Shake Shack Inc (SHAK) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to the Shake Shack Second Quarter 2017 Earnings Conference Call.

(Operator Instructions) Please note, this conference is being recorded today, August 3, 2017.

On the call today from Shake Shack, we have Randy Garutti, Chief Executive Officer; Tara Comonte, Chief Financial Officer; and Josh Omin, Vice President of Finance and Investor Relations.

And now I will turn the conference over to Mr. Josh Omin.

Please go ahead, sir.

Thank you, operator, and good evening to everyone.

By now you should all have access to our second quarter 2017 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 in the Risk Factors section of our annual report on Form 10-K, which was filed on March 13, 2017.

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 also discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance.

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.

Reconciliations to comparable GAAP measures are available in our earnings release.

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

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

Now more than halfway through 2017, Shake Shack continues to grow profitably and at a rapid pace with total revenue growth of 37% to $91.3 million in the second quarter and adjusted EBITDA growth of over 36% to $19.4 million in the same time period.

We're continuing to successfully expand Shake Shack both domestically and internationally, focusing more than ever on technology enablement and throughput initiatives, personalized and targeted marketing and even more dynamic menu innovation, all while staying true to our mission to Stand For Something Good.

With each new Shack we open, our overarching goal remains unchanged: to be a beloved community gathering place for your hometown offering classic American favorites made with premium ingredients and an unparalleled experience that connects with our guests wherever they are and whenever they want their Shack.

In this rapidly shifting retail moment, we're well positioned to continue the evolution of what it means to experience Shake Shack.

This is the moment when we further deepen our guests connection to the in-Shack experience while developing new digital channels both in and out of Shack to further our opportunity.

This quarter we opened 4 domestic company-operated Shacks and 3 net licensed Shacks.

For the full year 2017, we remain on track with our previous guidance to open 23 to 24 company-operated Shacks.

And now with more insight into our international pipeline, we can raise our previous estimates to open at least 15 net licensed Shacks.

This results in total company-operated unit growth of approximately 37% and total license unit growth of 30% compared to last year.

We are pleased with the continued pace and quality of our expansion and remain excited with the opportunities that lie ahead.

We've still barely scratched the surface of the global opportunity in front of us.

While we're incredibly proud of our top and bottom line growth, we did experience the same-Shack sales decline in the quarter of 1.8% which, as we guided to on our last call, reflected an improvement from the first quarter, albeit not quite to the degree of forecast at the time.

It's important to be clear, again, on the factors impacting this metric.

Firstly, let's remember this decline is on a prior year compare of 4.3% increase.

Secondly, due to the dominance of northeast Shacks in our small comp base, this metric remains disproportionally impacted by regional factors, which can swing the base dramatically, particularly weather in which the northeast in the second quarter endured more rain than was typical for that time of the year.

In addition, our comp base in quarter 2 includes only 37 or fewer than half of the total number of Shacks in operation.

To give further context, for the second quarter, Shacks outside of our comp base contributed $24.5 million to our year-over-year increase in revenue.

Compare that with the $900,000 that the comp base 1.8% decline represents and you'll see why same-Shack sales is not a metric to be looked at in isolation nor overstated at a broader context.

If you want to be clear about our development strategy and how that may impact the comp base today and going forward, as of the second quarter, New York City remains the largest region in our comp base with 10 New York City Shacks, equating to over a quarter of the total units in the base and over 40% of the aggregate comp sales.

We continue to believe more than ever in the growth opportunity that exists from opening even more Shacks in our hometown.

And as we shared on our last call, our AUV the last year in New York City were over $7 million, performance that speaks for itself.

As we look at the New York market, we do see clear opportunity ahead to open even more of these higher AUV Shacks and grow our overall New York City revenue and profit contributions.

We're thrilled to announce that we'll be adding 2 New York City Shacks in the next few months at Astor Place as well as further uptown near Columbia University on 116th and Broadway, and we expect each to be highly additive to our composite revenue and profitability.

That informs our decisions much more than any concern for potential impact to our same-Shack base.

When great opportunities arise, you can bet we're going to jump on them.

Let me give you one more example.

Last September, we opened a second Shack inside the King of Prussia mall in the Philadelphia market.

This decision was based on the strength and performance of our first Shack that sits outside the mall in a pad site.

So by opening this second Shack, we will grow our overall market there and deliver increased revenue and profits for the long term.

On a combined basis, these 2 Shacks alone should generate over $6.5 million in sales in 2017, nearly doubling the revenue we had from this location previously.

However, only the original Shack is in the comp base and as expected, its topline is impacted when we look at it on a stand-alone basis.

Let me say it again, 2 Shacks within a square mile of each other, bringing in over $6.5 million, adding sales and profit yet creating noise within the comp.

These are first and foremost great real estate opportunities for prime locations.

Count on us to make that decision every time.

Let's get back to what we're building now because as of this moment, we have only 76 company-operated Shacks in the U.S., on a road to a much bigger and broader price with the intent to accelerate the number of new Shacks openings next year.

That's the focus of this call and the focus of our strategy.

During the second quarter, we opened 4 new domestic company-operated Shacks in Long Island, Chicago's West Loop, Orlando and Lexington, Kentucky, bringing our total for the year-to-date to 11 new Shacks.

We've expanded and renovated our fourth ever Shack on Lincoln Road in Miami and have seen a strong uptick in sales since taking on more space.

In addition, it's been gratifying to watch our recent entrants and the strength of initial results in smaller markets, such as Detroit and Lexington.

And every time we open a Shack in new cities across the country, it proves again how versatile our brand is, gives us further conviction towards the growth we have ahead in diverse markets.

In terms of future openings, we will continue to build Shacks where we have secured prime real estate sites and where we see clear and demonstrable growth opportunities.

The majority of new Shacks will continue to be in existing markets with the balance in new markets across a variety of formats.

2017 will represent a strategically balanced mix of Shacks in urban locations, freestanding pad sites and continuing to focus on premier shopping and lifestyle centers around the country.

During the remainder of 2017, we're excited to enter the new market of St.

Louis and San Diego, while further expanding our existing markets including New York City in the Metro area, Washington, D.C., Texas, Michigan, California and more.

Moving towards 2018, we plan to build yet another great class of Shacks in both new and current markets.

