Shake Shack Inc (SHAK) 2016 Q2 法說會逐字稿

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

(Operator Instructions)

Please note that this conference is being recorded today, August 10, 2016. On the call today, we have Randy Garutti, Chief Executive Officer of Shake Shack, and Jeff Uttz, Chief Financial Officer. And now I'd like to turn the conference over to Jeff Uttz.

Thank you, operator. Good evening, everyone.

By now everybody should have access to our second-quarter 2016 earnings release, and 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 the earnings release. And with that, I'll now turn it over to Randy.

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

Next week, Shake Shack will reach a milestone that none of us ever dreamed possible. I'm proud to share with you that when we open our Boston Seaport location, it will mark our 100th Shake Shack opening worldwide. As we take that in for a moment, I want to remind us all of the humble beginnings, from which we came, a New York City hot dog cart with a vision to restore a park.

Today, Shake Shack continues to surprise us at every single turn. We've never been more confident in our ability to execute on the big opportunities ahead of us. So today, let's talk about the strong results for this year, and look ahead to the strength of what's to come.

It's no secret that the restaurant industry has seen its share of choppiness and challenges this year. Even against that backdrop, we are really proud to announce that yet again, Shake Shack grew its revenue. Total revenue increased by 37.2% over last year, fueled by 14 new domestic company-operated Shacks, and same-Shack sales growth of 4.5%. And to put that in perspective, the comp growth is an especially strong number, on top of last year's nearly 13% comp performance, a two year stack comp of 17.4%. To continue growing at that rate, on top of last year's impressive results, and in this environment, is a testament to our multi-format strategy and operational achievement.

Now for seven straight quarters as a public company, we've reiterated that if you're only looking at the strength of our Same-Shack sales which have been extraordinary, you'll be missing the real story of our industry-leading AUVs and Shack-level operating margins. This quarter, we raised that bar even higher, reaching a record 30.8% Shack-level operating profit.

To help you understand the breadth of that strength, year-to-date, not a single domestic company-operated Shake Shack has posted less than a 15% operating profit at the Shack-level. I want to say it again, across the country, in all types of formats and all levels of sales, Shake Shack continues to perform. With only 53 domestic company-operated Shacks, just imagine where we can grow from here.

Shake Shack is roaring into our second 100 Shacks, with better trained leaders, stronger than ever operations, a culture of boundless hospitality, and continuous innovation, and importantly, a pipeline of A sites that will lead our next phase of growth. Innovating around our core menu continues to be a focus for driving growth.

As we discussed in Q1, the Chicken Shack has been an important addition to our menu. In Q2, it represented 8.4% of our total sales, and has already become the third highest selling individual item on our menus domestically. That's an incredible behavioral shift, and demonstrates the trust our guests have in us, and their eagerness to try new menu items when we create them at the Shack.

In Q1, chicken was a strong traffic driver, and now with some time behind it, it's settled into a consistently strong position on our menu. It's also contributing to a higher average check, and has diversified our protein risk portfolio for the long-term. In short, it's a winner.

And as you'll recall for the first six months of the year, the Chicken Shack has been acting as our LTO. We really wanted to give it focus, and the attention runway it deserved. And now that it's settled in, we're back to innovating and highlighting cravable additions on the burger side, which is, of course, our largest piece of our business. On June 3, we launched the Bacon Cheddar Shack as our new LTO.

The Bacon Cheddar Shack is 100% all natural Angus beef hamburger topped with smoked Niman Ranch bacon and aged Wisconsin white cheddar cheese sauce. Now we only have limited data on this, but I am happy to report that out of the gate, the Bacon Cheddar Shack has been the best performing LTO we've run since we launched the LTO program last year. It's also been a positive contributor to mix, given its higher price point at $6.89.

This is important for a number of reasons. It demonstrates that our fans to continue to love it when we create new items, and that they're willing to pay a higher price than any of our LTOs in the past, all positive contributors to mix, average check, margin and our future opportunity. This summer, we expanded our LTO program to more than just burgers. It is peak frozen custard season. And so in June, we teamed up with Brooklyn's acclaimed bakery, Four & Twenty Blackbirds to create the Blueberry Pie Oh My concrete and shake, made of rich and creamy vanilla frozen custard, blended with a slice of blueberry pie, and topped with whipped cream.

Our guests have also been enjoying and Shack Shandies, our ShackMeister Ale blended with house-made lemonade. And never forgetting our name is Shake Shack. Subsequent to the quarter we launched an LTO shake, Chocolate Cookies & Cream, and in its first month, it's already become one of our top-selling shakes. Menu innovation at Shake Shack remains a key part of our core strategy moving forward, and we are excited to share the results of current LTOs, as well as what's cooking in the test kitchen for the future.

Now let's talk about the great Shacks we've opened, and the remarkable pipeline ahead. During the second quarter, we opened four new domestic company-operated Shacks. We deepened our roots in the mid Atlantic, with our sixth Shack in the DC market in Pentagon City.

It's important to note also, that when we look at our long-term strategy, and we open a sixth Shack in the DC market for example, we can better leverage our supply chain efficiency. We can strengthen our ops teams. While in the near-term, these efficiencies are a little bit offset by the higher costs we incur when we enter new markets; it will over time begin to help us leverage the COGS line. We're excited about DC, and we have a couple great Shacks teed up for the region next year.

We also continue to penetrate our home market here in New York City opening in Herald Square, on the corner of Broadway and West 36th Street, as well as our second Queens Shack in Forest Hills. New York City is our home market and we still see plenty of opportunity.

