Shake Shack Inc (SHAK) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Shake Shack first quarter 2016 earnings call.

(Operator Instructions)

Please note, that this conference is being recorded today, May 12, 2016. On the call today, we have Randy Garutti, Chief Executive Officer of Shake Shack; and Jeff Uttz, Chief Financial Officer. At this time, I would like to turn the conference over to Mr. Jeff Uttz. Please go ahead, Sir.

Thank you, Operator. Good evening, everyone. By now, everyone should have access to our first quarter 2016 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 was filed on March 30, 2016. 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.

With that, I would at now like to turn the call over to Randy.

Thank you, Jeff. Good evening, everyone on the call today. I am pleased to share the extraordinary results for Q1, kicking off a very strong start to 2016. I want to begin today by thanking our team for their incredible work, passion and dedication. We're working harder than ever to stand for something good while delivering strong results.

As we get into the numbers, I want to remind everyone that well into our sixth quarter as a public company, we continue to execute on our strategy and our message remains unchanged. We're more dedicated than ever to building community gathering places, elevating and innovating our menu, driving engagement with our guests and investing in our team. We believe the Shake Shack brand and culture have never been stronger and both continue to gain momentum. We've got an exciting runway for growth ahead and we wake up everyday excited to take this Company further.

Now, a few notable highlights from the quarter. Total revenue grew 43% to $54.2 million. Same-Shack sales increased 9.9%, lapping an 11.7% increased in the prior-year first quarter. Shack-level operating profit, a non-GAAP measure, increased 59% to $14.7 million, representing a 28.2% Shack-level operating profit margin. Adjusted EBITDA, a non-GAAP measure, increased 54% to $10.8 million. On an adjusted pro forma basis, net income increased 114% to $2.8 million or $0.08 per fully exchanged diluted share for the quarter.

We believe the biggest contributor to traffic growth this quarter was the addition of the Chick'n Shack to our menu, which launched January 14, at all domestic Company-operated locations. In addition, we benefited from the unseasonably warm temperatures in our largest markets, providing an extra tailwind to traffic. While we're still in the early stages of the Chick'n Shack launch, we believe this item could be a long-term game changer for Shake Shack. We are learning more every day about how it's affecting our business.

In terms of traffic, the Chick'n Shack is driving excitement with our current fans as well as giving guests a new reason to try Shake Shack for the first time. By expanding our menu, we're able to give our guests yet another opportunity to come back to the Shack. We've also better diversified our long-term exposure to commodities with the addition of this key protein. And with all of the excitement, we're keeping a close eye on things, but it's still too early to comment on the long-term impact of chicken on sales mix.

While the Chick'n Shack is priced higher than some of our burger options, we are seeing both the trade-up as well as the trade-down from certain higher-priced items. But most importantly, our guests love the Chick'n Shack and its provides our culinary team a whole new canvas on which to create in the future. What makes Shake Shack so unique is our ability to innovate around that core menu and create limited, one-of-a-kind, regional specialties that stem from our fine dining heritage.

Just as one example, this past April in our Washington DC market, we highlight the Chick'n Shack in a collaboration with celebrated chef Erik Bruner-Yang, to create the Crispy Peking Chicken, a crispy chicken breast with Maketto hoisin sauce, pickle, cucumber and scallion. This was a fun twist to the classic Chick'n Shack sandwich and ran for 10 days, furthering our place as a chef connected, culinary destination.

At our newest West Hollywood Shack, we created the Roadside Double. A double Swiss cheeseburger topped with Dijon mustard and onions simmered in bacon and beer, available only in California. Keeping our promise to team up with the best local and artesianal producers, we introduced a selection of concretes in collaboration with Larder Baking Company, Cofax Donuts, Sqirl Jams and Compartes Chocolate, all in LA.

For the first half of this year, the Chick'n Shack has been acting as our current LTO. However today, our culinary team is excited to announce that we will be launching the Bacon Cheddar Shack as a new burger LTO for the second half of the year. The Bacon Cheddar Shack is a classic cheeseburger topped with all-natural bacon, melted, aged, white cheddar cheese sauce that we've priced at $6.89 across all markets.

Moving onto development, during the first quarter, we opened three new domestic Company-operated Shacks. This includes our first two Shacks in Arizona at Scottsdale Fashion Square, followed quickly with a second in Uptown Phoenix. Next, we travel further west for our California debut in the heart of West Hollywood. Now while we generally don't comment on unit-specific data, we are really excited to share that this first California Shack has been one of the strongest openings in our 12-year history.

We are beyond thrilled and humbled by the passionate response from our guests in this new market. We remain excited about the opportunity we have ahead of us in California as we continue to grow our brand. And through 2017, we have announced a premier development plan to open at least four additional Shacks in the Southern California market; Glendale, Hollywood, Century City and downtown LA.