Really excited that we'll be officially breaking ground and launching in a number of key new markets, among them Milwaukee, Cleveland, Charlotte and Denver.

As you've seen from us in the past, with each year as more real estate opportunities become available and our team continues to grow, we have been able to accelerate the number of new Shack openings and we will provide guidance on this at the end of the year.

But at this stage, we do expect to increase the number of new unit openings again in 2018.

Moving on to our licensing strategy.

We continue to explore and enter into key partnerships both domestically and abroad as another clear source of revenue growth.

We love partnering with premier companies around the globe.

And we believe, especially now in the early days of our growth, this asset-light model is the best way to grow our overall brand and profit internationally while maximizing our returns on our own capital here at home.

During the quarter, we grew our domestic licensed business with a new Shack in Minute Maid Park for fans of the Houston Astros.

We also opened in LAX Terminal 3 our first Shack via our partnership with HMSHost as we increase our footprint in airport locations around the country.

Internationally, we added 2 Shacks in Seoul, South Korea, bringing our total in that market to 4 out of a contracted 25 over the next 10 years.

Based on the outstanding reception performance to date, we're excited about the continued opportunity ahead in Seoul.

Recently, we celebrated our 1-year anniversary with an important chef collaboration with Michelin-starred chef, Chef Mingoo of Mingles restaurant.

And we share this because we want to continue to parlay our fine dining routes into value-added marketing opportunities around the globe, distinguishing Shake Shack from the rest of the pack yet again.

Our Shacks in Japan also continue to deliver strong performance with a growing fan base.

And in July, we opened our fourth Shack in Tokyo in the Shinjuku area, further deepening our presence in the market and making plans for additional Shacks through the end of this year and into 2018.

Given our early success in Asia, we're bullish on our long-term growth opportunity in the region.

And a few weeks ago, we announced our plans to launch in Hong Kong and Macau through our new partnership with Maxim’s Caterers Limited.

Together, we executed a development agreement to open 14 total Shacks in Hong Kong and Macau over the next 10 years.

Maxim's is the team responsible for successfully bringing Starbucks and Cheesecake Factory to the region, and will be a tremendous partner for Shake Shack.

We're incredibly excited about this partnership and see significant whitespace to grow the Shake Shack brand in Hong Kong and Macau with an eye towards an even greater opportunity in Mainland, China at some point in the future.

I want to shift now to the second major piece of our business strategy, the digital evolution of Shake Shack.

Recognizing we built this company on the foundation of community gathering places, we're really excited about the ways we see Shack guests engaging with the next generation of Shacks.

We'll be executing on a multi-format strategy focused on the evolution of the digital experience in-Shacks, promoting and growing the use of our mobile app by adding features and improving the user experience, carefully considering improving the guest experience of delivery and the strategic push towards more personalized marketing initiatives to drive frequency and spend.

In mid-July, we launched the Android version of our Shack app.

At our heart, we are a social and community-based business, in all aspects of those words.

Our communities, our guests are increasingly online, and mobile is a key means by which we'll connect with them.

The Shack app, while still early days, is a really important tool for us to deepen our connection with our guests while bringing new convenience and ease to getting your Shake Shack.

Early engagement indicators are encouraging, with the downloads continue to increase, average check remaining higher via the app and positive retention and return rates of our users.

Overtime, we expect orders made via the app to increase and as we learn more, we'll be constantly innovating and updating elements of both the app and in-Shack guest experience as well as evolving our kitchen throughput initiatives as needed for the long term.

I also want to touch on delivery, a topic I know many of you are thinking about.

So to date, we've not -- we have chosen not to form any formal partnerships with third parties in the delivery space, and we continue to be comfortable with our existing operating relationships throughout the country.

We know, of course, that dialing up delivery availability is a growth opportunity for us, but we will continue to explore options in a thoughtful and considerate manner.

What's most important to us in this moment is that we don't focus on short-term delivery dollars without ensuring the full Shack experience remains at its best.

First and foremost, quality is a key component of the Shake Shack value proposition, and it's critical that we maintain that fullest expression of the Shack experience in a delivery model.

On that basis, packaging is critical to a high-quality food and hospitality experience.

So right now we're testing new to-go and delivery packaging in a few of our Shacks.

Kitchen design is also a key consideration in both new and existing Shacks to allow for increased delivery options.

We're constantly evaluating the best alternatives here.

Later in the year, we'll be testing out a few new and renovated Shacks with new kitchen flow with the goal of an even better food (inaudible) experience for future digital growth.

We believe that even more efficient throughput represents a big opportunity.

We'll be excited to update you on our kitchen enhancements later this year, specifically in our newest licensee Shack at Astor Place and others to come.

We're going to continue to test and learn as it relates to delivery as we work to ensure the Shake Shack delivery experience gives our guests what they love, whether they choose to enjoy in the communities of their homes, offices or anywhere else.

Here's why we have the advantage.

With delivery of all types ramping throughout the industry, it's easier than ever to get a convenient delivery approved, but few are as well positioned, nimble and carry the brand strength required to be successful.

Lastly on the tech front, we're excited to announce that just this week, we launched our ShackBot on Twitter Direct Message and Facebook Messenger.

Focus initially here is in the area of customer service.

So now our guests can get immediate responses from the chatbot to learn about menu, featured items, nutritional info, hours and many of their favorite questions.

It's early stages for sure, but we're having fun with it.

This is just another example of how we're testing and innovating in the digital world of Shack.

We're always looking for innovative ways to improve hospitality and the overall guest experience.

I'm really proud of the work of our IT and marketing teams as they push ahead.

We look forward to sharing more with you in the coming quarters.

Finally, a core strategic pillar of driving additional Shack sales is menu innovation.

We've got more exciting products in the pipeline than ever.

We recently wrapped our barbecue LTOs in May, which included the BBQ ShackMeister Burger, Chick'n Shack and BBQ fries.

And on June 1, we launched our classic bacon cheeseburger, and we're running that through the summer and early fall.

I'm really pleased to announce our newest innovation, that I actually ate for lunch, and we've just launched this week, a new chicken LTO featuring our first ever Hot Chick'n.

We tested this at select group of Shacks over the summer and based on those results, we launched it as an in-app exclusive for the weekend.

And we're excited to see how our guests go for Hot Chick'n, and we've got a lot of fun LTOs in store for later this year and in the next.