Lastly during the quarter we grew in the Midwest, and opened our first ever US interior mall location at the Mall of America in Minneapolis. This is strategically important, as we continue to diversify our Shack formats, and test the many types of Shacks we're intending to grow.

Subsequent to the quarter, we also opened our first Shack in the Westchester area in Yonkers at the Cross County Shopping Center, and another NYC Shack in the Fulton Transit Center downtown, which is one of the most stunning designs we've ever completed. Importantly, this Shack bridges the gap between sort of a normal Shack and a transit hub. So we chose to actually test breakfast upon opening this location. Breakfast as we know, is an exciting day part for us, but we have no intentions for now to expand it beyond our current transit hubs. But we're launching it here, will provide some good learning for us beyond our traditional airport and train station Shacks.

As we enter the second half of the year, we're really excited to share the dynamic line-up of new Shacks on deck. And I think that it's important to take a moment and reiterate, that despite this time of macroeconomic challenge, our strategy is to double-down. Our strategy is to dig our roots even deeper, across the country. We have a unique and powerful opportunity to capture the premium real estate that many other companies just can't get, or may not have the patience to pursue. It is this type of real estate selection that will sustain us for the long-term.

With 53 domestic company-operated Shacks open year-to-date, we're ramping up through the end of the year, with a strong group of Shacks ahead. As I mentioned earlier, we'll celebrate our 100th global Shack opening in the Boston Seaport next week, with a collaboration featuring two of Boston's great chefs, Jamie Bissonnette and Ken Oringer, where we created the limited edition Coppa Burger. Inspired by their award-winning restaurant in Boston South End, the Coppa Burger is a 100% all natural Angus beef burger, topped with provolone cheese, grilled mortadella, cherry peppers, caramelized onions, mayo and lettuce.

Collaborating with the world's greatest chefs and culinary leaders reinforces again Shake Shack's fine dining heritage and our competitive advantage. Because we want to celebrate our 100th opening with all of our fans on August 16, the first 100 people online before noon at every Shack around the world are getting a free Shack burger. This is a humbling milestone for us, and we look forward to celebrating across the globe.

In the coming months, we will open two new flagship Shacks in Texas, one in Houston Galleria Shopping Center and the other in Uptown Dallas' The Crescent. Situated inside a park, our first Dallas Shack promises to be one of the most unique designs and locations we've ever obtained.

We've also talked a lot about the early success of our first Shack in California in the LA area in West Hollywood. We're now poised to take our next steps, adding two more Shacks, one in Hollywood, and one in Glendale before the end of the year.

With the strength of this schedule, and the experience of recent favorable development tail winds, we're thrilled to announce that we are again increasing our guidance for domestic company-operated Shacks from the previous 16 to now 18 Shacks, with the 2 new Shacks slated to open at the very tail end of the year. This is due to the acceleration of permanent and construction time lines for Shacks that we had originally planned for 2017. Our development team is doing an amazing job right now, scaling our growth, and seizing our opportunity.

Looking ahead to 2017, we now have the majority of our leases signed, and we'll be launching in new markets such as Detroit and St. Louis. Additionally, we plan to deepen roots in our existing markets, in the Chicago area, in Texas, along the East Coast, and in Manhattan with a high visibility Shack in Penn Station. 2017 is shaping up to be a strong year for development, as we capitalize on the momentum and excitement around our brand.

Turning now to our license business, we're really excited to share with you the milestones we've reached, and the extraordinary new opportunities we're about to embark on. During the quarter, we opened three licensed Shacks. We furthered our domestic license business with a new Shack in the T-Mobile Arena in Las Vegas, where beginning in 2017 our Las Vegas and this arena will be home to a new NHL hockey team. Additionally, we've opened two international licensed Shacks, our second Japan Shack in Ebisu, and our first Shack in Bahrain at the Bahrain City Center.

Internationally, we are not immune to global economic and political uncertainty. As I mentioned in our call in Q1, our Middle East business which is the largest of our licensed portfolio, continues to experience headwinds, given the regional challenges, and the volatility of the oil market. Traffic throughout the region is down and uncertainty abounds, and therefore we are continuing to expect sales pressure on our Middle East business for this year. Also even though it's a much smaller part of our license business, the recent terrorism in Istanbul has, and will continue to affect our four Shacks there, one of which we've chosen to close and relocate to a new project, which will reopen each next year.

In addition to this, we continue to face currency exchange headwinds, especially of late in the UK. Brexit brings new uncertainty, and will temper our near-term expectations. But we are focused on the upcoming two new central London Shacks we'll be adding later this year, and it will be a strong addition to our growing business there.

I also just returned from an amazing trip to Asia. And as we look at our future growth potential, I'm thrilled to tell you that there is simply no question that our opportunity in Asia is vast. As I just mentioned in April, we opened our second Shack in Japan in central Tokyo's Ebisu, building off the strong start of our first in Gaien which opened last year.

We continue to be amazed by our guest response to Shake Shack in Japan, and we are on track now to open our third Shack in Tokyo at the end of this year. Japan has exceeded all expectations in its first year of business, and we're quite bullish about our opportunity in that market. If you followed our social media challenge lately, you may have also seen that subsequent to the quarter, we opened our first ever Shack in South Korea in Seoul's Gangnam district, with our new licensed partner, the SPC Group.

I want to pause, and attempt to share how special this opening really felt. I have seen some amazing things in my 17 years at our Company, but I don't think I've ever seen anything quite like this. More than 500 people lined up before our opening, many overnight. The media coverage was unlike anything I've ever experienced. And at one point during the day, we had upwards of 700 or 800 people on line, stretching blocks long in over 100-degree temperatures. It is still early days for our business in South Korea, but the response has continued at a fever pitch. And our start in Seoul reminds us yet again, of the unique power and attraction the Shake Shack brand has across the globe.