Subsequent to the quarter, on May 4, we opened our sixth Shack in the DC area, with our newest in the Fashion Center at Pentagon City, as we continue to grow this important and successful market. We also continue to execute on our full growth strategy for 2016, with about one-third of new domestic Company-operated Shacks targeting new territories and the remaining two-thirds focused on deepening our footprint in existing markets.

Looking ahead at the rest of 2016, we have been able to add a few more great Shacks to the end of the year lineup. And so, we are now raising our guidance from 13 Shacks to at least 16 for the year. We will be opening three new Shacks on our home turf in New York City also this year. One downtown at the new Fulton Transit Center, one in Harold Square and our second in Queens in Forest Hills. We remain on track to add Shacks this year also in Boston and Long Island.

In new markets, we are excited to be bringing our first Shack to Dallas' thriving uptown neighborhood towards the end of the year. And additionally, we will be extending our Midwest market with the upcoming opening in Minneapolis in Mall of America. As a reminder, scheduled openings and new Shacks added to our guidance, continuing to remain weighted more towards the second half of 2016, which will limit the sales impact of these new Shacks on total revenue for the year.

In our license business, subsequent to the quarter-end, we opened a domestic license Shack in T-Mobile Arena, brand-new in Las Vegas, further complementing our footprint in that market. Internationally, we've expanded our roots in the Middle East during the quarter, with our first shack in Oman at the city center in Muscat. Subsequent to the quarter, we also opened our first Shack in Bahrain at the city center.

While the Middle East remains a very important market and part of our international footprint, we are experiencing softness in sales there this year, particularly in our mall locations throughout energy dependent markets that are seeing a natural economic slowdown right now coupled with currency headwinds. We expect sales in our Middle East Shacks to remain under pressure through this year given the macro environment in the region.

Onto Asia and following the initial success of our first Shack in Japan, we opened our second location in Ebisu in central Tokyo, subsequent to the quarter. We remain very enthusiastic about the early acceptance of Shake Shack in the region and look forward to growing its market with our third Shack now in the design stage. Additionally in Asia, we're aiming to open our first Shack in Seoul, South Korea, with our new license partner, the SPC Group, toward the end of 2016.

As a reminder, our development agreement spans 25 total Shacks in Korea over the next 10 years. The Asian market for us presents a tremendous opportunity and white space for future. We are more encouraged than ever by our strategy there.

Looking ahead, our domestic Company-operated real estate opportunities have never been stronger. As a result, we are confident in our ability to accelerate our growth plans to 16 new domestic Shacks in 2016. We also expect open at least 16 domestic Company-operated Shacks for 2017, already with half of our pipeline of leases signed at this time for 2017. This success of our real estate model in all types of various formats such as urban high streets, neighborhoods, suburban gathering places, shopping centers, transit centers, even outlet malls, continues to validate the runway of growth that lies ahead for our brand.

With that update, I'll turn it back over to Jeff, who will take you through the numbers

Thank you, Randy. Now, I would like to share with all of you the results of our 13-week first quarter, ended March 30, 2016.

Total revenue, which includes both sales from Company-operated Shacks and licensing revenue, increased 43.3% to $54.2 million during the first quarter, from $37.8 million in the first quarter of last year.

Sales from our Company-operated Shacks increased 44.7% to $52.2 million during the quarter, versus $36 million last year. The increase was largely due to the addition of new domestic Company-operated Shacks over the past year, as well as our strong same-Shack sales growth.

Same-Shack sales increased 9.9% during the first quarter, on top of an 11.7% increase from the prior-year, or a stacked two-year increase of 21.6%. The growth in same-Shack sales for the quarter consisted of a 7.3% increase in traffic, combined with a 2.6% increase in price and mix.

Our strong performance in the first quarter was positively impacted by the factors Randy noted earlier, including an approximately 1.5% menu price increase taken in January 2016, and an increase in traffic due to warm weather and menu innovation, which in the first quarter was primarily the launch of the Chick'n Shack.

The comparable Shack base in the first quarter included only 20 Shacks, compared to 13 Shacks in the first quarter of last year. Of the 20 Shacks in the base, only 5 of them are in Manhattan and we continue to see relatively consistent performance across all markets. Additionally, our Madison Square Park Shack was not including the comp base for the quarter as it was closed during this time last year, but it will reenter the base for good in the middle of the second quarter.

Average weekly sales for domestic Company-operated Shacks increased 1.1% to $90,000 for the first quarter of 2016, from $89,000 in the same quarter last year, primarily driven by robust traffic trends, menu price increases, and a solid performance across the existing Shack base, including in new markets. As we expand further into our existing markets and open more target volume Shacks with annual sales of approximately $3 million, we naturally expect that our average weekly sales will decline over the long-term.

