approximately $28 million of equity-based compensation expense with about $25 million in G&A. We expect full depreciation of $124 million to $128 million and preopening of approximately $26 million to $28 million. We expect net income of $50 million to $60 million. Altogether, we now expect adjusted EBITDA of $230 million to $245 million, representing 10% to 17% growth year-over-year.

Thank you for your time. And with that, I will turn it back over to Rob.

Thank you, Alison. I want to thank our teams again for their hard work and passion for Shake Shack, which is the engine behind our ability to achieve our long-term goals. Thank you to everyone on the call today for your interest in our company.

And with that, operator, please open up the call for questions.

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

So just on the first quarter comps, and can you elaborate on the underlying cadence that you saw through the quarter? Any changes in consumer behavior that you've seen more recently that might be tied to higher gas prices and the Iran conflict? But also maybe provide some more color on how the value initiatives like 135, Chicken Shacks on Sundays performed in the quarter. And just curious how that might be positively impacting value perceptions or frequency among certain consumers.

Thanks, Brian. Great question. We had relatively consistent sales rates throughout the quarter. We didn't see significant changes. We did see a little bit of softening in the back half of March, but not at a significant rate. And so we were -- we made a lot of our investments in February behind the launch of our Korean launch and some of the innovation that we were planning. So most of the weather impact we saw was January and March.

We had anticipated even higher sales heading into Q1. So we made a lot of investments heading into Q1 with a sales plan that we would have achieved had we not seen those weather impacts. So our app and digital channels continue to drive significant value for our guests and are growing rapidly.

We've seen over 35% growth in our digital channel entrance rate, so 35% downloads of our app, and that is driving a lot of our traffic growth. And we feel great about that. We feel like that is a long-term investment that we're making. It is not a short-term promotion. These folks are coming into our digital community and they're staying. And their frequency is higher than our nondigital guests.

And when you think about the value prop that we offer today in our app, you can get a Shack burger fries and a beverage, a Coca-Cola for around the same price as you can get a lot of our other competitors for the same thing. So on average, an $8 Shack burger, $3 fries and $1 drink, you're talking about a $12 combo meal, if you want to call it that, we don't call it that. That makes us really competitive. That puts us in the universe of other brands that can persevere through these value challenged and value-oriented times.

So we feel great about level setting that value equation. We also feel great about launching very premium culinary innovation. I would tell you, and I highlighted in the comments, we launched a $12.99 BBQ Rib Sandwich a week ago, and we're seeing huge demand for that innovation at that price point.

So we really feel that we can play at both ends of the barbell. We can deliver great value on our core and continue to drive traffic through new guest acquisition and repeat, but we can also drive frequency and check growth with our most engaged guests through our premium innovation. So we feel like the sales engine is in place, and that's why we've stayed committed to investing behind it.

Our next question is from Christine Cho with Goldman Sachs.

Rob, it's really encouraging to see 3 consecutive quarters of positive traffic growth and really appreciate the quarter-to-date color. But could you elaborate on the key factors driving your confidence in that Q2 same-store sales growth guidance of 3% to 5% as well as the sustainability of this momentum through the second half of the year? And I think you mentioned a potential lift from the World Cup. How much of that benefit is currently embedded in your guidance?

Yes, you're welcome. So we are highly confident in our guide for Q2, driven by what we're seeing both on our core business with our app driving a lot of growth and strength in our digital channels, complemented by the success of our premium LTO innovation. So we are -- we saw last week with the launch of this innovation, we saw 8% comps and 5% traffic.

So we are seeing huge demand for the culinary forward innovation that we're bringing while underpinning that being able to go out and also deliver a great value proposition for a different consumer and primarily a newer consumer, right? Our new guests, when they come to Shake Shack are going to want to try the best burgers in the world. Like that's what they come for. They come for the Shack burger fries and Coca-Cola.

And when they get there, we have to have a value proposition that allows them to come in and feel great about the money that they paid for that. And so that's what the app is designed to do. And we're using that app as a guest acquisition tool. But we also need to continue to differentiate ourselves in the space.

We are not going head-to-head with the likes of the QSR value players from a holistic business proposition. We are going to continue to offer premium ingredients and culinary innovation and the best hospitality in the business with great assets. So when our guests come, it's a different experience than you typically see in traditional QSR. So that balance is working, and we're going to continue to invest behind it.

On the World Cup side, I mean, we're not going to get into specifics about what our model looks like. But our -- the markets where the World Cup is being played are all markets where Shake Shack has a high degree of penetration. And Shake Shack in markets where we have a high degree of confidence in our ability to drive traffic to our restaurants regardless of whether there's the World Cup or not. So that influx of traffic is just going to benefit and accelerate the business that we do in those -- some of our best markets. So we're really excited about Q2.

As we look to the back half of the year, we have more innovation coming. We have great items across our shakes, beverages, core sandwiches, and we're going to continue to invest in the marketing fuel that is driving a lot of this traffic.

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

It seems like your same-store sales are implied to be a little bit slower in the second half of the year versus the first half of the year. So can you sort of speak to the confidence in hitting that full year margin guidance of 23% to 23.5% as sales moderate a little bit in the second half of the year?

And maybe how you're thinking about that split between COGS, labor and other OpEx? I mean, is it about COGS deflation that's going to drive the majority of that expansion? Or how do you want to think about that?

Yes. I mean I would tell you that the 50 basis points growth that we had in Q1 was a bit muted given some of the revenue shortfall that we saw from some of the weather. So just the leverage impact. As we look forward, we continue to be able to -- we continue to see the path to continue to expand those margins.

We have a lot of supply chain work going on that is already flowing through in a big way. So obviously, beef prices are elevated, continue to be elevated, although the rate of growth on the beef pricing that we're seeing is less than it was last year. And we're actually seeing a lot of cost mitigation and other items in our basket. And some of that is the macro markets and a lot of it is the work that we've done in our supply chain. So from a cost side, we're doing a lot to mitigate the cost of the inputs into our business model.

On the revenue side, you're right. We delivered 4.6% comp in Q1. We're guiding to 3% to 5% in Q2. We're guiding to low single digits for the year. So that does imply a softer comp in the back half. And the reason for that is we're going to start lapping some of the marketing investments that we made in the back half of last year versus being fully incremental. So we're accounting for that.

We still have a lot of confidence in our ability to drive strong performance on the top line. We're seeing continued momentum build. So we want to make sure that both our broadening of our EBITDA guide as well as the reiteration of our low single-digit comp guide takes into account some of the macro risk. I mean the reality is none of us know what's going to happen tomorrow, much less what's going to happen 3 months from now. So there's consumer sentiment driven by a lot of the macro factors. There's cost in commodities driven by macro factors.

So we really thought very carefully about our guidance for this call because we want to make sure that we're informing our investors that we are very confident in our organic business model, but we recognize that there is volatility in the marketplace, and we want to express our guidance and show the risk of that volatility in that guidance.

Our next question is from Brian Mullan with Piper Sandler.

Congrats on the CFO hire. Congrats to Michelle. Related to that, Rob, last call, you said the new CFO would, I think, share some sort of G&A plan when he or she begins. Just to better understand, has that plan already been largely formed? Or would the new CFO need to kind of undertake that work from scratch once she begins? And you talked about Project Catalyst in the prepared remarks. I just -- are these one and the same? Or are these kind of just 2 separate topics? Any color would be great.

Project Catalyst will definitely be an asset for us as we create G&A leverage moving forward. We have built these tools that I highlighted in the comments, and we shared with our Board last week, and we rolled out to our team members 2 weeks ago. The technology -- we've made a lot of investments. Like I want to be clear.

The G&A is up $13 million this quarter versus a year ago, all right? Like I don't think about that lightly. Some of that investment was the Operations Summit that we had this year, which we haven't had before. So we had to obviously pay for that. But we felt like it was important for -- to recognize the great job that our operators did last year and lay out our vision for the future. So that was incremental.

We obviously are investing in marketing, but we're also investing heavily in tech and Project Catalyst is a big part of that. And the infrastructure that we're building is going to make us dramatically better. It's going to make us better from an operating standpoint. Our operators today don't have a lot of the tools that they need to make real-time decisions.

Our above-restaurant operators are spending huge amounts of time pulling reports and sourcing data to be able to have conversations with our GMs about their business. All of that time is going to be significantly reduced. And our folks in the field are going to be able to have real-time information to make informed decisions. So that's going to improve the quality of those decisions. It's also going to reduce the amount of capacity necessary to build those conversations.

So there is a huge amount of value creation in Project Catalyst for us. And so to your original question around Michelle, Michelle is going to come in and have a lot of great work on her plate. And she obviously has all the experience and all the capabilities to be able to contribute in a big way to the work that's going on here. G&A, we obviously have a plan. We have a road map. We have things that we're doing and how we're thinking about it for the balance of this year and moving forward.

But Michelle is absolutely going to come in and weigh in on all of that and have a point of view. Michelle and I are committed. We had a big discussion about this. We're committed long term to growing EBITDA faster than revenue and making sure that we're continuing to enhance our operating margins as a company. So that's going to be the work we're doing.

And in order for us to continue to do that, we have to get better on the G&A line, but we have to make sure that we're making the right investments to drive the long-term outcomes. And right now, it's all about battling for share in this marketplace. we cannot afford to lose guests right now. And so we are making those investments.

And yes, none of us are super excited about the way the EBITDA showed up this quarter. There's a lot of moving pieces there. There's a lot of timing. Opening up a lot more restaurants this quarter cost us a lot more, but we wouldn't make the decision not to do it. So we made some decisions knowing that this was going to be the outcome, but we have the most confidence we've had on the path forward.

Our next question is from Peter Saleh with BTIG.

Rob, I did want to circle back on that last comment you made on the decision to pull forward some new unit growth. Can you guys elaborate a little bit on that decision and maybe the impact that you saw in the first quarter from pulling forward some new units? And then I had a quick follow-up as well.

Got it. So it's not necessarily that we pulled them forward. We just built them better, faster. So we obviously guided to a range for the year and gave guidance on how many we would open in Q1. And we're just getting better at opening restaurants, frankly. We're getting better on the construction side, on the equipment procurement side and on the operations and preparation it takes to open up a restaurant successfully.

So we're just moving faster, and that's why we're able to take our guide up for the year. It's not just pulling forward from 1 quarter into this quarter. It's actually building restaurants faster. So with the same quality. So that really -- it wasn't as much a pull forward. It's just we're accelerating.

On the amount that it cost, I mean, we opened 4 more restaurants than the midpoint of our guide. So you can kind of do the math on historically what we -- our preopening costs are for those restaurants. And it's not exactly 1:1 because we have a lot of preopening costs that flow from quarter-to-quarter because we're incurring preopening costs right now for next quarter.

And as you think about the rate of acceleration and the fact that we're opening up so many restaurants in Q2, some of those preopening costs actually hit Q1. So that acceleration is great. We wouldn't change it. We're going to continue to build more restaurants. We love the returns. But it is a different cost profile on a quarterly basis, which did impact our results in this quarter.

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

I guess maybe just 2 questions on the margins. One is you mentioned that cost of goods were -- the inflation was negative low single digits, but you did see some margin pressure there. So is that promotions or the in-app value menu? And I guess the related question is, as you think about supply chain initiatives, and I think you said those will be the primary driver of margin expansion going forward versus labor. The dynamic was reversed in the quarter. So what -- I guess, what's still ahead of you? And how should I think about sort of the mix of those 2 margin components in the next few quarters?

Yes. Great question. So we did grow the margin 50 basis points, right? So we did make improvements. It was -- when we say we missed on margin, it's just relative to our guide. So we did anticipate higher margins than we delivered despite growing the margins 50 basis points. And a lot of that was just sales deleverage relative to our plan that formed our guidance.

So we came into this quarter with a significantly higher sales rate than what came -- what the outcome was. And that was primarily the weather. And if everyone recalls, we had some bad weather in 2025. Q1 2025 was not a great quarter for anyone, wildfires, blizzards, the whole thing. So we didn't plan for a huge negative weather impact in Q1.

So if you add that 240 basis points to what we delivered, it's pretty strong comp growth. And so our plans were based on that. The investments that we made in marketing, the guidance that we gave on margin was driven by what we anticipated on the top line revenue. And when that revenue didn't come through, you saw some -- you saw less than -- it was 10 basis points. It's not like we missed it by 100 basis points, but we take it seriously, 10 basis points relative to being within the guide.

And the supply chain is driving a lot of the margin right now in addition to continued operational improvements. We've done a ton of work, a ton of work. And that work has also required G&A investment. We had to rebuild a procurement team. We had to hire distribution people. But all of that work is why we have a very high degree of confidence in being able to deliver at least 50 basis points of margin enhancement throughout the rest of the year.

Our next question is from Jeff Bernstein with Barclays.

This is Anisha Datt on for Jeff Bernstein. As you prepare to launch a loyalty program by the end of 2026, what customer or behavioral insights have been most influential in its design? And how will the program differ from purely points-based or discount-driven offerings?

Yes. So we've been thinking a lot about -- it's a great question. We've been thinking a lot about this. And we have a big decision to make on -- does the [indiscernible] loyalty program, do they just kind of turn into one thing? And we made a strategic decision that, that's not going to be the case. So the app as it list today is going to be a continued way for us to drive value and acquire new guests.