In the quarters to come, we'll be sharing some of the new category and existing category innovations we've got in store from a product perspective.

With that, I'll turn it over to Tara Comonte, whom I'm very pleased to announce is hosting our first earnings call as our CFO.

We've had a ton of fun on-boarding Tara, getting her acclimated with all things Shake Shack and I'm looking forward to you all getting to know her.

Now she'll take you through the numbers.

Thank you, Randy, and hi, everyone.

So before we get into the numbers, I'd like to take the opportunity to share some initial observations during my first 8 weeks here at Shake Shack.

Firstly, the passion and belief system that built this company over the last 16 years remains as strong as ever.

This virtuous cycle starts with taking care of our teams, our guests, our communities and our suppliers and in turn, we believe it's the best way to build long-term value for our shareholders.

As a loyal guest myself, I always knew Shake Shack was special.

But after spending time working on Shack, I now truly understand our mission to Stand For Something Good and how that impacts all aspects of our business, including the exceptional teams we hire, train and promote; the premium ingredients that make up our menus; and the community gathering places we build.

Secondly, being new to this industry, I've been getting up to speed on restaurant economics and how our business model and our Shacks line up.

And what I found has been impressive and very encouraging in relation to what lies ahead.

AUVs of over 7 million in New York and over 4 million around the rest of the country with over 28% company-operated profit margin is right up there with the best of our industry.

And yes, of course, as we accelerate growth, we expect these averages to come down but remain among the highest performers in our business.

These kind of results are an incredibly strong validation of our ongoing opportunity and an equally strong foundation from which to build.

And finally, as I look at our strategies to grow both at home and abroad, I'm excited for the journey that lies ahead and to help shape that strategy with Randy, Zach and the rest of the leadership team.

Ongoing domestic expansions, entry into new international markets, constantly innovating in our use of technology to ensure that it adds to our Shack experience in every aspect, all represents significant paths to growth.

And in terms of the team that will get us there, there are few companies I've seen with such levels of energy, passion, focus, strategic vision and overall ambition that the team here has in spades and I'm thrilled to join them.

So moving on to results of our 13-week second quarter ended June 28, 2017.

Total revenue, which includes both sales from company-operated Shacks as well as licensing revenue, increased 37.4% to $91.3 million.

Sales from our company-operated Shacks increased 36.6% to $88 million largely due to the addition of 24 new domestic company-operated Shacks over the past year.

Same-Shack sales decreased 1.8% during the second quarter, lapping a 4.3% increase in the prior year quarter and consisted of a 4.3% decrease in traffic, partially offset by a 2.5% increase in price and mix.

And as a reminder, our comparable Shack base is still smaller, 37 Shacks, representing less than half of our domestic company-operated Shacks.

Randy explained in detail the factors that impact this particular metric including, but not limited to, the fact that less than half the Shacks are in the base, the regional SKUs that therefore occurred within the base and the impact of our strategy is to continue to penetrate further existing markets.

Average weekly sales for domestic company-operated Shacks was $92,000 for the second quarter of 2017, a decrease to prior year quarter resulting from our recent addition of new Shacks to the system.

Licensing revenue increased 60.4% to $3.3 million during the second quarter from $2.1 million a year ago, driven by a net increase of 15 Shacks or 34.1% since the second quarter of last year.

We saw strong performance in Asia driven by 6 new Shacks, offset by continued softening in the Middle East due to the economic slowdown in that region.

And we remain cautious in our outlook for the Middle East for the foreseeable future, but extremely encouraged by the new Shacks coming into the system, particularly in Japan and Korea, as well as the opportunity for further expansion that Randy mentioned with the recent addition of Hong Kong and Macau.

Finally, in licensing revenue, during the quarter, we were proud to launch our Shack's cookbook, which contributed $500,000 of previously deferred royalty revenue recognized in connection with the initial publication of the book, partially offset by expenses related to book production, which appeared on our G&A line.

Moving on to expenses for the quarter.

Food and paper costs as a percentage of Shack sales remained constant with the same quarter last year at 28.1%.

Looking forward to the remainder of the year, our expectation is that food and paper costs will remain relatively flat with the second quarter, showing slight leverage over the prior year both in Q3 and Q4 and on a full year basis.

Labor and related expenses remain our largest near-term headwinds and long-term challenge.

As a percentage of Shack sales, labor and related expenses increased 180 basis points to 25.5% from 23.7% in the prior year.

Similar to the first quarter, this deleveraging was primarily driven by 3 factors.

Firstly, the opening of more Shacks at various unit volumes, some of which therefore carry a higher percentage of labor cost than our current base.

Secondly, and consistent with the rest of our industry, we are increasingly experiencing regulatory increases to hourly wages in many of our markets and will continue to do so.

This will be compounded by additional regulations, including the Fair Workweek legislation in New York City.

Implementation of this legislation expected in late November of this year will certainly have some degree of impact on our future labor cost.

Thirdly, our label line will continue to be impacted by our strategic investments in our management team in order to support our ongoing growth.

For a business growing as quickly as Shake Shack, it is critical to make sure we have a growing bench of highly trained leaders and to ensure that we are developing people ahead of our expansion.

As mentioned many times on previous calls, the combination of these 3 factors do lead us to expect labor and related expenses to experience -- continue to see leverage over the next few years.

Other operating expenses as a percentage of Shack sales increased 30 basis points to 9.6% from 9.3% in the prior year quarter driven mainly by the impact of certain fixed operating expenses, deleverage from comp and the introduction of a broader range of unit volume Shacks into the system.

Occupancy and related expenses as a percentage of Shack sales decreased slightly to 8% from 8.1% in the prior year quarter.

Shack-level operating profit, a non-GAAP measure, grew 27.6% to $25.3 million from $19.9 million in the same quarter last year as a result of the strong year-on-year increase in Shack sales.

As a percentage of Shack sales, Shack-level operating margins decreased roughly 200 basis points to 28.8% primarily due to the aforementioned contributing factors in labor and other expenses.

We're incredibly proud of the team for delivering yet another strong quarter of profit.

General and administrative expenses increased $2.2 million to $9.7 million during the second quarter from $7.5 million in the same quarter of 2016, primarily driven by higher payroll expense from increased headcount to our home office to support our ongoing growth plan and one-time executive transition cost.