Just think about it for a moment. How many brands in any industry could cause that to happen at any point in their life cycle? We're doing it in year 13 of Shake Shack, and we're doing it halfway around the world.

Here at home, we're really excited to announce that we've just signed a licensing agreement with HMSHost, and we intend to develop Shacks in various airport locations now across the country. We've been cautious in this approach in the past, but with a few years of experience now in airport locations, we've consistently been pleased with our performance, and we've heard guests reach out, and thank us for bringing a Shack to their travel schedule. As we look at the future of our licensed business strategy, we like the diversification it brings; the resource-light and efficient model, the low-risk royalty stream, and the opportunity to reach places that we could not reach at home.

This has allowed us to forward the Shack brand in extraordinary ways, while we continue to focus on growing our domestic company-operated business here. Given the results, excuse me -- given the benefits and the great success we've seen recently, we're excited to pursue more licensing opportunities in the near-term.

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

Thanks, Randy.

Now I'd like to share with you the results of our 13-week second quarter, which ended on June 29, 2016. Total revenue, which includes both sales from company-operated Shacks and licensing revenue increased 37.2% to $66.5 million during the second quarter from $48.5 million in the second quarter last year. Sales from company-operated Shacks increased 38.3% to $64.4 million during the quarter, versus $46.6 million last year. This increase was largely due to the addition of 14 new domestic company-operated Shacks over the past year, and to a lesser extent growth in same-Shack sales.

Same-Shack sales increased 4.5% during the second quarter, on top of a 12.9% increase in the prior year, or a stacked two-year increase of 17.4%. The growth for the quarter consisted of a 1.2% increase in traffic, combined with a 3.3% increase in price and mix.

Embedded in the price and mix increase is approximately 1.5 points of price that was taken in January. And while we did see the traffic gains from the Chicken Shack begin to normalize this quarter, we continue to benefit from positive mix shifts from the Chicken Shack, as well as strong results from our new LTO, the Bacon Cheddar Shack, both of which sell at a premium price point.

The comparable Shack base in the second quarter included 23 Shacks, compared to 16 in the second quarter last year. Additionally, our Madison Square Park Shack reentered the comp base in May, and it will remain in the base for good from this point forward. Average weekly sales for domestic company-operated Shacks remained strong at $102,000 for both the second quarter of 2015 and 2016. As we extend further into our existing markets, and we open more target volume Shacks with annual sales of approximately $3 million, naturally we expect our average weekly sales over the long-term to decline.

Licensing revenue increased 10.7% to $2.1 million during the second quarter, from $1.9 million a year ago, driven by the opening of nine international-licensed Shacks since the second quarter of last year, offset by lower revenue from Shacks in the Middle East and Turkey. We continue to experience softness in the Middle East, our most established international market, due to the economic slowdown in energy-dependent markets, and regional turmoil in areas such as Turkey. As a result, we expect sales in our Middle East Shacks to remain under pressure for the remainder of the year, given the macro conditions in that region.

Now I'd like to give you detail on expenses during the quarter. Food and paper costs as a percentage of Shack sales decreased 130 basis points in the second quarter to 28.1%, compared to the prior year quarter. This improvement was primarily driven by the previously mentioned menu price increase, as well as lower commodity costs, primarily in beef and dairy. Our beef costs have decreased approximately 11% over the prior year quarter, and our outlook for the remainder of the year is that beef will continue to remain lower than last year, and that dairy will also continue to come down.

In addition to the benefits seen from lower commodity prices, we have been able to gain some efficiencies through supply chain enhancements, such as restructuring certain of our purchasing arrangements, and better geographic diversification of our suppliers. While we expect these improvements to continue to help us leverage the line, we'll continue to experience higher distribution costs when we enter new markets, and food costs for those new markets will offset some of these efficiencies. Additionally our commitment to transition completely to cage-free eggs by the end of 2016 will also put pressure on food costs. But overall, we are now expecting to gain some leverage in food and paper over the prior year.

Labor and related expenses as a percentage of Shack sales decreased 30 basis points to 23.7% from 24% in the prior year. As we mentioned on our last call, we implemented a company-wide increase to the starting wage for all of our 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. Our average hourly wage has increased over 12%, since we implemented this wage increase.

This has resulted in higher labor costs during the quarter, but once again were offset by strong sales growth, and lower expenses in other areas such as medical claims. For 2016, we still expect labor pressure year-over-year. However, given our strong performance in the first half of the year, we now expect labor and related expenses to deleverage by approximately 50 basis points for the full year fiscal 2016, versus the 75 to 100 basis points we previously discussed.

Other operating expenses as a percentage of Shack sales increased 130 basis points to 9.3% versus prior year, largely driven by higher repair and maintenance costs, as our base of mature Shacks has grown. As our Shack count continues to grow and the average age of our Shacks increases, we expect continued pressure on this line.

Occupancy and related expenses as a percentage of Shack sales decreased 20 basis points to 8.1% versus prior year, driven by benefits from tenant improvement allowances, as well as higher Shack sales. Shack-level operating profit which is a non-GAAP measure, grew 40.6% to $19.9 million from $14.1 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 50 basis points to 30.8%, as we leveraged food and paper costs, as well as labor.

We are so proud of our Shack teams for hitting this extraordinary mark. General and administrative expenses increased $1.4 million to $7.5 million during the second quarter, from $6.1 million in the same quarter of 2015, primarily driven by higher consultant fees, as well as incremental costs from our first annual shareholders meeting.

