Shake Shack Inc (SHAK) 2015 Q2 法說會逐字稿

Welcome to the Shake Shack second-quarter 2015 earnings conference call.

(Operator Instructions)

Please note that this conference is being recorded today, August 10, 2015. On the call today, we have Randy Garutti, Chief Executive Officer of Shake Shack, and Jeff Uttz, Chief Financial Officer. Now, I'd like to turn the conference over to Mr. Jeff Uttz. Please go ahead.

Thank you, Operator. Good afternoon, everybody. By now you all should have access to our second-quarter 2015 earnings release. If not, it can be found at ShakeShack.com in the Investor Relations section. Before we begin our formal remarks, I need to remind everyone that our discussions today will include forward-looking statements. These forward-looking statements are not guarantees of future performance; therefore, you should not put undue reliance on them.

Actual results may differ materially from those indicated by these forward-looking statements due to a number of risks and uncertainties, including those discussed in the risk factors section of our annual report on Form 10-K, which was filed with the SEC on March 27, 2015, our quarterly report on Form 10-Q for the quarter ended April 1, 2015, which was filed with the SEC on May 15, and in our registration statement on Form S-1 as amended, which was originally filed with the SEC on July 20, 2015.

Additionally, any forward-looking statements represent our views only as of today. We assume no obligation to update any forward-looking statements if our views change.

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.

Today, we filed an amended registration statement with the SEC. Our comments on today's call shall not constitute an offer to sell, or the solicitation of an offer to buy, nor shall there be any fail of these securities in any state or jurisdiction in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction. We refer all of you to our SEC filings regarding that matter. With that, I would like to turn the call over to Randy.

Thank you, Jeff. Good afternoon, everyone. In the second quarter, our team has continued to execute on our plan. We have delivered another strong quarter of outstanding operational results. We're excited to be sharing these results with you today, as well as discuss what they mean for the full-year outlook.

I would like to highlight a few notes from the second quarter. Total revenue grew 74.7% to $48.5 million, including a 12.9% increase in same-shack sales on a calendar basis. Shack-level operating profit, a non-GAAP measure, increased 110.9% to $14.1 million, a 30.3% shack-level operating profit margin. Adjusted EBITDA, a non-GAAP measure, increased 136.5% to $11.2 million. On an adjusted pro forma basis, we earned $0.09 per share for the quarter, ahead of our internal expectations, driven in large part by our much stronger than expected same-shack sales growth and strong performance across Shacks nationwide.

Similar to last quarter, we attribute our stronger than anticipated performance to a number of factors, including: menu price increases taken in September 2014 and January 2015, to offset commodity cost pressures; the continued lift in sales due to the return of crinkle cut fries; a positive mix shift from our limited-time offering of the ShackMeister burger; and our January custard calendar change, which added a Shake of the Week option to our seasonal custard offerings; and the extraordinary amount of press surrounding our IPO, which has cultivated new Shack fans and an even stronger brand awareness.

On May 20, after more than seven months of complete renovation as part of our lease renewal with the City of New York, we reopened the new and improved Madison Square Park flagship. The Shack quickly regained its place as a New York institution. We're happy to report that fans have lined up again in full force to experience the original Shack, now finally better equipped for our team to handle demand. Now as we've noted in past quarters, this closure may have contributed to an increased comp during the last three quarters in the six Shacks in the comp base in New York City.

During the quarter, we opened our first Shack in the great state of Texas. Located in Austin on South Lamar Street, as part of a great new development anchored by the well-known Austin institution, the Alamo Drafthouse. We continue to execute our strategy to cluster growth in existing markets: opening our third Shack in New Jersey, at the Village of Bridgewater Commons; and our second Shack in Chicago on Michigan Avenue, on the ground floor of the impeccably restored Chicago Athletic Association, a boutique hotel overlooking Millennium Park.

We also look forward to opening our second Shack in Austin, Texas later this year, as well as a second Shack in Long Island in New Hyde Park, our second Shack in Orlando, on International Drive, and our third Shack in the Chicago area at the Westfield Old Orchard in Skokie, Illinois. Development conditions remain favorable for Shake Shack. As a result, our team has been able to increase our pace of openings to exceed our originally stated guidance of at least 10 new domestic Company-operated Shacks in 2015. We are confident, that we will now open 12 new domestic Company-operated Shacks in 2015. The two newly added Shacks will open towards the end of the year.