The loyalty platform is really intended to drive brand affinity, brand engagement and frequency amongst our most valuable guests. So those 2 objectives will drive a different approach to our app and our loyalty platform. Now the folks that are already in our app will all transition into our loyalty platform because they're current guests. But we will communicate and approach the promotions and marketing that we do on the app differently than the loyalty platform.

So the loyalty platform will not just be a way to send discounts. It will actually be a way to drive brand engagement, giving loyalty members unique and special representations of hospitality to drive further engagement, drive affinity and drive frequency.

So we're looking at all kinds of different opportunities to do that, whether it's through some of our partnerships with some of our things we've done with partnerships and collaborations in the past, whether it's offering first access to special things that we do. So all of those things will flow through our loyalty platform and the app will kind of stay as a new guest acquisition tool.

Our next question is from Margaret-May Binshtok with Wolfe Research.

Just a 2-parter here. I just wanted to ask a little bit about the paid media that you guys have done, the location targeted paid media, how you guys are seeing that tracking in some of your newer markets versus more established markets?

And then just wanted to follow up on the remodels that you guys have mentioned are underway, I think, in New York City. Any early reads on what you guys are seeing and any sort of cadence for the rest of the year?

Great question. So our media, we don't have big national market media budgets. So we have to be very choiceful on what and where we invest. And so right now, our media is invested in 2 ways. One is guest acquisition through delivering a value proposition that's compelling for new guests, and that's primarily marketing our app and our 135 platform.

And then it is driving frequency and check benefit through our LTO innovation. So it's a balanced approach in different markets depending upon our market penetration, depending upon the number of guests that we have in the app platform today, which is how we kind of measure the number of current guests versus new guest potential. That will drive a lot of the decisions on how we make -- on how we invest our media.

On the remodels, we've been really pleased. We're continuing to invest in remodels. We're 22-year-old company now, and we're starting to see some of these great restaurants that have been in markets like New York for a long time and continue to deliver great revenue and some of our best margins, they get a lot of traffic.

We want to make sure that, that traffic is when they show up, they're getting hospitality. And so it's not about making everything brand new and fresh, but it is about making sure that the restaurants feel cared for, making sure that the restaurants are welcoming.

And then in addition to that, we're also leveraging remodels as an opportunity to optimize the back of house, right? We've done a lot of testing on kitchen and equipment and kitchen flow. And so when we go in and we know we're going to touch the restaurants, we're going to make sure that those restaurants are set up for the most productivity possible. And so that also can be a revenue driver as we increase throughput because of optimized back-of-house flow. So we're making both of those investments, and we're really happy with where we're at there.

We have reached the end of our question-and-answer session. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

Good morning. I'm Dennis Geiger, restaurants analyst at UBS, and I'm pleased to be joined on stage by Rob Lynch, Shake Shack's CEO. Also in attendance Alison Sternberg, who runs Investor Relations.

Shake Shack is a modern-day roadside burger stand with over 400 domestic locations and over 230 international locations. Shake Shack maintains one of the industry's largest growth opportunities and a robust global unit development opportunity, a focus on digital and menu innovation, and a margin expansion story, even in an elevated cost environment. With that, Rob, thanks so much for being here. We appreciate it.

Thank you, Dennis. I'm super happy to be here.

Great. Terrific. So maybe let's start, Shake Shack had another really strong year in 2025, off to a very strong start again in 2026, strength across both the top line and the bottom line. Could you kind of first talk about the top line momentum in the U.S. that you've been seeing? And how you're thinking about maintaining that top line momentum going forward?

Yes, for sure. It's been really exciting to see the business resilience given the type of weather we've had in the last 3 months. And I keep saying, I want to stop using the W word, but it just keeps coming back and coming back, especially with our footprint as it sits today. But I might surprise you by saying the thing -- the most foundational thing driving our top line performance is our operation. We have spent an inordinate amount of time building an operations capability that it shows up a lot on the margin and the bottom line.

But what people may not necessarily always take account of is operation is a foundation of sales growth. If you send your guests to the restaurant, and you have a throughput issue, obviously, that's costing you sales at that moment, but it's actually costing you more in lifetime value of that guest because the time that it's going to take them, the experience they're going to have is going to decrease their frequency. And we've seen that a lot on our business in the past, where we open new restaurants. We have a huge clamoring, whether it's in New York or now in our new markets, a huge number of people show up and they have an experience that they love the food, but it took them 30 minutes, especially when we started opening drive-thrus.

So the biggest unlock for our sales growth has been our operational improvement. And there's the process improvement, but there's also a lot of other things that we're doing that are going to continue to be a solid, sustainable growth engine for us. I'll talk about some of the -- right now, we're developing new packaging. This brand went through a really tough time in the pandemic, everybody did in the short term, but for this brand, which was dine-in only back then, they had to make a lot of tough decisions just to survive. And I give them all credit.

I think there's some talk of us taking some quality out because we've improved our supply chain or taking labor out. Well, a lot of that -- a lot of things were done during the pandemic for this brand to take some cost out because the margins got impacted in such a bad way. We're actually looking at everything across our supply chain and our operations to deliver the absolute best quality we can possibly deliver.

So we're actually adding cost in, in a lot of regards, packaging being one of them, ingredients being one of them, another, time. We're still focused on decreasing our speed of service. Yes, we increased our cook time on our fries 15 seconds, just to make sure that they're crispy and golden brown because fries used to represent 30% of our guest complaints, and today, they're less 10%.

So I tell you all that because it really is the foundation and the sustainable part of baseline volume sales growth. You have bad operations, you can't grow. We can -- I can tell you probably what the question was more focused on, like the marketing and stuff and I'll talk about that. But you can only invest in marketing when you have confidence that those investments are going to deliver return. And it's not just about driving foot traffic that day when you turn on an ad or you send out a promotion, it's about the lifetime value of that guest.

And so when -- given our -- we're comfortable in our operations, we are delivering great margins, now is the time where we can make those investments with confidence, and we are making those investments. We're making them across a lot of different platforms. So paid media, first time ever we've done top of funnel media. Really, all the marketing that has been done at Shake Shack in the past has been very low-funnel, conversion type of marketing that is really just about search and getting people with an offer to come in and trigger it that day.

Like we're actually investing and creating the positioning of the brand in the marketplace because we believe that we are an N-of-1. Like we believe -- and I used to talk to my friend who ran Chipotle for a long time and he'd say, "Rob, we're an N-of-1, we don't compete with anybody". And I may not have that point of view, but we really believe that we have the best food in the world, and we are a different experience. When you go to Shake Shack, you feel different than when you go to traditional QSR.

So we believe that if we bring people in, we take care of them, they're going to come back and it's going to create lifetime value. So that's all about the top funnel media. But the biggest thing that is driving our traffic right now is our $1-$3-$5 promotion in our app. And people are like, well, is it the right guess? Are you just buying the traffic? Like it's absolutely the right guess. Our app adopters are highest lifetime value adopters. They have the highest frequency. They have the highest check average. So we are leveraging our highest-margin items. So when we promote drinks at $1, fries at $3, we're still making money on that.

So it may be a bit -- a little bit margin dilutive, but it's profit accretive. So we're making penny profit while bringing in people into our most valuable ordering channel. And I'll tell you, I've been in marketing for a long time. I can't believe how effective it's been. Our traffic on our app since we launched is up over 50%. The guests that are coming in, this is what refutes the idea of like these are just value users that you're buying. Our guests that are coming in, we're already seeing a significant increase in frequency, 900 basis points increase in frequency since we launched this in the app.

So it really is about the foundation of operations, and then you layer on these things to bring in people to a great experience with great assets and that's the recipe for long-term sustainable sales.

Terrific. A lot going on, and I want to unpack some of that, Rob, but that's a great start here. Let's focus on innovation, menu innovation. You've done a tremendous amount since you joined the brand. Maybe can you comment on Shake Shack's LTO strategy for those in the audience that maybe are a little bit less familiar, already seeing very good success with that strategy, and perhaps anything on the high level on how extensive that menu pipeline is for 2026 and beyond?

Yes. I mean Shake Shack has always done LTO and has always been about culinary innovation. I mean, that's been kind of their bread and butter. I know that everyone loves the burgers and that's our core, but Shake Shack has always been a culinary forward recipe-driven innovator. And part of that is because everything we make is made to order. So when we bring an LTO, when we bring culinary innovation, it's not as disruptive to the assembly line because we don't necessarily have an assembly line, right? It's a lot harder for some of our larger scaled assembly line, assembled food, QSR competitors to do innovation because it has to fit in their assembly line.

When we launch innovation, so I learned this at Taco Bell, that's where I started in the restaurant business, where they were launching 12 LTOs a year, fast-cycle innovation, never seen anything like it. I started at Procter & Gamble. We did a lot of innovation. It was nothing like Taco Bell. I took that model. I brought it to R-B. We turned R-B around with innovation. We're doing that here, but we're not doing it at the same thing. Like we're launching big protein, big sandwich innovation, 3 or 4x a year.

Some of those are going to be evergreen, tried and true like we have the Korean menu in right now, which always does well for us. The truffle is always going to be something that we bring back on a regular basis. Some of those are going to be new to the world. We've got a new to world innovation coming in Q2 that I am so excited about. I cannot wait. This is being webcast, right? So this is public domain, so putting it out there.

And then we do supplemental innovation, I call it supplemental, which is such a weird word, but it's not like the focus of our LTO, but it's amazing when you hit that right, what it can do because there's a lot of incrementality in that supplemental innovation. I'll use the Dubai Chocolate Shake as an example of that. That was something -- I was actually in Dubai, and they brought it out and they're like, 'Look, we've built this thing". It's going to -- and I'm like holding it and I start cracking, I'm like, "Oh, my, there's a marker", I was like a kid in a candy store. So now we've taken that innovation, and we've built a whole platform around it, right?

So we had the True Love Shake for Valentine's. We're going to have an amazing Halloween crackable shake. So those are not going to be the thrust of our LTO calendar, but they're definitely complementary and very incremental. And then lastly, what I'll tell you about product innovation, and I'm the first to admit when I screw up, and I screwed up a little bit in Q4. We launched Big Shack, which was an amazing hit. We had sold a ton of them. And I was like, okay, great.

Like when I launch innovation, I want it to be a mix benefit, right? I want people trading up. So that reduces your need to take pricing. And you can get people to self-select out of lower-priced things and the higher-priced things because they want to versus charging the same people more for the same stuff. That's a very healthy model. That's been my model, my whole career.

So I launched the Big Shack and huge demand for it, but I priced it at $10 and did that for a reason, $10 is kind of a threshold. I want everybody to try it. We're so excited about it. And I anticipated a lot of people trading up from a $8 single Shack burger, and that would be mix accretive and profit accretive. And what we saw was that we had a lot of people trade in from the double and we -- our double prices range anywhere from $10 to $14. So we had a little bit of mix dilution in December because of that.

I learned from that. I should have -- I learned it 15 years ago and I shouldn't have made that mistake. But moving forward, like our intention is to bring premium innovation across the shakes, across the beverages, across our sandwiches and burgers and proteins and sides where we are going to allow people to self-select into premium products, which will drive mix benefit, which will further decrease our reliance on pricing.

And I just want to make that point now. We are doing everything we can to improve our value equation. And I've always thought of the value equation as B equals benefits over price. That's what P&G teaches you, right? Here, I talk about it as B equals, EH over price, enlightened hospitality. And everything in enlightened hospitality goes into that numerator. So whether it's your product quality, whether it's your culinary innovation, whether it's the hospitality that we deliver, that all goes into that numerator, right?

And obviously, the denominator is price. And we are doing everything we can to be as fiscally disciplined corporately in our supply chain and our operations. So we don't have to take price. And we took less price last year than we've taken in the last 5 years. And we talk about it as 4%, and that's kind of what the base increase was, but we also increased our promotions and our discounts, the battle for the traffic in that -- in the industry. And so our net pricing was actually only 3%. And this year, we're talking about kind of trying to get to about 2% with net pricing would probably get us down in around 1%.

So we have been able to mitigate -- not only mitigate the highest level of beef inflation that we've seen in 20 years, while taking less pricing. We've actually -- we actually drove 120 basis points of margin growth last year. So we are going to stay disciplined in our operations. We are working hard on our supply chain, and we are going to hold on our pricing while delivering all these additional things into that numerator to improve our value equation and take share from the competitors.

Terrific. I want to pivot for a minute just as you talked about the price piece there and the mix. And just again maybe for a reminder for those that are less familiar how you think about that breakdown of the comp going forward between the traffic and the price and the mix, sort of what the target looks like for you guys going forward?

Yes. I mean we have a long-range guide of low single-digit comp growth. I didn't come here to do low single-digit comp growth, like we aspire to do a lot better, and we're working every day, but that's right now where we see our forecast. And the composition of that comp is call it, 1% to 2% pricing, 1% to 2% mix improvement and 1% to 2% traffic. So if all those hit on the high end, then we have the greatest year ever. If all those hit kind of on the low end, then we deliver kind of 2-3%. And if I can take 0% pricing, I will.

Now that being said, we have pricing power. We have not seen significant traffic decreases when we take in our pricing. We took pricing back in December, and we have really strong traffic in Q1. So we have a great deal of confidence in our ability to take pricing if we see other unforecasted inflation. But we're doing so much in our supply chain right now that we have a plan to mitigate all of this beef inflation. And so this is -- if anybody -- if people could take something away from this, hopefully, you take it all the way, but one of the biggest bear cases for our stock right now is beef prices.