While that is the long-term view for 2017 and beyond, we believe that first year sales for Shacks we open in 2016 will exceed that amount. With greater visibility into 2016, and with a few openings under our belt so far this year, we now expect the first year AUV for Shacks to be open this year will be approximately $3.6 million, which is an increase of $300,000 from the $3.3 million that we previously discussed. This increase was driven by strong real estate selection and better than expected openings, primarily our new West Hollywood location, which has been posting strong sales, with lines well over one-hour since its opening in early March.

Licensing revenue increased 14.3% to $2 million during the first quarter, from $1.8 million one year ago, driven by the opening of nine internationally licensed Shacks since the first quarter of last year. Total licensing revenue was affected by lower revenue from Shacks primarily in the Middle East, and the unfavorable impact of foreign exchange rate fluctuations.

Now, I'd like to give you some detail on our expenses for the quarter. Food and paper costs. As a percentage of Shack sales, food and paper costs decreased 170 basis points in the first quarter to 28.8% compared to the prior-year quarter. This improvement was primarily driven by the previously mentioned menu price increase, certain supply chain enhancements, as well as lower commodity costs, primarily in beef and dairy.

Our beef costs decreased approximately 11% since last year, and our outlook for the remainder of the year is that beef will continue to remain lower than last year, and dairy will also continue to come down. However, as we get further into the year, a beef comparison year over year will get more difficult. And while we do expect it to be down for the remainder of the year, we do not expect it to be down as much as it was in the first quarter. So overall, we are now expecting total food and paper costs to leverage just slightly for the full-year 2016.

Labor and related expenses as a percentage of Shack sales were flat on a year-over-year basis at 25.2%. As we mentioned on our last call, we implemented a company-wide increase to the starting wage for all hourly team members. Team members now start at between $10.50 and $12 an hour, and our team leaders and our trainers now make between $12 and $15 an hour.

This undoubtedly resulted in higher labor costs during the quarter, but these increases were offset by strong sales growth and gains in other areas. For 2016, we still expect labor pressure year over year. However, given our strong performance in the first quarter, we now expect labor and related expenses to deleverage by approximately 75 basis points to 100 basis points for the full-year FY16, versus the 100 basis points to 150 basis points that we previously discussed.

Occupancy and related expenses as a percentage of Shack sales, decreased 50 basis points to 8.3% versus the prior year, driven by benefits from tenant improvement allowances as well as higher Shack sales. Shack-level operating profit, a non-GAAP measure, grew 58.6% to $14.7 million, from $9.3 million last year, mostly due to the flow-through captured on the strong Shack sales. As a percentage of Shack sales, Shack-level operating margins increased roughly 250 basis points to 28.2% as we leveraged food and paper costs as well as other operating expenses.

We continue to reiterate our long-term outlook and our belief to target volume Shack AUVs will be approximately $3 million and Shack-level operating profit margins will be approximately 20%. With further insight into the 2016 pipeline though, we do expect the average sales volumes and the Shack-level operating margins to be higher than our long-term forecast.

General and administrative expenses decreased $11.5 million to $6.9 million during first quarter, from $18.4 million in the same quarter of 2015. As a percentage of revenue, general and administrative expenses decreased to 12.7% for the first quarter of 2016, from 48.6% in the first quarter last year, which included higher costs related to our IPO, including $12.8 million of nonrecurring compensation expenses and $600,000 of IPO-related expenses. Excluding the impact of these nonrecurring expenses last year, G&A expenses decreased 30 basis points, down from 13% last year, to 12.7% in the current year.

Adjusted EBITDA, a non-GAAP measure, grew 54.4% to $10.8 million in the first quarter, compared to $7 million in the prior-year period and as a percentage of total revenues, adjusted EBITDA margin increased roughly 140 basis points to 19.9% for the first quarter. We recorded net income of $1.5 million, or $0.07 per diluted share, for the first quarter of 2016, compared to a net loss of $12.7 million, or $1.06 per diluted unit, for the same period last year.

On an adjusted pro forma basis, which excludes the nonrecurring items and it also assumes that all of the outstanding LLC interests were exchanged for class A common stock, whereby we would no longer present a non-controlling interest, we earned $2.8 million, or $0.08, per fully exchanged and diluted share, compared to $1.3 million, or $0.04, per fully exchanged and diluted share in the first quarter of last year.

Given our strong results in the first quarter, we're updating our outlook for the remainder of FY16. We now expect to open at least 16 domestic Company-operated Shacks in FY16 and each year for the foreseeable future. This is an increase of three openings per year from our previous guidance. We continue to expect to open seven licensed Shacks in FY16. Total revenue for FY16 is now expected to be between $245 million and $249 million, compared to $237 million to $242 million we previously discussed.

