Shake Shack Inc (SHAK) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Shake Shack third quarter 2015 earnings conference call.

(Operator Instructions)

Please not that this conference is being recorded today, November 5, 2015. On the call today, we have Randy Garutti, Chief Executive Office of Shake Shack; and Jeff Uttz, Chief Financial Officer. And now, I'd like to the conference over to Jeff Uttz.

Thank you, Operator, and good evening, everyone. By now you should all have access to our third 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 and 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 we filed on March 27, 2015, our subsequent quarterly reports on form 10-Q, our prospectus, which was filed on October 12, 2015, (sic - see press release August 13, 2015) and our registration statement on form S-1, which was filed with the SEC on October 8, 2015. Additionally, any forward-looking statements represent our views only as of today, and 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 the earnings release.

With that, I'd like to now turn the call over to Randy.

Thanks, Jeff, and good evening to everyone on the call today.

I want to start by celebrating the extraordinary hard work of our team in the recent quarter and throughout all of 2015. The results we're sharing today have surpassed our expectations in nearly all areas. I've been working with Shake Shack since we sold our first hotdog to support an art project in Madison Square Park 14 years ago, when none of us ever dreamed we'd be talking to you today.

We took the company public earlier this year. Even I, with more confidence in who we are and where we're headed than anyone, never expected the results we're sharing today. Both our existing guests and so many new guests have connected to our brand in record numbers, and it shows in our results. We're going to continue to take care of our team first, continue to innovate and continue to lead one burger at a time. It's that enlightened hospitality culture that got us here and it's what we'll always use as our compass while we continue to build a great company.

Guests today care more about their food choices. They want to know more about where their food comes from. They want to connect and share their experiences instantly with people the world over. Shake Shack is providing our guests with a community gathering place their neighborhoods need.

Now, to a few notable highlights from the quarter. Total revenue grew 67% to $53.3 million. Same-Shack sales increased 17.1%. Shack level operating profit in non-GAAP measure increased 106% to $15.6 million, representing a 30.4% Shack level operating profit margin. Adjusted EBITDA in non-GAAP measure increased 128% to $13 million. On an adjusted pro forma basis, net income increased 252%. We earned $0.12 for fully exchanged and diluted share for the quarter on an adjusted pro forma basis, well ahead of our internal forecast, driven primarily by stronger than expected same-Shack sales growth and robust performance across Shacks nationwide.

Let's be clear about the factors we believe drove our same-Shack sales growth this quarter. First, we've continued to benefit from increased guest awareness following our growth in our IPO earlier this year. There has been a boost in sales due to the return of crinkle cut fries which we just lapped in early November.

We've seen continued positive mix shift throughout the year from our LTO program. This quarter has shown strong results again from a Roadside Shack, our new cheeseburger topped with bacon and beer caramelized onions. Our Shake of the Week offering that began in January, has continued to shift guests toward more shakes at a slightly elevated price point and we benefited from two months of an approximately 3% menu price increase taken in early September 2014, and another 3% that was taken in January 2015, to offset commodity cost pressure.

Additionally on previous calls, we've talked a lot about the impact of closing our flagship Madison Square Park Shack for renovations from October 2014, through May of 2015. And the potential impact it could have had on our New York City Shacks. We are now happy to report with Madison Square Park reopened for the full summer, all New York City Shacks have shown sustained sales growth, six of which are included in our comp base. We will continue to keep a close eye on this dynamic as the Madison Square Park Shack has exited the comp base from now through May 2016.

Moving on to development and looking ahead at the next generation of Shacks, we continue to execute on our intended strategy. At a high-level, our goal this year and into next year is to open approximately one-third of our Shacks in flagship launch sites of new markets and the remaining two-thirds of openings, we'll deepen our roots in our existing successful markets.

Executing on that plan during this quarter, we opened four new domestic company operated Shacks in existing markets, including our second Shack in the Orlando area, a freestanding location on International Drive in the exciting new project I-Drive 360. We opened our second Austin, Texas, Shack in the Domain, a stunning new freestanding Shack including Bocce courts, solar panels and design we're truly proud to bring to the neighborhood. We also opened our third Shack in the Chicago area at the Westfield Old Orchard Shopping Center in Skokle, Illinois. And finally back East, we welcomed our second Shack on Long Island in New Hyde Park.

Following the quarter end on October 7, we increased our Western footprint with our second Shack in the Las Vegas market in downtown Summerlin. And just last week, we opened in Woodbury Commons in New York, executing on our increased development plans, opening a total now of 12 new domestic company operated Shacks in FY15. Additionally last week, we opened our seventh Shack in Kuwait, which is our third international licensed Shack opening this year.