I would tell you that that's the biggest bulk because we've mitigated all of the beef inflation. We've delivered margin growth while dealing with all of this inflation. And anybody who's been in this business long enough knows they're called commodities for a reason, right? They go up, they come down. As the supply goes down, the prices go up, the supply goes up, the prices go down. And I don't know when that's going to happen. I don't know what the next war is going to be. I don't know what screw worm is doing in Mexico. I'm not down there on the order kind of checking that out.

But like I do know that at some point, there's going to be incentive for ranchers to raise more cattle. And it's right now if they can do it. But as that happens, the beef prices are going to come down. And we are going to flow all of that through. Now we're going to make decisions on how much of that would drop in the margin and how much of that we reinvest in top line growth because I think there's a huge amount of continued potential in driving our top line.

And these last 3 quarters where we've grown traffic, the first time we've grown traffic for 2 quarters in a row in the back half of 2025, and I think since 2021 when everyone was growing traffic because there were $7 trillion to be spent. That is a testament to the marketing we made, and we're just like dipping our toe there. It's the least amount of marketing I've ever had to work with in my career, but that's what makes it interesting, right?

Just trying to figure that out. So as those beef prices come down, we're going to have a great opportunity to determine do we continue to flow that into our restaurant margins? Or do we reinvest that back into the business?

Let's talk about marketing maybe because that was a big kind of initial focus last year as you ramped that some and great results in the back half of the year, as you mentioned. How do you think about marketing as far as leaning in more on the marketing side? What's the potential longer term as you think about the marketing opportunity for the brand?

So we have to earn it. Like marketing is a privilege, not a right. So we have to grow our revenue and grow our profit in order to have the investment. We don't have a franchisee marketing fund to go out, right? It comes straight out of our P&L. So every dollar I spend has to deliver returns. And those may not be like returns that day, but returns on bringing in people who create lifetime value, right? So -- and we look at it from top to bottom. Some top funnel stuff that has lower return on advertising spend today but can create greater long-term returns and looking through the funnel at the conversion cycle and where we do things to drive traffic that day.

So the other thing about the marketing is hit my G&A line. And so I get tagged with this G&A growth guy, right? And look, once again, this is an amazing brand that Danny started and built this beautiful thing. And the fact that this company persevered through the pandemic is a testament to the leadership in place at that time, but also need to recognize that while it's scaled, it's scaled with the people who kind of built the company. They didn't have a lot of the processes and capabilities and infrastructure necessary to get where we aspired to be.

So my G&A line is a reflection of investments in operations, which we are -- have gotten 100x return on, investments in supply chain, which we are -- which is making the year for us this year with the beef prices, investments in marketing, which is driving our traffic, investments in tech. I mean, we have an unbelievable CIO that has changed the game for us. I hired him, it's been about a year now, and he is a get things done -- a lot of tech people are like, "ah, it takes so long. Oh my gosh, it's going to cost so much. How are we going to resource this, we're going to have to not do this to do this".

This person is like, "show me the problem, and I'm going to show you how tech's going to solve that ". So we've invested in our technology platforms and our people. So yes, my G&A is inflated versus when I got here. But we have built the foundation. We've built the model. I committed in the last earnings call that '26 will be the last year that, that happens. We have the plan in place. We will start to get leverage in '27, and we will continue to deleverage moving out as our revenue grows even faster and we hold and don't have to build out these incremental capabilities.

So I tell you all that because marketing is a function of G&A. Right now, we're planning for -- to be between 2.5% and 3% on a run rate basis. We see that we're getting great returns, it will probably be up near 3%. If we see that we're getting less, it may drop below 2.5%. But that's kind of the target. And the amount that the marketing will grow every year will be dependent upon the amount of revenue growth that we drive. And the thing that makes it really excited -- sorry, the thing that makes me really excited is we're going to drive a lot of revenue.

Because the #1 driver of revenue growth is new store opening. And you may have a question for that when we get deeper on it, but like we're going to open -- we opened 45 Shacks last year. It's the most we've ever opened in a year. We're going to open up 55 to 60 this year. That will obviously be the most ever, and it's just going to keep going because we also invested G&A in building out that capability. Our real estate teams, our design teams, our construction teams, all in place, all executing in an unbelievable level.

We took 10% of our costs out of our restaurants last year, where we went from $2.2 -- it's gone from -- in 2 years, we've gone from almost $2.5 million to $2 million in a period, I don't know if any of you are building any structures lately, but it's not a deflation environment in construction. And we have decreased our costs dramatically, increasing our cash-on-cash returns because margins are up, revenue comps and revenue are up, costs are down.

Like if this was a private company, that's the biggest story. I mean, that's where we -- our return on invested capital is just going through the roof, and that's exciting, but it's also exciting because it's driving a ton of revenue, which will then allow us to increase our marketing investments on -- while keeping the rate the same or even lower which will drive even more top line growth.

I want to unpack the development opportunity in a few minutes as well, of course. Let's tap it maybe over just to the macro, lots of focus, obviously, from investors there. Shack's done extremely well in a difficult macro, very resilient versus most in the industry. How are you thinking about the macro and where we go from here, how it impacts the brand? And maybe on that stimulus question, anything that you're thinking about on the stimulus side of things, how it impacts your customer and potentially your business this year?

Yes I think I know, given Shake Shack's history, we always had a kind of over penetration in New York, L.A., Miami, Chicago, and that's always created -- it's wonderful and it's challenging at the same time. Obviously, the weather in the Northeast this year has disproportionately impacted us, which is why I'm so excited about doing 4.3% in January. But it also can color your lenses on value and pricing because when your whole executive team is in New York and most -- a lot of your Shacks and revenue are in New York and Los Angeles and Miami, you start thinking like, hey, a $10 burger isn't that big of a deal, right.

I'm from Pittsburgh, Pennsylvania. Like nobody at Pittsburgh wants to spend $10 for a cheeseburger. So like -- I like to think that -- I am sorry. It's an amazing burger. It's the best burger in the world. So -- but -- and also in a lot of these markets, these expansion markets, we haven't necessarily told our story as well like historically. So people don't necessarily know that we use 100% Angus, no hormones, no antibiotics. And if I'm being honest, some of those people don't really care about that. They just want a great tasting burger that fills them up for $10 or less, right?

And so we are really focused on going into these markets and diversifying our footprint, which is really important for us. And I think historically, the belief there is that we couldn't do it because of our price points and our cost structure and all those things. We've proven that we can. I mean we are succeeding in this macro environment in Rochester, New York; Pittsburgh, Pennsylvania; Oklahoma City, Oklahoma, like we're going into markets that people never thought there'd be a Shake Shack and blowing it out of the water.

So we have a lot of confidence that we can go into these markets. And even though the household incomes are a bit lower, we believe that we're creating value, not necessarily we've got the right price for these folks, but we've got the right value equation. Our Shacks are beautiful that we're opening up, our hospitality is on point. Our price points are -- we're holding on them. We're giving promotions and incentives to bring the right people into the Shacks. So these macros have been challenging for everybody, and there's been this value war and to a certain extent, we're a little insulated from that because of our current footprint, right?

We have New York and L.A., higher household incomes. Everyone knows the higher-income folks are doing a little better and spending a little bit more. But we don't want our brand to be an exclusive brand. I'm not the marketing guy that says, "I need an exclusive lifestyle brand". Like our company started in a park, raising money for charity with an art installation. Like if that's not inclusive, like I don't know what it is. Everybody had to wait in line for those burgers. I get stories from every -- people that are billionaires telling me about the stories about waiting in Madison Square Park.

Like we want to create an inclusive company where everyone in the world can come and experience the best food in the world. That we truly believe that we sell the best burgers, whether it's taste or quality. And so I want everyone to be able to experience that, whether you're in New York or Oklahoma City, and that's why I focus so much on getting that value equation.

And just diving into that a bit, and you talked about $1-$3-$5 earlier and how successful that's been. How do you think you are positioned on value now? Between the $1-$3-$5 and everything you talked about earlier, are you where you want to be from a value perspective? Do we see a bit more in the way of new value strategies this year? Or for the most part, are you pretty comfortable with how you're positioned where the scores are and what the strategy is?

Yes. I think that's another thing. A lot of people talk about like, "Oh, my gosh, Shake Shack is doing discounting. That's not Shake Shack and they were just buying traffic or something like that". But we sell 10% of our business on discounts. The average in QSR is 25%, and that doesn't even count combos, right? I mean everyone in here knows that drive-thru business is all combos. They don't count that in that percent discount, even though there's a discount applied to combos.

So like we're at 10%. We are doing it in a surgical strategic way. We didn't come out and say, "Okay, McDonald's doing $5 meal deals. So we're going to do $5 Shack burger" and crater our business and that on the comp, that our traffic was going to offset the check decrease and the margin impact. Like we went out and we figured out a way to deliver a promotion that drives an inordinate amount of traffic without cannibalizing our core business.

So $1-$3-$5 has -- and while it's doing that, it's laying the foundation for future lifetime value. And every one of those new app users is going to seamlessly move into our loyalty platform that we launched at the end of the year. So we are going to have loyalty, there will be an incentive structure in that loyalty. So we're going to continue to use the right level of tactical surgical promotions and incentives to bring the right people into the restaurants because we believe when we get people there, they're going to keep coming back because we have the best food and now it doesn't take 10 minutes to get a burger.

Our service times have gone from over 7 minutes to under 6 minutes in the last year. And we are never going to be as fast as QSR because we make everything fresh when you order it. It takes 3 minutes to cook a burger. So -- but all of those things are contributing to a great guest experience that if we -- the more people we drive in, we know it's going to be sticky. We know that they're going to come back and our frequency is going up as a result of that. So we'll use the right amount of incentives to make sure we get the right amount of traffic.

Anything else on the loyalty side of things, to your point there, for those of us that are high-frequency users? [indiscernible] any thoughts on initial benefits yet? Or it's a little bit early and there's not a whole lot more to say on the loyalties?

Yes. I would say it's still early. The only thing I would say is that my vision for our loyalty platform is that we can deliver enlightened hospitality through digital. Like I don't want it to be just applying like points to an app. We already have or just discounting and sending e-mails, who needs another e-mail. Like it really is -- I really want to find a way to build a comfortable connection with our guests. And so loyalty, I think you have to have an incentive structure. I don't know if anybody in here has kids or teenage kids, I have 3 teenage kids. They're like, "Dad, like we love Shake Shack, but you got to give us some points. We don't go places that don't give us points".

And I'm like -- and these are not like super price-sensitive kids. So trust me. They are at college and I'm getting DoorDash 3 times a day. So yes, so we are -- I want it to be a connection point. That's kind of the essence of our company and where we started and -- so if it just becomes transactional, we will have failed. And I've laid down the gauntlet and told everybody we're launching it this year. So it's hard because we could pop in a points-based program and we'll start to see some traffic improvement or what have you, but I don't -- that's not good enough for us. We have to build that connective tissue with our guests to create that lifetime value.

Great. Makes good sense. One more on same-store sales, and I want to shift over to development. Maybe just as it relates to 1Q guidance, you had a terrific January, as you mentioned, even with the weather pressures. February sounds like it's off to a really good start as well. Anything more to kind of highlight, you touched on it a little bit earlier around the strength that you've seen so far year-to-date and kind of where we go from here given the strong start to the year already?

Yes. I mean I would just tell you our guidance, look, there is nothing but volatility right now in everything. I mean I'm really excited that we've been able to deliver consistent, strong traffic growth, consistent strong margin growth. We do a lot of heavy lifting every day to make sure that happens. But I'm also just aware, we gave that guidance before what happened last week. And the week before that, it was Mexico and like all these things.

So we're trying to be transparent and our beliefs on what the business can do, but we're also trying to be cognizant of the fact that we're not in control of everything that impacts our business. I've got a lot of questions on gas prices. What's that going to do to your business? You're a high premium priced burger shop. I actually think we're insulated more from the gas prices because of our footprint. Out drive-thrus is only 10% of our business. Drive-thrus is 80%, 90% of the business for a lot of the QSR folks. So we don't have a lot of drive-thrus and people in New York and -- Los Angeles everybody has a car, but people in New York don't necessarily have a car.

Like -- and we are at the higher income group. So I do think that the gas prices, there's always been a correlation between QSR and gas prices. If you go back and look at when gas prices are high and how our brand performed, we've always kind of done well. So -- but it's just another example of the volatility that it can't be foreseen, so we're trying to be transparent, but we're also trying to be conscientious of the volatility.

Perfect. Shifting over to development, and we talked about some already, but as you mentioned, doing more new opens this year than last and last than the prior year. How about on the TAM side of things on that 1,500-plus TAM on the company-operated Shack side of things. Just talking about the confidence there, you talked about going into some of those smaller markets, et cetera. But just kind of sharing thoughts on returns and what gives confidence to that sizable number and the long runway that you still got to reset on?

So I have 100% confidence, not even -- not a shred of doubt. And I want to see that come to fruition while I'm still here, and I plan to end my career here. So this brand can go into every market and be successful. And right now, the work that we've done on creating a spectrum of formats affords us the opportunity. They not only to go into every market they go into every piece of real estate. Meaning we can go in and build a 2-acre pad next to Chick-fil-A and Raising Cane's and run double drive-through or we can go into a street side, walk up, shop with a storefront with a limited dining room and do primarily takeout and delivery.