Looking to 2016 and beyond, we continue to strengthen our pipeline of new Shacks. We plan to open at least 12 domestic Company-operated Shacks per year moving forward. We've already announced our plans to enter Los Angeles, California, with our launch in West Hollywood, and both Phoenix in Uptown and Scottsdale at Fashion Square, on the corner of Camelback and Scottsdale Road. Our development plan through 2016 looks strong. We are well-positioned to capitalize on our brand strength to secure premium sites in dynamic locations around the country.

On the international front during the quarter, we opened our second Shack in the UK. Located on the street in the heart of the bustling Westfield Stratford City Shopping Centre, as well as our third Shack in Moscow, Russia, located in Aviapark, Moscow's newest premier shopping and dining complex.

We remain on track to open our stated five international licensed Shacks in 2015. For 2016, so far we've announced the planned opening of our third London Shack on New Oxford Street and our first UK Shack outside London in Cardiff at St. David's Shopping Centre. Additionally, we expect to open our first Shack in Tokyo, Japan, with our partner the Sazaby League.

In addition to growth within our restaurants, the Shake Shack brand continues to grow and create a deeper engagement with our guests on all of our social media channels and beyond. We've seen organic growth across all platforms. In our recent Instagram post announcing the launch of the Chicken Shack at our three Brooklyn Shacks received nearly 7,500 likes, the most we've ever received on a single post. Which just speaks to the active engagement we have with our guests and their desire to share their Shack experiences with their own communities.

This has been an amazing part of the Shake Shack story since we were born in 2004 and continues to demonstrate the sincere and organic nature with which we connect with our fans. With that, let me turn the call back over to Jeff for a more detailed financial review of the quarter.

Thanks, Randy. Let's now turn to the results of our 13-week second quarter ended July 1, 2015. Total revenue, which includes Shack sales and licensing revenue, increased 74.7% to $48.5 million during the second quarter, from $27.7 million in the second quarter a year ago. Shack sales increased 77.9% to $46.6 million during the quarter versus $26.2 million in the year-ago period. The increase was largely due to the addition of 14 domestic Company-operated Shacks over the past year, as well as our stronger than expected same-shack sales growth.

Same-shack sales increased 12.9% on a calendar basis during the second quarter versus a 4.5% increase in the same quarter last year. This consisted of a 4.3% increase in traffic, combined with an 8.6% increase in price and mix. Our second quarter reflected the continuation of many of the positive trends we experienced in the prior quarter, including menu price increases taken in September of 2014 and January 2015, to offset higher commodity costs; the reintroduction of crinkle cut fries, which we believe had a more significant impact to this quarter, because at this time last year we were in the latest stage of our phased rollout and most of the Shacks were on fresh fries; positive shifts in mix from the Shake of the Week and the limited offering of our ShackMeister burger; the extraordinary amount of press surrounding our IPO; and lastly, the temporary closure of our Madison Square Park Shack, which may have provided a lift to our other Manhattan Shacks.

As a reminder, our comparable Shack base includes only those Shacks that are open for 24 months or longer, which we feel is the best comparison, given the long honeymoon periods at our new Shacks. The comparable Shack base in the second quarter of 2015 included only 16 Shacks, compared to only 10 Shacks in the second quarter of 2014, in which both years included only six Shacks in New York City. It's important to note, the second quarter same-shack sales improvement was pretty consistent across all Shacks in the comp base.

During our recent success, we continue to reiterate our long-term belief that our Shacks will deliver low single-digit same-shack sales growth over the long term, given that most of our Shacks already operate at very high industry-leading volumes. Average weekly sales for domestic Company-operated Shacks, increased 7.4% to $102,000 for the second quarter of 2015, from $95,000 in the same quarter last year, primarily driven by menu price increases, positive shifts in mix from menu innovation and strong performance from several Shacks opened in the second half of 2014, including those Shacks in Las Vegas and Chicago.