Because of the number flagship 2016 openings in new markets, we expect the average sales volume for the 2016 units to be at least $3.6 million and Shack-level operating profit margins to be at least 23%. Remember however, that our long-term guidance past 2016 still remains at approximately $3 million and 20%. Flowing through our performance in the first quarter, same-Shack sales growth is now expected to be between 4% and 5% for the full-year 2016. As a percentage of Shack sales, we expect deleverage in labor and related expenses of approximately 75 basis points to 100 basis points on a year-over-year basis, compared to 100 basis points to 150 basis points previously discussed.

Lastly, we expect our adjusted pro forma effective tax rate to be between 40% and 41%, compared to 43% to 44% previously discussed. We are extremely proud of our start to the year, and I hope this has giving you a clearer picture of where we are and where we're headed.

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

Thanks, Jeff.

We believe Shake Shack is well-positioned to deliver thoughtful and crafted growth in the future. Our recent new market successes in LA, Arizona, and Japan far away from our home market in New York City, remind us the lengths to which our fans will go to be part of what we do. We continue to see record engagement with our fans, both in line and online and we believe our message is resonating more deeply than ever.

Before we end, I do want to highlight what's happening at all Shacks across the country right now during the month of May. Our fifth annual Great American Shake Sale is in full swing. Over the last four years, our guests have helped raise over $1 million for Share Our Strength No Kid Hungry Campaign to help battle childhood hunger.

Now during the entire month of May, guests who donate just $2 at Shake Shack, receive a coupon for a free shake, valued at over $5 for a return visit. Through this great program, we've helped raise crucial funds for No Kid Hungry, as well as create another reason for our guests to visit us again soon. It's our most important charitable effort of the year and we hope you will come out and support our teams during this busy month.

Jeff and I want to sincerely thank our team for making Shake Shack the brand it is today and bringing to life the boundless hospitality that differentiates the Shake Shack experience. Our team is executing the plan; our future is bright; our opportunities are vast; and we will continue to make the strategic investments and decisions for the long-term that are building our Company for decades to come.

With that, I want to thank all of you for taking the time to follow our story by joining today's call. Operator, you can go ahead and open the line for questions.

(Operator Instructions)

Sharon Zackfia, William Blair.

Hello, good afternoon. A couple of questions. I know you didn't want to talk too much about the long-term impacts of chicken, but then you did call it a game changer. I guess how are you measuring whether it's increasing frequency or bringing in new customers and can you talk about whether it's above what you saw in Brooklyn or similar in terms of mix?

Thanks Sharon. We did say it could be a game changer and we certainly hope it will be. I think what we've witnessed so far, the data we have in Q1 is that it really did drive traffic.

Hard to measure exactly who is doing what. We had a little bit of everything, as we mentioned. You've got a lot of first-timers, you've got a lot of people who are just really excited about it.

It's a little different from the initial hit in Brooklyn, which was a lot of euphoria. But then it has settled into a very similar pattern across most Shacks. The behavior has been consistent with some of the things we've said in the past, it's a top-five seller. But really is a traffic generator.

Again, the biggest point we're making on this call is we're still not sure. I just think it's premature to say with one quarter's data how it really will affect mix long-term, because we are seeing a little bit of everything.

People are trading up, people are trading down, people are trading sideways, people are adding on. It's a little bit of everything. And it's such a new thing for us that it's hard to know exactly where it goes.

So the best and the most exciting news is when you look at our comp and you look at the overall traffic in Q1, we believe chicken was likely the largest contributor to that. And our price was relatively consistent with the roughly 1.5% that we took. So it was just above that at about 2.6%. That tells you it's hard to measure early on here what the mix shift has been.

Okay. My second question would be, as you think about menu evolution over time, is there a thought process that chicken could be a platform similar to the burger platform and the hot dog platform that you have?

There is. It's pretty exciting. It's a category. We've not chosen to use it that way just yet. It's really early.

But our culinary team is really excited about what other kinds of things we can do with chicken. Our test kitchen is constantly kicking out fun ideas for us like the one we did with that chef collaboration. We've never done a collaboration with chicken and we chose to do that.

In the first day in Washington DC, we sold almost 1,000 of that Peking Chicken just in a small market of four Shacks at the time doing that. We think it has vast opportunities for Shake Shack. But you know us well enough to know we're going to take our time and make sure we fully understand its impact before you see a whole lot of addition or change to that category.

Great. Thank you.

Alton Stump, Longbow Research.

Hello, guys. This is actually Brittany Whitman on for Alton this afternoon. Congratulations on the quarter. Just one quick thing. First of all, can you repeat the pricing component that was in the ticket number for the quarter?

We had 7.3% increase in traffic and 2.6% increase in price and mix, of which about 1.5% of that is price.

Just on the chicken pipeline. Do you have any color that you could add as far as timing on some of these new chicken items, or if we're going to see anything go into testing soon or anything like that, just to follow-up (multiple speakers)?