As a percentage of total revenue, G&A decreased 70 basis points to 10.6% for the second quarter of 2017 from 11.3% in the same quarter last year.

We continue to be on target for the guided $38 million to $40 million in G&A expense this year and remain committed to investing in our team and the infrastructure needed to continue to execute on our growth plan.

Adjusted EBITDA grew 36.4% in the quarter to $19.4 million, and adjusted EBITDA margin remained strong at 21.2%.

Net income in the second quarter was $4.9 million or $0.19 per diluted share compared to net income of $3.3 million or $0.14 per diluted share for the same period last year.

On an adjusted pro forma basis, which excludes nonrecurring items and assumes all outstanding LLC interests were exchanged for Class A common stock whereby we would no longer present a noncontrolling interest, we earned $7.3 million or $0.20 per fully exchanged and diluted share compared to $5.2 million or $0.14 per fully exchanged and diluted shares in the second quarter of last year.

Included within these pro forma results was a tax benefit due to the new accounting standard we adopted at the beginning of the first quarter that changed the way we account for excess tax benefits associated with stock-based compensation.

On a non-GAAP basis, the new standard resulted in a tax benefit of $165,000 for the quarter or $0.01 per fully exchanged and diluted share.

Following these results for the second quarter, we're providing annual guidance for fiscal 2017 as follows.

We are reiterating our previous total revenue guidance of between $351 million and $355 million, an increase of approximately 31% over last year.

Based on the second quarter results and for all the factors Randy laid out that will continue to impact our same-Shack sales metrics, we're updating full year 2017 to be down between 2% and 3%.

This is primarily based on our 2017 results to date, and it's worth reminding you again that of all our metrics, this one can be the most volatile, while our comp base continues to grow and diversify regionally.

We are reiterating our total expected domestic company-operated openings of between 23 and 24 Shacks in 2017, representing a company-operated unit growth rate of approximately 37%.

As you might expect, dealing with landlords, developers and local governments remains a less-than-exact science when it comes to predicting precise opening dates, and opening TAM from time to time moves slightly up or slightly down the calendar and this is why we give you a range and also the reason that we occasionally update that range as we get better visibility to exact timing of openings.

With a look towards 2018, and as Randy mentioned, we intend to increase the number of new unit openings, and we'll provide updated guidance on that within our overall 2018 guidance in a future call.

Due to favorable development timing, specifically in Japan and Korea, we are increasing guidance for licensed openings to 15 net new licensed Shacks, up from 12 in our last guidance.

And due to strong performance in our Shacks opened year-to-date, I'm confident in our upcoming second half opening.

We are increasing our guidance for the class of 2017 Shacks to deliver at least a $3.4 million AUV, and this is an increase from our previously guided $3.3 million.

Moving on to our expense guidance.

For 2017, guidance remains unchanged for our Shack-level operating profit margin between 26.5% and 27.5%; G&A expense between $38 million and $40 million; depreciation of approximately $22 million; and interest expense of between $1.6 million and $2 million.

As for our tax rate, we expect to continue to experience some degree of volatility as a result of potential tax impacts associated with the changes to the standard related to accounting of stock-based compensation.

And as such, our tax rate guidance excludes any potential future tax effects of the new standard.

We do, however, continue to expect our annual adjusted pro forma effective tax rate, excluding the new standard, to be between 40% and 41%.

So wrapping up and giving you my closing comment, we will continue to focus on the strong pace of unit and revenue growth, opening Shacks that generate strong operating margins and strong cash and cash return.

As a company born in New York, we have industry-leading AUVs and operating profit, and yet our expansions will increasingly include unit at all levels of both.

We are focused on the long-term top and bottom line performance, and we'll continue to execute against our clear business strategy and not be distracted by short-term volatility in isolated metrics.

We will continue to invest in our infrastructure, our systems, our processes, our teams to make sure we're ahead of the curve and supporting our expansion and maximizing our ability to scale effectively and efficiently.

And we will continue to innovate and evolve additional features of the Shake Shack brand and overall guest experience wherever that guest may be.

Now having said all of that and having had a few weeks in this earnings process to review how we communicate externally, I do believe that we have the opportunity to take a look at how we share data around some of the key drivers impacting our results to date and our future results.

Our intent is, of course, to communicate and share those data points that we believe to be most useful and informative as it relates to assessing and understanding our performance base today and in the future.

I look forward to providing additional clarity and data to further understand the long-term Shake Shack story in upcoming earnings releases.

And with that, thank you, and I'll turn it back over to Randy to conclude our prepared remarks.

Thanks, Tara.

We are at a moment in retail and restaurants where we believe the winners will be those who best combine an authentic experience with the convenience our world expects today.

Our strategy is clear and outlined for you.

Ongoing investments in our team will be accelerating growth, great sites domestically and internationally.

We'll be investing more heavily than ever in technology to drive the in-line and online Shack experience.

We'll be working towards a more personalized marketing connection with our existing guests as well as acquiring new guests.

And we'll be driving further menu innovation to drive traffic and spend.

We believe we're in an incredibly strong position to continue to expand and grow.

The Shake Shack brand is a powerful one with plenty of whitespace ahead.

We're more focused than ever on continuing to deliver against that opportunity.

And with that, I want to thank all of you for joining today's call.

And operator, you can go ahead and open the line for questions.

(Operator Instructions) Our first question comes from Sharon Zackfia with William Blair.

William Blair.

A couple of questions.

I guess, Randy, you talked a little bit more about cannibalization than I recall you talking in the past.

Is that something that's becoming a more meaningful aspect of your business?

And then on the new unit productivity, the rate there and what you expect for this year, is that the result of some sort of out of the ballpark opening that you've had this year?

Or is generally everything a little bit better than you expected?

Thanks, Sharon.

Yes, look, with regard to new Shack impacting current Shacks, we shared a little bit of that on the last call and talking about some of that impact specifically in New York that we felt a little bit in a handful of Shacks.

And as we said, over 40% of the comp sales are in New York City.

So whenever something happens in New York, we feel it, right?

And that happened.

Whether that's cannibalization or other factors, it's really hard to say.

We did want to specifically call out on this call the King of Prussia mall because that's a strategy.

Look, we never want to see any Shacks have a decline in its sales.

