Shake Shack Inc (SHAK) 2015 Q4 法說會逐字稿

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

(Operator instructions)

Please note that this conference is being recorded today, March 7, 2016.

On the call today, we have Randy Garutti, Chief Executive Officer of Shake Shack, and Jeff Uttz, Chief Financial Officer. I now would like to turn the conference over to Jeff Uttz.

Thank you, Operator. Good evening, everyone.

By now you should all have access to our fourth-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 factor section of our various Securities filings, including our annual report on Form 10-K for FY14, our subsequent quarterly reports on form 10-Q and our final prospectuses on Form S-1. 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 our earnings release.

Now, I'd like to turn the call over to Randy.

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

I am thrilled to share the fourth-quarter results that have rounded out an extraordinary year for us. Now one year into our life as a public company and with record-setting results in nearly all metrics, we are looking far ahead in reiterating the story we have been sharing with you. We have just barely gotten started. We're also going to spend a lot of our focus today looking forward at the exciting strategic developments we have in store for 2016 and beyond.

Guests around the world are engaging with Shake Shack in record numbers and with a deeper connection than ever. Shake Shack has never been in a stronger position to capitalize on the opportunities ahead. We hit the ground running in 2016, with a strategic focus on driving long-term value creation, continuing to build the community gathering places our guests love while innovating around our core menu and further investing in the unique and special culture that differentiates and drives our Company forward.

Now, a few notable highlights from the fourth quarter. For the fourth quarter, total revenue grew 47% to $51.1 million. Same-Shack sales increased 11%.

Shack level operating profit, a non-GAAP measure, increased 88% to $13.9 million, representing a 28.2% Shack level operating profit margin. Adjusted EBITDA, a non-GAAP measure, increased 104% to $9.9 million. On an adjusted pro forma basis, net income increased to $2.9 million or $0.08 per fully exchange and diluted share for the quarter.

Moving on to development, we opened 3 new domestic Company-operated Shacks in the fourth quarter, bringing our 2015 total to 13, including 1 Shack originally included in our 2016 guidance. We continue to execute on our increased growth strategy, opening approximately one-third of our Shacks in new markets and the remaining two-thirds in existing markets, capitalizing on our brand strength while driving operational efficiencies as we cluster shacks in existing markets.

In October, we opened our second Shack in the Las Vegas market in Downtown Summerlin. Next, we headed upstate to New York to Woodbury Commons for our first ever outlet center Shack and entered the last day of our fiscal year with our first street side Shack in Queens, New York, at the Queen Center Mall.

We hit our development strategy on all cylinders showing broad strength geographically, as well as through various real estate formats. The class of 2015 highlighted our multi-format development capabilities and includes Shacks in flagship, urban, suburban, outlet mall, pad side and in line locations in both new and existing markets. Exactly the type of growth we are thrilled to continue into 2016 and beyond. Every time we open a Shack in a new format, in a new city or in a new size, it opens new doors for us, further proving the versatility of our model and demonstrating the tremendous wide space we have in front of us.

Internationally, the fourth quarter was busy for us. We opened six international licensed Shacks, bringing total openings for 2015 to eight. As a result of some favorable construction timelines, two of the Shacks that were originally included as part of our 2016 guidance of eight Shacks, opened in the last two weeks of 2015.

During the quarter, we've deepened our footprint in the Middle East with our seventh Shack in Kuwait, our second shack in Qatar, our second shack in Saudi Arabia, in Riyadh. In the UK, we launched two more Shacks, including our third London-based Shack on New Oxford Street and our first Shack in Wales in the City of Cardiff.

Heading to Asia, as we announced on our last call, we opened our first Shack in Tokyo, Japan, on November 13, located in the renowned Meiji-Jingu Park, drawing inspiration from our very first Shack in New York City's Madison Square Park. This opening reminded us again of the strength of the Shake Shack brand globally as guests were camped out overnight with 400 people waiting online by 9:00 AM, surrounded by TV cameras and media documenting the event. This strong start in Tokyo has continued through the winter as we build on our partnership with SAZABY LEAGUE and now plan to open our second location in Ebisu in Central Tokyo, Spring 2016.

Looking forward into 2016, we're really excited to highlight the menu innovation taking place at Shake Shack. On January 14, we launched the Chicken Shack at all domestic Company-operated Shacks. Since July, this item had been only offered in our three Brooklyn Shacks. The guest feedback was extraordinary during that six-month test, giving us the confidence and time to plan the wider rollout, which we now believe could become a permanent menu item for Shake Shack.

As a reminder, the Chicken Shack is an all-natural hormone antibiotic-free fresh chicken breast, slow cooked in buttermilk and herbs, hand breaded, battered and crisp fried to order. It is currently selling for $6.29 in all markets and is likely the most important menu addition we have made since Shake Shack began.

We have receive incredibly positive feedback in our Shacks and on all of our social media channels. It was a top-five selling menu item in all three Brooklyn Shacks during the test and it has continued that trend in the early days since its launch nationally.

While it's still too early to know exactly what chicken will mean for a system-wide, we are hopeful that it will prove accretive to sales, traffic, average check and food costs. It is important to note that the Chicken Shack requires a little more labor, so we do expect to see an uptick in labor due to this item.