As a percentage of total revenue, general and administrative expenses decreased to 11.3% for the second quarter of 2016, from 12.5% in the second quarter last year. Looking ahead, we don't expect further leverage on G&A as we are committed to investing in our teams and building our infrastructure, so that we can execute on our ramped up growth schedule.

Adjusted EBITDA, a non-GAAP measure grew 39.3% to $15.6 million in the second quarter, compared to $11.2 million in the prior year period. And as a percentage of total revenues, adjusted EBITDA margin increased roughly 40 basis points to 23.5% for the second quarter. We reported a net income of $3.3 million, or $0.14 per diluted share for the second quarter of 2016, compared to net income of $1.1 million, or $0.08 per diluted share for the same period last year.

On an adjusted pro forma basis, which excludes non-recurring items and also assumes that all of the outstanding LLC interests were exchanged for Class A Common Stock whereby we would no longer present an new non-controlling interest, we earned $5.2 million, or $0.14 per fully exchanged and diluted share, compared to $3.4 million, or $0.09 per fully exchanged and diluted share in the second quarter last year.

Given our results for the first half of 2016, we are updating our outlook for the remainder of fiscal 2016 to the following. We now expect to open 18 domestic company-operated Shacks during fiscal 2016, and each year for the foreseeable future. This is an increase of 2 openings per year from our previous guidance of 16.

As a reminder, the majority of the remaining 2016 openings are weighted towards the latter part of the year, which will limit the sales impact of these new Shacks on total revenue for the year. We expect seven licensed Shacks in fiscal 2016, net of the international relocation Randy mentioned earlier, which is an increase of one over our previously stated guidance. Total revenue for fiscal 2016 is now expected to be between $253 million and $256 million, compared to $245 million to $249 million that we previously discussed. And we continue to expect Same-Shack sales growth between 4% and 5% for the full year of 2016.

And as a percentage of Shack sales, we expect deleverage and labor and related expenses of approximately 50 basis points on a year-over-year basis, compared to 75 to 100 basis points we've previously mentioned. And lastly, we continue to expect our adjusted pro forma effective tax rate to be between 40% and 41%. We're extremely proud of our start to the year, and I hope that this has given you a clear picture of where we are, and where we're going.

And with that, I'll turn it back over to Randy to make some final points, and then we'll take a few questions.

Thanks, Jeff. I am really proud to close tonight's call by sharing a few of the team's recent achievements. In year 13 in the Shake Shack story, we are thrilled that our devoted fans continue to voice their love for our brand and our food. We were recently named the absolute best burger in New York by New York Magazine, the best burger in Boston by the readers of Boston Magazine, and named among the best six burgers in LA from LA Magazine. All of these, and so many other recognitions, just a few of the markers of the continued evolution of our brand strength, as we deepen our footprint across the country, and around the globe. 13 years into this journey, and we're bringing more excitement and loyalty to Shake Shack than ever.

In addition, through the month of May, we continued our 5th Annual Great American Shake sale nationwide to benefit Share Our Strength, No Kid Hungry campaign, and help battle childhood hunger. We are so proud, and that with the help of our guests, our team raised almost $600,000, bringing our total in five years to just under $2 million. Not only are we donating to a great cause, but we were also able to drive incremental sales and traffic on future visits while doing it. Just another way we bring the life of boundless hospitality that differentiates the Shake Shack experience, and enriches the communities in which we serve.

While we continue to grow in new markets across the country and around the world, we are constantly innovating around our core with new products that keep our guests coming back, thus ceaselessly reinventing ourselves in the ever-evolving landscape of our industry and the world around us. And we never stop asking the question Danny Meyer asked so many years ago when this journey began, whoever wrote the rule we should accept things how they are?

We are continually challenging ourselves to think a little bit bigger, and go a little bit farther. We are really investing in building our team of leaders who are training the future leaders, who will lead our Company. Together we are executing on the plan.

And as we celebrate the incredible milestone of our 100th Shack opening next week, we're positioning our team and our Company to continue that growth, and to reimagine what the next 100 Shacks will look like, and the 100 after that. We're thankful and honored, you've come along for the ride with us. Now operator, you can go ahead, and open the line for questions.

Thank you.

(Operator Instructions)

Sharon Zackfia, William Blair.

First question is on labor. Looking at the labor pressure in the second half, in order to get to this 50 basis points of deleverage for the full year, how do you get there, given that it's been flat to down in the first half? If you can just kind of tell us your thinking around that?

Yes, we've been actually very happy where it came out for the first half of the year. But as we get to the second half of the year, we're going to continue to invest in our teams, in this competitive environment, to get the right people, in order to get the people that we need, in order to continue to execute the way that we have. We know wages are going up, and we're going to continue to invest in our team, and spend the money in order to get the right people. So looking at what we expect for the remainder of the year, I really think we're going to see a little bit of an increase to get to the 50 bps for the year, simply because of our plan to invest in a little bit higher quality team members than some of our competitors.

And it's not just the hourly team members which we're doing. It's managers at all levels, it's our shift managers and our supervisors, many of which we're going to need to bring on in an increased number, in order to be well-prepared for that ramped up growth, for this year and next. So that's an investment that we're excited to make.

Okay. So would it be fair to say then, that you're anticipating incremental wage pressure in the second half?

I think that's fair to say, yes.

Yes.

Okay. And then just I guess, on trends, comp trends, I mean. Could you tell us what trends were like throughout the quarter? And then would you be willing to share what trends were like in July?