Despite the strong performance this year, we continue to expect our average weekly sales over the long term to decline as we continue to open more of our target volume Shacks.

Licensing revenue increased 20.1% to $1.9 million during the second quarter from $1.6 million a year ago, driven by the opening of eight internationally licensed Shacks and one domestic licensed Shack over the past year.

Let's now turn to the expenses for the quarter. Food and paper costs, as a percentage of Shack sales, decreased 110 basis points in the second quarter to 29.4%, driven primarily by the previously mentioned menu price increase, which partially offset higher beef costs. That, coupled with lower dairy costs and certain supply chain initiatives, provided better than expected margins during the second quarter.

Looking ahead, we expect continued pressure on beef prices. Additionally, we are closely monitoring the effect of the avian flu outbreak, which is negatively impacting the cost of eggs, which is a key ingredient in our frozen custard base and in certain of our sauces. We anticipate overall commodity inflation to remain at elevated levels for the remainder of the year and into 2016. Therefore, we continue to project inflated food and paper costs over last year and throughout the remainder of 2015.

Labor and related expenses as a percentage of Shack sales were 24%, a reduction of 150 basis points compared to the prior year, as a result of higher Shack sales, and from reduced labor requirements from the return of crinkle cut fries. Over the next few years, we continue to expect deleverage on the labor line as target model Shacks make up a larger percentage of our base and as minimum wage increases continue to pressure our labor costs. We've always taken care of our team and offer competitive compensation packages.

In July, we took a proactive approach to rising minimum wages and the competitive labor environment and chose to raise the starting wage at our four Shacks in the Washington DC market to $12 per hour. Minimum wage is pressuring the overall restaurant industry. We don't see this pressure easing any time soon. As we look at the minimum wage issue, we are going to stay proactive with our compensation practices, recruiting and with the development of our team. Taking care of our team members first will always drive our decision making. As a result, we expect deleveraging on the labor line over the long term.

Occupancy and related expenses as a percentage of Shack sales decreased 20 basis points to 8.3% versus the prior year, driven by the higher Shack sales. Shack-level operating profit, a non-GAAP measure, grew 110.9% to $14.1 million from $6.7 million last year, mostly due to the flow-through captured on the higher Shack sales. As a percentage of Shack sales, Shack-level operating margins increased roughly 470 basis points to 30.3%, as we leveraged labor and other operating expenses.

We remain proud of the strength of our current Shack of economics; however, long term, we're still targeting AUVs in the $2.8 million to $3.2 million range for new Shacks. Given some of the cost pressures I mentioned earlier, Shack-level operating profit margins in the 18% to 22% range. As more of these target volume Shacks enter the base, our overall Company operated Shack AUVs and Shack-level operating profit margins are expected to decline over time.

General and administrative expenses increased $2.5 million to $6.1 million during the second quarter of 2015 from $3.6 million in the same quarter of 2014, primarily driven by incremental stock-based compensation expense related to the stock options that we granted in connection with the IPO, increased payroll costs related to the additional home office personnel that were hired to support our long-term growth, and the inclusion of expenses related to our annual leadership retreat in this quarter. This leadership retreat was held in the first quarter of the prior year.

As a reminder, because our IPO priced above the filing range, recurring stock-based compensation expense will remain relatively high in 2015. As a percentage of total revenue G&A decreased to 12.5% from 13.1% in the prior-year period, despite the increased costs associated with being a public Company and the incremental stock-based compensation expense I mentioned earlier.

Adjusted EBITDA, a non-GAAP measure, grew 136.5% to $11.2 million in the second quarter, compared to $4.7 million in the prior-year period. As a percentage of total revenues, adjusted EBITDA margin increased roughly 600 basis points to 23.1% for the second quarter.

We reported net income of $1.1 million, or $0.08 per fully diluted share for the second quarter of 2015, compared to net income of $1.9 million, or $0.06 per diluted unit for the same period last year. On an adjusted pro forma basis, which excludes non-recurring items and also assumes that all of the outstanding LLC interests were exchanged for Class A common stock, whereby we would no longer present a non-controlling interest, we earned $3.4 million, or $0.09 per fully exchanged and diluted share, compared to $1.1 million, or $0.03 per fully exchanged and diluted share in the second quarter of last year.