Internationally, the Chicken Shack is now launched in Turkey and all of our shacks in the UAE. We believe as we look towards growth internationally, especially in Asia over the long-term, this will be an important addition to our strategy. We are really excited about chicken and the new opportunities it creates to further build fan base.

Staying on menu innovation to make room for the Chicken Shack, we've temporarily removed the burger LTO. The last one we did was the roadside Shack that we plan to introduce a new burger LTO to the menu for the second half of the year. As we continue to grow our Shack footprint, we have never been more excited about a class of restaurants as we are looking at 2016 and the pipeline for 2017.

As a reminder, scheduled openings this year is slightly more weighted towards the back half of 2016, which will limit the sales impact of these new Shacks on total revenue for the year. That being said, our real estate opportunities are stronger than ever and we remain confident in our ability to execute on our growth plans for 2016 and beyond.

This year, we will launch in four new major markets; Los Angeles, Phoenix and Scottsdale, Dallas and Minneapolis, while deepening our roots in our existing markets. On February 26, we welcomed our first Shack in Arizona with a flagship at Scottsdale Fashion Square, to be followed by a second Shack in Uptown Phoenix, opening later this week.

Next week, if you're in LA, we will be opening our first Shack in California in the heart of West Hollywood. For anyone who's driven by the area, you may have noticed a public art piece we commissioned by Danish artist Thomas [Stanbro], which we named the Happy Wall. Passersby can interact with the wall and create inspiring messages for the neighborhood. It has been so fun to watch our new community come to life and experience the Shack even before we open.

In true Shack form in January, we teamed up with some of our soon-to-be neighbors for a series of pop-up events to launch the brand and get the city excited for our arrival. We have very high hopes for our growth in California and have already announced our second LA area Shack in Glendale at the Americana brand, as well as a third site in downtown LA slated for 2017.

Towards the end of the year, we will expand deeper into Texas with the addition of our first Shack in Dallas' thriving Uptown neighborhood, with a freestanding glass box design in the center of a park at the Crescent. And finally for new markets, we will be opening in the Twin Cities Mall of America, deepening our roots in the Midwest, following our successful launches in the Chicago area over the last 18 months.

We'll also be growing our presence in existing markets with exciting new Shacks in our own backyard here in New York in Harold Square, and downtown at the Fulton Transit Center in Manhattan, as well as in Queens, Long Island and other East Coast markets from Boston to DC. We've got a great lineup of Shacks coming this year, and we're working towards a strong pipeline for 2017, to build at least 14 Company-operated Shacks per year moving forward.

Internationally, we opened our first Shack in Oman in February, and intend to open at least six more international licensed Shacks this year, with great sites coming online in the Middle East, London, Japan and now, South Korea. We now also plan to open a new domestic license Shack in Las Vegas' T-Mobile Arena, effectively increasing our previously stated guidance on licensed Shacks by one.

In December, we announced plans to enter South Korea, with a new license partner, the SPC Group. It's the same group that has successfully partnered with brands such as Dunkin' Donuts, Jamba Juice, Baskin Robbins and many others, and also operates over 3,000 Paris baguette bakeries in South Korea. We're aiming to open our first Shack in Seoul in late 2016, and our development agreement spans 25 total Shacks in Korea over the next 10 years.

Before I hand the call back over to Jeff, I want to focus some attention on the way we're taking care of our team in the midst of rising minimum wage legislation affecting our industry. Kicking off the new year, we made a decision to increase the starting wage of all hourly team members in our Company. The team members now start at between $10.50 and $12 an hour, and our team leaders and trainers now make between $12 and $15 per hour. As a result, we fully expect a higher labor cost moving forward, which Jeff will discuss in more detail later.

We believe that paying our team well will drive more sales, help us attract and retain the best people, reduce turnover and provide the opportunity to advance our leaders to even stronger places in their careers. We will continue to take care of the talent and will lead our future and people who work the hardest every day to take care of our guests, our suppliers, our communities and, ultimately, our shareholders.

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

Thanks, Randy.

I'm excited to share with all of you the results of our 13-week fourth quarter ended December 30, 2015. Total revenue, which includes Shack sales as well as licensing revenue, increased 46.8% to $51.1 million during the fourth quarter, from $34.8 million in the fourth quarter last year.

Shack sales increased 49.2% to $49.3 million during the quarter, versus $33.1 million in the year-ago period. The increase was driven by the addition of new domestic Company-operated Shacks, robust sales at our mature Shacks, as well as our stronger than expected Same-Shack sales growth.

For FY15, total revenue increased 60.8% to $190.6 million, compared to $118.5 million in the prior year. If you recall, in November, we raised our total revenue guidance for the year to $189 million to $190 million and are pleased to have exceeded that range. Same-Shack sales increased 11% on a calendar basis during the fourth quarter, versus the 7.2% increase in the same quarter last year. This consisted of a 6.2% increase in traffic combined with a 4.8% increase in price and mix.

Our strong growth in the fourth quarter was positively impacted by several factors including heightened brand awareness, which has fueled our extraordinary growth this year as well as the strength of the brand geographically across new markets. Our LTOs that ran throughout the year continued to drive traffic, mix and price. The roadside Shack was a success for the fourth quarter and rolled off of menus on January 14.