But when we see that there's a clear operating profit, sales increase opportunity and a Shack may impact another one, if it's a great real estate opportunity -- we're managing this company for a lot of dollars, not for percentages.

We've talked about that since the beginning of time.

So again, with our small comp base, a small handful of Shacks who can be impacted in that way, that can happen.

And then as we noted there, we've seen some of that in a couple.

When it comes to new unit productivity, I wouldn't say there's any grand slams in the current base.

Last year, as you know, we exceeded some of the guidance that we gave in terms of that AUV, mostly because we had our first restaurant in California, other strong restaurants in California and a few in New York.

This year, we haven't had those, I would say, heavy hitter, high AUVs restaurants as we've talked about.

But we've been really happy with the early start in some of the Shacks in Long Island, really powerful start in Detroit, Lexington.

But again, these are generally smaller markets, so we don't expect those to have similar AUVs.

But we like the opportunity, what we see ahead of the Shacks that are going to come in.

We've got about 11 or 12 Shacks to open the rest of this year.

That will be back-weighted.

Again, we'll probably have a similar third quarter that we did in the second quarter in terms of new unit openings, so the 4 to 5 depending on development, but we're excited on what those look like over the long term as they run.

Okay.

Just one follow-up.

Is it fair to say then that the comps outside of New York are outpacing New York at this point?

We haven't broken that out, Sharon.

So we can get back to you on that.

I think at this point, we haven't decided to break that out.

I think it's fair to say that, again, of the 37 Shacks, some are impacted more than others and it's not necessary a regional question.

Our next question will come from Nicole Miller with Piper Jaffray.

I want to know, how is the team embracing technology?

They've been so great at building relationships locally in their stores.

Do they feel like they can still do that with consumers?

And what feedback are they giving you in terms of some of your technology initiatives, specifically maybe the mobile app, et cetera?

Nicole, thanks so much for that question because we struggle a lot with how to answer that when we talk about hospitality as the birth of this company when Danny started Union Square Cafe in 1985.

So we are super excited about the new levels of hospitality we can gain at Shake Shack.

It's funny, just this week, I've had the opportunity to have different meetings at Shacks, right?

And now, when I might not have been able to go to Madison Square Park before and have a meeting because I couldn't count on how long it might take me online, now I can show up and get my Shack all ready to go.

So we love the idea of that hospitality.

People can walk in, get up.

I just had a friend hit me up the other day because they went to Penn Station and were able to catch their train because they had preordered on the app, grabbed their food and got to their train on time, something you never could have done 6 months ago in this company.

So we love that.

With the ShackBot that provide instant answers, and again, that's super new.

With the mobile app and with a number of things that we also have in store, we're really excited about technology being a leader for us in increasing hospitality opportunity at Shake Shack.

And just the last one.

Tara, if you could talk about your first few months now, and I know you gave us a little insight on that.

But what's most surprising?

And/or maybe more importantly, what are the couple biggest opportunities that you're seeing and how are you prioritizing those?

So a few months -- so a couple of months, I think probably almost to the day actually.

So I mean, my first couple of months has really, I think -- you and I have chatted, but had been spent really trying to get to know the business in the Shack with the operators, with the rest of the leadership team, getting to know my team.

And I'm not sure that anything has massively surprised me and certainly nothing to the negative.

If anything, my optimism and my excitement for what I thought existed here was just absolutely reconfirmed in terms of the growth opportunity, the quality of the product, the culture, the caliber that relates to the leadership around the globe.

And so all of was just [emphasized] and validated to me as I spend more and more time with more and more people in the company.

And in terms of the opportunities, I mean, Randy has touched on most of them.

I mean, I think our opportunity to continue to leverage technology across the business is significant.

We talk about using technology as it relates to engaging with our consumers, our customers and guests and getting to know them better.

But also, I'll be looking, along with Zach and other operators, we'll be looking at how we continue to use technology and systems to help efficiently scale the back-office and the support function to allow the operators to really focus on driving top line growth.

So that's where I'd go next, trying to get more into back of house and making sure that a company that's growing 30-plus percent a year is spending the time and money, quite frankly, to make sure that we're investing up in the infrastructure that will support our future growth.

So that's kind of where I go next.

And our next question will come from Jake Bartlett with SunTrust.

I want to dig in on the comp guidance for the back half of the year, and the guidance that would look like the first half of the year.

And just kind of delving into that a little bit.

One is weather.

You see -- you mentioned that weather had an impact.

How much of an impact and should we consider -- should we expect something like that to be happening in the back half?

I'm just trying to kind of frame the -- how conservative guidance is in the back half.

Thanks, Jake.

I'll take it in and say look, when we last talked to you at the call in May, we talked about the improvement from comp in Q1, which we saw in April.

We had a stronger April.

That then in May and June declined a little bit.

We've seen that, that kind of trend continue through July.

So that's what's led us to be a little more conservative about the guidance just based on what we're seeing.

Look, we know we'd see some better compares as we get into Q3 and Q4, specifically Q4 as the best compare we'll have.

But look, knowing what we're doing, knowing the strategy that we're on, we're going to go ahead and give you that new guidance to be conservative about how -- where we see things going.

As we said, we -- certainly, weather was an impact of some type in Q2.

Hard to say what that will look like moving forward.

But again, I think the focus of it is when you look at -- we added $24.5 million of non-comp sales.

We lost $900,000 when you look at the comp base.

So we'll take that trade all day long when we believe that we're adding great Shacks that are increasing the overall opportunity for Shake Shack.

And that's what we saw this quarter.

That's what we're going to guide to for the rest of the year for now.

Got it.

And just to clarify, did you see -- I mean, by my count, weather wasn't as much of an impact in July.

But you're seeing just the same trend that you had in May and June in July despite weather not being much -- any worse in July.

Yes, similar trend today to Q3 that's led us to that guidance for the year.

Okay.

And then is there any impact -- I mean, one of the things about your small comp base is that it's actually now starting to grow pretty quickly.

Any impact do you expect from that?

Could you gauge that the new stores entering the comp base, how they're impacting the comp?

Is that part of maybe some of the headwind we're seeing here?

Well, no.

As we would say, that's pretty balanced reporting when you look about new Shacks coming in.

The rest of the year, we have about 6 Shacks coming in the comp base.