Following the strong results of the first half of 2015, we're also raising our guidance for 2015. We now expect total revenue to be between $171 million and $174 million, compared to $161 million to $165 million, as we previously estimated. Same-shack sales are now expected to increase mid to high single-digits for the full year, compared to low to mid single-digits as we had previously estimated.

This implies lower same-shack sales in the second half of the year compared to the first half. Due to the lapping of menu price increases taken in September of 2014; the return of crinkle cut fries, which we will lap in the second half of 2015; the limited offering of the ShackMeister burger, which ended in July; and the significant amount of press following our IPO, which has provided a lift in sales in the last two quarters, but is not expected to continue.

As a reminder, we currently only have 16 Shacks in our comp base, of which 6 are located in New York City. Our Madison Square Park flagship reentered the comp base in May, and in October, the month in which it closed last year, it will come back out of the comp base again. As Randy previously mentioned, we are confident that we will now open 12 new domestic Company-operated Shacks in 2015. We continue to target five internationally licensed Shacks for FY15.

Looking to 2016 and beyond, we continue to strengthen our pipeline of new Shacks and plan to open at least 12 domestic Company-operated Shacks per year for the foreseeable future. With that, I will turn it back over to Randy for some final points.

Thanks, Jeff. I could not be more proud of our team and what they have accomplished this quarter. It's exciting to see how we've capitalized on the wind at our back and taken this opportunity to grow our roots even deeper for the years ahead.

With that, I do want to share some exciting innovations happening on our menu. Our team continues to embrace our fine dining heritage as we develop new products around the core menu.

Through the second quarter, we continued to see a positive mix shift from our limited-time offering of the ShackMeister burger, which has since rolled off our menus in the last week of July. This burger was a great addition to our menu, and due to its success, we chose to add a new limited time offering, which began on July 27, the Roadside Shack. This is our tribute to the old roadside burger stands that have dotted American highways for generations. The Roadside Shack is our classic cheeseburger, topped with beer- and bacon-simmered onions.

This new burger replaces the ShackMeister burger at the same price point of $6.19 and will run for a limited time. Also in the beginning of July, we launched the ChickenShack, Shake Shack's first ever chicken sandwich. The ChickenShack is a crispy, all-natural, antibiotic-free chicken breast, served with shredded lettuce, pickles and our buttermilk herb mayo.

Due to an overwhelming response, the ChickenShack sold out within two days and returned to the menu a week later. It's currently available for a limited time, exclusively at our three Shacks in Brooklyn. The guest response in Shack and on social media has exceeded our expectations. We're learning a lot as we continue this limited offering.

Before we move to the Q&A portion of today's call, I would like to once again thank all of our truly dedicated and passionate team members, who have created the excitement and strong momentum driving our Company today. With that, Operator, you can go ahead and open the lines for questions.

(Operator Instructions)

John Ivankoe, JPMorgan.

Just a clarification, the Madison Square unit, you've argued, for the better part, since last October that you thought it was helping your New York restaurants from a comp perspective. Now that Madison Square has come back in and is reopened, has there been that corresponding negative effect on the New York restaurants that you possibly saw as a benefit in the last seven months?

John, it's a little early to tell, we have really only one month of results in the second quarter on that. That was really in the reopening, getting our feet wet and getting going again. We're not going to talk about mid-quarter results here in Q3. But what we can tell you is it's open.

It's rocking. People are lined up again. Time will tell, as the year goes on how that impact has impacted. We're going to continue to be conservative as we did today and in previous quarters, saying we're just not sure of how that impact worked. We're going to be careful watching that in the coming quarters

Let me ask you this, if I heard right, Madison Square comes back in the comp base in May and then goes out again in October?

That's right, it will go out again -- when it was closed since it had nothing to comp against. So it will go out from October through the following May.

So presumably, in the third quarter, you get that year-on-year benefit of Madison Square doing much better year-over-year. You have a bigger restaurant, so I think it's fair to say your sales are up 2015, over 2014. Correct me if I'm wrong, but then it comes out again on your reported comps for your fourth quarter. So there could actually be a more negative effect on the fourth quarter than the third quarter?