Additionally, from mid-November through the end of the year, for the first time, we introduced a new LTO of three holiday shakes; gingerbread, Christmas cookie and chocolate peppermint, available at all domestic Company-operated Shacks. This trio of shakes added an exciting new offering and gave our guests just another reason to love Shake Shack during the holidays.

Throughout Q4 we continued to benefit from an approximately 3% menu price increase that was taken in January 2015. While we lost that increase at the beginning of FY16, on December 26, we took an additional 1.5% menu price increase. I want to remind everyone that while we do expect traffic to continue to be positive during 2016, we don't believe that the current numbers are sustainable in the long-term and are anticipating Same-Shack sales to be 2.5% to 3% for the full year FY16.

Our comparable Shack base includes only those Shacks that are open for 24 months or longer. The comparable shack base in the fourth quarter of 2015 grew to include 21 Shacks compared to 13 Shacks in the fourth quarter of 2014. The 21 Shacks in the base for 2015 includes Madison Square Park, which was only included in the comp base for the first week of Q4. It came out of the base in October, and won't come back until May of 2016.

As we continue to add Shacks to the comp base, the impact of Manhattan locations continues to be diluted as well. In the fourth quarter only 6 of the 21 Shacks in the comp base were located in Manhattan, further demonstrating the strength of the brand outside of our home market.

Average weekly sales for domestic Company-operated Shacks, increased 4.7%, $89,000 for the fourth quarter of 2015, from $85,000 in the same quarter last year, primarily driven by robust traffic turns, menu price increases, positive shifts in mix from menu innovation and solid performance across the Shack base. As we expand further into our existing markets and open more target volume Shacks in the $2.8 million to $3.2 million range, we naturally continue to expect our average weekly sales over the long-term to decline. I've added to the long-term forecast for 2017 and beyond, for those Shacks that we plan to open in 2016, we expect the first year AUDs to be at least $3.3 million.

Licensing revenue increased slightly to $1.7 million during the fourth quarter. Since the fourth quarter of last year, we have opened eight internationally licensed Shacks, of which six were opened during the fourth quarter. Licensing revenue from these new Shacks was partially offset by lower revenue from Shacks in the Middle East and the negative impact of foreign exchange rate fluctuations.

Now, I would like to give some detail on our expenses for the quarter. Food and paper costs as a percentage of Shack sales was 29.3% in the fourth quarter, down 300 basis points from the prior-year fourth quarter. Throughout 2015, we experienced tailwinds in our supply chain that have benefited us on the cost of goods sold line. This improvement was driven primarily by the previously mentioned menu price increases that we took in early 2015, that helped offset higher beef costs, while lowering dairy and other costs as well as certain supply chain enhancements, led to better than expected margins during the quarter.

In the fourth quarter of 2015, we did see a decrease in the price of beef from the fourth quarter of 2014, but all-in-all, we expect our food and paper costs to be flat for 2016, compared to 2015. We will continue to stand for something good by investing in high-quality ingredients and making further supply chain improvements.

Labor and related expenses as a percentage of Shack sales were 25%, a reduction of 130 basis points compared to the prior year. That is primarily the result of leveraging better than expected Shack sales. While we have been able to leverage labor and related expenses in 2015, we don't expect that to continue into 2016 for a couple of reasons.

First, as we open more target volume Shacks, labor as a percentage of sales will naturally increase more than it has historically been. Second, and more importantly, we expect labor to increase due to the Company-wide increase in starting wages that Randy discussed earlier, which was implemented at the beginning of FY16. We believe that these investments in the team will impact the labor line by 100 to 150 basis points compared to the prior year, but will ultimately translate into higher revenue.

Occupancy and related expenses as a percentage of Shack sales, decreased 100 basis points to 8% versus the prior year, driven by better than expected sales. Shack level operating profit, a non-GAAP measure, grew 88.1% to $13.9 million, from $7.4 million last year, mostly due to the flow-through that's captured on the higher Shack sales. As a percentage of Shack sales, Shack level operating margins increased approximately 590 basis points to 28.2%, as we find healthy flow-through from the increased sales.

We are extremely proud of the robust results produced by our current base of Shacks. I am excited to reiterate our view on long-term targets. Now with a year under our belt as a public company, we continue to outline to you the significant unit growth opportunities that Shake Shack has in front of us. We maintain our long-term outlook and our belief that target volume Shacks 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.

Our performance in 2015 clearly exceeded those metrics, which is also why we provided an update on how to think about 2016. As we stated previously on the last quarter call, given the visibility into the pipeline for 2016, and the balance of growth in both new and existing markets, we believe that the Shacks we opened in 2016, are likely to produce average sales volumes and Shack level operating margins at the high-end of our long-term ranges.

Therefore, you can expect that our 2016 opens, will average at least $3.3 million in annual revenue and achieve at least 22% Shack level operating profit margins. While our 2016 units is expected to be a strong class of Shacks, the majority of our pipeline for 2016 is weighted towards the back half of the year, and as a result, we will not receive the full benefit from the increased sales volumes and operating license for 2016 Shacks.

General and administrative expenses increased $1.7 million, to $7.7 million during the fourth quarter, from $6 million in the same quarter of 2014. As a percentage of total revenue, G&A expenses decreased to 15% for the fourth quarter of 2015, from 17.2% in the fourth quarter last year, which included the higher costs related to the preparation for our IPO.

