Dive Brief:
- Shake Shack has decided to close nine company-owned restaurants in California, Ohio and Texas, the chain said in a U.S. Securities and Exchange Commission filing.
- As part of a regular evaluation of its portfolio, the brand identified these locations as underperforming and said they will not produce “acceptable returns in the foreseeable future.” In some cases, these units were cannibalizing sales from other nearby Shake Shacks.
- The closures aren’t expected to impact Shake Shack’s plans to open additional stores in these states and the company said it doesn’t expect to close any other locations following its evaluation.
Dive Insight:
Shake Shack’s overall strategic priorities remain the same, as do its expected openings for the year, per the filing. As of the end of the second quarter, the chain had over 540 locations globally, including 350 in the U.S.
During the second quarter, the chain opened 23 units, including its first restaurant in Canada, Katie Fogerty, Shake Shack’s CFO, said during the company’s second quarter earnings call. By the end of 2024, the company expects its new openings over the course of the year to total 40 company-owned units and 40 licensed units. The chain also expects same-store sales growth in the low-single digits,
The closures are in line with the company’s strategic plan to increase restaurant-level margins, which Fogerty projected to be 20.6% to 21% for the year. Removing restaurants that are cannibalizing sales from others will help boost sales and margins of the remaining stores.
Shake Shack said it’s also committed to reducing costs of new builds by about 10% for new units in 2024. Additional reductions are expected for new units in the 2025 pipeline. It is also leveraging its diverse ordering channels, including drive-thrus, as well as third-party delivery, as part of its revenue model, Fogerty said.
Many chains that operate in California have struggled to drive sales and traffic following the state’s implementation of the $20 minimum wage for fast food chains with 60 or more units. Same-store sales improved from negative low-single digits to positive during the second quarter following a 7% increase to menu prices, Fogerty said.
Closures are expected to be completed by Sept. 25 and employees were notified on Aug. 27, per the SEC filing. Management will be offered positions at nearby Shacks and hourly employees are eligible to be rehired at other locations. Hourly team members and managers who don’t accept a transfer will be provided up to 60 days pay.
Shake Shack plans to record a cumulative pretax cost of $28 million to $30 million during the third quarter due to these closures.
Several other chains, including Bloomin’, Hooters and TGI Fridays, have closed underperforming stores this year as they reevaluate their portfolios amid traffic declines and same-store sales slumps. A KFC franchisee closed around 25 restaurants in the Midwest in August.