That depends on its performance, as I said. I didn't say that, Madison Square Park is not a bigger restaurant. What we did is fixed the restaurant that was never built to be a year-round restaurant, added about four feet in the back, so it's really not a bigger restaurant. We went underground, so we didn't have to have a commissary as we did in the past. So, we're learning today. We'll keep you posted on its performance relative to years past.

Okay. That's helpful. Thanks for that color. Then my second question, is on labor costs especially in New York.

You called out the $12 pay in DC, but obviously New York -- Metropolitan or in New York City, more specifically a bigger more important market to you from a revenue mix perspective. How is Shake Shack thinking about the Governor's mandated wage increases affecting the industry overall?

How might you respond, firstly, in terms of paying your people more? But also do you think you have other opportunities around pricing or productivity initiatives to lessen the financial impact?

So, John, the first price increase will come in December -- excuse me, the first labor increase will come in December. There's no doubt it's going to take a toll on the entire industry. We've always paid above minimum wage. We're well-positioned to increase that as we need to. We're going to always, as we've said, lead with taking care of our team.

We do believe, as we've said, when you look at the results certainly in this first half of the year, that have been so strong. We do expect deleverage on the labor line over this coming years -- over these coming years as minimum wage goes up.

I think some of the good news that you alluded to is there -- look, we've taken 6% price this year. Our traffic is up, our sales are up, we continue to find ways through menu innovation to drive sales. That's going to be our focus. Our focus is going to be on taking care of our team the right way to put the best people in front of you when you come to Shake Shack and continuing to drive sales to pay for it and keeping a strong business. But we have a lot to learn. We'll keep you posted as those raises come on board.

Thank you.

John Glass, Morgan Stanley.

Jeff or Randy, just the 18% to 20% long-term margin goal. Maybe if you can just put that in the context of what you're experiencing right now. You seem to be so far above that, that doesn't seem realistic any longer. I understand, you've had great comps. You've had a lot of mix benefits from that.

Can you maybe just talk about what margins look like now in the non-comp stores? Maybe give us a guide of, is this just really even better on the comp stores in the under -- in the lower margins of the non-comp stores? We're not seeing underneath the average, there's a bigger disparity?

Or how do we understand that difference? Also as your volumes have grown, how have you not seen more labor inflation for example in the P&L, how have you mitigated that? Have there been labor saving devices you've already been able to use to keep that in control?

John, it's Jeff.

So the 18% to 22% margins that we talked about when you're putting together your model, as you talked about or as you mentioned, there's a 12.9% same-shack sales that we experienced really helped us leverage that quite a bit. Going forward, as we start to lap some of the things that I had talked about in the release, the price increase and some of the other things that we're going to be lapping, we just don't think it's prudent to model anything more than 18% to 22%.

That's what history has shown, that's what we're comfortable with right now. But the flow-through that we got from that 13% same-shack sales was pretty good and really helped that line. As we talked about, we just don't believe that a 12.9% comp is sustainable. That's why we're guiding you the way we're guiding you. I think, it's prudent to keep it at 18% to 22% going forward.

Okay. That's helpful.

Then just a couple of things, one is on the food cost line, does it sound like food costs bottomed this quarter? It still seems like you've got favorable food costs from B standpoint. Maybe just where you -- are you actually seeing an inflection for example in custard prices that would drive food cost up from the second-quarter level?

Yes, we're remaining a little cautious John. As you know, we follow the market in our major baskets of beef and dairy; right? So beef is still up, high single-digits from last year for us, even in Q2. So we're being conservative about what that means for the rest of the year. We just don't see the light at the end of the tunnel there just yet for some time.

We've been winning on dairy as of late, but then as Jeff noted, it's starting to get a little more expensive. Eggs are up. Our dairy costs have gone up. But that has been the contributor to a strong COGS performance in the last two quarters; however, we continue to believe in mid single-digit inflation in that line, throughout the end of the year.