For 2016, we expect stock-based compensation expense to increase and remain high. It is our intention to continue to use equity-based compensation to incentivize our team members to grow the business, which we believe will ultimately lead to increased profitability and this will lead to incremental expense for FY16.

Adjusted EBITDA, a non-GAAP measure, more than doubled to $9.9 million in the fourth quarter, compared to $4.8 million on the prior-year period, and as a percentage of total revenues, our adjusted EBITDA increased roughly 540 basis points to 19.3% for the fourth quarter. We reported net income of $1.2 million, or $0.07 per diluted share, for the fourth quarter of 2015, compared to a net loss of $1.4 million, or $0.05 per diluted unit, for the same period last year.

On an adjusted pro forma basis, which excludes nonrecurring items and also assumes that all of the outstanding LLC interests have been exchanged for class A common stock where by we would no longer present a noncontrolling interest, we earned $2.9 million or $0.08 for fully exchanged and diluted share, compared to a net loss of $300,000 or $0.01 per fully exchanged and diluted share in the fourth quarter last year.

Now, let's move on to guidance. For FY16, we expect that total revenue will be between $237 million and $242 million. Of the 14 domestic Company-operated Shacks that we previously guided to, we were able to open one early on the last day of FY15. We are on target to open the remaining 13 Shacks in 2016, with the majority of those scheduled to open towards the back half of the year.

Similar to the domestic front, we were able to pull forward two of the eight international licensed Shacks we previously reported. The remaining six internationally licensed Shacks are all on track to open in 2016. Additionally, we now expect to open a new domestic licensed Shack in Las Vegas' T-Mobile Arena, effectively increasing our previously reported guidance by one Shack. Because of the number of flagship 2016 openings in new markets, we expect the average sales volumes for the class of 2016 to be at least $3.3 million, and Shack level operating profit margins for those Shacks to be at least 22%.

Our long-term guidance remains at $2.8 million to $3.2 million and 18% to 22%. We will be comping against double-digit Same-Shack sales increases, and therefore, we expect 2016 Same-Shack sales growth of 2.5% to 3%, which consists of a 1.5% menu price increase that was taken last week of December, and nominal traffic and mix increases.

Additionally, we are providing the following supplemental guidance for FY16. As a percentage of Shack sales, we expect deleverage in labor under related expenses of approximately 100 basis points to 150 basis points on a year-over-year basis. And lastly, we expect our adjusted pro forma effective income tax rate to be between 43% and 44%. Hopefully, this has given you greater insight into our performance and what lies ahead for us at Shake Shack.

And with that, I'd like to turn it back over to Randy to make some final comments.

Thanks, Jeff.

Before we open the call to questions, I want to take a moment and reflect on how far we've come in our first year as a public company. We ended FY14 with 63 Shacks systemwide. At the end of 2015, we had 84, a 33% increase. Same-Shack sales increased 13.3% in 2015. In 2014, our total revenue was one $118.5 million, and we closed 2015 at $190.6 million, a 61% increase.

Shack level operating profit, a non-GAAP measure, increased 97% to $52.9 million. Adjusted EBITDA for FY14 was $18.9 million, and we ended 2015 had $41.1 million, a 118% increase. Adjusted pro forma net income increased $12 million, or $0.32 per fully exchanged and diluted share.

At the end of 2014, we employed over 1,600 team members, and today, we lead more than 2,300. We had 141,000 followers on Instagram at the end of 2014, and today, we have over 250,000. A number rarely seen by companies our size, which just further demonstrates the level of engagement we have with our guests.

Jeff and I want to sincerely thank and applaud our team for making our first year as a public company a remarkable one. The one that has set expectations high for us going forward.

I want to thank all of our guests who continue to visit us in record numbers and support what we do everyday to stand for something good. This is what thoughtful, crafted, considered growth looks like and it's what you can count on from us moving forward.

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

(Operator Instructions)

Sharon Zackfia, William Blair.

Good afternoon. Jeff and Randy, just a few questions. It sounds like in the guidance, you're not assuming any mix uplift from the Chicken Shack. You mentioned nominal mix or traffic. I wanted to confirm that. And then the 2.5% to 3% comp guidance for the year, have you seen comps come down that much already in the first quarter?

Sharon, without getting into mid-quarter guidance, we will talk about that on our next earnings call, Sharon. We've had a great start to the first quarter. It's hard to say what chicken will mean. It has only been six, seven weeks. What we don't want to do is give guidance too early on that item. We are excited. Again, it's been tremendously well received. It's been a top-five selling item nearly all Shacks that launched it. We have high hopes for it.

In our roughly 3% comp guidance for the year, that's still some really strong comp guidance, and we only have 1.5% price running through the system. On a two-year basis, based on the four quarters of double-digit comp growth and some in the mid-teens that we saw last year, we want to be conservative as we always have been.

Since this began for us, we have been conservative on our guidance with comp, and we are looking at a whole year of comp here. So we're going to remain conservative at this stage and we will certainly let you know as we see more into the system with what chicken means for mix. Once the excitement of it being a new item lends itself into a normal operating comp.

Great. Thank you.

John Ivankoe, JPMorgan.