Next year we'll add 18.

So when you look at how it's still a very small comp base, look, it gets more regionally diverse and Shack diverse as we go through this next few years.

But with only 6 coming in, I wouldn't tell you that there's anything that's really telling about the recent or upcoming class or the 18 necessarily that will be coming in to the next year.

Okay.

And then lastly on digital.

I think you've mentioned before, in the last quarter, what percentage of sales it had been.

And maybe if you can just give us what it is now and maybe what impact some of the changes you've made, like increasing the order size limits, launching Android.

Any kind of just idea of the trajectory of the digital sales will be helpful.

Yes, so Jake, I said a little bit in my comments, we're not going to give a number this quarter.

I think what we really want to do is learn.

We just launched Android.

There's so much to go yet.

Last quarter it was brand-new and we wanted to give you the earliest data we had.

So we'll keep updating you.

What we know is downloads are increasing.

We've had some fun in-app exclusive type of things that have driven some interesting results.

We do know our average check is a little bit higher in the app, continue to see that and we continue to see return rates that are impressive.

So we like what we're seeing and we'll keep you updated as we have, I think, telling -- more telling metrics down the road.

Our next question will come from John Ivankoe with JPMorgan.

I think one question (inaudible) second question, if I may.

It's related to competition.

(inaudible) competition on those differentiated, beginning to price increase competition and especially, increased quality of independent or smaller chain competition as maybe taking away some customer traffic that they haven't seen taken away (inaudible) before.

So could you comment, and whether you talk about New York or other newer markets or small markets that you have, is competition becoming more of an issue?

In other words, has competition at this point take any of the blame at all from a customer perspective?

And then the other part to that question, if you can comment on your ability to attract and retain the quality of labor that you won.

I understand that you have to pay more for labor, but are you getting the quality of labor that you want for [other levels] that you want.

Yes, thanks, John.

It's hard to say where the competition is pointing out.

Look, we've lived in a long, many decades of a lot of great food being available to people all the time, right?

I don't think that's changing.

I think there's more and more great food.

I think the important note that we're making is the ease by which you can obtain that food, right?

You look at the shifting retail landscape, there's more and more food being brought to you or being ready when you're ready.

So when we look at our initiatives to capture the greatest amount of our share of New York dining time, we're looking at tech to be a big part of that answer.

Also, we've always said, and we continue to believe, our guest is not your typical fast food customer.

Everything we've seen, every Shack we build, we want to be the premier experience in your neighborhood and I believe we'll continue to do that better than ever.

So that when you choose to eat a great burger or a shake or fries or all the other things that we serve, you're coming to Shake Shack.

When it comes to the quality of our labor, I think it's really been consistent.

I'm incredibly proud of our team.

When people ask me what keeps you up at night and what stops this amazing party from continuing at Shake Shack, I always say the answer I give you today will be the same answer I'd give you 10 years from now: team, team, team, team.

That is why our labor is up.

We're investing more in that, and not just what we pay, but in how we find people, the number of great leaders we need to find and develop.

Our training team led by Peggy Rubenzer and her incredible team, they're just doing more leadership development than ever, scaling hospitality in the way that has been our sweet spot for a very long time in this company.

So we're bullish on that.

So I don't think there's been any difference in the quality as we go.

We just need to continue to invest in retaining the excellent hospitality our team brings every day.

Sounds great.

And then secondly, as you just kind of settled on the design for Astor Place that presumably increases your peak hour production capacity, is there a retrofit opportunity for your existing stores, I mean, I guess a relatively easy retrofit for existing stores to reconfigure some equipment or add some things or move some things around without complete kitchen redesign?

So just give us some insight if Astor Place is what you want it to be (inaudible) application to the existing system?

Yes, I'd love to tell you it's easy.

Nothing's easy, especially when it comes to so many of our Shacks being in urban locations.

So yes, on Astor Place.

We've got some really cool initiatives that you'll see there, and we'll share that when that opens later this year.

We are already doing some remodels that will be towards the end of this year at some existing Shacks.

They're not a full program, but there are various pieces of that.

We'll be renovating a little bit of our Upper East Side Shack, down in Battery Park as well here in New York to get some learnings on what that exact question can look like in terms of increased throughput.

So we're constantly learning, constantly innovating.

There will always be versions of Shacks out there, but we want to learn a lot at Astor Place.

So whatever we learn, it's not going to be easy to just turn on a dime.

These things take time, and they will take time over time, but we do feel really good about the approach we're on.

Our next question will come from Alton Stump with Longbow Research.

First off, you mentioned in opening comments, Randy, that you do expect unit growth to accelerate in '18.

I know, of course, you're not going to ask you to give us special guidance to get here.

But how much just from actual labor standpoint could you build?

Is it 25?

Is it 30?

Any kind of granularity on sort of how high you guys could go next year?

Too early to say, Alton.

We're still developing our plan.

If you look at our history, last year we did about 20 Shacks, right?

This year we'll do 23, 24.

The year before, last -- in 2015, we did 13 Shacks.

So you've seen a demonstration of when we feel great about our opportunity, we will continue to grow that.

So real estate is there for us, premier sites, great cities are there for us.

You will see us branch out to a lot of new cities next year and beyond, some of which I mentioned.

We are -- continue to be a coveted tenant for landlords around the country.

So we'll get back to you on a tighter number.

We're going to be smart, we're going to be measured, but we intend to accelerate.

That's helpful.

And then I guess just a second follow-up, just on the beef cost run.

Any concerns there?

[Beef is coming] back up, but kind of what you guys (inaudible) tied directly into -- on regular beef price, so to speak.

So any thoughts on how that could impact margin in the back half or even...

Yes, yes, we're essentially expecting flat for the rest of the year, not a whole lot of leverage versus last year or sequentially.

Beef has been up a little bit in Q2.

We have to balance that out with some other wins.

Those things then balance each other out through the end of the year.

So we've been slightly down from last year, but basically flat.

So our hope is that beef continues to kind of stay where it is or go down, okay?

But that overall, we're expecting near flat COGS line for now.

Our next question will come from Nick Setyan with Wedbush Securities.

So I mean, you guys have kind of commented on the cannibalization potentially from the upcoming 2 stores.

First, what exactly is the date when those are going to open?

And then second, I mean, does the guidance in the second half in terms of the comp incorporate the potential cannibalization there?