Just one last one. What was the notion behind just launching chicken in the couple of restaurants? Is that how you've done those new -- if except there's been any precedent for this, that's how you do in the past? Or what -- is there any reason why you wouldn't have that system-wide relatively soon?

It's something we've got to learn a lot about. What we like about chicken, as we look at it, is balancing out our risk in proteins. As you know, we've basically been a beef restaurant. All this time, the majority of our basket is beef. We've looked at that.

But you know what led it, John, is a lot of people asking for a chicken sandwich. Our team, probably for about two years, testing, having some fun creating and landing on the Chicken Shack. That's just an extraordinary sandwich for people. The feedback has been amazing. You do a search on Instagram for Chicken Shack and you'll get many thousands of posts of people having a good time and loving it.

So it is an interesting thing for us to watch. We have only planned today for the three Brooklyn Shacks for a limited time. As we learn more about what it means for us and our mix and the menu, we will keep you all posted on what we may or may not do with chicken down the road.

Got you. Thank you.

Jeffrey Bernstein, Barclays.

A couple of questions as well. First one, I know you mentioned in the release and I think you mentioned on the call as well, that bumping up the unit development for this year and presumably next year, you attributed it to more favorable development opportunities. Just wondering, if you can give a little bit of context on that, whether you're seeing a different reception today versus a year or two ago? Or are you getting better locations, or terms? What exactly does that mean in terms of getting more favorable development opportunities?

Yes, it's been exciting. Obviously, we've always gone for great locations. So I wouldn't say that what we're seeing is any better. I think it's continuing the same -- to execute on the same plan of A real estate in great markets that will drive Shake Shack's AUVs and our business overall.

The two that we were able to add, we were fortunate we got to bump those up. They were intended for next year. We had some favorable conditions on permitting and construction. So those are going to allow us to open those two later this year.

We are also confident in our pipeline. Our development team is out there hitting the road and doing a great job. There's no question -- there's a lot of developers out there and landlords who understand our story more than ever, due to the IPO and due to the increasing geographic reach of Shake Shack. People want a Shake Shack. We are thankful for that. We're going to go ahead and take this opportunity to ramp that up to at least 12 Shacks a year.

All right. Then the new market performance, I know you're slowly entering into more and more new ones. But the ones where you've been for a bit whether it's Vegas -- I don't know if it's hard to consider that a normal market, but Chicago, Boston. Any color on that relative to your -- what you talked about earlier your non-New York City guidance at a more conservative $3 million in volume and the 18% to 22% restaurant margin? How are those other markets playing out in the early days relative to that?

We've seen geographic strength everywhere. The reception has been really strong. I think one of the things about being the brand of Shake Shack is when we do arrive, we're able to really capitalize on a strong start. We spent a lot of money on our start-up costs to open our restaurants the right way and take care of everyone that's coming in.

So we're really happy with the new markets of Austin, of Chicago, Vegas, of Baltimore. As we continue to grow around Boston this year, we've got a great pipeline in and out of New York. We're really excited about wherever we've gone, we've seen a strong response.

All right. Then just lastly, any update on the -- being that throughput is a challenge, especially when you have the demand you have. But on the mobile order and the payment? I know you were testing different things but is there anything we can look forward to in the short-term? Or is that still a ways away?

No. Not at this time. We're continuing to look at it and continuing to look at the way we operate in the restaurants every day. There's been an increase in traffic this past quarter. And the team has been doing a great job taking care of more and more guests every day.

Great. Thank you.

Karen Holthouse, Goldman Sachs.

A quick question on the unit growth side of things. You know, trying to look at the gap between average weekly sales growth and comp growth to try and get a sense of new store productivity. It looks like the gap was a little bit more narrow this quarter than it's been. But I would assume also that Shake Shack coming back -- sorry, the Madison Square Park location coming back in changes that a little bit.

If I understand your comment, if you're just looking at new store productivity in apples to apples markets, should we still be thinking about things as similar to the materials that we've previously gotten? Or some of the benefits that the whole system is seeing on the top line or on the comp line? Is that also impacting productivity around new units, awareness that sort of thing?

