Shake Shack's new Chick'n Bites are eating into profits and could be scrapped

Shake Shack

• Shake Shack's new Chick'n Bites could prove short-lived after they ate into profits last quarter.
• The menu item fueled a 35% spike in food and paper costs, shrinking the fast-food chain's adjusted operating margin by more than a tenth to 24.4%.
• The hand-breaded pieces of chicken breast are also time-consuming to prepare.
• "It's something we've got to see people continue to come back for," CEO Randy Garutti said.
• Watch Shake Shack trade live.

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The future of Chick'n Bites at Shake Shack could be in doubt after the new menu item ate into the fast-food chain's profits last quarter.

Shake Shack - known for its ShackBurger, crinkle-cut fries, and custard shakes - grew comparable sales by 3.6% in the second quarter, sending its adjusted operating income up 14% to around $36 million. However, the roll out of Chick'n Bites spiked food and paper costs by 35%, shrinking the company's adjusted operating margin by more than a tenth to 24.4%.

Chick'n Bites were one of two "significant headwinds" to Shake Shack's profitability, along with higher staffing levels in newer restaurants, finance chief Tara Comonte said on the earnings call this week. The crispy pieces of breaded chicken were the main driver of higher food expenses and had a "meaningful impact" on paper costs, she said.

"Chicken is a high-cost item in our basket, particularly the premium-quality, fresh, antibiotic-free, whole breast meat that we source," Comonte said.

"It's not a commodity product," CEO Randy Garrutti added. "It's something that we spend a lot of money on."

Assembling Chick'n Bites has proven to be time-consuming as well.

"Every single Chick'n Bites is done by hand to order, right? That takes time," Garutti said on the call. "It's operationally challenging. It takes labor."

Shake Shack has been pleased with initial demand for Chick'n Bites and early customer feedback. It also expects the product's margins to improve following price hikes, renegotiations with chicken suppliers, and supply-chain tweaks.

However, Chick'n Bites may not stick around. Shake Shack plans to "listen, learn, and assess how long it stays on the menu," Comonte said.

"It's something we've got to see people continue to come back for," Garutti said.