We are also thrilled to announce next week, myself and our team, will be over in Tokyo. On November 13, we'll open our first ever Shack in Tokyo, Japan. Due to favorable tailwinds in our construction and supply chain efforts, this Shack is opening earlier than planned. This will be a freestanding Shack located in the renowned Meiji-Jingu Park and is inspired by the first ever Shake Shack in New York City's Madison Square Park.

I really hope you'll follow our social channels next week as the gingko trees in this park change from green to yellow lighting up and inspiring our opening in this exciting and important market for us. As a reminder, our licensed partner in Japan is the SAZABY LEAGUE, a great partner who's team was initially responsible for bringing Starbucks to Japan at its first international market. They continue to focus today on specialty retail and restaurant brands and we are thrilled to team with them to launch Shake Shack in Japan next week.

In addition in Japan, we remain on track to open two more international Shacks in the fourth quarter for a total of six international openings in FY15, exceeding our original guidance of five international licensed Shacks for the year. Looking ahead into 2016, our development pipeline is strong. As you know, at the time of our IPO almost 10 months ago, we communicated we would open at least 10 domestic company-operated Shacks per year.

Last quarter, we increased that number to at least 12. And now, with more insight into our pipeline for 2016, we are again raising guidance for 2016, and now plan to open at least 14 domestic company-operated Shacks. The schedule is more weighted towards the back end of 2016 than we'd like, which will limit the sales impact of new Shacks on overall revenue for 2016. Nonetheless, we're excited to share with you that our plans continue to strengthen, our growth model continues to achieve the targets we've set and we're seeking increased real estate opportunity into 2016 and beyond. We are well-positioned to capitalize on our brand strength to secure premium sites in celebrated locations around the country.

As we've announced, we'll be entering California with our first Shack in the Los Angeles area in West Hollywood, as well as two Shacks in the Phoenix, Arizona market. First in Scottsdale with a flagship at Fashion Square on the corner of Camelback and Scottsdale Road, followed by a second Shack in uptown Phoenix. And most recently, we were thrilled to announce our continued growth in Texas with the addition next year of our first Shack in Dallas' booming uptown neighborhood. This is going to be a free-standing Shack in the center of a park at The Crescent.

In addition to new markets, you'll see exciting growth from us in our hometown with new Shacks planned in Manhattan and Queens as well as other Shacks in our existing markets on the East Coast and Midwest. The 2016 Shacks are setting up to be a compelling addition to our Shack base in new and existing markets.

On the menu innovation side of our business, our new Chicken Sandwich which launched exclusively in our three Brooklyn Shacks in July, has shown strong early results during the operational testing phase. Guest feedback has been overwhelmingly positive and it has become one of our top-selling items on the menu at all food Shacks. Day-by-day, the team is learning what chicken could mean for Shake Shack system-wide in terms of menu mix contribution. And additionally, we just recently launched chicken in our first international market at four Shacks in Istanbul, Turkey, and it's off to a great start. We will keep you posted on the future of chicken as we continue this market test.

With that context, I'll turn it back over to Jeff, who will walk you through the numbers.

Thanks, Randy. I'm really excited to be able to share with all of you the results of our 13-week third quarter ended September 30, 2015. Total revenue which includes Shack sales and licensing revenue increased 67.4% to $53.3 million during the third quarter from $31.8 million in the third quarter of last year. Shack sales increased 70% to $51.3 million during the quarter versus $30.2 million in the year ago period. This increase was largely due to the addition of new domestic company-operated Shacks over the past year, as well as our stronger than expected same-Shack sales growth.

Same-Shack sales increased 17.1% on a calendar basis during the third quarter versus a 1.2% increase in the same quarter of last year. This increase consisted of an 8.1% increase in traffic combined with a 9% increase in pricing mix. Our strong growth in the third quarter was positively impacted by the factors Randy noted earlier, including increased brand awareness from the IPO, the return of crinkle cut fries, a positive mix shift from a menu addition including the Roadside Shack and our Shake of the Week, and menu price increases, approximately 3% taken in early September 2014, which we have now rolled over, and another 3% taken in January 2015, to offset commodity cost pressures.

When we discuss comps, it's important to remind everyone the balance of these numbers and the context of our relatively small comp base. Our comparable Shack base includes only those Shacks that are open for 24-months or longer. The comparable Shack base in the third quarter of 2015 included only 16 Shacks compared to 12 Shacks in the third quarter of 2014. Of those 16 shacks in the base, only 6 of them are in our original market of New York City. We want to highlight that our same-Shack sales results for the quarter are relatively consistent across all of the markets. And thus continues to demonstrate the strength of our brand outside of New York City.

Average weekly sales for domestic company-operated Shacks increased 9.6% to $103,000 for the third quarter of 2015, up from $94,000 in the same quarter of last year. Primarily driven by robust traffic trims, menu price increases, positive shifts and mix from menu innovation and solid performance across the Shack base, including in new markets. As we expand further into our existing markets and open more target volume Shacks, we do continue to expect that our average weekly sales over the long-term will decline.