Hi, great. Thank you. Obviously you guys report 24-month comps, and Jeff, you mentioned a few times the 2016 openings would not influence your 2016 revenues very much based on the timing. So the question is, how the 2014 and 2015 classes come in?

Because it does look like, in our model, that it is well in excess of that $2.8 million to $3.2 million, or $3.3 million number you're talking about with 2016, that you really have pretty big tailwind from your 2014 and 2015 class. If you could comment on that?

Yes, John, we do. 2014 and 2015 were both really good classes. And 2015, in particular, outperformed where we thought it would be, which is why we increased that guidance for the 2016 openings. We've just continued to see the leverage with same-Shack sales and seen that operating profit come up.

We know exactly where the Shacks are going to be in 2016, as well John, exactly which street corners they're going to be on. And with the estimated revenues we put in, which is really why we expect that to be a little bit higher at the high end of the range from what we've earlier stated.

John, just to be clear, the 10 Shacks will come into the base this year. So, there's 10 that opened in 2014, and the majority of those are more towards the end of the year. You only have a couple coming in, in Q2, and then you have 8 out of those 10 come in, in Q3 and Q4. So the impact of that will be more towards the end of the year. That was a good class of restaurants.

Obviously, as we said, that 2015 class, no question, the existing restaurant base of 45 Shacks that are Company-operated in this country is stronger than the $2.8 million to $3.2 million. We've said that quite a bit, and we expect 2016 to be stronger. But as we look a long term we are going to continue to guide toward, there's a lot of good Shacks out there that when we look at our $1,000-a-square-foot model over the long term and a $3 million average, at a 20% op profit towards the long-term future, we're excited about that future.

Understood. If I may, just looking at the 2016 openings, I think you used the word flagship to describe Scottsdale, Mall of America, the unit in Crescent Court in Dallas, obviously Harold Square, West Hollywood, you can go down the list. It seems like a lot of these units are going to be significantly above your target range. So do you really have confidence -- it's a weird way to ask the question, do you really have confidence that some of your openings are going to be significantly below the average?

There will probably be some that are below. We will see how it shakes out. It's hard to say. Remember, our base is so small, John, that we will continue to guide to conservative until we know more.

Yes, we have a fantastic class for 2016. There are some fantastic, throughout the country, flagships that should be well above the average. And we may have some that are below and we'll have some that are probably right at the average, as about two-thirds of that class in 2016, fills in existing markets, like DC, like Boston, and that is a really solid plan for 2016 and beyond.

Understood. Thank you.

Jeffrey Bernstein, Barclays.

Great. Thank you very much. A couple of questions. One, following up on the comp conversation with still only 20 a year or so units in that base. I'm wondering whether you can give any color in terms of divergence of the comp among those? Whether there's any common thread among the best of the worst, or whether there's any geographic divergence, or weather maybe came into play or Chipotle's weakness? Any color on any of those metrics specific to the fourth quarter?

If you look at the fourth quarter, we had an 11% comp. That's a pretty strong comp for any company. We are really proud of that. It was very balanced, very balanced across the nation. We continue to share with everybody, of the 21 Shacks in the base, 6 were Manhattan. The narrative of this being a New York based story or a comp story is completely inaccurate at this stage. This is a well-balanced comp base, though it is very small.

So, hard to say whether we had an uptick to your question about Chipotle. Really hard to say, but we've had strength. And I think the weather's been pretty balanced. For all the great weather we've had, we've had some blizzard in Q1 and that took out some days. But that's been balanced by some great weather days too, so we don't generally talk to weather too much. I think it's just been normal, on balance for that comp base. Short answer, the comp base is performing strong across the regions.

Got it. In terms of restaurant margin outlook for 2016. I think you now mentioned food basket flat. That seems it's come in a little bit from what you previously mentioned. Maybe we get some leverage there. Obviously, you've quantified now the labor deleverage, and now, I think we've firmed up that it's 1.5 points of price.

I'm just wondering, directionally, what you think of your outlook for margin in 2016? Again, I guess that's assuming the comps within the guidance range of 2.5% to 3%. Or, I don't know if you want to look at it a different way, what comp would you need to lead the flat restaurant margin in the current environment?

Jeff, I haven't given total Shack-level operating profit guidance in terms of what it means for the total Company. We're really talking more about the fact that the restaurants have already opened this year and that we expect those to be a little bit higher than what our average is. We've talked about, on all these calls, that we expect Shack-level operating profit, over time, to deleverage a little bit.

And specifically talked about comps that are sold, too. We are coming out now and saying we think that will be flat. I think in the last call, we said flat or slightly up. The reason, even though we have some wins in beef and other places, we're going into four new markets. We're continuing to buy high-quality ingredients, stand for something good. And that's really going to offset some of what we've gained in beef.

What it's going to do for the overall consolidated restaurant margin, if you look at it where it is today, it's probably going to take a little bit of a hit. We have said that because of those target volume Shacks that are coming into the base.

If you look at it, we're up almost 600 basis points year over year, on the non-Shack-level op profit. We've had an extraordinary year and an extraordinary fourth quarter. We expect that to be extraordinary. But we would rather focus on driving sales, driving long-term future, by making that commitment to our team, our culture and the strength of the people that we hire.

Again, focusing on only a percentage of sales when it comes to labor. We want to have amazing people taking care of our guests day in and day out. That will drive the long term, that will drive our culture and that's what separates Shake Shack from what else is happening in our industry.