So we don't get into mid quarter guidance. We'll let you know about July, when we do our Q3 call. Q2 was fairly consistent through the quarter. So we generally have not broken that down, and we're going to stay with that. But it has been a fairly consistent quarter for us for Q2, and that landed at the 4.5%.

Okay. And then, I guess, just finally, I think you guys have breakfast in a handful of locations, or maybe testing it. I don't know if you would characterize it like that. But do you know whether breakfast has broader applicability across your portfolio, and when you might decide that?

Yes, we hope so. We really like the business. We do it just at six Shacks today globally, and they're really only in our transit centers. As I mentioned Fulton Center is sort of half transit center, half normal Shack. So we thought it would be a fun test there, just opened there a couple weeks ago. So we're just getting started, but we like breakfast a lot.

There are no plans today to expand it beyond those transit centers. But we got our eyes on it, we're learning it, we're testing new products, and we're having a lot of fun. People really tend to enjoy it. I know I do, every time I'm flying out of JFK Terminal 4 so.

Okay. And then, I guess, a last one, just getting back to expenses. Looking at other operating expense, it seems like there was a big increase there. I mean, I think it was only down 20 basis points or something. So was there another cost factor that hit in the second quarter?

The biggest hit on that line was the R&M expense, and the Shacks are getting older, we're reinvesting back in the Shacks, giving them the quality we want them to be, and we expect that to continue. So the base of Shacks is aging, and we're in our 13th year, and some Shacks are getting a little bit older. They're not all have been remodeled, and we're reinvesting and fixing things, and keeping them the way they need to be. And expecting to continue to do that for the remainder of the year.

Okay. Understood. Thanks very much.

Thank you.

Alton Stump, Longbow Research.

Hey, guys, it's actually Brittany on for Alton this afternoon. Congrats on the 100th store, that's super exciting. Just wanted ask a couple of quick questions. I know you guys said your beef costs were down about 11%, you continue to expect that over the quarter, or over the remainder of the year. I was wondering if you had any initial thoughts on 2017?

No, Brittany. We'll probably get into some more [guidance] later in the year. We're not going to give any 2017 guidance right now, expect to hear from us in three months potentially and we'll talk about that. But really what I expect for the remainder of this year is a little bit of leverage. I haven't given any specific numbers or a range of guidance on that. But beef is down, think it will continue to be down. But we have a handful of other things that offset that, with some geographic -- going into new markets as well the cage-free eggs I mentioned. So a few offsets offsetting the beef. And I think we'll be down a little bit, and we'll talk about 2017 in a few months.

Okay. And then what was your food and packaging costs as a percent of sales in the quarter? I don't know if I missed that.

It was 20, I'm sorry, 28.1%.

Okay, and then one final question if I could. What do you -- what are you expecting for these new stores as far as an AUV contribution, I guess, just as an average for 2016 maybe?

Yes, for 2016, we're sticking with that roughly [$3.6 million] that we've been talking about throughout the year. And we've not given any guidance for the future, other than the continued long-term $3 million average that we model in for the very long-term.

Okay, great. Thanks so much guys.

Thanks, Brittany.

Andrew Charles, Cowen and Company.

Great, thank you. Just to follow-up on an earlier question. You mentioned Randy, that there are no plans to expand breakfast for now, but what would you need to see in order to expand the initiative beyond transit centers?

Yes, I want to continue to see that menu, see what sales we've got, it's a pretty small focused menu, so we're looking at that. We're also just really focused on the big opportunity of so many new great Shacks in new great regions throughout the world, so today it's not our focus. We've been able to drive so much growth in sales, in every direction through our sweet spot, which is lunch and dinner.

We're fortunate. We have a Company that is nearly identical in lunch and dinner, so it skews a couple points higher to lunch. That's one of the reasons why we have these incredible AUVs. We also have the frozen custard ice cream part of our business which is significant, which gives us afternoon and evening daypart expansion.

We've got beer and wine. All these things have led to these nearly $5 million AUVs in the last quarter, which is just an extraordinary number that we're excited about. So there may come a day, but it's not something we're focused on today. We want to focus on the heart of our business today, and that's lunch and dinner.

Very fair. And then, would the Chicken Shack -- very helpful with the 8.4% sales mix, and obviously very impressive. Is that up, as awareness has grown, when you compare it to the first quarter, or is it down a little bit, just given there might have been trial last quarter for it?

There was a lot of trial in Q1. That's where a lot of the traffic was driven from in Q1. It's normalized a bit now, but it's holding firm.

I think the test will come later in the year, as we have the Bacon Cheddar Shack which has been so successful as an LTO, and as we look at what impact that might have over the long-term, which we only have about a month of data on that in the numbers we're reporting. So stay tuned on that, but it's pretty exciting. We know that it's been a frequency driver, it's been a change. It's been a new customer growth opportunity, and we love chicken.

As do I. My last question is just on the HMSHost agreement. Have you guys specified how many stores are in that development agreement?

Not yet. It's brand new to us, we're really excited about it. We are -- we have two very busy restaurants in the airports, in JFK and one in Dubai. We really like the airport business for Shake Shack.

It's been great for us to differentiate amongst people's expectations of airport food. So we can really get in there, and have an extraordinary business. However, the reality is for airports, these things take time. They're often long-lead RFPs, they have a lot of details in winning a site. And because of that, we're not going to come out and talk just yet, about how many and when. I think we'll have a closer look at that, probably in the next quarter. And we'll try to give some guidance on that for 2017. But it's a long-lead business that will be -- we'll grow conservatively, as you've seen us do in all aspects.

Very helpful. Thanks, Randy.