No plans at all that we would announce today. It's really only just few months old. It's wildly -- widely launched now across all Shacks in the US. No new plans just yet.

We think we've got a good runway of the current, but we are focused on our new announcement that we did talk about with the next burger LTO, which we'll add since we have not had a burger LTO this quarter. The Bacon Cheddar Shack at $6.89, which we're pretty excited about. That should be a fun item to run for the second half of the year.

Absolutely. Thanks so much.

Andy Barish, Jefferies.

Hello, guys. Wondering if the entry into four new markets is shown up at all in your thoughts on margins this year? And if so, where? Or does the big volumes you're expecting out of this class offset some of those new market inefficiencies?

They're really four great markets when you look at it. LA obviously, we are performing well above our expectations early on. We're just beyond excited about the acceptance of Shake Shack out on the West Coast. That is super exciting.

It does appear obviously in the G&A line when we have any new market. You've got one restaurant out there, we've got a great operator and our area director out there. Some of the G&A, some of the start-up costs are affected.

Generally one of the reasons, even though we benefited in the COGS line quite a bit this quarter, one of the reasons we're continuing to see just a little -- we can predict just a little bit of leverage this year is those new markets at times have a higher cost for us. There are little bit more inefficient, we only have one or two restaurants and they take some time to grow in as we cluster restaurants. Which is exactly to the point of our long-term strategy of continuing to do new markets and clustering there.

I think the big answer is a little bit of COGS, a little bit of G&A and we're happy that even with that, we were able to leverage G&A a little bit this quarter.

I think Jeff, you mentioned some supply chain wins in your discussion on food costs. Can you give us a little more color on what happened there?

Beef came down 11% this year compared to last year. Dairy also came down. Those are wins, which is why I updated our guidance that we expect a little bit of leverage on the COGS line as we move forward.

The reason I was saying a little bit of leverage is because we have those wins in the commodity market, but we have -- like Randy just talked about, the new markets that we are going into. Some of the inefficiencies that we have there will also offset some of that as well.

Last call, we talked about flat year-over-year. Now, I'm expecting to see a little bit of leverage there on the COGS line because beef is reacting more favorably really than we thought it would as we get into this year.

Okay. Thanks.

John Ivankoe, JPMorgan.

Hello, thank you. First, a little bit of housekeeping question. Obviously, of the 20 units in the comp base, it's still a very small comp base. The majority of those in the Acela corridor for the lack of a better word.

How much did weather benefit that traffic number in the first quarter of 2016 if you're able to parse that out? And as we think about setting traffic expectations for the remainder of 2016, do think that two-year traffic relationship between the first quarter of 2016 and first quarter 2015 will hold as traffic was obviously pretty volatile in 2015?

On the weather, John, you know we don't talk a whole lot about weather. It's pretty balanced. It was certainly warmer on the Amtrak corridor, as you would say, in the Northeast. We did have that blizzard, which we had some closures during that time. That balanced it a little bit.

Generally, it was a warm weather winter, record warm weather winter, in the Northeast. Hard to say. We don't really know and we also had the chicken as a big driver there. Hard to separate how that worked. But we do believe the warmth certain helped us out in that first quarter. Your second question --?

In terms of our guidance, we upped our guidance to the 4% to 5% for the year, John. We're coming up on some tough comparisons, as you know, the 12.9% in Q2 and 17% in Q3. And we're hopeful and we hope the traffic will continue to be positive for us and we believe that it will.

With those comparisons coming up and with a 9.9% that we posted in Q1, again, just with a little bit of conservative eyes, we're looking at it that way. Which is why we came out with the 4% to 5% and not something higher than that at this point. As you know, as we get further through the year, we will have much more visibility to that, but there are tough comps coming up. Really tough comps in Q2 and Q3.

But it's interesting -- it's actually, it's the check that's really tough. And certainly the traffic does toughen as we go from the first quarter to the third, which is why I asked whether that two-year relationship would hold through 2016. But certainly I hear the overall consolidated guidance.

Secondly, if I may regarding the uptick in development in 2016, you've already given a preliminary 2017. For basically every year you've increased the number of units that you open versus the previous year. 2016 is another example of that.

As you give the initial 2017 guidance and as half of those units they are already in contract or have been identified, why wouldn't there be an increase in 2017 over 2016 in terms of the absolute number of units?

There certainly could be, John, as long as we find the great sites. Today, we feel really good about half of that class with leases signed. Those are going to be some great Shacks in 2017. But there's still a lot of work to be done. It's May, and we don't have the whole class down for 2017.

As soon as we have any more than that, we feel real good about the sites we have set for 2016 -- excuse me, 16 sites for 2017. If we can ramp that up, we'll let you know, but we feel good about that. That's an increase from our last call as it is. We will keep you posted if that goes up.