Understood. Lastly to clarify, I think you mentioned the US, you had openings which totaled at least 13. I know you mentioned more back-end weighted. Any color in terms of openings by quarter, or should we -- it sounds like we're talking about 8, 9, or 10 units in the back half of the year?

Is going to be slightly, a slight majority of the 14. It'll probably be right around there. It's hard to say, but probably right about 8 of the 14. We, in the first quarter as we've said, we've got Scottsdale open, Queens Center opened the last day of last year. So if you count that, we're going to open in Phoenix this week, later this week, and LA will open next week. So that should give us the four, so our quarter two will be a lighter, and then it will ramp up in Q3 and Q4.

Understood. Thank you.

Andy Barish, Jefferies.

I wanted to dive in on the cost side a little bit more in terms of the four new markets and where that shows up primarily? Is it restaurant-level margin inefficiencies, as well as G&A, or are we already seeing the infrastructure already reflected in your G&A numbers?

Let's talk about restaurant margins for a second. Generally, when we open in a new market, like California, we're going to have increased costs on the COGS line. And what happened this year, with our change in payroll, you take a market like California, we start everybody at $12 an hour.

We expect that restaurant to do a bit higher on the payroll line as well. So generally, new restaurants open that way. This is why our development strategy is one-third new market, two-thirds fill-ins. Because as we fill in, we start to strengthen our supply chain, we start to strengthen everything.

Towards the G&A, we've got a lot of money committed in marketing and G&A level ops oversight to a new market, like Phoenix, like LA. So we generally see some short-term pressure on that, which is why we're guiding you here for this year. And then as you've seen, our results -- the tremendous results we had in all of 2015, as we've set the cluster, those results generally improve. And as our base gets bigger, the impact on new market, higher COGS will be muted a bit.

Andy, just to elaborate on that a little bit. As we add area directors, too, geographically, it depends on where we are, we might have you in a situation where an area director can only have two restaurants because that's just the way it works out geographically. So you might see a little bit of a spike in G&A because of that.

But then as we continue to fill in those markets and we're able to geographically get those area directors in a better position, then you'll see that start to tick down a little bit. But there is pressure in G&A a little bit, as we open in new markets, as well as the restaurant operating margin line that Randy mentioned.

The development team has done just fantastic work on this. If you look at Scottsdale, Phoenix area, we're going to open three restaurants this year. Whereas in years past, it took us a little longer to get the market. So we're going to recoup some of those efficiencies sooner now. In Los Angeles, what should be a really big market for us, we've already announced three restaurants. We've got our eyes on quite a bit more. So we're really excited about how quickly we can grow into that. But, in 2016, we're cautious on what it takes to get that market open the right way.

Great, that's helpful. And then just on international travel with the dollar strength, have you seen any pockets in New York or other regions where maybe tourism is down? I know some other higher-end restaurants have cited some of that. I'm wondering if you are seeing any of that?

We've not. Even in our home market, even with the dollar where it is, New York City is a super strong tourist market, continuing setting record-setting numbers here. So, we've not seen a lot of that. But as you did say, in international royalty fees, it's slightly down because of the strength of the dollar. It affects us in different ways overseas, but generally, no, we have not seen any pressure here at home.

Very few of our Shake Shack's are tourist related. There are a few certainly. But, the reality is, they're really that town's neighborhood gathering place, short of a few particular locations that are more tourist centric.

Thank you.

John Glass, Morgan Stanley.

Thank you very much. Can you, Jeff, just help on the labor? Quantify that in dollars given that you're making a comp assumption so that the base is meant to make change being where comps come out? Or maybe talk about what portion of the labor line is influenced by the change in the hourly wages? Is it half, two-thirds of that line that's actually getting the raise?

It's most of it, John. The 100 to 150 bps that we talked about is mostly in the hourly labor line. If you look at it and you say, okay, we went from $10.50 to $12, and you do the math, then you might say, it looks like it's more than that. We have offsets in other areas.

There were certain bonuses that we used to payout related to attendance and some other things, that we are no longer doing. So when you net the higher hourly pay against some of the other bonuses and some of the other programs we had in place at the Shack level, that's where we get the 100 to 150 bps as an increase over prior year.

John, it's so important to think about it for us, exact dollars, we couldn't answer that exactly right now. But generally, the average employee made between -- the starting employee, depending on where you were at Shake Shack, started at $9.50 or $11 an hour, depending on the market. That team now makes $10.50 to $12, and throughout the organization, that goes up.

We have seen very early progress, so it's very hard to say what it will mean over the long term, but we've seen early progress on retention and turnover. And just, even stronger people. That's what we're committed to. That's what we think drives the kind of results that we've posted in this Company in the last year. That to us is the commitment we want to make to our team, to our culture, that we have no question that will pay off in the long term.

John, as we get into Q1 and Q2, we might update that guidance. We have no problem updating that guidance. Remember, we're only six weeks into this. During the time when there's -- it's really our slowest month for fast-casual restaurants is January, and even into February.

As we start to get into some of the better sales volumes months, we're going to have more insight into exactly what it means. Right now, we believe 100 to 150 is a really good range to put out there for you all. Like I said, as we get further into the year, I will update that for you.