Licensing revenue increased 20.4% to $2 million during the third quarter from $1.7 million a year ago, driven by the opening of seven internationally licensed Shacks since the third quarter of last year in the Middle East, UK, and in Russia. As we have during the first two quarters, in the third quarter we faced significant foreign exchange headwinds due to the strength of the US dollar. And we estimate that our third quarter internationally licensed revenues were negatively impacted by approximately 8% year over year due to foreign currency exchange rates. We expect this pressure to continue for the remainder of this year and into 2016.

Now let me give some detail on our expenses for the quarter. Food and paper costs, as you followed this year, we have had continued tailwinds in our supply chain that have allowed us to beat expectations on the costs of goods sold line. As a percentage of Shack sales, food and paper costs decreased 190 basis points in the third quarter to 29.1% compared to the prior year quarter. This improvement was driven primarily by the previously mentioned menu price increases we took to help offset higher beef costs, while lower dairy and other costs, as well as certain supply chain enhancements, led to better than expected margins during the quarter.

Our beef costs were still up slightly in the current quarter compared to the prior year third quarter, but we are beginning to see even pressure there. However, as we've stated in the past, we do not expect any significant long-term reduction in these prices until early 2017 as our cattle producers continue to rebuild the herds. As a reminder, while we do contract our supply for beef, we do not contract price.

We've had good deal in dairy compared to last year but we have seen that category continue to increase in sequential quarters and we believe that dairy will continue to be up as we close out our fiscal year. For the remainder of FY15, we believe overall commodity inflation for our market basket to be relatively flat to slightly higher on a sequential quarter-over-quarter basis. Heading into 2016, if beef markets continue to hold at elevated levels, we should see only a modest increase in our food and paper costs year over year as we continue to stand for something good by investing in better ingredients and making further supply chain improvements.

Labor and related expenses as a percentage of Shack sales were 23.7%, a reduction of 170 basis points compared to the prior year, the result of higher Shack sales and reduced labor requirements from the return of crinkle cut fries. These reductions were partially offset by our decision to raise the starting wage to $12 an hour at our four Washington DC area Shacks which went into effect in July of 2015. While we have been able to leverage labor and related expenses this year, we don't expect that to continue into 2016.

Over the next few years, we expect deleveraging on the waiver line as target volume Shacks make up a larger percentage of our base and we increase wages throughout Shacks nationwide. Minimum wages continue to increase and we continue to compensate our teams above those minimums. We intend to continue to offer competitive compensation packages and career development opportunities in order to attract the best talent and to take care of our team for the long-term. We've always led our Company this way and we believe that this will lead to the best long-term financial results.

Occupancy and related expenses as the percentage of Shack sales, decreased 70 basis points to 8.2% versus the prior year, driven by the higher Shack sales. Shack level operating profit, a non-GAAP measure, grew 105.7% to $15.6 million from $7.6 million last year, mostly due to the flow-through captured on the higher Shack sales. As a percentage of Shack sales, Shack level operating profit margins increased roughly 530 basis points to 30.4% as we leveraged food and paper costs as well as labor and other operating expenses.

Clearly we're very proud of the strong [floor] profitability of our current basis Shack. But I do want to take some time in this call to quantify our long-term targets. Pre and post-IPO we've guided you to understand the significant light space opportunity that Shake Shack has in front of us. We've also shared in our long-term outlook, and I believe the target volume Shack AUBs will be in the $2.8 million to $3.2 million range and Shack level operating profit margins will be in the 18% to 22% range. We continue to guide you with these long-term assumptions.

That said, clearly, we outperformed these metrics in 2015 thus far, and we have some updates for 2016. As we now have a much more detailed look into the pipeline for 2016, I want to guide your thinking there. Due to the balance of growth in new and existing markets, we believe that for the 14 Shacks we expect to open in 2016, you can expect the average sales volumes and the shack level operating profit margins to be at the high-end of our long-term ranges. Our revenue guidance for FY16 assumes the 2016 units to average at least $3.3 million in annual revenue and achieve at least a 22% Shack level operating profit margin.

Although 2016 is expected to be a strong year of Shacks, I want to reiterate what Randy said earlier, that the majority of our 2016 pipeline is weighted towards the back half of the year, and as a result, we will not benefit as heavily from the increased sales volumes and operating margins of the 2016 Shacks. General and administrative expenses increased to $0.5 million to $5.7 million during the third quarter from $5.2 million in the same quarter of 2014. As a percentage of total revenue, G&A expenses decreased to 10.8% for the third quarter of 2015 from 16.3% in the third quarter last year which included higher costs related to the preparation for our IPO.

