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Diving certificate:
- Shake Shack has decided to close nine company-owned restaurants in California, Ohio and Texas, the chain said in a statement to the U.S. Securities and Exchange Commission (SEC).
- As part of a regular assessment of its portfolio, the brand determined that these locations were underperforming and that they would not generate “acceptable returns” in the foreseeable future. In some cases, these units were cannibalizing the sales of other Shake Shacks nearby.
- The closures are not expected to impact Shake Shack’s plans to open more stores in those states. The company said it does not expect to close any more locations following the review.
Diving insight:
Shake Shack’s overall strategic priorities remain unchanged, as do the new store openings planned for the year, the statement said. At the end of the second quarter, the chain had over 540 stores worldwide, including 350 in the United States.
In the second quarter, the chain opened 23 stores, including its first restaurant in Canada, Shake Shack CFO Katie Fogerty said during the company’s second-quarter earnings call. By the end of 2024, the company expects to open a total of 40 company-owned and 40 licensed stores during the year. The chain also expects store sales growth in the low single digits.
The closures are consistent with the company’s strategic plan to increase restaurant-level margins, which Fogerty forecast to be 20.6 percent to 21 percent for the year. Closing restaurants that take sales away from others will help increase sales and margins at the remaining stores.
Shake Shack said it has also committed to reducing new construction costs by about 10% by 2024, with further cost reductions expected for new units in 2025. As part of its revenue model, the company also leverages its multiple ordering channels, including drive-ins and third-party delivery, Fogerty said.
Many chains operating in California struggled to increase sales and customer numbers after the implementation of the $20 minimum wage for fast-food chains with 60 or more stores. Store sales improved from negative low single digits to positive in the second quarter after menu prices were increased by 7%, Fogerty said.
The closures are expected to be completed by Sept. 25, and employees were notified on Aug. 27, according to the SEC filing. Management will be offered positions at nearby Shacks, and hourly employees may be rehired at other locations. Hourly employees and managers who do not accept a transfer will receive up to 60 days’ pay.
Due to these closures, Shake Shack expects cumulative pretax costs of $28 million to $30 million in the third quarter.
Several other chains, including Bloomin’, Hooters and TGI Fridays, have closed low-revenue locations this year as they reassess their portfolios in the face of declining customer traffic and falling store sales. A KFC franchisee closed about 25 restaurants in the Midwest in August.