Like we have all of those formats. And now we've built a standard kitchen, that works. And I know it sounds crazy, but we've never had that. Like every Shack that was built in the past was some different, fit it in here, do it in here. We'll make this work when we open, like literally. And once again, that's not disparagement. I have nothing but respect for everybody that came before me. It's just the model is different. And so now as we look to scale to 1,500 plus, like it needs to be -- we need to balance standardization and customization.

And our kitchens need to be standard. We need to be able to train one GM in one kitchen. And if they move to another restaurant, they shouldn't have to learn the kitchen all over again, like they need to show up and know how it works. When our new opening -- when our opening restaurant teams come in, everything is set up, they know how it works. That's never been that way. So our flows, our processes are all going to improve once we launch this kitchen at the end of this year.

And that gives us like an engine to go out and build these things everywhere rapidly at lower cost. And -- but I also mentioned we're balancing customization. So the dining room needs to feel like Shake Shack. It's not -- can't feel like a standard box. I talk about clean, comfortable, cared for, right? Whether it's brand new or 20 years old, got to be clean, got to be comfortable, got to look like it's cared for.

Everything doesn't have to have fresh coat of paint on. Sometimes you walk into a restaurant, it's not like all white and bright, and airy and it feels warm like that's amazing. They have a lot of Shacks like that. And there was like a little bit of idea, well, we need to go remodel these Shacks and make them light and bright. I'm like, "No, you don't. Go over my dead body". When I walk into the Shack in Atlanta that is -- has all the beautiful wood on the walls, music playing and TV up there with Sports Center on. I'm like give me -- never forget, it was my first experience, Korean chicken sandwich, and a pomegranate [indiscernible]. I'm like, "Man, this does not feel like QSR, I want to do this".

Anyways, I'm sorry. So I off tracked there, down memory lane. But development look, with the TAM 100% confidence, we've got multiple formats, give us access to real estate everywhere. We've shown that we can make money at different levels of AUV given the different formats, our cost structure to build is down. Now I want to also make -- I want to make everyone aware the cost to build will be something that we evolve how we report because as we do launch these new formats, like this year, we're going to build more drive-thrus and the year after that, we're going to build more drive-thrus and the year after that we're going to build more drive-thrus, and they cost more.

So you may see the average cost go up, but that's because of the mix of the format. It's not because we've gotten sloppy. So my challenge to my team is like, look, "Don't worry about the mix. If we get great real estate, don't worry about our average cost going up". We'll report out average cost by format. So people can see that we're still disciplined and still driving cost out for each of these different types of units. Let's put the Shacks where they need to go that are going to work.

And so when you couple that lower cost and better operating kitchens, higher margins, which we've committed to 50 basis points again this year, despite the inflation and comp sales growth, like the returns just I mean you can't invest your capital better than what we're doing right now. So yes, the development is the thing that nobody really talks about, but if you're underwriting this business as a long-term investment, I mean that's the engine.

To that point, and you just talked about the importance of the restaurant itself and then the dining room itself, and speaking from experience, you know the kids love eating in the dining room. But there are times where, "Hey, would, that drive-thru would be really convenient"? You touched on it a little bit. But just how you think about the drive-thru, how that's gone so far and sort of what the potential is? Clearly, if you can figure this out and you're starting to, this can be a big unlock, it feels like it's all development and...

For sure. Last year was the first year that the drive-thrus delivered incremental revenue. So for 3 years, we have been building drive-thrus that cost more that didn't deliver any revenue above kind of our core Shacks. The reason was because we didn't know how to operate drive-thrus and the experience is terrible. We were looking, when I got here, pick at times, I don't even want to disclose. The most improvement in speed of service has happened in our drive-thrus.

So we -- despite our restaurants and our legacy drive-thrus, not the kitchens, not necessarily being built correctly to flow everything to the distribution point at the window. They're still making all that product. Our new standard kitchen for our drive-thru blows everything to that window. So we're only going to get better. So we have a lot of confidence in the drive-thrus, in making the investments, the incremental investments to build a drive-thru, which will deliver commensurate returns with our core business.

Great. You touched on margins a few minutes ago, driving great margins this year targeted despite all the inflation that you're seeing. So maybe we could talk about some of the key initiatives, some of the key buckets where you're getting the savings? I know you touched earlier on the quality hasn't actually gotten worse. It's actually improved even as you're kind of finding these savings opportunities. So can we just talk about that the margin opportunities and how you look at it this year and over the coming years?

Yes. So '25, the cost mitigation happened in the restaurants on the labor line. We just got way more efficient with how we allocate our labor, now over time, consistent attainment, all those things led to significant flow-through in the restaurants. On the supply chain, we have done a lot of work on the procurement side. We've RFP-ed almost every major ingredient. We brought in new suppliers that increases competition. And I'm a sports guy, played sports my whole -- competition makes you better.

And the competition we've created in the supply chain has improved our quality because we've got new suppliers bringing new ideas and new capabilities. It's significantly derisked our business. When you have a single source of supply, they get hit by a cyber attack or something happens like you are left standing there without a solution. And the outcome of all that is we've also increased the competition driven down costs. So we are mitigating the inflation this year with procurement savings through the supply chain, but make no mistake, there is an absolute baseline of bringing on any new supplier needs to at least hit our quality threshold.

There cannot be a decrease in any of our quality of any of our ingredients. If there's an increase, wonderful, we look for that, but no decrease in the quality of our ingredients. So that's procurement. Moving forward, we're just scratching the surface on our distribution and logistics and freight. That's been managed the same way since we had three Shacks. We have 400 company Shacks. So obviously, it's more productive to [ review ] to our company today than it was back then.

So we should be driving value from the productivity of that. But also, we should be getting better fill rates, better service levels. As we penetrate these markets with more restaurants, it becomes easier to get full truckloads to go from our distribution centers to all of our Shacks. And once again, when you bring in competition, it makes everyone up their game. And so that -- we're just scratching the surface there, but that's going to be beneficial kind of later this year and heading into 2027.

Terrific. Well, we are just about out of time. So Rob, Alison and team want to thank you guys very much for spending time and sharing insights with us, terrific momentum. And looking forward to continuing this year. So thank you so much.

Well, thank you, Dennis. And hopefully, next time we meet, I'll have a new CFO in place. We've got a great search going. We have a ton of interest in that. I mentioned last earnings that we plan to have that position filled by the -- in the first half of this year. We've got great candidates with public company experience, CFO experience, restaurant experience. So it's going to be a lot of fun. That's the last member of our executive team that we have to fill. We've got a world-class team, every one of them I put up against anybody in their functional areas of expertise. So we hire a great CFO, we're ready to go.

Great stuff. Great story. We appreciate it very much, Rob, thank you. Appreciate it.

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, Carry 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 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 park that had fallen into this repair and needed its community to bring it back to life. So what did our founders do? They raised money for that park by selling premium hot dogs, made in one of the world's most acclaimed fine dining restaurants to everyone who is willing to stand in line to order. And they served everyone with the same principles of enlightened hospitality that they were known for delivering in their fine dining restaurants. We aspire to bring that founder story to life every day and through each new Shack that we build. We want to provide the entire world access to the quality of food and hospitality that historically has only been found in higher-priced fine dining [indiscernible] prove that the world's best food doesn't have to be exclusive. In fact, it can be a delicious beacon of hope that brings us all together.

But in order to accomplish this goal, we have to continue to use the highest quality ingredients, turn those ingredients into our culinary forward recipes, prepare our sandwiches, shakes and sides fresh woven ordered and then deliver our food in a convenient and timely manner, all at a great value. Certainly, not a small task, but we are well on our way to proving the food that is prepared fast with approachable price points doesn't have to mean that you are settling for anything less than the best in the world. I believe this endeavor is something to truly be proud of. It's why I'm here.

Now on to our 2025 results. 2025 was a year of strong execution and disciplined growth. Despite macroeconomic environment that remained uncertain for much of the year, our team delivered solid financial results, expanded our footprint with the largest class to date and made important strides in improving our unit economics and guest value proposition. These outcomes reflect the hard work of our restaurant teams and the effectiveness of our strategic initiatives. I can't emphasize enough that we are laser focused on becoming a best-in-class restaurant operations company.

What does that mean to us? It means that we will support our team members so that they can accurately and expediently serve our guests the highest quality, best tasting in the industry at a great value with enlightened hospitality. Our teams have made so much progress in 2025, and I can't wait to celebrate all of their upcoming achievements in 2026. For the year, we grew total revenue by more than 15% and increased our presence domestically and internationally by opening 85 Shacks System-wide and delivered same-Shack sales growth of 2.3% in our company-operated business, all while we expanded our restaurant level profit margin by 120 basis points to 22.6% and drove 20% year-over-year growth in adjusted EBITDA and reaching approximately $210 million.

Our success this past year reflects an investment in and disciplined execution of a focused set of strategic priorities. We strengthened the fundamentals of the business while continuing to elevate the team member and guest experience, driving improvements in operational excellence, laying the foundation for greater quality and cost discipline within our supply chain, and delivering compelling culinary innovation and value. At the same time, we enhanced unit economics through margin expansion and meaningful reductions in build costs, positioning business for more durable and profitable growth.

As stated earlier, operational excellence remains foundational to our strategy. In 2025, we completed the first full year under our new labor model. which is designed to place the right team members in the right roles at the right times to drive both efficiency and more importantly, hospitality. It is not about cutting labor. It is about the optimized deployment of our talent so that we can maximize the effectiveness of it. We want to make sure that our team members are well prepared to take care of our guests during our busiest times and that they are able to do that in a well-orchestrated results-oriented manner.

We've implemented a performance scorecard across our company-operated Shacks, providing visibility and accountability by measuring key metrics across people, performance and profits. As a result of this, we've seen attainment to the labor guide improved from approximately 50% of Shacks meeting targets in mid-2024 and to consistently above 90% in 2025. This isn't about driving out costs. Cost reduction is an outcome, not the overarching goal. Our priority is to help our managers become more strategic and less reactionary to their ever-evolving scheduling needs. It's like any other thing that we do in life.

When you align on a plan, measure results, and continue to optimize in a disciplined and consistent manner. It reduces stress that results from unforeseen circumstances and ultimately improves performance. In turn, you're able to better deal with the unexpected challenges that inevitably come your way. We are highly focused on execution through optimizing deployment, improving throughput and ensuring our teams can deliver great service. We are seeing meaningful success from these efforts, evidenced by reduced wait times across all dayparts and higher team member retention.

Specifically, our wait times improved from approximately 7 minutes in 2023 and to under 6 minutes in 2025, and team member tenure has increased nearly 40% since 2023. Those results would not be achievable if we were simply cutting labor and increasing stress on our teams. Like many in the industry, we faced a challenging commodity environment in 2025 with beef inflation reaching the mid-teens in the second half of the year.

Supply chain optimization was a critical focus as we navigated these pressures and we approached it with a long-term mindset, not by reducing portion sizes or negatively impacting quality but by building a significantly improved supply chain. To mitigate rising costs and protect margins, we accelerated supply chain initiatives focused on diversification and logistics. We conducted the most comprehensive RFPs in our history across key categories and onboarded additional suppliers to foster competition, reduce business risk and of course, to augment quality.

At the same time, we have made significant improvements in our freight and distribution network reducing the time and distance required to transport goods as our footprint expands. These structural improvements enhanced our resilience, improved purchasing leverage and help mitigate inflationary pressure without taking outsized price increases. Importantly, the groundwork we laid in 2025 positions us to achieve additional cost savings and further expansion in 2026 and beyond.

Our progress in operational excellence has unlocked a new level of confidence and capability within our culinary organization allowing us to introduce more elevated menu items and to be highly responsive to evolving consumer preferences and trends. In 2025, we formalized and strengthened our culinary development process by implementing a disciplined stage gate framework to ensure every item meets 3 critical criteria. It must deliver our gold standard of culinary innovation and quality, resonate with our guests, and be operationally friendly in our Shacks and our supply chain.

We have a 12- to 18-month innovation calendar in place, giving us greater visibility and time to optimize our go-to-market planning and training which leads to operational excellence and consistency at launch. This enhanced approach delivered tangible results in 2025. We launched 1 of our most successful LTO shakes, the Dubai Chocolate Shake which drove meaningful traffic to our Shacks and generated exceptionally strong guest satisfaction source. We also leaned into side innovation, introducing items like fried pickles and onion rings, both of which performed strongly.

In fact, onion rings resonated so much with our guests that added them to our core menu, a testament to our ability to test, learn and scale effectively. But our improvements are not limited to our LTOs. We also improved the quality of our core items as we made meaningful investments in improving the quality of our core sandwiches, fries and beverages. These wins are not short term in nature. They represent the foundation that we are building for the future as we continue to innovate thoughtfully and deliver the highest quality food and hospitality in the industry.

In January, we reintroduced our Korean-inspired menu, building on its previous success, while elevating it with the addition of soft chicken bites that have been very well received by our guests. We believe we have a lot of opportunity to increase our in sales. And innovation like sauce chicken bites will help us build new chicken occasions. We also expanded our crackable Shake program with a True Love Shake which added another exciting limited time option to the LiDAR fans. We are extremely excited with the sales of this premium crackableShape platform and will continue to drive innovation there.

Lastly, we introduced our Good Fit menu, featuring a new way to enjoy Shake Shack and start the new year on a healthy note. The Good Fit menu items meet the current market demand for differing dietary preferences, including high-protein serving sizes. We have always made these items. We simply package them up and merchandise them. is a timely, relevant additional sales layer for our business. A great example of our ability to drive sales growth without significant operational or supply chain disruption.