As a reminder, because our IPO did price above the final range, recurring stock-based compensation expense will remain high in 2015 and in years to come. We expect incremental stock-based compensation expense over the next few years as we intend to continue granting stock options to our team numbers.

Adjusted EBITDA, a non-GAAP measure, grew 128.3% to $13 million in the third quarter, compared to $5.7 million in the prior year period. And as a percentage of total revenues, adjusted EBITDA margins increased roughly 650 basis points to 24.5% for the third quarter. We reported net income of $1.5 million or $0.10 per diluted share for the third quarter of 2015, compared to net income of a $0.5 million or $0.02 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 to noncontrolling interests, we earned $4.4 million or $0.12 for fully exchanged and diluted share, compared to $1.2 million or $0.03 for fully exchanged and diluted share in the third quarter last year.

Given our strong results for the first nine months of 2015, we are again raising our guidance for 2015. Before I do that, I want to acknowledge the fact that we'd exceeded our stated guidance each quarter this year. We're a new public company and we're learning every day and we're continuing to outperform in ways that even we did not fully expect. And while we've been conscious thus far, we also want to update our numbers based on the learnings that we have had in order to provide all of our investors and all of our analysts a more realistic look into what we expect for the balance of this year, and give you some preliminary views on 2016.

With that, here are the numbers that we see for the remainder of 2015. We now expect total revenue for FY15 to be between $189 million and $190 million compared to $171 million to $174 million previously. Same-Shack sales are now expected to be between 11% and 12% for the full-year of 2015. This implies a lower increase on same-Shack sales in the fourth quarter compared to the first three quarters which is mainly due to the lapping of menu price increases taken in September 2014 and is also based on the trend that we are seeing in the fourth quarter to date.

As Randy previously mentioned, we've accomplished our goal of at least 12 new domestic company-operated Shacks in 2013. And with the early opening in Tokyo next week, we're now targeting six internationally licensed Shacks for FY15.

Now let's talk about what we expect to see in FY16. We expect total revenue will be between $237 million and $242 million. Remember, although we have increased our store opening guidance for 2016 and beyond to at least 14 openings from 12, the openings in 2016 are skewed towards the back half of the year, and as a result, we will not see a significant impact from any of these openings. Because of the number of flagship 2016 openings in new markets, we expect the average sales volumes for these 2016 units to be at least $3.3 million on check over operating profit margins to average with 22%.

However, I want to reiterate again that our long-term guidance past 2016 remains at $2.8 million to $3.2 million, and 18% to 22%. We'll be comping against double-digit same-Shack sales increases in 2016 and therefore, we expect 2016 same-Shack sales growth to be between 2.5% and 3% which consists of a minimal menu price increase to be taken in early January, nominal traffic and mix increases. And lastly, we expect to open at least 14 domestic company-operated Shacks and 8 international licensed Shacks in the Middle East, UK and Japan. Hopefully, that's given all of you a much clearer picture of where we are and where we're going.

With that, I would like to turn it back to Randy to make some final points.

Thanks, Jeff. I want to take a moment now to talk about next year and how you should think about our business. Make no mistake, we like to set the bar high for ourselves. We've been consistent in delivering on what we said we would do and we plan to continue to execute on our plan. I do want to call timeout and recalibrate our message as we look forward.

So far this year has been extraordinary for all the reasons we've mentioned before, and for all the people who continue to come to Shake Shack in record numbers. The world is telling us this is a product they love, this is a company whose ethos they want to share and this is say place they want to gather. The results speak for themselves. We're incredibly proud of our team and the results for the year so far, and at the same time, we remain cautious about the challenges ahead.

I want to reiterate Jeff's comments on the labor pressures ahead as we expect rising wages to remain a headwind for us and the entire restaurant industry. Shake Shack has always taken care of our team and competitive wages to attract and keep a sincere hospitable and high-performance team.

We will continue to take a high road and offer a competitive wage packages while focusing on growing revenue and attracting the best talents of the Company. What we do takes talent as human beings. It takes able hands and full hearts and we remain committed to delivering the genuine hospitality our guests have come to expect from us.

Moving forward, it's really important to balance our own as well as your expectations of our growth, especially as it relates to our small comp base. We set the performance bar extremely high in 2015 and next year we will have to lap some of the strongest results we've ever produced in our Company's history. I have said it on previous calls, I'll reiterate today, we do not expect these numbers to continue at this rate. We believe Shake Shack long-term is a low single-digit comp story in 2016 and beyond.

Anyone who's been to a busy Shack and studied our AUVs can tell you how many happy people come see us on a daily basis. As we look ahead, want to urge you to focus on our long-term growth story. Allow us the opportunity to continue to grow the Company and execute on the promises we have made as we've done since the first hotdog was sold in 2001. We have been fortunate this year to have been able to surprise on the upside and this has truly been a remarkable quarter, but our eye's on a much larger prize. We'll be a Company not based on quarters but for future generations to come.