Is that the constraint is solely real estate at this point? It's not a human resource or a G&A or Management structure issue? Or is it just solely a site issue?

There will always be a human resource question, John. It will always be a supply chain question. Human Resources will lead our decisions on real estate.

That said, every time we've bumped this up, we've got more and more comfortable with our ability to develop the leaders for the next generation of Shacks. We feel great about doing that for a much increased number from last year. If we can do it again in 2017, we will do it.

But we are still a new company. These are big percentage increases over the current total units in this country both from last year and even into 2017. Those are some high percentage increases. So at least want to make sure we're ready for it.

Thank you.

Andrew Charles, Cowen and Company.

Great. Thank you. It's obviously encouraging that you're raising your first year sales volumes for 2016. I want to check in how the Phoenix and Scottsdale are behaving that opened two weeks apart from each other? The last time you did two openings on top of each other was in Boston last year. Presumably, this is a strategy that works well for you.

It's hard to say. That's really based on developer timing. That's not a strategy where we go ahead and say we want to open two at once. Generally, we would prefer to spread them out actually.

But we hit it at a great time towards the end of the busy season and the tourist season in Scottsdale. That season comes to a quieter time now. But we had a great start with both of those.

But without getting into unit specific data, we're really happy with it. We have a great third Shack planned that should open at the end of this year out in Kierland. That's going to be a freestanding model in a fantastic development of Kierland as I'm sure you know.

That will add really hit the market with a great real estate strategy for those three very significantly different but strong areas. So we're helpful for a lot of opportunity in the future in the Arizona market.

And Andrew, to reiterate what Randy said, I don't believe it will not necessarily be our strategy to open back-to-back like that in future cities. It was a timing issue with the developer that we had to follow through with.

Got you. Did you see the mix of Chick'n Shacks increase in the three Brooklyn Shacks where it was tested once the rest of the store base rolled it out?

No. Actually, it's been pretty straightforward across Shacks. It hasn't really changed much in Brooklyn.

Again, when we first launched in Brooklyn, as you might imagine, when we make newspeople come from far and wide at times for something like this. So at the very beginning of that launch last year in July, August, was a huge tick up in percentage for those restaurants.

That leveled off towards the end of the year and that leveling off has remained pretty consistent. I think as we got into the end of last year, it became more of a normal item in Brooklyn and not something people were traveling for as they did in the very beginning of that launch.

Great, thank you.

Jeffrey Bernstein, Barclays.

Great. Thank you very much. A couple of questions. Just one on the comp. With the traffic as strong as it was, north of 7%, I'm just wondering how you think you're actually achieving that? Usually with the volumes that you're running at, the traffic you are already running, unless you have some sort of fee-for-service initiatives or new technology initiatives, it's hard to figure out exactly where the traffic is going.

I'm just wondering if you think you're seeing it maybe in broadening out your key periods or from extended hours? Or how exactly do think you're getting that traffic through when you're already at those volumes?

That's a great question. No real expansion of hours or anything of that sort. I think we just made an investment in our team this year.

If you recall, at the same time we did this, we've also given people raises across the Company, significant raises that we talked quite a bit about. And we believe our team is more excited and more motivated than ever. They're getting paid well, they're being taken care of and they're just doing a better job.

Again, every year, we get a little bit -- a little tick here and there better at operating, at throughput, some small changes that we make in how we move food through. But it was really about chicken. As chicken extended the shoulder periods, people were coming for it, they were adding things to their order. It really was the driver for the first quarter with a lot of initial excitement.

Got it. And in terms of other potential drivers. I know in the past you have dabbled with or talked about delivering for a while it seemed like a lot of people try and fight the trend. But it seems like more recently, maybe you're welcoming it. So I'm just wondering what the thought process is in terms of potential signings with partners in terms of delivery, which could be a new driver for you?

We've had our up and down emotions about it. Mostly just about the guest experience and making sure that the guest is paying the right price that we set, not someone else, and that they get a great Shake Shack experience if they choose to work that way.

There's no question we're seeing a lot of delivery through the major new players throughout the country, especially in urban markets. It's certainly been an impact for us in 2015 and ramping up.

We have a lot of good relationships with those companies. We have no firm partnership. No intentions at this time to do so other than continuing to improve that experience.

Every time if you choose to experience Shake Shack in your own home through a third-party delivery, we are going to make that as good as we possibly can, that experience. That's where we sit today. Certainly, got our eyes on that opportunity and what it could mean for how people use the Shack in the future.

Got it. And lastly, Jeff, on the baskets of commodities. In the past, I had down that you had said the basket was expected to be flat year-over-year. And now, I think you were saying you were going to leverage the line a little bit. I just want to make sure from an apples-to-apples perspective, are you now saying the baskets are going to be down a little bit or you're going to see a little bit of leverage as a percentage of sales?