Or that's just you're taking the July trend as you're moving that forward?

Well, we're -- look, you can never know exactly.

I wouldn't say there's any necessary planned cannibalization at any time.

Nick, we continue to see a balance there.

So we're just kind of moving forward with our expectations and what we see in the first half, [first 7] periods there.

So when we look at it, our guidance is actually up, when you look at the 2017 AUV, right, balancing out some of that comment.

So we've got a great class of 2017.

And at the same time, even with that comp question, we've been holding our revenue guide solid.

So we believe we can get there.

And again, there's never any planned cannibalization.

So it's hard to give you a date on anything other than saying that, look, over time we may make real estate decisions that may impact.

We got a lot of evidence from many years now that second and third and fourth Shacks in regions, there's going to be absolute cannibalization to continue to grow the market.

So we expect that to be over time.

And we're much more focused on adding, as we did in this quarter, $24 million in sales in non-comp opportunity here.

That is the extraordinary growth percentage that we want everybody focused on what we're achieving here at Shake Shack.

Okay.

Okay.

And in terms of [the unit over] margin guidance for the year, maintaining flat year-over-year margins in the second half more or less gets me to the midpoint of your annual margin guidance.

And so I guess, if we are to expect continued deleverage in the second half, labor particularly, what are kind of the variables there on some of the other line items that gets us to, let's say, the midpoint of that guidance at the unit level?

Well, with flattish comps and labor, we don't really expect a ton of additional deleverage in labor this year.

Our comments specifically on that are really as we look ahead at years to come, we'll have a lot of minimum wage increases in next year and coming.

So most of that, we think, will hold for this year generally.

But what we've been incredibly proud of is even with some of those Shacks having a comp decline, the teams have done such a good work of extraordinary profits for this company for the first half of the year and again, last quarter, over 28% operating profit amidst that shifting environment.

So we're really proud of that.

That's where it gets us to hold our expectation for the year.

Got it.

Got it.

Just to be clear, you're not expecting as much deleverage in the second half on labor?

That's right.

That comment is more towards the longer term as we look into the years to come and changes that coming.

Our next question will come from Jeff Bernstein with Barclays.

Great.

Two questions.

One, just on the traffic component of the comp.

I think you said it was down 4% range, which I guess is slipping a little bit from the past 2 quarters.

I'm just wondering, when you think about that decline, how much of that would you say is maybe capacity constrained versus a great problem to have and maybe your technology helps, versus how much of that would you say is kind of the broader challenges in the retail or consumer landscape, maybe the consumer's pulling back on the brand?

Like, how do you split those 2 up just to give you comfort that, that it's not a further problem?

Well, not exactly sure on that, Jeff.

I mean, it's hard to quantify where that traffic shifts, right?

We know we've shifted some of our traffic to mobile.

That's a small percentage here.

We know we continue to find ways with -- as much as we can to drive new traffic.

But I mean, it's mostly a factor of the same things I talked about in the overall comp discussions here.

So it's hard to say.

I mean, we're constantly doing more brand research and customer studies.

The brand, when we study it, remains a beloved brand.

Our social -- our impressions that we get on social are higher than they've ever been.

We continue to be a really beloved brand.

So we don't think it's anything about that other than really just the shifting that we've seen based on the reasons I've said.

And again, we're only talking about a small base of restaurants here, so let's not over take that comment and what it means for the broader company.

Understood.

And then just on the labor side, just wondering, I mean, with the pressure you're seeing, just wondering how you think about mitigating it, whether it's -- whether maybe you have some cost saving opportunities or whether some of this technology will help ease that, or maybe there's more potential pricing [loss still keeping good] value.

And obviously, the labor law is pressuring everybody, but I'm just wondering whether we just kind of assume this is the kind of the norm, whether you have some things that could potentially offset.

Yes, that's the right question.

We are constantly evaluating and then testing new things in just the way we schedule, the way that we open and close our restaurants and the way that we most effectively lead our teams, getting our teams the hours that they need that work for the business.

So constantly looking at the evaluation of that.

Price will be some of it.

As we've said, we expect to take some price next year or at the end of this year as we usually time it.

And that will be based mostly on the questions of labor, and that will be a market by market and tiered decision.

So I think we will continue to find ways to offset as much as possible, but we do -- we expect to deleverage in that line.

Got it.

And just lastly, do you see any difference in your stores' performance, just to indicate that maybe it is more the retail landscape or the mall base?

Or do you see anything when you read the results of your stores just to demonstrate what stores maybe are doing better than others?

Is there any common thread there?

Not really.

We've got a very small percentage of our restaurants today that are what you would classify as a mall.

If you -- and even less moving forward of that.

We've got -- we look at the years to come, kind of we'd always focus on a lot of different types.

Mostly that's urban.

That's the lead of our company today.

There's a lot of new -- more and more freestanding pads.

Some of those really premier shopping lifestyle centers and your traditional mall.

And we'll be doing a large amount of 3 to 4 of those different categories as well as some others.

We've seen some great growth in outlet mall as we've talked about.

So there's no real common thread that we would say that would carry that trend today in our Shacks.

And our next question will come from Andrew Charles with Cowen and Company.

Tara, congrats on your role.

Randy, you made several references to more personalized marketing.

So philosophically, do you think a loyalty program could fit within the Shack brand?

And if so, what could it look like?

Yes, that's a great question.

We debate that a lot.

We've talked a lot here.

We do believe that reaching guests where they are, how they use Shake Shack and finding ways to have them do it more often is our ultimate goal.

We're doing more targeted posting than ever, more targeted marketing opportunities than ever, such as launching the Hot Chick'n in the app only.

We're learning so much day by day about our guests with more and more use of technology.

So we never say never in this company.

We continue to think about what traffic-driving initiatives we have in store, and we'll keep you posted if we choose to go a traditional loyalty or any type of program.

But we see a lot of opportunity to get to know our guests and target them more directly in the future.

That's great.

And in the spirit of technology, I know you're not giving numbers, but is it safe to say you're seeing increase in mobile app mix from the iPhone once you rolled off the initial burger giveaway?

We're not giving that number just yet, but again, we continue to be encouraged with the retention and return rate that we've seen here.

So it's just so early with so many initiatives happening that we want to balance that number out over time and give you some better data.