Other line items, G&A, is there anyway you can help us think about G&A? As a component of that, you said stock-based comp was going to go up a lot. I think -- was it $4 million this past year? What is the order of magnitude you think that will increase by in 2016?

Stock-based comp annually, is about $5 million, related to the IPO grant. As we get into 2016, it is our intention to offer more equity-incentive opportunities for our employees, whether it's stock options or some other equity vehicle. That's something we want to do. That's going to put a little bit more pressure on G&A as well, on top of the $5 million annual charge we have from the IPO grant. I haven't quantified that yet.

Certainly, will not be another $5 million a year, but it will put some added pressure on the G&A line. So there's a percentage of sales, expect a little bit, small enough to leverage on that line as we move forward. Nothing significant or major on G&A, but I do expect that as we add 14 Shacks, that will leverage slightly as a percentage of sales.

Last one. You opened one in an outlet mall. You talked about Woodbury Commons. Is that the kind of -- did you experience the above $2.8 million to $3.2 million in that location as well? So that it can inspire you to think about other locations, how did that perform relative to your expectations versus that range?

What I was saying off the exact sales, it's been a big surprise for us. As I said in my notes, it is the kind of thing that just when we wake up every day, Shake Shack never ceases to surprise us. When we opened in an outlet mall, we weren't sure what the volume would be, what the take would be, how it would fit. It has been incredible.

We are really excited about what that unit looks like for Shake Shack and what it means for the potential of opening up a whole series of that type of real estate that we hadn't imagined before. So very pleased, very pleased on the early going here at the one outlet that we have.

Thank you.

Jake Bartlett, SunTrust.

Thanks for taking the question. I'd like some detail on the comp guidance. First off, was the Madison Square Park not being in the comp guidance, or in the comp until May, can you remind us what the implications are? What impact that has on comp?

Madison Square Park came out of those -- it was in the base up until the first week of October. It was in there for just one week. A very short period of time in Q4. It will remain out until middle of May. It was just before Memorial Day when that restaurant reopened in 2015. That's when it will come back in the base. So, late in Q2.

I believe when it came back into the comp base, it was a help. Do you expect it to be a drag not having that location in the comp base for the first five months?

Quite honestly, Jake, now there's 21 Shacks in the base, and I don't expect that one restaurant coming in or out is really going to move the needle materially on our comp. When this first started happening, I think we only had like 13 restaurants in the base, so it was a much bigger piece of the comp. So that's why we had talked about it a lot. But the further we get in time, the less that's really going to have an impact. I wouldn't really consider that that's going to have a material impact on our comp even when it comes back in.

Jake, in Q4, with 11% comp, that's a great number. And Madison Square Park was only in for 1 of the 13 weeks of that quarter. You can already see where that lies.

I did look back in the last first-quarter call, you did talk about some adverse weather. Any benefit from rolling over that? I think you mentioned it was offset by the hype and the interest around the IPO. Any comment on weather? Maybe go into a little more detail on the fourth quarter but also in the first quarter here?

We generally don't use weather one way or another. I will say we had quite a few closures during the blizzard that range all the way from DC to Boston. But again, that's been balanced, as I said, with some really good weather as of late.

So I think as you look at Q4 and into the Northeast, anybody who's tried to ski this season in the Northeast knows that it's been pretty warm, there hasn't been a lot of snow. That's been generally pretty balanced. I think you should not imagine that that's going to be a factor for us for Q1.

Perhaps the last question, the Chicken Shack, what was your experience in terms of check? It is a higher-priced item. I would think it would boost check. What was your experience in the three Brooklyn locations where you tested it?

Without getting into details of those three, because I think those three act very differently for different reasons. Let us get back to you on that when we have more data. It is just so young yet. Across the system, it's only been six or seven weeks and it's hard to say. Again, as I said in my notes, we generally believe Chicken Shack could be accretive to everything that we do in terms of sales, traffic, average check, and hopefully over the long term, food cost. It should be a good thing for us there.

Most importantly, people love it. It spreads out our protein risk that previously was really just beef. And it's selling. So we're excited about the reaction that we've gotten thus far.

Great. Thank you very much.

Paul Westra, Stifel.

Good afternoon. Just a couple more questions for me. How should we think about your comp guidance, 2.5% to 3%, for the year? Should that change dramatically as you go through the year? And obviously, commentary on how you see or visualize how hard the lapse should be as you get into the second half of this year, given at least the one-year comparisons get a lot difficult? I know it's a lot more closer of a difficult lap on a two-year stack basis.

The reason for the 2.5% to 3% comp, is as we get into Q2, we're comping at 12.9%. As we get into Q3, we're at comping at 17.1%. Those are really big numbers. That's a number we're watching as we get into May. We are two months into the year. As Randy said, we are pleased where sales have been for those first two months.

But, with only one-sixth of year done, it's too early for us to update that guidance. And we will when we feel it's prudent to do so, Paul, but right now, it's 2.5% to 3%. And it's going to be really interesting to see what happens when we get into Q2 and go against that 12.9%. Even if we have a 2.5% comp like we talked about, 15.5% two-year stack, which is pretty good.

Paul, I know we will say this every time, and I know we'll keep talking about comps, but we've had at our young stage in our small base, I'm going to continue to remind people of the Shake Shack story. If you look at our AUVs, if you look at our average weekly sales, you look at the kind of sites we choose and the way that we enter a market, it's just different and it is special.