As a percentage of sales, I expect that to be down just slightly year-over-year.

But as a basket, how's that looking in terms of relative to the percentages you talked for the first quarter?

Beef and dairy, which are the two biggest things that we buy, are down. I mentioned beef was down 11%. Didn't quote a number on dairy but it's down as well. Commodity basket is down favorably for us.

As I mentioned earlier, it's going to be offset by new market inefficiencies and a couple other things that we just expected to be down a little bit. So we're not going to be able to completely get the benefit of the commodity basket being down year-over-year, because of some of the inefficiencies. But overall, I do think we'll see a little bit of leverage on that line.

Understood. Thank you.

Paul Westra, Stifel.

Great. Thanks, good afternoon. Just a follow-up on your comp outlook. Your forward comp guidance looks to be relatively unchanged in that 2% to 3% range than you had before, your increases the first quarter beat. Just want to make sure -- maybe framework around it, are you seeing a comp slowdown inter-quarter or maybe the start here? Or obviously you mentioned the tougher lapse, so has this maybe -- give us an idea how we should think about whether you're seeing a slowdown or not?

Paul, what you mentioned about the tough comparisons coming up is really why we kept our guidance for the remainder of the year at the 2.5%, 3%. We don't give inter-quarter numbers or information on how the last month when subsequent to the quarter and we're going to continue to do that.

The comparison is coming up in how we look at it. When we're up against a 17% number, if we can continue -- if we can put in three and have a 20% stacked, it's pretty good number and we're going to be pretty happy with that. That's what our outlook is for the remainder of the year.

A great. And maybe a follow-up to Jeff's question. On the costs to goods sold guidance, it's almost the same thing. Your forward cost to goods sold outlook looks to be flat on a year-over-year basis despite what you mentioned on the more favorable beef and dairy outlook. Should you expect more incrementally inefficiencies as new store weaks growth inter-quarter or is there some other offsets that you hadn't mentioned yet?

It's in the things that I mentioned, the commodity wins that we're having combined with the inefficiencies. And also the fact, Paul, I'm just not convinced that beef is down to stay quite yet and it's volatile still. It's great that it came down and it surprised me and I told you on the last call we thought it would be flat. Now, I'm saying I expect it to be down on the cost of goods sold line.

That's really what it is. It's all those factors and combined with the uncertainty of the commodity market at this point. It's just one of those things, as we get further into the year and if it stays at a reasonable level where it is, then perhaps that guidance will change. But right now, I think it's prudent to leave that as a slight leverage on the cost of goods sold line.

Great. And maybe another quarter into your higher wage rollout, any positives, negatives or anything unexpected as far as turnovers, productivity? Any qualitative changes there?

A little bit early to say. We only have a few months of data here. Generally our workforce is certainly happier. We are able to continue to get the kind of great hospitality that we strive for in our restaurants.

But it's too early to comment on any kind of real turnover trends just yet. The team did a great job in the first quarter. Obviously, the high comp and the uptick in sales helped offset the higher costs to keep our percentages relatively flat, which was pretty amazing work on the part of our operators.

They did a hell of a job and we're continuing to get more effective in the way that we schedule and the way that we think about how to operate a Shake Shack day-to-day. But that said, we do continue to expect 75 BPs to 100 BPs of pressure on that line versus last year through the rest of the year. That is a significant increase we gave our team and we still think it's going to be an impact on the line.

Great. Last question, going overseas. Mentioned the Middle East, obviously understandable. Is there going to potentially be an impact to development? How fast could development change if obviously the economics weren't a little slow down of dynamics there?

Not really. If you look at our guidance of seven more Shacks -- seven Shacks all year here for that. The Middle East has got quite a few restaurants there. Our region there is maturing for Shake Shack quite a bit. We have some great opportunity we just opened in Riyadh and doing really well there as I said in Bahrain and Oman. We fully expected that region to mature a little bit.

The majority of our growth that we're focused on through the rest of this year and the next couple years, is the Japan and South Korea markets that are just getting going for us. We are incredibly encouraged. If you had been there the day that we opened our second Shack in Tokyo and seen the excitement and the lines at both the second Shack and the first Shack, it's just continuing to get more exciting for us over there.

And we've got our sights set now on where we will open at the end of the year in South Korea. So we are excited about the international opportunity. But it's important to note, that the Middle East has slowed a bit. Obviously, it's a dynamic market day by day right now, with what's happening with the price of oil.

Great. Thank you.

John Glass, Morgan Stanley.

Thanks very much. I wanted to ask about the average weekly sales versus the comp. So, average weekly sales growth is 1% and it's been lower than the comp for a number of quarters for the reasons new store developments.