With that, I want to thank all of you for taking the time to join the call today and Operator, you can go ahead and open the lines for questions.

(Operator Instructions)

John Ivanhoe with JPMorgan.

Hi, first, congratulations. Very impressive quarter. So you made your remarks, some comments around the fourth quarter, basically saying you're losing 3 points of pricing, you're lapping the crinkle cut fries. It's a really big trend change relative to the 17% that you saw in the third quarter to what I think you're implying to be something like a mid-single digit comp in the fourth quarter.

So I guess confirm that's the comp that you're talking about, if you are seeing that. And I realize there's only 16 restaurants in the comp base. But are you seeing a significant change in your compensation between the third quarter and the fourth quarter? And I'm sure you know some of your peers have talked about a pretty slow October.

Hey, John, it's Jeff. I'm going to guide you back to the 11% to 12% versus really talking about numbers that we're seeing in Q4, specifically. But there were a number of factors that went into that 11% to 12% number. The things that we're rolling over that we previously mentioned a few things on the call, as well as we're five weeks into Q4 and really what we're seeing in Q4. So I don't want to get into the specific numbers mid-quarter where we are Q4, but we do expect that 11% to 12% range for the year.

If you look at, John, the 17% versus the previous quarter of nearly 13%, third quarter was just an extraordinary quarter for a lot of reasons. And I think just knowing that we've lapped that 3% price, knowing that we're lapping crinkle cuts, knowing that at the Madison Square Park is now back out of the base and that had been a contributor to the third quarter. So there's a reason for the 11% to 12% guidance right now.

Okay, you just said that point. Madison Square Park was a big contributor in the third quarter?

Yes, as we talked about, as I talked about it earlier in the script here, Madison Square Park and all the New York Shacks were contributors to the comp. But as we've said again, nationwide across geography, the comp base is small. But of all the 16, much more weighted outside of New York, and all those restaurants perform really well.

And John, just to give a little bit more color on that, there's five Shacks that'll be coming into the base in Q4. So we'll be at 21 Shacks in the comp base by the end of this year.

Okay, that's helpful. If I can continue, in your comp guidance for FY16, is there any additional pricing that you're anticipating especially in the context of higher labor costs across the industry?

Yes, as Jeff noted, we're hoping that we can hold on the comp line to slightly elevated for next year which is going to allow us use price to really pay for, partially offset, the deleveraging we see on the labor line. We're intending a low single-digit price increase in mid-January right now. Haven't finalized that plan yet. We'll keep you posted.

Okay. I may have missed that. And you mentioned there was a mix of a flagship and fill in restaurants. I think one-third flagship and two-thirds fill-in. I don't think you use the word fill-in but that's what I'm calling it. Should we think about significant average unit volume difference between the two? For example, maybe the fill-in restaurants do the $2.8 million to $3.2 million that you previously guided and flagship is something like $5 million plus? Are you willing to talk about the different average unit volumes that you expect of these different classes of units?

John, we all talk about it differently. But I think that's actually not the right way to think about it. A flagship launching in new market does not necessarily mean a higher volume. For example, we'll have a Manhattan Shack next year in Harold Square. So, that's where we expect that to be a high-volume restaurant but that would categorize as a fill-in, right?

So not every Shack just because it's a new market means high volume. That's where we've come off of the long-term $2.8 million to $3.2 million which we believe in past 2016. But for the class of 2016, as far as we know it today, we're projecting a higher segment in that range around $3.3 million on average. So, there will be stuff below that. There will be restaurants above it.

Understood. And a final one for me. Hopefully, there are all small enough questions. I think there was some confusion in the press around your registration for the shares bringing class B to class A. You didn't mention it really in your prepared remarks. But is there anything that you would like to clarify in terms of what that means? When that stock could be sold by the existing shareholders? Is there any lockups that we should be sensitive to blackout periods, what have you, in terms of when that stock could be in the public market?

Well, thanks for asking that John. I appreciate it. Giving us a chance to clarify that. I think there was some misunderstanding of that. Let me direct you first of all, the best information you're going to get is the registration statement that's on file with the SEC.

But I will say, we believe -- the reason I was doing it, is there's efficiency to achieve by us registering the class A shares at once. We have a unique upsea structure here, okay? That registration allows any pre-IPO owner to sell from time to time as they might choose. It is not an indication of anything more than that. This filing does not overshadow the confidence of Danny Myer, our Board, our Management, myself, our Directors have in the long-term outlook of this business.

Okay, thank you.

Thanks John.

(Operator Instructions)

Paul Westra, Stifel.