In late January, we launched our We Really Cook campaign. This campaign spotlights our recipes and the quality ingredients that go into preparing the cook-to-order food we deliver each and every day. In each Shack, every day, our skilled team members Chop, prep, grill, season and build meals, we're proud to share with our desks. This marketing platform is an investment in creating awareness amongst current and prospective guests about what really makes Shake Shack special.

We want to reinforce the fact that we freshly prepare fine dining quality recipes in our Shacks every day and deliver them with enlightened hospitality. Over time, this awareness will continue to build our value proposition and make us even more competitive across the restaurant industry. We will also continue to strengthen our value offering to lingerie points within our digital channels. Our 135 in-app promotion platform has proven to be a powerful guest acquisition and engagement tool. -- driving app downloads up approximately 50% since launch.

Importantly, this platform allows us to deliver targeted value while maintaining pricing integrity across the broader menu. The combination of elevated innovation and strategic channel-driven value resulted in strong traffic trends, improved brand engagement and a more balanced positioning between premium quality and everyday accessibility. The new guests that we are bringing into our app are also the foundation for the launch of our loyalty platform later this year.

On the development front, 2025 was a milestone year for Shake Shack as we expanded our global footprint while materially improving the economics of how we build and scale the brand. We opened 45 new company-operated Shacks during the year. We successfully entered new domestic markets like Buffalo and Oklahoma City. The viability of these markets for our brand may have been questioned in the past, but we are proving that Shake Shack has the potential to enter every market in the United States. In 2025, we made significant progress in optimizing our build model.

Through disciplined design simplification, value engineering and procurement strategies, we reduced the average net build cost for new Shacks to under $2 million in 2025, a reduction of approximately 20% compared to the prior year. By improving build costs, maintaining AUVs and expanding margins, we are generating stronger returns and creating more efficient, profitable growth as we scale. Looking ahead, our pipeline for 2026 is even more robust with plans to open 55 to 60 new company-operated Shacks primarily in markets outside of our historical footprint of the Northeast and in major tourist cities.

Our License business also delivered strong momentum with 40 new licensed openings in 2025. We -- we saw particularly strong performance in our new Shacks and markets that we have entered in the past 2 years, such as Canada and Israel. We are also proud of our strong comp performance in the Middle East Japan, the United Kingdom and in U.S. airports. We announced several strategic growth partnerships, including expansion into Hawaii, a new partnership with PENN Entertainment to bring Shake Shack to casino destinations expansion into Vietnam and a new agreement to enter Panama.

Most recently, in January, we partnered with the Australian Open to launch 2 pop-up Shacks at the tennis tournament. Together, these 2 licensed sites did approximately $1.6 million in sales in just 3 weeks over the course of the tournament. Attendees there, we're willing to stand in a very long line to get a Shack burger and fries, indicating strong demand for our brand in this market despite having never been there before. These partnerships expand our global reach, reinforce Shake Shack as a premium internationally recognized brand and give us extreme confidence in our ongoing global growth potential.

As we close out 2025, we are proud of the progress that we've made from delivering strong financial performance and improving unit economics to accelerating development, strengthening our operations and continuing to innovate in our culinary offerings. The year was truly transformative laying a foundation that positions Shake Shack for sustainable, profitable growth. We are entering 2026 with confidence, guided by a clear strategy and disciplined focus on creating long-term value for our guests, team members and shareholders. Looking ahead, we are executing against the strategy centered on profitable revenue growth, margin expansion and strategic investments in our brand and infrastructure.

We hope to achieve this by focusing on 6 key priorities. Those priorities are building a culture of leaders, optimizing restaurant and supply chain operations, driving comp sales through culinary, marketing and digital innovation, building and operating our Shacks with best-in-class returns, accelerating our license business and investing in long-term strategic capabilities. By staying disciplined in these areas, we are confident that we will continue to drive strong operating results, enhanced guest experiences and sustainable growth as Shake Shack scales both domestically and internationally.

The investments we're making in the business in 2025 and into 2026 will position us to start leveraging the capital spend and our P&L in 2027 and beyond. As a result, we expect that by 2027, we will be growing G&A at a lower rate than sales. We plan to disclose our G&A long-range plan that will deliver this leverage in the back half of 2026 and after our new CFO joins the team.

Finally, I would like to give some color on our strong start to the year. January same-Shack sales grew 4.3% year-over-year. Despite meaningful weather headwinds in January, we've nevertheless generated solid sales growth, fueled by continued traction in our in-app value platform, increased hours of operations in our Shacks and the launch of compelling culinary innovation. Our start to the year, coupled with the leadership team that we now have in place gives me unwavering confidence that our plan is working. We continue to believe that we can deliver on our goals for 2026 and for years to come.

I will now hand the call over to Carrie Brittain, who has been an invaluable leader and partner through our CFO transition to discuss our quarterly results and guidance. Carrie?

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% and 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 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% while blended pricing across all channels increased approximately 4%.

This compares to approximately 6% last year demonstrating our ability to deliver positive same-Shack sales with less dependence on price increases. We're off to a strong start in 2026. January Same-Shack sales increased 4.3% year-over-year despite weather-related headwinds that represented an approximate 400 basis point impact during the month. We saw strong year-over-year sales growth across our owned channels, led by our app channel and the success of our 135 promotion.

January AWS was $68,000, down 7% year-over-year. The decline versus prior year was primarily attributable to the 53rd week in 2025. And -- as a result, January 2026 did not include the benefit of the high-volume holiday period between Christmas and New Year's Eve that was captured in January 2025. Excluding this timing impact, January AWS would have been up approximately 1% year-over-year.

Fourth quarter restaurant level profit was $87.4 million or 22.7% of Shack sales, in line with last year. strong benefits from our labor management strategies helped offset higher beef costs and investments in sales driving initiatives, highlighting our ability to sustain profitability despite commodity headwinds. And in the fourth quarter, food and paper costs were $110.6 million or 28.7% of Shack sales, Blended food and paper inflation was up low single digits with beef costs up low teens and paper and packaging costs flat year-over-year.

Through proactive procurement and cost mitigation initiatives, our teams meaningfully offset industry-wide commodity pressures, left unmitigated, inflation would have been up mid-single digits. Labor and related expenses totaled $97.9 million or 25.4% of Shack sales, representing a 150 basis point improvement year-over-year. driven by more efficient scheduling and deployment through our labor management strategies.

Other operating expenses were $59.9 million or 15.5% of Shack sales, up 70 basis points versus last year, driven by higher delivery sales mix and repairs and maintenance expense as we continue to invest in our company assets. Occupancy and related expenses were $29.4 million or 7.6% of Shack sales flat year-over-year. Fourth quarter G&A totaled $50.5 million or 12.6% of total revenue. For the full year, G&A was $176.2 million, approximately 12.2% of total revenue, reflecting incremental investments in marketing and continued investments in our people to support growth and strategic initiatives. Excluding $1.7 million in onetime adjustments, G&A was $174.5 million, approximately 12.1% of total revenue.

Looking ahead, we plan to continue investing in marketing and digital capabilities to drive traffic and guest frequency with marketing spend expected to remain in the 2% to 3% range of total revenue above historical averages of 2% or less. Unlike last year, our marketing plan for 2026 is more evenly distributed across the quarters rather than back-end weighted. Additionally, we expect our total G&A expense to remain relatively steady each quarter of 2026. This will result in a higher year-over-year G&A step-up in the first half tapering in the back half of the year.

As Rob mentioned earlier, we expect to capture additional leverage in G&A following these incremental investments as the business continues to scale. Equity-based compensation was $5.3 million or 21.8% year-over-year with $4.8 million in G&A. Preopening costs were $5.2 million, up 1.7% year-over-year, reflecting 15 new Shack openings and investments to support a strong opening schedule for the first quarter and throughout 2026. Notably, the lifetime preopening expense for the class of 2025 declined approximately 14% compared to the class of 2024, demonstrating continued efficiency gains. The modest year-over-year increase primarily relates to the future opening classes as we advance a robust 2026 development pipeline.

We currently have approximately 34 Shacks under construction. We grew adjusted EBITDA by over 20% year-over-year to $56.1 million or 14% of total revenue. Depreciation was $26.4 million, Net income attributable to Shake Shack, Inc. was $11.8 million or $0.28 per diluted share. Adjusted pro forma net income was $16.6 million or $0.37 per fully exchanged and diluted share -- our GAAP tax rate was 39.6%, and our adjusted pro forma tax rate, excluding the tax impact of equity-based compensation was 26.1%. Our balance sheet is strong, and we ended the year with $360.1 million in cash and cash equivalents and generated $56.5 million in free cash flow.

Now on to our guidance for the first quarter and full year 2026. Our outlook assumes no major changes to the macro or geopolitical environment. For the first quarter of 2026, we expect System-wide unit openings of 14 to 18 with 12 to 14 company-operated openings and approximately 4 license openings. Total revenue of $366 million to $370 million with same Shack sales up 3% to 5%; licensing revenue of $12.8 million to $13.2 million and restaurant level profit margin of 21.5% to 22%. As a reminder, our guidance incorporates the year-over-year impact of the 53rd week in 2025 on this year's guidance which results in approximate 250 basis point year-over-year headwind to total revenue in the first quarter, primarily driven by holiday timing.

Additionally, to ensure a more comparable year-over-year analysis, we have shifted our same-Shack sales comparison by 1 week to better align operating weeks and holiday placement between periods. In late February, we rolled off the price we took on our delivery channels last year an approximate 1% impact. We plan to exit the quarter with approximately 3.5% overall price. Our inflation outlook reflects our expectations for low single-digit inflation with commodity pressure from beef up mid-teens, partially offset by supply chain savings initiatives. For the full year, we are reiterating our guidance that we provided at the ICR conference in early January.

Our pricing plans for the year remain modest, assuming no outsized macro ranges, as our overall price across all channels will be up approximately 3%. We are planning for low single-digit year-over-year inflation in Food and Paper costs after accounting for our supply chain strategies -- excluding these savings initiative, food and paper cost inflation would be up mid- to high single digits, with pressure led by uncertainty in beef pricing that represents approximately 30% of our blended Fod & Paper basket. We expect labor inflation to be in the low single-digit range.

We remain confident in continuing to achieve our 3-year targets for fiscal 2025 to 2027 of total revenue growth in the low teens system-wide unit growth in the low teens, restaurant level profit margin expansion of at least 50 basis points per year and adjusted EBITDA growth in the low to high teens range.

Thank you for your time. And with that, I will turn it back to Rob.

Thank you, Carry. 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 loans? 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-throughs, the average build cost will not see the same type of incremental decreases in costs simply because the drive-throughs 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-throughs 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 2020 that could potentially turn this into a tailwind?

Wow, great questions, Rahul. I'll go with the first 1 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 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 is such an accelerated 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 and 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 and light and hospitality experience that we try to deliver in our restaurants.

In regards to your second question, surrounding the Northeast, there is no question that we have been impacted by weather each of these last 3 months. And disproportionately, I think relative to the industry, given our current footprint. And -- that's not always the case. 2024 was a great weather year for New York and the Northeast. And so the brand benefited from that. But we had to lap that in 2025. And obviously, there's been 2 big weather situations, 1 in January and 1 essentially just wrapping up right now where we've had some closed restaurants, and we do everything we can not to close our restaurants, but we got to make sure we put our team member safety first.

So yes, the numbers that we reported out in Q4 and then in P1 in January this year, we are extremely proud of because those we mitigated some really significant weather impact. And so in our guide for this quarter also is something we're proud of, given the impact we're seeing right now. As we move forward with our development, we will continue to diversify our footprint.

The majority of our development in 2026 is outside of the Northeast. I want to make it clear. That's not because we don't see growth opportunity in the Northeast, and that's not because we don't still love our New York routes. We're absolutely committed and we're starting to remodel a lot of our Shacks in New York City and excited about the impact that's going to have.

But there's just so much white space. for us to go into a lot of these other markets. And frankly, the results we're seeing in some of these other markets that we may have thought and others may have thought we couldn't be as successful in are really surprising us with how strong the demand is. So we are going to build out a lot of markets across the United States, that's going to diversify our footprint and mitigate some of our disproportionate exposure to particularly the Northeastern and Mid-Atlantic weather situations that we are dealing with right now.

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, for 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 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-through as we've optimized a lot of our drive-through back-of-house design and just the way we operate drive-throughs. 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 will 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 they'll 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 or incremental visits are primarily trade up, trade down within existing guests?

Yes. So we don't 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 or 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 kiosk 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 135 menu that you guys, I guess, recently rolled out again. I think you mentioned 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 135? 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 35 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 13.5% 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 -- 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 13.5%. 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 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 long 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 135 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 135 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 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 it clearly 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 to be 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, the lift or the contribution -- and how should we think about perhaps mix in the future?

Great question, Sara. So 1 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 the lesson for the last time moving forward will be much more optimized. But what we found is we saw big Shack to a lot of double buyers. So the double price points range anywhere from $10 up to $14, depending on whether you're buying an avocado bacon burger, 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 in dollar 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 go up as we move through the year?

Mean 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 were 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 100% angst, 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 had 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 drive 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 the beef markets right now are very predictable. 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 pricing, I think 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 Cheng 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 West outpacing New York City in the Northeast during the quarter. How does the margin and cash-on-cash return profile of these growth regions compared to the legacy Coastal core? And how should that regional mix shift influence [indiscernible] margins over the next 3 to 5 years?