Yes, I think you got it on your last comment there, Karen. It is affecting us across the system. The increase -- the comp of 12.9% has been a really strong contributor to the better performance that led to a 30.3% Shack-level op profit this quarter. So many of the Shacks just continue to capitalize on that and have done a great job of flowing through.

So, nothing new from the way we've talked about in the past in considering how you think about it. Again, nothing new reiterating the long-term Shacks in that 20% op profit range and the $3 million range. That's where we believe the long-term majority of Shacks, which are some really strong numbers, will continue to go.

Great. Thank you.

Sharon Zackfia, William Blair.

Jeff, I was hoping you could give us some update on what you expect for Company-owned operating weeks this year, given the incremental Shack that you'll be opening -- the extra one or two?

Yes, I would fill that in later in the year, towards the back half of the year. I don't have an exact number on the operating weeks in front of me. But put it in towards the back half of the year.

Okay. Then on wage inflation, following-up on an earlier question. Can you talk about where your wage inflation is right now? What the outlook is for the back half of the year and into 2016?

Well, Sharon, it's been down so far this year. Again due to the increased comp and the increased performance. So we haven't seen a whole lot of wage inflation this year. We gave quite a good raise to our team about 1.5 years ago. We've been living with that for awhile, outside of our change in DC, which is a brand new change that just happened in July. We have continued to see really strong labor performance across our Shacks.

If you recall, one of the things that we talked about in the past -- at this time last year, most of our Shacks actually had a higher labor because we're doing the fresh cut fries. That increased labor quite a bit.

Now not having that, we've been able to come down. In addition with the increased sales, the flow-through has been strong. So, again, over the long-term, as minimum wage creeps on us, as it will for the entire industry, we do expect deleverage on that line in the future from the results you're seeing today.

Okay. I guess I was just trying to separate productivity, which I would relate to the french fries versus the actual average hourly pay? So if you just look at that average hourly pay -- I would assume that has to be going up?

It is. That's right. Our productivity has gone up, obviously, because of the increased sales that we've noted.

Sharon, one of the things, I think John Glass might have asked this too and I didn't answer that time, but I think that one of the things we need to think about is with the increased sales, is there's a number of Shacks out there where the kitchen gets -- it gets to a max, where you really can't get another person in the kitchen.

At that point, your labor becomes fixed. You really get quite a bit of leverage. You've been in Shacks; the kitchens are not particularly huge. But they're very, very busy restaurants. When you get so many people in there and you can't add another person, you get quite a bit of leverage from each additional person that comes in the door.

Okay. One last question, kind of following up on John's question earlier, as well. What would make you rethink 20% as the right long-term restaurant level margin? I mean what would you need to see in the business?

Well, we will keep you posted on that. Nothing today. Right now, we believe as we head towards our goal of domestic Shacks at 450 restaurants over the long-term, those are some really good numbers. We're going to be proud to continue to deliver on those. So if we continue to have moments where we rethink that, we will let you know. But today, that's the plan.

All right. Great. Thank you.

Paul Westra, Stifel.

Can we just go through pricing? Can you quantify that -- well, second-quarter pricing was 6%. How much is falling off again in September? Just maybe a little more details on how you're thinking about -- if you're thinking of adding to -- to add some more pricing into September as pricing falls off? If so, are you looking to target certain markets maybe when minimum wage is up, take more pricing? Or would it be more of a national pricing strategy?

Yes, Paul, it's Jeff.

So just to give a history on the price increases. Beginning in September of 2014 is when we took 3%. So what you're going to see is one month at the end of Q3 will lap over that 3% price increase. Then the second 3% that we talked about to get the 6%, happened at the beginning of 2015.

Then, as far as any pricing we plan to take this year, we don't have any plans to take any additional price this year. Historically Shake Shack has always taken very low annual price increases in the 1% to 2% range. This 6% that we took over the last year was an anomaly and was a direct response to increasing commodity prices, primarily beef. Unless there's some skyrocket in beef, we have no plan to take any more this year. We'll see as we get into next year what we'll do.

As far as you have some of the spikes, for instance in New York City, minimum wage spikes -- you have the flexibility and in the past, you've taken targeted price increases in geographic locations as opposed to everywhere?