Thanks, good afternoon. Great quarter. Congrats. Just to follow up on your cost of goods sold commentary and specifically, beef. If I understood it right on the call, it sounds like you're not experiencing too much of drop in ground beef although others are and I know you guys have different cuts of beef. Any more granularity on the outlook there? And then, I think your commentary qualitatively for next year's because you had hold or elevated cost of good sold, does that mean a flattish commodity basket before price?

We said flat to slightly up. Beef is still up quarter-over-quarter, Q3-over-Q3, but based on what we're seeing to date, it's started to level out. It's still high. It hasn't come down and as I said earlier, we don't expect to really see it come down quite a bit until early 2017. But it has started to level out on us a little bit. And because of that, I think in previous calls, I had said that we expected sequential to the mid-digit inflation quarter-over-quarter. And now, we're saying flat to just slightly up sequentially quarter-over-quarter.

And Paul, reminder, that we're not buying commodity beef. We're not buying trimmings. We're buying whole muscle, hormone, antibiotic free, never ever beef. And that doesn't follow exactly the same rules as the commodity does. So we've been fortunate as Jeff said, to be sort of levelling in this last quarter, still up from last year and we don't see it going down anytime soon. But we're hoping that it can kind of hold as far as we can tell into this next few quarters.

So, even with the rest of the beef complex coming down, I get the whole meat, most cuts are down. But as of now, I guess the overall supply of that type of cut is relatively small enough that's the best you can hope for at this point?

What we might call it, it's less than 10% of the overall beef market, so it doesn't necessarily behave the same as what everybody else is buying.

We'd be happy to see flat this quarter and through next year.

Fair enough. Okay. And can you just remind me in the Madison Square Park store, when did it leave, when did it come back out? I think I got tripped up on that. Just remind me when that comes in and out of the comp base?

The out is basically October to May. So it was out in October of 2014 to May of 2015. Then it came out again in October of 2015 and will stay out until May of 2016. And then back in and all that noise is gone.

Oh, okay. Thank you. Lastly, if I may, just one more word on the minimum wage hikes especially with New York City. A lot of uncertainty for all players in the city in particular. Any thoughts about -- in relation to your price increases? Will it be regional? That's low single-digit? Is that a weighted average national? Maybe a little bit more in New York City? I know you were preemptive on your taking wages higher generally this calendar year. Maybe just refresh us on that and what you're thinking about New York City in particular?

Yes, Paul, it's up. It's headed up. We've always paid above minimum wage. As Jeff mentioned, we've been experimenting for a couple months at being a couple dollars above minimum wage. Washington DC at $12 an hour. We're paying $11 an hour in Texas, well above minimum wage. And we're going to continue to think about that.

We haven't decide on the dates but we do know that we'll be increasing our wages. We want to get the best team. We want to have the best people driving sales and driving our restaurant. So we're going to pay the right wage in each market to do that, to be determined when. We don't believe the low single digit price we intend to take will fully offset that. So we expect even further pressure than this year through next year on the labor line for our hourly team members.

Great, thanks, and congrats on a great quarter.

Thanks, Paul.

Sharon Zackfia, William Blair.

Hi, good afternoon. I'll add my congratulations. I think the mixed component really tipped up materially sequentially between the second and the third quarter. And I know you talked about all of the things that are adding to the average check. But I'm just curious as you looked at that summer versus spring season, what really accelerated for you there? Was it just the Shake of the Week or something like that which is more seasonally important in the summer? It's a pretty big tick up.

Well, you're right to say that. It's a little bit of a tick up. Traffic was really up too. I will agree with you, Sharon, when we're higher volume, that volume does translate to a higher percentage of those LTO's. If we look at the Roadside Shack versus the Shack Burger, you get nearly 20% kick on that item if somebody were to trade to that.

For the shakes that we talked about, no question. That's our summer season. We sell more shakes in the summer. You're absolutely right to hit on that. And when we're selling the new kind of shakes, the special custard's of the week shakes, that gives us about a 5% win from ordering a regular vanilla or chocolate shake. So you got it. I think you're spot on to it and that has been a contributor to the mix continuing to go.

That's also part of why, as we explained to John a few moments ago, why we're being more cautious about Q4. Because with lower volume seasonally, we are a little slower in Q4 than we are in Q3 and Q2. We are a little busier in the summer of our restaurant. So that's an impact.

Okay. And then, you were talking a lot about focusing on the long-term, and the expansion opportunities, both in the US and abroad. And I'm curious as you are opening these doors in the US, and they're obviously well ahead of the volumes you thought you could achieve, does that change if you're thinking around 450 locations in the US? Can you go to markets perhaps that you didn't think you could and generate $2.8 million in sales? Or is it just too early to talk about that?

I think everything we've seen has been encouraging. But we're at 43 domestic company-operated Shacks today. And we've got a long road to 450. So we've got our sights on that, we've got our sights on the increase to 14 Shacks for next year which we're really excited about the quality of those 14. And nothing has changed yet. But we're both on our future. We're excited about all the performance across markets that we're seeing.