But since so many stores aren't in the comp base, maybe you could give a -- and you're bullish on the stores that you're opening this year, maybe a little color on those sophomore stores and how they have performed and if there's been a change in the performance in those second-year stores versus prior years maybe?

In the last call, the call before this, John, we had mentioned that the 2015 opens exceeded the $2.8 million to $3.2 million range that we had always talked about. I haven't thrown a number out there as to what the AUVs were of those Shacks, but it was above the range of the $2.8 million to $3.2 million because we had some heavy hitters that opened up in 2015. When you look at those sophomore Shacks combined with the comp base. And then, nice increase in the 2016 opens from $3.3 million to $3.6 million is really where you're going to be able to close the gap between the average weekly sales and all those three years.

And John, we've said for a long time, we all fully expect that that number slowly comes down over time. We been able to perform in a great way this last 1.5 years on that particular metric of average weekly sales.

But as we add even this year that we predicted $3.6 million, and in the coming years in the $3 million average, that models down slightly overtime. We fully expect that and those are great restaurants that can make a lot of money for us. It's an important metric for us, but we are well aware of where it's headed.

You've got to remember to, John, that if Shacks come in at the $3.5 million or $3.6 million range, that is below our a AUV at this point, too. It's our AUV for 2015, it's $5 million so it's a decrease from our AUV is. The story you've been telling for the 1.5 years we expect that to come down and we expect average weekly sales to decline over the long-term also.

The question just had to do with the rate of change. It grew 1% this quarter and it had been growing 7% or 8% in prior quarters. I understand the comp is a component of that in AWS, but I just wanted to solve for the other piece that's was all. That was helpful.

The pre-opening was higher this quarter, at least in I had modeled. Has preopening changed or are you pulling forward to that preopening number this quarter? Future openings? How do we think a preopening per store, has that changed at all?

Not really. The dynamics of this quarter that made it high, we had a little bleed over from Q4. If you remember, we opened in Queens on the very last day of the year. So it will bleed from that.

But the most significant one was we had quite a bit of charge preopening to LA. We did some amazing press events that obviously kicked off the year. We spent a lot of money preopening marketing. We even had some preopening rent, which we almost never do.

We really wanted to launch that important market the right way. The majority of that uptick really is that. And you should see as we do more Shacks and more clustered -- as we've got it, that will be slightly decreasing per Shack over time.

Okay, great. Thank you.

(Operator Instructions)

Karen Holthouse, Goldman Sachs.

I actually want to follow-up a little bit on a question from earlier about the change in the unit growth guidance. Looking at the original guidance was to open 24 units between 2015 and -- between 2016 and 2017. Now, that has gone up to at least 32 on a base of 40, so adding eight on a base of 40.

I guess I just would like a little bit more color on how you're ramping the human capital pipeline behind that and what gives you confidence that you're not putting too much stress on the pipeline for general managers, the opening teams, the training teams, just given the percentage increase we are talking about? Thanks.

That is absolutely so much of our focus. That will be one of the hardest things we ever do at these levels or whatever levels we get to in the future. It's also our sweet spot. It's also the thing we've been doing in our parent Company for 30 years and at Shake Shack for the dozen years that we're here. We're really good at creating leaders that train future leaders.

We have more than ever scaled our training systems. We've in this recent pay increase, we continue to pay our top trainers even more than they have ever made. Our entry-level team members are more inspired than ever to grow, make a little more money and be a part of this.

We are developing more people from within than we ever had. I think we had something over 400 internal promotions last year in this Company. That's an extraordinary number for Company our size. We are so focused on just growing and growing and growing our people to meet that need.

And we've got great people running these Shacks. Come on into any Shack and say hey to our team and I think you will be proud to see what you are doing. Which gives us all the confidence to ramp that up to those 32 Shacks in those two years.

If we can do more and we feel like all those things are in place, as we said in the last question, we'll certainly get there. But today, 16 feels like a great number to us.

And one quick follow-up to that. At this point, the field leadership organization, so whoever is sitting right above the General Manager, what percentage of that are internal promotions versus external hires, just roughly?

The Area Director group, which we have about 10 people now who oversee between four to eight Shacks, they are almost entirely from within. We've got a few examples of people who have come from the outside, but generally, they start as General Managers and grow from within. They are some of the strongest operators you're ever going to meet in this industry.

We just had an Area Director meeting here in office last week and that group of people is just doing extraordinary work. They are led by two Regional Directors as well as our Senior VP, Zach Koff, who is doing a hell of a job running operations. Clearly, the results over this last six quarters have shown that kind of incredible operating excellence that these guys are working on.

We're so proud of that team. We feel like we've got a great pipeline of people here who will be ready to meet that growth as we view the 16 plus 16. So we feel really good about that leadership group being in place and developing the people they will need.

Great. Thank you.

Ladies and gentlemen, that is our last question today, and it does conclude our conference call. We appreciate your participation.