We may. Today, we have basically the same prices across the nation. But we're not stuck with them.

If we need to for a certain region, that may have a different pressure on the COGS line or the payroll line as you noted, we may choose to do that. But we have no plan to do that through the rest of the year. We'll look at that a little more closely as those changes come into effect.

Okay. Can we -- just one time, is there a way to quantify, how much does this wage rate (inaudible) wage rate question? Year-over-year wage rates, I get the hours are down because of fresh cut fries. I think it would be helpful to get some quantification of how much the wage rate is going up on a year-over-year basis?

No. We would not provide any information at this time, Paul.

Okay. I just wanted to make sure that was -- okay. So lastly, on international, just give us some more color on sales trends, opening volumes? Obviously I know you gave us a good roadmap of the future openings. If you have any more clarity, or qualification on how international stores are doing?

We increased 20% year-over-year, mostly due to the new Shacks that we opened throughout different markets. But, we're not going to break out any unit by unit performance there. Our international business continues to grow. It's a great business for us. It performs similarly to our domestic business, where we open hot. Generally, year two things come down a bit. Then it starts to grow back up into year three. That has been the general performance.

But for the most case, we have of the 29 Shacks -- the majority of them were built in the last couple years. So we're continuing to learn how that business is going to go. We're excited about launching in Japan in 2016 too.

Great. Thank you. Congrats on a great quarter.

Thanks, Paul.

(Operator Instructions)

Matt DiFrisco, Guggenheim Securities.

Just wondered if you could give us some commentary on what you're seeing on the newer stores that have opened, not the iconic locations like a Vegas one or so, but if you could -- I guess it's a question that's been asked a couple times here, more so on the progression of how we should see some of these averages come down as you move away from the $5 million openings and more towards these $2.5 million to $3 million openings? Is that being seen now? Is that the run rate that you're seeing at these newer stores? Or are they surpassing and exceeding the initial targets that might be by some perceived to be conservative?

Thanks, Matt. We're not going to break them out store by store or by region. What we can say is as you've seen in average weekly sales in the total performance of this quarter, it's been strong everywhere. We are not changing our long-term outlook that on average we will see that $2.8 million to $3.2 million of those new stores. Of course, within that, there are Shacks that are busier. All right? We've talked about some of those on previous calls, some of the more flagship locations.

Within that there may be some that are slower than that average. That's why we've picked that average to look at over the long-term. That's really what we want to talk about today. We've had a great start to the six Shacks that have opened domestically this year. We're excited about that. It's really early results for the rest of it. So we're watching it and excited about where we are headed.

Matt, just something I think you all should think about too, is the IPO lift that we talked about at the existing Shacks could have an impact on some of the new Shacks we're opening now as well. People that have never heard of us maybe in another region and now, they're saying, gosh, I heard the news on Shake Shack, it could be [frying] them up there.

So we think it's conservative to go with a $2.8 million to $3.2 million that we've always talked about because next year, we may not have that IPO hype. We won't have that IPO hype.

Interesting. I guess, also just as a follow-up question to the question about chicken earlier. I understand you're doing it in a test and you're gathering learnings from it. But is there any reason why not to -- that this cannot be rolled out on a national basis, say this time next year? It could be in all your stores? Going forward, as a full-time menu item?

It's way too early to say, Matt. Have you had a Chicken Shack yet? I hope you come by and have one. It's a really good sandwich. We'll keep you posted on where we're headed. It's really too early to say at this time.

Well, I'm not asking plans. I'm asking is there anything restrictive from the supply that you're getting? Where you're sourcing it from? Or the format of the stores? Or the cooking process? Or should it just be simply implemented as an additional menu item if you chose to?

I think any implementation across the entire system is a major undertaking. So there's a lot that we need to consider. So, that's why we're taking our time on it. So at this time, I couldn't say what that thing would be. But we're continuing to listen, learn and get guest feedback, see how it goes.

Thank you.

Thank you. With no further questions in the queue, I would like to turn the call back over to Mr. Garutti for any additional or closing comments.

Thanks again, everybody. I appreciate your time. I hope you all have a good night. Take care.

That does conclude today's call. Thank you for your participation.