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Shake Shack’s Profit Margins Took a Hit Due to Increased Labor Costs

Erika Adams
Shake Shack’s Profit Margins Took a Hit Due to Increased Labor Costs

Shake Shack’s operating profit margin slid to 22.5 percent in the fourth quarter of 2018, according to the burger chain’s fourth quarter and full year 2018 earnings report released on Monday.

The fourth quarter operating profit margin represented the lowest margin that the company has reported all year. Shake Shack CEO Randy Garutti attributed the shrinking margin to the high number of Shacks that were opened in the last few months of 2018, and the higher labor costs that come with new openings.

“We’ve previously shared that new Shacks typically see a higher labor rate during the initial operating period and new teams calibrate staffing levels to support demand before the Shacks settle into a normalized operating rhythm,” Garutti said on a conference call with analysts. “With 50 percent of our 2018 class opening in the fourth quarter, we certainly saw that impact to our operating margin in the period.”

Shake Shack opened 17 new locations in the fourth quarter of 2018, as compared to seven new restaurants in the third quarter and five each in the first and second quarters of the year.

The company bumped up menu prices by 1 percent to 1.5 percent to slightly offset the increase in labor costs. Labor accounted for 28.5 percent of total costs in the quarter, compared to 26.9 percent of total costs in the same period the year prior.

Along with a general increase in labor costs due to the high level of new openings at the end of last year, the minimum wage has risen significantly in Shake Shack’s most important U.S. markets.

In New York City, Shake Shack’s home market, there’s been a 43 percent increase in the minimum wage since 2016. In Los Angeles, Chicago, and Washington, D.C., there’s been a 33 percent increase, a 26 percent increase, and a 20 percent increase in minimum wage rates, respectively, in the same time period.

“Opportunities to streamline and optimize labor are a key focus and include kiosks, scheduling tools, kitchen design, and process changes,” the company noted in its supplemental earnings presentation.

A Jump in Revenue

Overall revenue in the quarter was up 27 percent compared to the same year prior, accounting for $179 million in system-wide sales. Comparable store sales increased 2.3 percent in the fourth quarter (measured on a 24-month operating basis at Shake Shack). For the full year, comparable sales were up 1 percent.

Shake Shack shares slipped 1.21 percent in after-hours trading immediately after the call.

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