Andy Barish, Jefferies.

Hey, guys. On the implied kind of back half same-store sales of sort of 1% to 3%, should we think of the third and fourth quarters differently, just given the comparison in the 3Q is so strong?

No, Andy. We look at it, it's (inaudible) call it low single-digits up towards 3%-ish on our guidance in the back of the year. And we haven't given it quarterly, [haven't said] Q3 should be different than Q1. But yes, Q3 we're going up against the 17.1%, so it is a tougher comparison in Q4. And but for the full year, Andy, it's -- the remainder of the year is an implied 3%, call it 2.5%-ish.

Okay. And then one quick follow-up on the labor line. I'm just not sure how -- if you've got 12% wage inflation and only a 1.5 point of price, how you're getting labor leverage on that line? Is there something else going on there that we're missing, or that was in last year's labor number is not recurring this year?

Not really. It's the continued comp, we have 4.5% comp. And when you put that on top of it, that really helps offset that 12%, that's a big number. When we got busy restaurants, and we expect them to continue to grow, so we're going to keep investing there. As we said, we do expect higher wages throughout the rest of this year, and certainly again into next year. So we've got our eyes on that for the very long-term. I think it will be [ours], and then one of the greatest industry's challenges as we move forward.

Thank you.

Thank you, Andy.

John Ivankoe, JPMorgan.

Hi, thank you. Randy, you mentioned being conservative, but you're taking up your unit development, what you achieved in 15 of 13 units to 18 and 16 is -- I mean those are really impressive numbers. And so, on that basis, I mean, do you see any limitation as you think about 2017 and 2018 development, and development being obviously such a critical piece of the overall financial model? Should we expect that number to perpetually rise in the future years? I mean, and I guess, what would be the constraint to perpetually accelerating growth, in terms of the number of domestic company-operated Shacks?

Thanks, John. Yes, look, we're really excited. We've been able to add some really cool Shacks here in some great cities that's gotten us up to 18 for this year. For next year, we do expect to do at least 18. And yes, as we talked about before, our goal is to continue to feel that out each quarter, feel out how we did, how many great Shacks we could have in the pipeline that we feel strong about. And make sure that we've got the team in place to execute.

Every time we do a new format or a new city like LA, like a mall-type location, like the ones that we've tested, and they continue to win, that opens our minds up to how we might expand that number in the future. No plans John beyond 18. We'll get back to you on that, but at this point we feel good about doing about 18 a year. And I'd say, the governor to your question is getting A sites.

We're going to keep on hitting some really good sites. We are in a coveted position in our industry with like brands, in a struggling retail environment where we are a wanted brand. And that's been helpful for us. And we have a moment here to pounce on that, and that's why we're jumping up to 18.

Okay, thank you. And there's some interesting comments made about licensing. And I think you used the word licensing I think broadly in your prepared remarks, but to focus a little bit more on the licensed domestic opportunity? I think you've commented publicly, you expect at least 450 Shacks in the US. I assume that was just Company Shacks in the US, but how many licensed stores could there be, as you begin to kind of open up the map, and think about some non-traditional opportunities?

You're right about the 450. That's we see that as our company-operated restaurants. We have no desire to let anyone else license a restaurant in this country. We love our returns, and we want to keep them for ourselves. Unless it's a situation like an airport or a stadium where there's a better operator and possibly the only operator that can get that. So in that case, we're happy to take the royalty fees, and we've got a great business there.

We've not given that guidance, John. So this year, we did -- a new one for us, which was the Las Vegas arena. We have very moderate expectations for domestic licensing. As we get into the airport business, we'll see how it grows. And if there's big country out there of airports, we generally want our strategy, so you understand it, to follow the regions that we're in, or getting to soon. And so that will temper us a little bit in what those numbers should look like. We've got a great partner now with Host, and we're excited to get a few of those rolling.

And the final one for me, just in terms of overall menu pricing. Have you guys broken the $10 price point on any of your premium sandwiches yet? And at least I haven't seen it in some of the stores that I've visited recently. But do you think that that would be any kind of an obstacle for you, or can we take the brand even more premium than it currently is?

Yes, I think we can, John. The most encouraging thing, and I said it in my notes was with the Bacon Cheddar Shack at $6.89. So in previous LTOs we charged $6.19. We were able to do a more premium product at $6.89 and it has become the number one selling, both in sales and quantity just in one month, so the data is really raw, we only have one month of it. But it shows you that people are willing to pay.

Look, we're focused on being a great value burger joint, but we have an opportunity here. The Shake Shack brand I think has gained a lot of trust in our guest's mind. And we have no plans for it, but I think we could experiment at the higher end of the category that we're at right now. So we'll see. We'll keep you posted, if we intend to do a huge burger over $10 someday. No plans today.

Thanks.

Jake Bartlett, SunTrust Bank.

Thanks for taking the question. Jeff, I had a question about the guidance for revenue, and the increase in the revenue guidance? It was unclear as to what drove the increase, given that the two additional units are going to need in the back half, or towards the very end of the year.

It's really that. The openings that we have planned for the second half of the year, not the two new ones, but the ones that were always existing, we feel could pull forward a little bit. Plus when you add in the two new ones, is where the additional revenue came from.

Okay. So but it's not that the new units have been performing a little bit better than you've expected?

A little bit. We're very pleased with the performance of the openings. And if it comes in a little bit higher than we expected at [$3.6 million] that would be great. And pull a few openings forward, throw two more in at the end, and there's your increase in the revenue guidance.