It's an interesting question. What I would tell you is are -- 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, while 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 Nick. But yes, it does include the 400 basis points of headwind. Did we lose 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.

Thank you.

Greetings. Welcome to Shake Shack's Third 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 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. 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 third 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.

Thanks, Alison, and good morning, everyone. We are extremely proud of our third quarter results, which showcase the important foundational work we've been doing to position ourselves for growth in the achievement of our long-term goals. Despite the strength of the outstanding quarter, we will not be complacent. Our focus remains to build a resilient long-term business, one that's not defined by any single quarter. We are making the necessary strategic investments today that set us up for long-term success. This means continuing to prioritize initiatives that strengthen our foundation and support sustainable growth.

We have been executing with purpose against the deliberate strategy inspired by our mission to deliver enlightened hospitality to our team members and guests. Collectively, our efforts have resulted in stronger team retention, better guest service, operational improvements and productivity, a steady cadence of culinary innovation and the foundation of a brand marketing model.

The engine behind our success in the heart of our brand is our team. We have assembled an incredible group of talent who bring a wealth of experience from both inside and outside the company. Our external hires come from well-established multiunit organizations where they have learned how to implement best practices that can help us as we continue to scale. And we are equipping our managers with tools to develop high-performing teams from within that are building a culture of hospitality, productivity and excellence. It's no surprise to us that we are seeing a reduction in turnover, leading to more tenured, higher-skilled hourly team members, which, in turn, is having a direct impact on the productivity of our labor in our Shacks.

We're also building a brand marketing model. We recently announced that we appointed Michael Fanuele as Chief Brand Officer. In this role, he will oversee advertising, paid media and insights and analytics, working in close collaboration with the broader team to advance our marketing strategy and steward our brand in the marketplace. Michael has been supporting our team as a consultant since earlier this year, where he played a pivotal role in helping to build our strategic brand positioning and in making the selection of our new creative agency partner.

We're extremely excited to take this next step in evolving our marketing model, which we believe is a critical component for us to build an enduring and powerful comp engine for growth. Michael's creativity, experience and leadership will help us continue to build demand for our culinary innovation, optimize our media investments and strengthen the Shake Shack brand.

Over the past year, we have made important strides in improving operations, and I want to spend some time walking everyone through what we are seeing. I'm incredibly thankful to our operations team and our support center for all the work that they have done to advance our business. This year has been an important year across our operations as we establish new practices that will help us scale our business with hospitality, efficiency and excellence. While we do not report this way, we recognize that many in the industry analyze our cost trends on a per operating week basis. We are aware of the fact that we are currently operating with fewer labor hours than we used to, and that our labor costs on an absolute dollar basis per operating week are down, however, still high relative to the fast casual industry.

Our historical labor model and the execution of that model was not well positioned to achieve the operating excellence that we need to deliver on our aspirations. In fact, the reduction in hours necessary to operate our Shacks with excellence has improved our ability to serve our guests because we are using those hours in a more productive way. We will continue to optimize our operations and get even more efficient in areas where we're simply overstaffed, while at the same time focusing on and delivering on better hospitality.

As we have discussed over the course of 2025, we implemented a new labor model that is an activity-based labor model moving off of the sales-based labor model. We also took a hard look at how we were deploying the hours that our Shacks were allocated and streamlined a lot in the service of the guest experience. We have built a disciplined approach and our Shack leaders are showing real accountability and using the tools and processes provided to attain our labor goals. I am pleased to share with you that nearly all of our Shacks met or beat labor targets in the third quarter. This is a meaningful improvement versus last year where approximately half of our Shacks met their labor targets. We are doing a better job of supporting our managers with strong above store leadership, data and analytics, and recruiting and training tools as they work to optimize the operations of their restaurants and deliver on their goals.

But our work is not done. Team members are at the heart of everything we do and the lifeblood of our company. One of the things that I'm most proud of is how much longer we are seeing our team members stay with us. We believe this improvement reflects our ongoing focus on creating an environment where team members can grow and succeed. We have included retention as a key metric on our operator scorecard, and our leaders are focused on training and development to help build a more tenured team. We are seeing improved throughput across all dayparts, including peak, from our team members that have more experience and tenure. This is not surprising as we make many items fresh from scratch and there's a natural and longer learning curve to our process versus traditional fast food. Simply put, the more experience our team has the better they can execute against our operational model.

Our top priority is guest satisfaction. We will continue to seek out ways to help our team members become more productive, that it won't come at the expense of guest and team member satisfaction. The evidence of that commitment can be found in our improvement in operating metrics, which we measure as a way to hold ourselves accountable for our North Star, our guests.

At Shake Shack, we cook our food to order. That is a big part of why it tastes so good. I am proud that our speed of service has improved from approximately 7 minutes in 2023, to now approximately 5 minutes and 50 seconds. We are going to continue to get even better here. Our guest satisfaction scores across meal taste, cleanliness of our Shacks and likelihood to return has all improved. And finally, with our optimized deployment, we are seeing higher throughput in all dayparts versus last year.

In addition to our work in operations, we're also driving improvements across our supply chain, and we are just starting to see the benefits from this. We have identified a long runway of opportunities ahead including, firstly, we are diversifying our supplier base, making sure that we have the right partners and enough partners to mitigate business risk and optimize costs. Second, we are diversifying our supplier footprint and optimizing logistics. Our supplier geography needs to grow as we grow. We're doing a lot of work to reduce time and miles from our suppliers to our distributors and to our Shacks. Lastly, we continue to invest in technologies that support our supply chain department in the critical functions as we scale.

As we continue to improve our supply chain, we will also continue to prioritize product quality and innovation, as we have onboarded additional suppliers across several key categories we're making sure that we can continue to procure high-quality ingredients. The work we are doing today in our operations and supply chain is also critical to helping us address a volatile beef market as we expect to face mid-teens beef inflation in the second half of 2025. Going forward, planned savings in our supply chain and continued improvements in operations afford us the opportunity to offset a meaningful part of beef inflation without having to take outsized price and still expanding our restaurant margins. This hasn't been the case historically for Shake Shack.

Another exciting part of our evolution is on the equipment side, where we are actively testing multiple solutions designed to make our Shacks easier to operate with an emphasis on improving product quality, consistency and speed. We plan to roll out the first of these solutions towards the end of the year, starting with new fry holding equipment that will allow us to serve crispier hotter fries every day. There is a lot more to come over the course of 2026 and beyond.

We are also investing heavily in our technology infrastructure, particularly our kiosk and digital channels, which will continue to be critical parts of our comp sales growth. In our kiosks and our digital platforms, we are driving positive check growth from improved merchandising of our core menu. As I've stated in the past, we are focused on delivering enlightened hospitality to our guests. Big part of that long-term commitment will be a strong loyalty platform, which we are working to deliver in 2026. As we build this best-in-class loyalty platform, we are currently leveraging our app with value and frequency offers. We have seen success from these initiatives and are tracking of approximately 50% more app downloads this year than last. This is important to our long-term growth as our app guests have higher frequency and lifetime value than our nondigital guests.

At the end of the day, we know what really excites our guests is our culinary innovation. Our made-to-order model affords us the ability to deliver food that other QSRs and even fast casual concepts cannot easily replicate. Culinary innovation has always been a part of our fine dining heritage and DNA, but the cadence of innovation in place now is unprecedented for us. Our Dubai Chocolate Shake was a powerful illustration. Dubai was highly incremental and drove a positive impact on all key brand measures with the largest brand perception gains on ingredient quality and innovation.

Beverage is obviously an important and growing segment within our industry. We have always offered high-quality, innovative teas and lemonades alongside of our world-famous custard shakes. Our goal is to significantly grow our beverage business across soft drinks, teas and lemonades, and to simply own the shake innovation space. With inspiration drawn from global recipes, seasonal occasions, unique textural elements and flavor trends.

Following on the success of our Dubai Shake, we've established a shake innovation pipeline with exciting crackable shake offerings as a plus up to our typical Shake LTO lineup. We're also continuing to fuel our pipeline of new sizes with fried pickles and onion rings and we are seeing strong attachment rate. But our crinkle cut fries continue to be the crown jewel of our sides platform. And alongside our new hot holding equipment, we are about to launch new procedures that will make them crispier, hotter and more consistently seasoned, making them the best we've ever served.

We are also going to continue to innovate across burgers and sandwiches. This includes our summer barbecue menu, which we launched in mid-Q2, and our limited time French Onion Soup Burger that launched in September. We're pushing the envelope and currently have a French dip Angus steak sandwich and a baby back rib sandwich in test markets. These innovations are part of our ongoing strategy to balance premium sandwich offerings with value platform so that we can continue to drive traffic growth. Once again, our made-to-order model affords us the culinary flexibility to make things that no one else can deliver with the type of premium quality that our guests have come to expect from Shake Shack.

While we're focused on developing traffic-driving LTO innovation, we're also continuing to invest in our core menu. These include fry improvements mentioned earlier, new chicken bites, which deliver a more consistent guest experience, and rolling out an improved cheese sauce for our fries that increases cheese coverage and has performed much better in test than our current offering. Our culinary innovation, as well as improvements to our core menu and operations are enabling us to serve our guests better and has prepared us to amplify our brand through new advertising and paid media.

In the third quarter, we invested in paid media at scale for the first time. We shared with you last quarter that we were starting to make some investments in that capability, and I'm happy to report that we are delivering results while learning a lot. We invested media behind Dubai Chocolate Shake as well as our dollar soda and app-only promotion, and these investments are a reason why we are delivering the sales growth that we shared with you today. Our brand positioning work is now complete, and we will launch new advertising starting later this quarter. We are working with one of the most awarded creative agencies in the world to bring our brand story to life through advertising throughout 2026.

Turning to development. We have significant white space to open new Shacks in the U.S. and around the world, and we are doing so at lower costs in spite of inflation. As part of our development work, we are also focused on new kitchen prototypes and equipment that could have a significant impact on improving our throughput and quality. This year, we are on track to open our largest class of company-operated Shacks. And next year, we expect to open at least 55 to 60 Shacks as we accelerate our rate of new Shack growth, and continue to build our strong pipeline of Shacks to come.

Turning to our licensing business. With 23 new store openings as of Q3, we are well on our way to 35 to 40 openings this year, and we plan on opening 40 to 45 more in 2026. This business is healthy and growing. Our existing markets are performing better than expected despite global macro headwinds with strength coming from new openings in the U.S., Canada, Israel and Turkey. This year, we have announced 4 new license partnerships, most recently with Union Mak in Hawaii to bring the Shake Shack experience to the Aloha state. We are building great momentum in the license business, and there is much more to come.

As we reflect on the most recent quarter and what is to come, Q3 was an example of our sales model at work. Multiple great LTOs in Dubai Chocolate Shake and summer barbecue and an in-app value message with support from advertising and media complemented by a healthy digital business that collectively drove strong traffic in a tough environment.

Now going to October. Our sales trends, although positive, were not consistent with what we saw in the third quarter. Macro headwinds to the industry did intensify and we are lapping one of the most iconic LTOs in our history, Black Truffle. We continue to invest in advertising and media to support the business. However, our French Onion Burger LTO, while loved by the media, has not been as accretive to traffic or check as was the case for our LTOs in Q3. After 3 weeks of analyzing the data, we pivoted and shifted support to our in-app value platforms. Over the last week, our in-app traffic is up 85%, and our overall traffic has seen over a 400 basis point change.

Looking ahead, we will need to deliver newsworthy LTOs complemented by a strong value platform and a healthy app and loyalty platform, as well as a strong delivery business. That is exactly what we expect from the balance of Q4 and our plan for 2026. We will also need to mitigate the continued traffic declines in the DC and New York Metro, which we believe to be macro in nature with outpaced growth in other regions.

I am really proud of the progress the team has made on the plan that we laid out at the beginning of 2025. And the quarterly results show that we are focused on the right strategic priorities moving forward despite the macro challenges. We have a long way to go to realize our full potential, but the progress is certainly heartening, and will allow us the opportunity to continue to gain share against the challenging industry backdrop.

And with that, I'll turn it to Katie for more details on the quarter.

Thank you, Rob, and good morning, everyone. We are pleased with the results of our third quarter that marks the 19th consecutive quarter of positive same-Shack sales growth, along with strong restaurant level and adjusted EBITDA margins, and double-digit adjusted EBITDA growth. Considering the macro environment, we feel especially proud of our results that reflect solid momentum and execution across both our company-operated and licensed businesses.

We grew total revenue by 15.9% year-over-year to $367.4 million, led by strong new Shack openings and growth in our comp Shack base. We grew licensing revenue by 21.1% year-over-year to approximately $14.6 million, and license sales by 15% to $218.7 million. As we opened 7 licensed Shacks in the quarter and saw broad-based strength across most of our regions. In our company-operated business, we grew Shack sales by 15.7% year-over-year to $352.8 million. We opened 13 new Shacks in the quarter, bringing the total as of the end of the third quarter to 30 openings, well on our way to opening our largest class on record, and we have plans to open 55 to 60 new Shacks in 2026.

We grew average weekly sales by 2.6% year-over-year to $78,000. We delivered 4.9% positive same-Shack sales growth that represents a 390 basis point improvement from our first half 2025 run rate. This acceleration was led by improved traffic from initiatives that Rob described earlier in his remarks. We grew traffic by positive 1.3% in the quarter and all months saw positive traffic growth.