There aren't a whole lot of people selling $5 hamburgers that are doing what we're doing. I think we've got to remember to focus on that rather than only the comp conversation. That said, we will be happy to keep talking about comps as you guys ask.

You mentioned the new-store margin in their first year to be over 22%, which is obviously a great number. Is the year ago, on the first-year stores, is it a significant change in that guidance? In other words, are you going to get a reasonably good boost on the overall margin number because of the year-over-year improvement in the first-year margin performance?

We've seen about a 5% decline in year two from year-one sales. Some Shacks are higher than that. Some Shacks are lower than that. Our numbers indicate that a good average is about a 5% decline in year two. So I wouldn't necessarily say that the margin significantly improves in year two.

We normalize pretty quickly. Shake Shack, when you look at some brands, it takes them several months to normalize their numbers. But at Shake Shack, we normalize pretty quickly. Within the second to third operating month is really where we see the margins where we think they're going to end up long term. We don't see any significant drop necessarily in year two or any significant increase in year two. It remains pretty steady.

Great. Thanks.

Andrew Charles, Cowen.

Appreciate all the detail around the labor outlook. What's the expected wage inflation for next year versus what it was versus the fourth quarter and 2015 as a whole?

As a whole, as a percentage of sales, we would say it's between 100 to 150 points of pressure. The general average wage that we are paying our hourly employees has gone up roughly 15%. That does not make up every bit of our payroll. That's just one piece of it.

I think we're actually staying ahead of wage inflation by paying the $12 an hour over where minimum wage is and staying ahead of that benchmark, I believe.

Okay. My other question is from the other operating expenses for the quarter is a little bit heavier than we expected, or you just didn't get as much leverage as expected, just given the 11% comp that you did. Just curious, you called out sales leverage helping that line a little bit, were there any one-type items going against it?

Nothing off the top of my head, Andrew, comes to mind. Actually, I show that for the quarter, other operating expenses were 9.6% this year, compared to 10.1% last year.

Right. I understand that you levered it. The degree of the 11.4% comp, I guess I would've thought it would've levered more than that in that instance.

We're pretty happy with the leverage that we did give. There's nothing, again, that sticks out in my head. We're happy with that leverage. I don't have anything specific to report on that.

Fair enough. Thank you.

Karen Holthouse, Goldman Sachs.

Thanks for taking the question. Just one quick question (technical difficulty) unit growth. Just curious regards the talk of more national footprint from almost nontraditional locations doing like an outlet mall. What was the range of square footage for stores opened in 2015? Just curious how small have you been able to engineer it down?

Generally, the lowest we have gone is in the high-2,000s. So, call it, about 2,800 square feet. And then, we've gone largest, is probably about 4,500 square feet. Some of those overseas Shacks are sometimes even bigger in the Middle East, where they really ramp up to big sizes. Generally, the Shake Shack is about 3,000 square feet, plus some outdoor seating. That's what we shoot for.

To I think what you're getting at, we've seen some really good success in our smaller-model Shacks. Uniquely, in JFK, where we don't even have a dining room in one of our two Shacks, in Grand Central Terminal, where we have a very small footprint under 3,000 square feet. Even in Baltimore, Maryland, we have seen a smaller unit, as well as Tyson's Corner. So that's why we get so excited when it works so well at these smaller footprints.

That just further opens up the window of opportunity. And when it works so well in these different formats, like outlet, like train station, like mall or pad site mirror mall, we have really been hitting on all cylinders, and we're going to keep doing that. We're still early in where we're at. We want to diversify the way that we bring Shake Shacks to market. The good news is we see them working in every one we've tried. We're going to keep mixing it up.

Thank you.

Alton Stump, Longbow Research.

It's actually Brittany Whitman on for Alton this afternoon. I wanted to ask about the comp performance, and I'm not sure if you guys broke this out already. I might have missed it. Did you break that out between transaction or guest count and ticket, and if there's any pricing built into that ticket number?

We broke the comp down. The 11% was 6.2% traffic and 4.8% price and mix. There is a 3% price in that fourth-quarter number that rolled off at the end of the year.

Okay, great, helpful. Lastly, on the competitive environment. I know some of these major QSRs have been doing some pretty heavy promotions over the last couple of months. Have you guys had any impact from that or any color you can provide? Any commentary?

We've not seen impact at all. When Shake Shack was created, it was created for people who say, I don't really eat fast food anymore, but I still love a great hamburger and I want to do it in a cool environment with ingredients that I can count on. That is what Shake Shack was born to do.

We firmly believe people are more than willing to pay just a little bit more to come to the experience that is Shake Shack. We've not seen any impact from that deep discounting that I think has been part of the fast-food culture forever, in various forms, and we have no intentions to enter that fray.

Absolutely. Okay, that's great. Thanks, guys.

Thank you.

That concludes today's question-and-answer session. Mr. Garutti, at this time, I'll turn the conference back to you for any additional or closing remarks.

Thanks, everyone, for taking the time with us. We're really proud of our team in this incredible first year, and we have never been more excited about where we're looking at for 2016 and beyond. So stick with us and we'll look forward to updating you on our next call. Take care.

This concludes today's presentation. We thank you for your participation.