Okay. And then I'm trying to reconcile, in terms of the same-store, or the traffic in the menu mix, trying to reconcile the fact that Chicken Shack is still doing very well, that the Shack, Cheddar Shack is one of the best LTOs you've had. What are the factors that have limited your traffic or even the check? The mix was higher most of last year, what are the factors that are limiting the growth here? Are you seeing a drag, or are you kind of detecting the drag from the industry, or maybe if you can go into that?

Well, I don't think -- we always think of ourselves in different category than that. I would say, look, we only took a 1.5 point in price, and we've shown almost 3.5 points in price mix for this year. So that's on top of the extraordinary gains we had last year that were all double-digit, so pretty big increase there. Traffic still increasing at 1%, over 1% over numbers that were record-setting for us. So you just got to remember, this is where -- I know, only anyone will only want to talk about comps. But I'm going to plead with you to keep remembering everything else, and really the future of this Company is about the growth of this incredible business model. And when you have an AUV selling $5 hamburgers near [$5 million], that's a lot of people moving through the door, and we're excited to open a lot more doors.

Got it. In light of that, I'm going to ask one more comp question, but just really just to understand the third quarter lap. The lap is obviously difficult for the third quarter of 2015, but that lapped an easier 2014, just trying to understand what the real trend is that you're lapping, just given the traffic was positive 8% last year, but negative 2% the year before, what is the right way to think of that? Was last year just strong, because of the weaker year before, or how should we think?

The whole thing, and this is another reason to talk about comps differently, the whole thing we have 23 Shacks in the comp base. Last year we had less than that. There's eight more coming in for the rest of this year. This is a volatile comp base for lack of a better term., and it's a small comp base, and it's not the only factor, as we've said even when we celebrated 17% a year ago. So look, we're excited about the two year trend. We're going to look at it that way, and we're going to guide you towards the low single-digit comps for the rest of the year.

Okay. And then, one last question on that. I mean, are you seeing, as more stores are coming into the comp, are they weighing down the comp by any chance, as it's broadened from the original really strong units?

No, it's been balanced. As we talk about all the time, it's been balanced. And we'll just talk about the comp as a whole, when we report it, and it's been fairly balanced.

Okay. Thank you very much.

Jeffrey Bernstein, Barclays.

Great. Thank you very much. A couple questions, just one, Randy, I know in your prepared remarks you said, I guess the industry is seeing some challenges and some choppiness. And yet I know in your sequential trends, you said it was fairly stable. So I'm just wondering, based on the numbers you see for the Shack brand, is there any evidence in your numbers of kind of a broader industry slow down? We're hearing a lot from the consumer softening perspective, and different factors that might have had that impact? I'm just wondering if there's any evidence in that, whether it's regional numbers, or day part numbers, or whether or not you're just not seeing any of that challenge and choppiness?

There's no doubt there's been a lot of choppiness out there, throughout so much of our industry, in all phases of our industry, all the way from casual to fast food. I think Shake Shack is a special brand. I think the best thing I could tell you is, we still grew 4.5% comp, and grew our revenue by 37% at a time when we feel good about growing our Company to the greatest extent we've grown so far. So we're really bullish on where that future is.

I can't speak to other company's trends or the macro environment any more than saying we think this is a great opportunity to continue to capture some really strong real estate, and move ahead as we have. We wanted 53 Shacks that we own in this country. We have barely gotten started, so we're focused on that, and we're still growing each of our own Shacks here.

Yes. And then in the press release you say, and I think you said on the call as well, you're committed to investing in your team for the next 100 units or more. Just wondering if we were trying to make a -- kind of dive into that from an interpretation perspective, I think you made mention of investing more at the store level. Is it primarily at the store level, or how would you think about that versus more at the G&A and not the corporate level, if again you're accelerating the growth, and you're investing in the next units? So where should we think the bulk of that investment is going to?

All of the above. We're going to invest at the store level, make sure we have the leaders in place to grow, and we're going to invest here at the home office, with people that will continue to lead our Company. We need to do that, if we're going ramp up our growth as we've just talked about, we got to make sure we have the resources at home here to support that. So you're going to see that, as Jeff mentioned in the G&A, and at the Shack-level. And that's the right place to put our money.

Got it. And then, lastly on that other line, I know that someone questioned it earlier, just that it was up so significantly, some [outsize] pressure. I think you'd said it was going to continue at that level. Was there anything in particular we should point to from that line, that would be the driver of that? Or maybe the magnitude of the pressure you expect in the back half, just because that caught us by surprise this quarter?

Was that the other OpEx line, Jeff? I didn't hear it. (multiple speakers)

It was like 9.3%, like up [170] basis points?

Yes, it's really primarily, the bulk of that increase is because of increased R&M at the restaurant, as the Shacks get older.

So that's not unusual to see 100 plus basis points going forward, based on the further remodels you might be doing?

Again, I expect to see continued pressure on that line, as we continue to put some pretty good dollars into keeping the Shacks looking the way they need to be.

Got it. Thank you.

John Glass, Morgan Stanley.

Thanks very much. Randy, you talked about stepping the LTO activity in the back half after you let the Chicken Shack find its feet. Do you -- so maybe could compare first half versus second half of this year, how many LTOs you expect in the -- maybe the number, not necessarily explicitly what they are? And maybe also compare the second half of this year, versus the second half of last year's calendar for LTOs, just so we have a sense of what's going up against what?

Yes, so our [order] ramped up because in the first five periods, we had really Chicken Shack was the only LTO, okay? Through the summer now, we have the Bacon Cheddar Shack which we intend to run through for awhile. That will be the main LTO through the year. And then we had just other smaller ones, that are some custard, we've done this great shake, with cookies and cream that people are literally enjoying, the Shack Shandies.