Great, thank you.

John Glass, Morgan Stanley.

Hi, guys, this is Courtney on for John. Just wanted to follow up on the comments about the new store economics coming in above the range you had provided for your long-term guidance for next year. Is that more of a function of the non-Manhattan stores performing better than you expected or is it the mix of Manhattan versus non-Manhattan? Earlier you talked about the store in Manhattan performing better than a flagship store.

You're talking about the 2016 guidance Courtney, for the new Shacks?

Yes, the $3.3 million and the 22% margin.

That really has nothing to do with non-Manhattan versus Manhattan Shacks. Really what it is, is we know where they're going to be. It's a 2016 pipeline that's coming up.

We have very good sales estimates for all of those and we've calculated what we believe that average will be. And it's really a function of knowing where the Shacks will be and it's not a function of geography, per se. Like Randy said earlier, it's a mix of Shacks in new markets and Shacks in existing markets and some will be above the $3.3 million and some will be below.

And just to reiterate the notion that what does Manhattan, non-Manhattan mean? We continue to talk about this. We've talked about it a lot in the IPO. We're really thrilled with what's happening outside of New York. This is no longer the New York-based company that you read about in our prospectus. It is a diverse company spread out around the country and only going further. We're thrilled about the performance that we've seen in all markets. I just wanted to reiterate that point.

As we continue to move further away from our IPO, we're going to talk about less and less about Manhattan versus non-Manhattan. Just the Company as a whole and the Company in general.

Okay, got you. Sorry, I know you don't want to talk more about it. But how many of the 14 stores next year are you planning to open in Manhattan?

There's two. There's two that we intend to open. Harold Square and downtown in Fulton Center. Those should be the two that are in Manhattan. And then we've got a couple others in New York and Queens. So we're excited about two more that we'll be doing in Queens.

Okay, great. And just lastly on the minimum wage increases, have you guys quantified at all what the headwind to the labor line should be as a percent of sales?

We haven't yet. At this stage, we haven't gone down other than the major 2016 guidance we've given. But it's significant. It's going to be up. And we're going to continue to take care of our people and make sure that we're putting the best team out there.

And the menu price increases that we've talked about in the future of the low single-digits, I think Randy mentioned this when he was talking earlier. We don't expect that to fully offset the labor pressures that we're going to see. We expect it to partially offset and to help but certainly not offset completely what we're going to see with labor in this country over the next two, three, four years.

Great, thank guys.

Jeffrey Bernstein, Barclays.

Great, thank you very much. A couple of questions. Just one actually following up on that last one with regards to price. I think you're going to be running 3% now, and then something very modest I guess in January. Maybe we're talking about 4% plus as we start next year.

Just wondering how do you arrive at that number? As you said, Jeff, it doesn't seem to be fully offset in the inflation. I'm wondering why it wouldn't be more? If it was a structural labor issue or maybe you get the sense that there's some pushback? Or you hit a certain point where you just can't fully offset it? What's the thought process in terms of how you arrive at that increase?

So for 2016, Jeff, we talk about a nominal menu price increase. We always say, we've always taken low single-digits. But, I need to be clear, that 3% that's in there, that rolls off at the beginning of January. The first 3% rolled off this past September. And the second 3% will roll off in January. So the only thing that we're going to have in there as we get into 2016, will be that nominal menu price increase that we plan on taking sometime in January.

Yes, so it's not accurate to say that 4% gets us off a year. We start the year before. We raise prices at zero. We lap both.

So it's a nominal increase you take in January that you're going to be running through 2016?

You got it.

Yes, we talked about the 2.5% to 3% comps for next year. Didn't break it out yet between price and mix and traffic. But it'll be a nominal menu price increase and nominal traffic.

Got it. I guess the question more being, what leads you to come up with that price if you acknowledge it doesn't plan to fully offset the labor, and just wondering whether there's any sense of pushback? Because it would seems like the traffic is strong enough for you. You might be able to take more and therefore, better protect the margin.

Yes, we might. But I think the reality is for us is we want to find the right price. So we feel really good about where we're priced today even at risk some of the anomalies we're talking about. We feel really good about the level of product that we provide versus the competition. And we just got to keep winning on that. We're not going to get overaggressive. That may mean that we've got to trade a little bit on the labor line next year.

As we said, we feel good about cogs, so that hopefully puts us in a strong position to be flat to just up a little. But I think the answer is we're willing to take a little bit of a hit on the labor line to get the right people, pay people right and make sure we don't take too much price. We took 6% in the last year. Prior to that, you would never know anything over 2% to 3%.

Our hope is to return to that very cautious price taking. And just continue to excite people with the brand. We're at beginning of this story and there just is no reason to take more price than we need. If we do fine and we need it, we'll consider that down the road. But that's not our intention right now.