We had positive comps in traffic in nearly all of our regions. However, we continue to see macro pressures in New York Metro and Washington, D.C. that are weighing on our overall results. New York Metro and D.C. represent over 1/4 of our sales, and we have been experiencing a higher degree of macro pressures in these regions than many industry peers given our footprint today. So a challenging macro backdrop here continues to have an outsized impact on our overall performance.

But in spite of those pressures in a few of our markets, we still delivered nearly 5% in same-Shack sales growth with positive traffic. And that's really a testament to our strong success in other markets we're actively growing our footprint and scaling. In fact, we drove 7% to 8% comps in the South, West and the Midwest, with double-digit comps in San Francisco, Orlando, Dallas and Denver among a lot of other major metros. As our development pipeline has significant tilt away from growing in New York City and D.C., I am optimistic that over time, we can lessen the impact that 1 or 2 markets with specific pressures can have on our overall trends.

And Shack menu price was up approximately 2% and blended across all channels up approximately 4%. We took approximately 2% in menu price in the quarter to help offset the cost pressures from the mid-teens percent price increase in the beef market, and rolled off last year's nearly 2% price increase in October. With this, we will exit the year with approximately 3% menu price. We drove 1.4% of positive mix, led by kiosk merchandising efforts. Items per Shack declined 1.6%, consistent with our trends last quarter.

Turning to restaurant-level profitability. We generated $80.6 million of restaurant-level profit, reaching 22.8% of Shack sales, a 180 basis point improvement over last year. Overall, the strong performance by our operators and the advancement of our strategic initiatives underscores the momentum we've built and our commitment to sustainable margin expansion over time, all while delivering on better guest metrics that Rob outlined earlier.

Food and paper costs were $103.5 million, or 29.3% of Shack sales, up 110 basis points versus last year. The increase was primarily driven by mid-teens inflation in premium beef, which remains the largest part of our commodity basket. Historic low supply and sustained demand are contributing to a volatility in this category, and we expect elevated beef costs to persist through year-end and into next year.

In the third quarter, our blended food and paper inflation after factoring in our cost savings was in the mid-single digits range. As we shared in our shareholder letter, while we are planning for these costs to still be up mid-teens percent year-over-year in the fourth quarter, we anticipate only a low single-digit net impact on food and paper costs. This is an improvement from the levels we showed in the third quarter, and this is due to the positive impact from our ongoing supply chain strategies. We expect cost savings from our supply chain to grow and be even more impactful in 2026.

Labor and related expenses were $88 million or 24.9% of Shack sales, down 310 basis points year-over-year, reflecting continued operational efficiencies, improved retention and gains in our throughput. Other operating expenses came in at $53.8 million, or 15.2% of Shack sales, up 30 basis points year-over-year. This increase was primarily driven by higher digital sales. Occupancy and related expenses were $27 million or 7.7% of Shack sales, flat year-over-year.

G&A was $44.4 million, or 12.1% of total revenue, and up 24.3% year-over-year as we made incremental marketing and people investments to support our growth. Equity-based compensation was $4.4 million, up 6.4% year-over-year, with $3.9 million in G&A. Preopening costs were $4.6 million, up 26.3% year-over-year as we opened 13 new Shacks and prepare for a strong opening schedule in the fourth quarter and into next year. We have approximately 30 Shacks under construction today.

We grew adjusted EBITDA by 18.2% year-over-year to $54.1 million, or 14.7% of total revenue, a 30 basis point improvement compared to last year. Depreciation and amortization expense was $27.1 million. Net income attributable to Shake Shack, Inc. was $12.5 million or $0.30 per diluted share. Adjusted pro forma net income was $15.9 million or $0.36 per fully exchanged and diluted share. Our GAAP tax rate was 35.2%, and our adjusted pro forma tax rate, excluding the tax impact of equity-based compensation, was 25.1%.

Our balance sheet remains strong with $357.8 million in cash and cash equivalents at the end of the quarter. This is up approximately $47 million year-over-year, and $21 million sequentially. We grew operating cash flow by 50% year-over-year to $63 million. We invested $39 million in CapEx to support the strong opening calendar, and are on track to deliver another approximate 10% reduction in our build cost this year.

I'm going to now provide our guidance for the fourth quarter and the implications for our fiscal 2025 guidance. Our outlook assumes no major changes to the macro or geopolitical environment. Additionally, our fiscal 2025 includes a 53rd week. Due to the calendar impact from the 53rd week, the Christmas holiday closure falls outside of our comp measurement period this year, resulting in an extra sales day in our fourth quarter and full year comps. Our fourth quarter 2025 guidance, we expect system-wide unit openings of 27 to 37, with 15 to 20 company-operated and 12 to 17 licensed. Total revenue of $406 million to $412 million with same-Shack sales up low single digits year-over-year, and license revenue of $15.4 million to $15.7 million. Restaurant level profit margin of 23.3% to 23.8%.

For the full year 2025, we expect total revenue of approximately $1.45 billion, up approximately 16% year-over-year, with same-Shack sales up low single digits year-over-year and license revenue of $54.1 million to $54.5 million. Restaurant level profit margin of approximately 22.7% to 23%, G&A to be approximately 12.3% to 12.5% of total revenue, equity-based compensation expense of $20 million, preopening costs of $19 million, net income of $50 million to $60 million, and adjusted EBITDA of $210 million to $215 million, reflecting the impact from the macro headwinds and increased marketing investment. Please see our shareholder letter for the full details on our fiscal 2025 guidance.

Additionally, as a housekeeping note, next year, we are moving to a guidance framework that better conforms with general industry practice, and we look forward to sharing this with you when we provide our fiscal 2026 outlook.

Thank you for your time. And with that, I'll turn it back to Rob.

Thank you, Katie. I want to thank our team again for their hard work and passion for Shake Shack, which is the engine behind our strong third quarter performance and our ability to achieve our long-term goals. Thank you to everyone on the call today and for your interest in our company.

And with that, operator, please open up the call for questions.

[Operator Instructions] Our first question is from Christine Cho with Goldman Sachs.

Congrats on the strong quarter, and I appreciate all the color. I'd like to better understand your supply chain initiatives as a key driver of the margin expansion going forward. So first, how do you size the opportunity in the midterm?

And two, how do you really plan to track and respond to consumer feedback regarding some of these product modifications that may arise due to your supplier changes, and to ensure kind of consistent quality across regions and stores?

Katie, maybe I'll answer the second question first and then you come back to the expectations. Christine, so there will not be any spec or product modifications. We are committed to delivering the same quality that we have delivered. And it has made Shake Shack's reputation for culinary excellence what it is. So when we're looking at bringing on new suppliers, we go through a very thorough testing and validation process to make sure they can deliver the specs that meet our standards and that the quality is consistent or better than what we have used in the past. And that's across every component of the supply chain, whether it's the beef that we're using, the buns that we're using, our custard that goes to our shakes, our fries, everything has to meet our standards or else we will not add that supply to our system.

Christine. So how we would think about the savings potential here? We started to roll out some more material cost savings in the fourth quarter. We're expecting that to build into next year. We've talked about -- as you saw in the third quarter, we had a pretty big step up in our food and paper costs as a percentage of sales. That was largely led by the mid-teens inflation in the beef market. And what we're seeing now with being able to mitigate some of that cost pressure through negotiations with our current suppliers and some additional supply chain strategies is that next quarter we're anticipating that food and paper as a percentage of our sales will moderate to more normalized levels with this low single-digit inflation.

This is really powerful for us, and we expect that these benefits will grow into next year, especially considering historically, when we've had big swings in the beef market, our main lever has been to pull price to help offset that and protect margins. Now we just have a much bigger aperture of tools that we can use to help navigate these waters. And part of it is for -- to help optimize our cost structure. But also, as Rob talked about, we need to add more suppliers. We need to have multiple sources of supply on our critical items. And we need to make sure that we're really pushing ourselves to make sure that we have the right suppliers.

And so I believe all of that work is underway here. It's really exciting to see that also translate into an ability to help navigate what is likely to be a challenging market for the foreseeable future on beef and still have net overall pretty muted inflation in our business.

And I think we've heard about kind of that broad deceleration in the macro intra-quarter and also softening trends into October. Could you kind of provide us with some thoughts on how you think about that setup in the fourth quarter? I know you pointed to D.C., New York travel pressures. But have you seen any pressures on the spending of the younger consumers under age 35 et cetera, that you would call out?

Yes. I mean I would just say that I think it's pretty broadly understood that there's definitely some pressure on the lower income consumers. And I think there's also been some commentary about the unemployment rates of younger populations as well, which obviously impacts our industry. But we have taken those challenges and incorporated them into our strategy.

I called out in the commentary that we launched French Onion LTO at the beginning of October. And we weren't delivering the incremental growth that we had anticipated in what we were seeing in Q3. And so we did a lot of analytics to understand what was happening and what the challenges were. And everyone knows, and it's everyone's talking about it, there's obviously a push to value in this industry. And so we leverage something that worked really well for us in Q3. Over the last week, 1.5 weeks, we went back to our in-app value platform and shifted our media, and shifted our awareness building to that platform. And we have seen dramatic change in the trajectory of our business over that time. We've seen over 80% growth in our app traffic -- traffic sales.

So it's been really transformational for us. And that's a big part of our plan moving forward. We need to have a balanced approach. We are the premium player in the burger market and we will continue to offer a great culinary innovation that plays in that premium space, but we need to have a balanced approach where we also have a value offering that can be very attractive to our guests, but also be accretive to us both on top and bottom line. And by leveraging our -- which represents a relatively small portion of our business, the traffic that we're driving and the check that we have to give up to drive that traffic is much less cannibalistic of our holistic business. So it's really driving the performance that we're seeing right now in Q4 and what we anticipate will help us deliver strong results again in Q4.

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

Actually, Rob, I wanted to follow up on that last point a little bit. You talked about how French Onion Burger didn't perform up to what you thought it was going to. So maybe what surprised you relative to what you thought was going to happen? And how does that change the way that maybe you're testing, or that innovation calendar? Because the message has been pretty clear that you're excited about the innovation calendar going forward. And so is there anything about what you're doing that might need to change to drive that innovation going forward?

Yes. Great question. What I would say is that French Onion was another flavored burger. And it's not that there's not room for flavored burgers in our innovation calendar. But it's -- that is kind of our standard based form of innovation. Moving forward, including another big idea that we have coming this quarter, it's much more of innovation that we haven't done before. Ideas that bring a new story, not just a new flavor to the ticket. And so we're focused on trying to bring things we've never done before, complemented by some of our historic LTOs that have been our biggest winners.

So Truffle was a huge success for us. You're going to see Truffle again. For the Korean menu, a huge success for us, you're going to see that again. And we'll continue to innovate on our burgers. But right now, we're really focused on -- if we're going to be advertising and marketing a premium price point, it needs to be something that can generate, earn media, be newsworthy outside of just the launch a couple of days, a couple of articles written about it. We want our guests talking about our premium innovation similar to Dubai Shake, things that really create virality around the ideas that we're bringing. So that's the premium part.

The other innovation that we're delivering, I just mentioned, is on the -- in our digital platforms, particularly in our app. Like we have never seen the kind of growth that we're seeing right now in our app. We both in the form of downloads as well as actual sales. And it's driving traffic growth on our business. And so that is going to be a focal point for us. We're going to continue to double down there. We just launched our new platform, which is our 1, 3, 5 platform $1 drinks, $3 fries and $5 shakes. And I think that this is a transformational thing for Shake Shack.

It shows -- and we really built this and we talked about it, is how we show empathy to our guests during some challenging times. And I think that's resonated and that's going to -- that balance is going to be the holistic innovative way we approach the marketplace. It's not just about the premium offerings. It's about having a balanced approach, particularly in this time where we need to make sure that we're delivering value to our guests.

And it's sort of like you knew my next question was going to be about value. Do you think that the 1, 3, 5 on the drinks, the fries and the shakes, do you think that's powerful enough for the consumer to recognize the value while you're still running premium burgers and sandwiches? Or do you think you need to sort of pivot a little bit on more of those like center-of-the-plate entree items to really give the consumer a little bit more value?

Well, I can tell you, I have 10 days of data that would suggest it's extremely impactful. So I'm really excited about what we think this can do for us through the balance of the quarter and heading into 2026. And I can't wait to share those results with you next year when we're reporting on Q4.

Our next question is from Brian Vaccaro with Raymond James.

I wanted to ask about operations and sort of the guest experience and really appreciate the color you provided on average ticket times now below 6 minutes. I was wondering if you could elaborate just on what you're seeing in terms of other guest satisfaction metrics? Obviously, speed is very important, but it does sound like you're seeing improvements in the experience, quality, maybe taste metrics, that sort of thing. Are there any other metrics worth highlighting?

Brian, I had a call with Stephanie last night at like 9:00 after she wrapped up. She's in Atlanta with our entire senior operations leadership team. We built this Atlanta center to bring our teams from all over the United States and be able to collaborate and plan and train and develop our teams. And it's amazing everybody is using this space right out of the gate, our operators, our development teams.

But she had our operations team there over the last couple of days, and they are doing their quarterly business planning. And they are building plans to close the year really strong and they're also building plans to make sure that we have a pipeline of talent to be able to open up 60 Shacks next year. So our operations have really never been at this level. And every time I think we can't get better, we get better.