We do Shacktoberfest, we do the same as last year, but we always continue to innovate around that in September and October. And that's really it. So I think in terms of looking at it ramped up, it's the stuff we've talked about in those categories, in addition to chicken for the first half. For comparative to last year, we really only had one burger LTO, and that was the Roadside Shack which was at $6.19. So the difference there is the Bacon Cheddar at $6.89 and the other stuff. So it's a little bit -- sort of ramped up a couple smaller items, and a little bit on price.

Thank you for that. And just one other way to come at the labor question. Labor dollars per store fell 1% this quarter. So there was something else going on in that line, and I suspect it could be a couple things. One could be the mix of stores that's driving it down, so maybe you're in more lower labor markets, or maybe -- there's some other efficiencies you're gaining in labor that -- because a 4.5% comp doesn't delever 12% labor inflation. It's just -- math doesn't work. So what else is -- I don't know, Jeff, maybe you could -- what else is going on there that might provide down dollar labors per store?

It's all those things, and it is absolutely part of the comp. It's just continued smart scheduling by our operators. John, being a small Company, we continue to get a little better at that stuff every day. Even with that 12% increase, we do, and it is down.

You make a great point. So much of our -- we always try to get people off thinking this is only a New York-based Company. Such a small minority of our Company is in New York these days, we generally do have less wages outside of the major capital cities here. So some of the restaurants we've opened, we do pay less per hour. Some we pay similar, and more like in LA or in Chicago. So it's a balance that has led us to that number.

But again, I think the more important thing to say, is we're expecting continued pressure on that. Minimum wage is going up, we're going up, and we're paying people. Our leaders are making $12, $15 an hour. These are great people that we want to make sure we're investing in, so they're ready to take us to the next step.

And John, it's Jeff. One more thing too on that line is, for whatever reason, during the quarter, even in the first quarter, we experienced lower medical costs associated with our hourly employees. It is in that line as well. For whatever reason, people weren't getting sick and going to the doctor. So don't know why, but there's no reason to expect that may continue for the rest of the year. And it's kind of an unknown, which is another reason we expect pressure on that line.

Okay, thank you.

Karen Holthouse, Goldman Sachs.

Just one quick modeling clean up. You made a comment about not levering G&A and continuing to invest in your people, and sort of ahead of the growth curve. Is that comment applicable to just this year, or is that something we should be thinking about over -- more of a medium-term horizon as well?

It's a medium term this year, and medium, Karen. We'll get -- we'll give a little more detail on that towards the end of the year, as we have stronger insights into 2017. But look, we're going to ramp -- we're ramping this year, we're ramping next year. We expect to make some investments here that will be G&A based. And our operators who are multi-unit out in the field, will have more of them, as we grow to more regions. So that's where we want to put some money, to make sure that we're ready to rock with the ramped up schedule.

And 120 basis points over last quarter, I wouldn't expect to see anything more than that in the next quarter, even if we even hit that.

Wait, so to clarify that you're saying that, we -- for the balance of the year, we shouldn't expect leverage period? Or shouldn't expect more leverage than what we saw this quarter, because those are two pretty different numbers?

Don't expect anything for the remainder of the year in leverage and G&A.

Okay. And then bigger picture question, between some labor scheduling inefficiencies that you talked about working on, some supply chain work, did greater geographic distribution of suppliers, and some other purchasing things. Also noted consultants as one of the things pressuring or adding to the cost structure. Has there been sort of an internal mind set or realizing that there might be more opportunities? Are these things that come just more naturally with scale? And are there other buckets of the cost structure, not saying you might attack tomorrow, but as you get bigger, at this many dollars of system sales, or this many units, it starts to make sense to start -- to take a look at some new things?

Yes, we're always looking at new things. And we're doing that in the Shacks without a doubt. So I think that's where some of that, that good operations come from. But again, we're guiding towards an increase there. In the home office as you mentioned, we've had some additional fees. They're really just associated with becoming a big public Company, and making sure we're prepped and ready for that, some of those costs that are associated with being public. So that's sort of on the other direction. So but as Jeff said, we want to -- let's be clear. We've ramped up now to 18, from 13 last year. That's a lot more units. We're excited about our licensed growth as we talked about, and we want to make sure the infrastructure is in place to do that.

Great. Thank you.

Nick Setyan, Wedbush Securities.

Thank you. On the labor line, maybe I should ask it a little bit differently. The 50 bps deleverage you expect, how much of that is just new unit inefficiencies, versus labor inflation and healthcare inflation?

It's both. When we open new units, we obviously sell at a higher payroll cost. We are going to open 11 units in the back half versus 7 in the first half, right, versus 13 in all of last year. So you're right, in saying that's a piece of it. I think that it's more about -- it's that plus, just the ongoing continued raising of our team over time.

Got it. And obviously, you do have a small comp base, but you are opening stores at a faster clip here, and we are going to see an increasing per of stores coming to the comp base. To what extent, does cannibalization start to come into play? How are you guys thinking about that internally?

We've not seen a lot of it. We've had a little bit over time in certain Shacks, but then they generally bounce back. And we have for -- also we've talked pretty clearly about, our focus really is on when we open a flagship Shack in a new city, we obviously start pretty big, and generally that comes down in year two. So our impact on the current sales is more about whether it was a flagship or a start, and less about cannibalization. Look, we've got so few Shacks, and we're spreading them out really well. We don't see a concern at this time of cannibalization issues.

Got it. Thank you.

And at this time, we would like to conclude today's call. Thank you for your participation. You may now disconnect.