Understood. And then just the comp this quarter, obviously very impressive. I think you said it was really roughly 8% if I got that right, traffic. I'm just wondering one, how that's possible? I've been to your stores. I'm just wondering is it faster through-put? Are you coming up with ways to get through all food faster? Or is it more shoulder periods? How do you assess how it's possible to get that kind of traffic through your stores already?

You know in the 13 years, 14 years since I've watched this company, nothing seems to surprise me. And neither does 8% traffic at a mature base of restaurants. We were pretty amazed by that too.

Our operators are just doing fantastic work. I think there's just continued everything happening. As we mentioned on it, just continued awareness, continued extension of the day parts.

Remember, one other thing about Shake Shack that's important to remind everybody, we've got an advantage in day part. We sell ice cream, frozen custard, shakes. That extends in afternoon day part that may not exist in another restaurant.

We sell beer. Really good beer. Really good wine. And that extends a little bit of an evening at day part. And we're hopeful as we continue to look at paying higher wages to people, that we're going to continue to get even better staff, even better team members, and our hope is that we increase that productivity as we go. But let's celebrate the grade A percent traffic this year and now, we're back to work.

And my last question was just on the unit growth and Randy, I think you've summed it up pretty well. You started by saying 10 a year and then it went to 12, and now it's at 14. It's only natural for people to wonder why next quarter or after that, it might be 16 or 18. So I'm wondering -- I'm assuming the brand's reception is pretty strong. I'm wondering what the constraint is? Is it real estate or people? How do you arrive at that number? Just seems like it could continue to go higher.

Over time, I certainly hope it will. But let's put that on the base of where our Company is today. Domestic company-operated Shacks, with 14, we're going to be over 30% increase in unit count in 2016. That's some pretty solid growth. We are not looking to go too fast. If we find compelling sites in great community gathering places that we believe we have the leadership in place, the supply chain, everything, we'll look to ramp that up as we have last year or this year for our guidance in the next year. That is our goal. Right now, what we can tell you is we feel really good about 14 great Shacks next year.

Great. Thank you very much.

Andrew Charles, Cowen and Company.

Great, thanks. As you think about the Shack's strong social media presence and credibility you have with digital, what features do you believe might make the most sense if you were to launch a mobile app?

Hard to say. We've got our eyes on it, obviously. The team continues to work on what that might look like and we're looking forward to what the digital future and the mobile experience will be for Shake Shack. But we have the good fortune of strong comps, strong traffic and a lot of people coming to our brand.

So we are going to take our time on that. We have nothing to announce yet on that. No question, our guests continues to be a millennial and even younger guest who is engaged in digital more than ever. But not having that has not hurt our business. So, we're going to keep looking forward to the right way for that experience to find its way to Shake Shack and we're working on it.

Got it. Jeff, as you know, we think about G&A. I think last quarter you said it might be a $6 million to $7 million run rate. We were a little bit below this quarter. Is that still fair as we look to Q4 in 2016?

Yes, the one thing we talked about that you're going to see incremental stock-based comp in there. We haven't guided to the exact number of what we're going to see in terms of additional stock-based comp. But I think we'll see leverage as we get into 2017, is really where we had talked about previously. Hopefully we can leverage it in 2016. But I would encourage you to think about leverage hitting more in 2017.

I just want to reiterate that. We're building a team right now. We've got a fantastic team in place today. We're going to continue to invest in that team so we can execute on our plan. That means that you're not going to see leveraged likely next year in the G&A line especially because of that options expense that we have. That is high because of where we priced the IPO.

And high because of where we're trading.

If you look at our run rate, G&A, it's pretty well controlled even though we continue to make big investments.

Thank you.

Karen Holthouse, Goldman Sachs.

Hi, good evening. This is actually Greg Orman for Karen today. Just a quick question for me actually. We've been seeing some warmer weather this winter so far, and I'm just wondering how does weather actually impact your sales dynamics versus other concepts?

Well, it's a good question. We don't want to be a company that either blames or uses weather on the upside. That's going to come in and out of our lives. Last winter was really cold. So far, this fall has been really warm.

That for us is not going to be a compelling factor for us to explain to you our results in the future. Just to set that aside, we're going to get out there and take care of people as best we can. I think we're fortunate, some of the other businesses that are more affected by weather, we hope that over the long-term we're less in our fine casual setup, less affected.

Great, thank you.

That will conclude the question-and-answer session. I'd like to turn the call back to Management for closing comments.

Yes, Dawn, I just want to say thank you to everyone. It has been a fun quarter for us. We are working hard every day to earn your trust. And with that, it's dinnertime and I hope you all head out to get a Shack burger tonight. So, thanks for joining in and take care.

That does conclude today's conference. We thank you for your participation.