And it's as much about the mindset and the culture as it is about the specific components of the plan. We -- our team, our operators right now are not talking about the macros. They're not talking about the challenges. They're talking about how we can serve our guests better. They're talking about how we can get faster. They're talking about how we can get better at deploying our labor where it needs to be. They're talking about how now we can extend hours to better service our guests in the Shacks where it makes sense. So -- and they're doing that with excitement and pride. And winning begets winning. And these guys have knocked it out of the park for the last year and have gotten better every month.

And we've had some turnover and brought in some external leaders that have really brought great perspective to kind of the middle to higher end of our operations team. But it's also the folks who have been here for a long time and have been a part of Shake Shack for a long time. Sometimes when you bring in change and you try to transform something in 12 months there's resistance. And my discussion with Stephanie last night is like, look, everybody is on board. Everybody is full go. They're not talking about how tough it is. They're talking about how great we're doing. And that gives me the confidence that we're going to be able to continue to improve on our speed, accuracy, particularly in the delivery channels is a big core focus for us. We want to make sure that we're getting those orders right because those guests aren't in our dining rooms. They're not able to bring up something if it's not right. So we're focused on accuracy. We're focused on speed.

And something that Katie talked about, and I talked a little bit about in the comments, we are significantly increasing the tenure and retention of our team members. You would think as we hold our teams more accountable, that, that might create an environment where people don't want to be a part of it. It's just the opposite. They're seeing success. They're seeing opportunities for them to advance their careers and they're staying longer. And that tenure builds experience, which makes them more productive and makes us a better operating units. So all of those things are moving in the right direction.

On the guest sat -- yes, I mean get satisfaction across restaurant cleanliness, friendliness, all of the things that you measure have all moved in the right direction despite less labor hours. So we're just getting better. We're not ripping out labor to just drive savings. We're building models that optimize our labor pool, and that's delivering better guest satisfaction.

All right. That's very helpful. And just a follow-up, if I could. Just Katie, a question on the G&A guidance. I think if we did our math right, it implies maybe a $10 million increase in the quarterly spend versus what we saw in Q3. And I understand you've added a lot of new talent to the organization. But could you just elaborate on what's driving the uptick in the fourth quarter?

Yes. Yes. So as Rob talked about, we are making some meaningful investments here in marketing and media to drive the business. We're really excited about the stuff that we have lined up. We started kind of marketing this 1, 3, 5 platform that you talked about on the value side and seeing extremely strong results on the back of it. And we also have some exciting steps planned for later this year. These investments that we're making are all really geared at driving traffic, driving sales which, in turn, we expect to drive profitability at the restaurant level and beyond. So we're really excited about that.

For those who haven't followed us as closely last quarter, we did talk about kind of embarking on this new strategy, new for us, kind of common place for the industry. But new for us of investing into paid media to better expand and grow the awareness and our message, and our ability to drive traffic at our restaurants. The results that we showed in the third quarter with 130 basis points of positive traffic growth and some really strong comps, especially relative to a challenged industry give us the confidence that this is indeed the model that we should be doing, and we're excited to make these investments here today.

Our next question is from Sharon Zackfia with William Blair.

I wanted to delve in a little bit more on that improvement you've seen in speed. And 5 minutes and 50 seconds is obviously a big improvement, but I'm curious what that bell curve looks like when you look across the Shacks, and what you would view like an ideal speed over time for the company to get to?

That's a great question. And I think when you think about speed of service, averages can be very -- even though that's what we shared. Averages can be a little bit vague. I mean, what we are focused on right now is mitigating the tickets over 7 minutes. We want to make sure that we are not executing in a way that frustrates our guests. People don't get real upset about 5 minutes and 30 seconds versus 5 minutes and 50 seconds. They get upset when it's 8 minutes to get their food. So our plan to continue to drive down the average ticket time is to minimize our exceedingly long tickets. And that usually happens in rush when we've got super busy Shacks. Obviously, we do high-volume hours. And so some of the ways we're going to mitigate that is through some of the equipment technology that we talked about.

One of the things that holds us up is we're making fries to order. And that takes a lot of time. And it's not like we can't hold fries. It's what everybody does. It will make them hotter, and it will give us better access to those fries. And so like fry holding is a simple way for us to make sure that, that doesn't become a bottleneck while still delivering the same or better quality. So there's equipment solutions that we can impart. There's also labor deployment.

We used to -- part of what we're doing and how we're driving labor savings is we used to have like standard deployment schedules where when we opened, we always had in every Shack 5 or 6 people show up. We don't need 5 or 6 people every minute of opening. We're staggering the approach. We're bringing people in when we need them. What that does is it frees up some labor for us to deploy during the peak hours. So as we move underutilized labor off the shoulders and into the peaks, we're going to be able to get faster and be better.

So there's equipment solutions, there's labor deployment optimization that are all going to drive improvement. But I think if we're in that 5-minute zone, 5 to 6 minutes like we're making our customers happy. They know it takes longer. We're cooking to order but we can't have the 8 minutes to 10 minute orders. That's where -- that's the danger zone.

I also wanted to ask a follow-up on the menu innovation. Clearly, I think a lot of it has been on the premium end, and it sounds like French dip and ribs might be there as well. Is the idea that you can keep kind of your base price at a very affordable kind of hurdle for the consumer and allow them to self-select into these kind of higher price points and drive check that way? I'm just curious how you're thinking about kind of balancing premium versus value?

I mean, you absolutely nailed it. We have pricing power. I want to make it really clear that if there is some significant inflation, we could execute price increases to mitigate that inflation. We are approaching pricing in a very disciplined way and challenging ourselves to not take pricing, especially in this environment. So we will continue to utilize pricing in the most productive way. But we want to hold -- we want to keep our core menu prices as low as we can possibly keep them. And the way to do that, is to get more efficient in our supply chain, more efficient in our operations, and to bring this innovation that allows us to have people, like you said, self-select into more premium price points and drive check growth.

But I will tell you, we're also being very judicious on how we price those premium innovations. We have a big innovations coming here in the next couple of weeks that we're really excited about. And we are being very aggressive on the price point for what we're offering. And we're doing that because right now in this environment is the time to take share. Right now, when there's a challenging environment, that's the time when great companies get better. And we are focused on taking share. We are focused on making investments. We're not -- excuses and results are negatively correlated. Like we are not blaming macros. They are out there. We'll acknowledge them. It'd be naive not to do so. But we're building plans to address them. And we are focused on delivering value at every price point, whether it's our premium innovation, our core menu or the value offerings that we're putting into our app.

Our next question is from Jake Bartlett with Truist Securities.

My first is on COGS and the impact of, obviously, beef inflation. You expect it to go into -- continue into '26. My question is that you've had some nice offsets this year, even aside from the supply chain savings, but you've seen some lower costs on the other items. So I guess if you can kind of give us a base case or roughly what we should and what you're thinking about for overall inflation -- food cost inflation in '26, including the items outside of beef, that would be helpful? And I have a follow-up.

Jake. So how we're thinking about next year, we have this long-term guidance that we're going to be able to continue to expand our restaurant margins that's consistent with our 3-year outlook. We've reiterated that today, calling for 50 basis points a year in restaurant margin expansion. How we get there, and as we've talked about, we're expecting a lot of that next year to come from supply chain and through kind of the natural leverage from growing the business.

We are embarking on kind of an accelerating path of supply chain savings. And also, as you've called out, there are some items that are moving more favorable as well in the commodity basket. We are planning for beef prices to still be a pressure though, next year. And we are working with our suppliers to help navigate through that environment, still meeting our objectives and our guidance for continued margin expansion next year without having to lean on a significant amount of price to offset the beef markets.

I will share all of the details on how 2026 will -- how we're expecting that to shape up when we give our annual guidance in January.

Great. And then I had another question about the labor savings that you've been realizing. You're going to be lapping some right about now the labor deployment and then in January that the new scorecard. So the question is how much more you have kind of in the tank for labor efficiency? I know the message is you're kind of switching much more to the supply chain to drive the margin expansion. But is there any opportunity still to drive efficiencies with labor into '26 and beyond?

So one of the big opportunity, untapped opportunities is on equipment. So we have built essentially an equipment innovation center in Atlanta. And our teams are doing work that we've never done before at Shake Shack to bring a standardized kitchen model that leverages equipment, that is really all about making our teams more efficient through increasing the ease to execute our model and delivering higher-quality hotter items faster.

And we just had our global team come into Atlanta last week, and we shared some of these ideas with them, and they were blown away. And their remark was all the kitchen innovation used to come from our licensees internationally because they were going out and doing things that Shake Shack wasn't necessarily exploring. And now we are bringing the ideas to our restaurants, but also bringing them to our license partners so that they can operate their kitchens more efficiently, drive higher margins and build more Shacks at a more rapid rate globally. So equipment is a big untapped opportunity for us to be able to continue to drive operational efficiency and increase our speed.

Our next question is from Jeffrey Bernstein with Barclays.

Just wanted to build on the marketing discussion. I know you mentioned building a foundation of a brand marketing model. I'm just wondering what new do you think we'll see into '26? I mean it sounds like a ramping on the paid media, which just began and wondering how that will tie in with the new loyalty program being rolled out in '26? How you think the interplay on those will drive incremental traffic? And then I had one follow-up.

Yes. I mean our product innovation supported -- our product innovation and our value platforms, supported by media are what we are focused on delivering new guests, creating awareness and traffic, right? Our loyalty platform should increase frequency. And right now, what we are doing with 1, 3, 5 and the amount of adoption and downloads. And the -- all of that increased application user base is going to transfer directly into our loyalty platform. So we will launch our loyalty with a built-in user base and we will be able to leverage that loyalty platform to drive frequency with our most valuable guests.

So both of those work in a symbiotic way together. We're going to advertise and bring people in with exciting new innovation and value platforms. They come in into our -- over the next 6 to 9 months as we build out our loyalty platform. They transition into the loyalty platform, and we leverage that to drive frequency. And that's the model that we're going to employ next year and moving forward.

Understood. It does seem like there's confidence around the comp trajectory and initiatives there. And obviously, the unit growth that is accelerating in terms of openings and the restaurant margin, Katie, you just mentioned, kind of margin expansion. I guess it's the G&A that's therefore getting a lot of the attention and hopefully, that gets a good return. But because of the significant uptick in the full year spend this year, I know you said paid media starting in the fourth quarter. Should we therefore assume that, that uptick is sustained in 2026, presumably more like the fourth quarter of '25? Is it a good run rate to assume for that? How should we think about the -- at least directionally, that G&A spend, which seems to be the only area that's maybe working counter to all the other things that have that positive trajectory?

Yes. No, it's a great question. I mean, we will obviously be providing guidance on 2026 in January. So I'm not going to necessarily speak to what we're forecasting in sales. But what I can tell you is the G&A is the fuel that's going to drive the comps. And obviously, we are going to make investments that we believe we're going to get returns from.

And so this, as I said earlier, this environment, where we're seeing a lot of competitors be challenged and lose traffic. This is our opportunity. This is our opportunity to take share. This is our opportunity to gain customers at a disproportionate rate. So we are all in. We are -- we believe ourselves to be a hyper growth company, right? And now we have the operations excellence to have 100% confidence that when we're sending new guests, or infrequent guests who may have had a bad experience in the past, back to our Shacks, they are going to have a balanced options in terms of value and premium. They're going to have the highest quality that we've ever delivered, and it's all going to be served fast and accurately. So that creates lifetime value.

So yes, I mean, we're investing G&A because that's the fuel. And over time, we should be able to scale that investment. We should be able to grow our revenue faster than we grow the rate at which we invest marketing and G&A, and that's going to create margin expansion. So this is a first in time we've invested at scale on paid media. And so yes, right now, it isn't scaled. It isn't necessarily at the point where we're able to decrease our G&A as a function of revenue, but that's the plan. And so it's either that or we kind of batten down the hatches. And we're not prepared to like issue a dividend anytime soon. This is a growth company. We're going to invest in growth. We believe that we have the right model in place.

Our next question is from Andy Barish with Jefferies.

Rob, just a question kind of from your background in QSR and sort of taking a higher-level approach to what's been sort of an unrelenting discounting promotional environment, both below you guys as well as above. How do you kind of see that playing out in '26? And is that informing any of your decisions on driving the Shake Shack business? Or do you guys think you can do what you can do if you execute on the plans you've given us today?

Yes. I mean we're in the thick of it right now. I mean, everybody is pushing value. You've got $5 meals. You've got $11 casual dining meals where you sit down and get waited on, like there's value of plenty. And we are executing our model in the thick of that and delivering, I think, outpaced results.

We're not optimized yet. We are going to continue to learn. We're going to continue to get better. Some of our things we're doing have better results than other things we're doing. But we are very well prepared to deliver a balanced growth engine into 2026. And we -- like I said, are continuing to identify what works, what doesn't, what price points make sense, how to execute things, which target audiences to go after? All of that is feeding our plan moving forward.

And I'll just tell you, it never feels good to get on a call and say, hey, we ran something for 3 weeks, and it didn't work, but -- as well as we wanted it to. But what I want everyone to take away from that is that we have an agile business model. We are going to evaluate everything in real time with data and analytics. And when we see an opportunity to improve our results, we can shift into something that we believe will give us higher returns and deliver better outcomes.

So we have our plan already in place for 2026. We know what we're launching. We know when we're launching it, we know how we're doing it. We'll continue to assess the environment, the competitive environment as well as the results that we see and optimize on an ongoing basis.

We have reached the end of our question-and-answer session. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.