And our next question will come from John Glass with Morgan Stanley.

First of all, I want to ask about the average weekly sales you reported.

That's probably the best metric to use.

I know your comp base is small, so that's probably the most all-encompassing.

That declined this year year-over-year by about, I don't know, 8% or 9% or 10% versus last year, but you raised your new store productivity goal.

So it's lower last year, but the absolute numbers are lower this year on average weekly sales basis.

How do those fit together?

Were you just being conservative a year ago?

Or can you talk about maybe the types of opening your experiencing this year versus last year to explain that difference?

Yes, John, thanks.

When you look at it, the primary driver of that average weekly sales number right now is the addition of Shacks at all volumes, right?

Again, when we -- we increased, as you said, our 2017 guidance.

But that's on a $3.4 million number, right, on a previous AUV, around $5 million.

That's the full expectation.

And actually as you've said, we've exceeded that expectation most years here.

But we continue to look at the long-term theme of slowly declining AUV.

That's our target.

That's what we're after.

And we are targeting Shacks at all levels of sales.

So when we look at last year and some of the guidance we gave and then the clear outperformance on an AUV basis, that was based really on the heavy hitting class of 2016 that we had.

The 2015 class didn't have West Hollywood and a few Shacks in New York City [unlike] 2016 did and similarly, the 2017.

So look, as we add that number again, we expect it to slowly decline over time as we've guided you.

And then just you mentioned the cannibalization in King of Prussia.

Did you quantify that, just to help us understand when you do put stores that close together, what the impact is?

No.

We haven't quantified it, yes.

The way we quantify it, this is a really good business decision, and we're not going to allow -- we're going to add dollars to the business in the top and bottom line parts of them.

And if that affects the percentage, we're going to be okay with that, and that's the case in this particular restaurant.

I mean, we may see some of those from time to time throughout Shake Shack.

But when you can get more than $6.5 million of Shack burgers within a square mile, you take that opportunity.

Good.

One more on the line items in the P&L.

You actually got better productivity out of the nonfood items on a per store basis, so down year-over-year than the first quarter; in some cases, down versus up, so labor, but also the other operating, the occupancy.

Is that part of -- I know there's movement around stores (inaudible).

Is that still part of either better efficiency in store openings or a concerted effort like you mentioned on labor scheduling?

Are there things you're doing that are actually improving those metrics specifically?

What are they if you are doing them?

There's things up and down the P&L.

There's also things outside of the Shack-level op profit, such as startup cost and the way we continue to open restaurants a little more effectively.

I'm not sure if you're referring to that as much as you are above the Shack-level op profit line.

But yes, I mean, the team, we're constantly reconsidering, even with labor increasing, how we view those things.

So we got a lot of opportunity across the P&L over time as we go.

And it also helps, John, when we get a little more deep into each market.

We've talked about this a little bit in the past.

As we build a number of Shacks in each market, we can leverage some of those things.

It helps the overall P&L when we get a little diverse population continuing to grow.

I'm not sure that answered your question, but I just want to make sure that's the part of the P&L you were referring.

No, I think that helps.

And from Jefferies, we'll hear from Andy Barish.

Yes, just a question on the G&A side.

The 2Q had a significant amount of leverage and the full year guide doesn't imply certainly that amount.

Was there something timing wise in the 2Q G&A numbers that maybe was a little bit better?

Or just some color there.

Yes, Andy, there was a little bit of that timing.

When we gave that full year guidance, that's what we intend to spend through the full year.

We -- in order to hit the accelerated growth we've talked about in terms of Shack number of units for next year and the technology, the marketing, the menu innovation, all of the real pillars of our strategy that we've discussed, we're going to need to spend some more money in G&A.

So look, we're real happy with the team and how we've leveraged a little bit this year in that number.

We know that when you look at Shake Shack over the long term, G&A leverage is a great opportunity for us.

However, we are not focused on that number today.

We are focused on driving top and bottom line opportunity within our restaurants.

So we will continue to invest.

We'll continue to guide you on that to help you understand, but expect us to make continued big investments in our team and our technology that will help drive the bigger picture over the long term.

Our next question will come from Karen Holthouse with Goldman Sachs.

I had a question on the labor line.

We've seen a couple of years of [pressure] . I guess, number one, is there a level that you could get to that would maybe make you think about a different sort of pricing trajectory particularly in markets that you're seeing outsized wage increases in.

And then if you're looking at that labor pressure, I'd presume you're seeing a similar sort of delta or similar pressure on new units.

And just maybe help us think through how that impacts the high-level unit economic model, which at this point really hasn't been updated since, really, since the IPO.

Yes, thanks, Karen.

Look, when we look at labor right now, we do use price generally for these days on the labor model.

So when we see an increase, for instance, in Washington D.C. as a high minimum wage right now, we take a little price there.

So we've got the regional pricing tiers that are generally set to offset as much as possible some of that labor, but we never take enough price to fully offset in these last couple of years.

That is not our intention even moving forward.

We want to make sure we continue the incredible value our guests see at Shake Shack today.

So in terms of new units, we always have the expectation that the very new units have a high labor in their first year.

We have guided, as you know, towards that long term 20% economic model at Shake Shack.

We're -- obviously, we've outperformed that this quarter at 28%.

Whenever we have higher-sales restaurants, we generally have higher op profit percentage.

But we do expect a lot of $3-plus million Shacks over the long term as we head to this huge opportunity in front of us.

We're barely 20% there on our stated number of 450 Shacks just in this country over the long term.

So we've still got a lot of continued learning, labor pressure changing and we'll -- look, we've got initiatives non-stop, tech, food [delivery] and other things to offset some of that over time.

But as we find the new balance, if we think that's going to be a long-term different new economic model, we'll update you on that.

And ladies and gentlemen, that concludes today's question-and-answer session.

Mr. Garutti, at this time, I'll turn the conference back over to you for any additional or closing remarks.

Okay.

Thanks, everybody, on the call again today.

We're really excited about where we're at.

We've got a lot of work to do.

And we just always want to say thanks to our great team who's out there taking care of our guests and our communities, our suppliers and our shareholders.

So thanks again, and we'll see you soon at the Shack.

Thank you.

And again, ladies and gentlemen, that does conclude our conference for today.

We thank you for your participation.