Shake Shack Inc (SHAK) 2017 Q3 法說會逐字稿

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

Welcome to the Shake Shack Third Quarter 2017 Earnings Call.

(Operator Instructions) Please note that this conference is being recorded today, November 1, 2017.

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

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

Thank you, operator, and good evening to everyone.

By now, you should all have access to our third quarter 2017 earnings release, which can be found at investor.shakeshack.com in the Financial Info section.

Additionally, this quarter, we have posted supplemental third quarter's earnings slides, which can be found in the Events and Presentation section on our site or as an exhibit to our 8-K for the quarter.

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 place 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 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 and the appendix of the aforementioned supplemental materials.

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

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

During the third quarter, we delivered robust growth and profitability, with total revenue increasing 27% to $94.6 million and adjusted EBITDA growth of 20% to $18.2 million compared to the third quarter 2016.

As 2018 comes into view, our focus remains on executing against those key pillars of our strategy that will continue to fuel our global growth.

The Shake Shack experience in today's world of convenience is a key component of the overall growth strategy.

I'm excited today to share with you some of the technology initiatives we've launched to date and talk about those still to come.

We're actively testing throughput enhancement initiatives with kitchen design in both new and existing Shacks.

Our marketing team is working towards the future of ever-increasing personalization and connection with our guests.

Our menu innovation team continues to experiment and innovate on the culinary side of our business, driving excitement this year and beyond.

Our development and design team is delivering an accelerated pace of unit openings while continuing to secure premium sites due to the strength of our brand, at the same time designing some of the most dynamic community gathering places we've ever built.

In this rapidly evolving consumer environment, I am prouder than ever of our teams as they remain nimble and innovative, delivering the best of the Shack experience to our guests and communities regardless of the channel.

In the third quarter, we opened 4 domestic company-operated Shacks and 5 licensed Shacks.

For the full year 2017, we are now increasing our guidance and expect to open a minimum of 24 Shacks.

There is a possibility we could open up to 26 Shacks if construction and permitting are favorable.

If we do, though, those Shacks will likely open just before the year-end.

Due to strong performance from our international pipeline, including 3 Shacks that have opened in the last week, we are raising our guidance now to 18 net licensed Shacks, an increase from our previous guidance of 15 net.

These levels equate to expected full year total company-operated unit growth of approximately 38% to 41% and total license unit growth of 36% compared to last year.

Our opportunities to continue expanding both domestically and internationally remain compelling, fueling our confidence to continue a pace of high-quality unit, revenue and profit growth.

For the third quarter, we reported a same-Shack sale decline of 1.6%, improvement from the first half of 2017.

As a reminder, our comp base includes only 39 or roughly half the total number of company-operated Shacks.

We're pleased with both our top and bottom line growth in the third quarter despite the negative impact of Shack closures caused by 2 major hurricanes.

Between Hurricane Harvey, which made landfall in late August, followed by Hurricane Irma in early September, we've temporarily closed 9 Shacks, 1 in Texas, 6 in Florida and 2 in Georgia, for a total loss of 33 operating days.

We estimate approximately $300,000 in lost sales in the third quarter as a result of these closures.

Taking care of our teams is always our priority, and we decided to pay our team members for estimated hours that they would have otherwise worked during these closures.

Most importantly, all of our team members are safe.

Thankfully, none of our Shacks sustained physical damage.

And during this time of crisis, we are really proud of our teams in Houston and throughout Florida, who stepped up to feed their communities and move mountains to reopen as quickly as possible.

Their leadership was exemplary and should be commended.

Let's get back to results and our overall strategy for growth.

Beginning with licensing.

We continue to focus on key partnerships, both domestically and abroad as a channel for robust revenue growth.

Partnering with premier companies globally through an asset-light model is proving to be a highly effective route for continued profitable expansion of our international business.

In the third quarter, we opened our fifth Shack in Seoul, with South Korea continuing to deliver strong performance.

We also had our fourth Shack in Japan in Shinjuku, and subsequent to the quarter, added our fifth in Yokohama.

Yokohama represents our first location outside of Tokyo, as we build upon our success in the region and further leverage the strength of the brand.

We remain bullish on the long-term growth opportunity for Shake Shack in Asia.

During the third quarter, we announced our plans to enter Hong Kong, Macau and now Shanghai, through a new partnership with Maxim’s Caterers.

Our development agreement plans for 14 Shacks in Hong Kong and Macau over the next 10 years.

And starting in 2019, we'll extend that to Shanghai to open an additional 25 Shacks through 2028.

Maxim's is the partner responsible for bringing Starbucks and Cheesecake Factory to the region.

We're confident they'll be a tremendous partner for us in this significant expansion opportunity.

On our domestic licensing front.

During the quarter, we open our first football stadium Shack at M&T Park in Baltimore.

However, it's important to understand that this Shack is only open for a limited number of events during the year, but we really love the brand-building opportunity of football.

We're also thrilled with the early results of our Shack in the LAX Airport, and are proud to announce that we've also won the bid to operate in Atlanta, in Terminal A. We expect to open that Shack in 2018.

During to the third quarter, we opened 4 new domestic company-operated Shacks, bringing our third quarter year-to-date openings to 15.

We entered the new market of San Antonio and further increased our footprint in Las Vegas in the suburb of Henderson.

We also opened in Livingston, New Jersey and New York City at Morningside Heights.

Following the quarter-end, we opened in Preston Royal Village in Dallas, furthering our penetration into Texas, now with a total of 8 Shacks in the state.

We also opened our seventh Shack in Washington, D.C. and expanded our Southern California footprint, opening in San Diego at UTC.

We also added our second Shack in Michigan in the suburb of Troy just last week.

And finally, we opened up in Astor Place in New York City, launching a number of exciting new initiatives I'll talk about in a little bit.

In the next week, we'll open up in El Segundo, in the South Bay of L.A. That will leave only 3 to 5 Shacks for the balance of the year, firmly scheduled to open in December, including the new markets of Milwaukee and Danny Meyer's hometown of St.

Louis.

Looking towards 2018, we are stepping up our development plans for our biggest year of unit openings to date.

We are currently targeting 32 to 35 new, domestic company-operated Shacks in 2018, which will represent year-over-year unit growth of between 36% and 40%.

Our development strategy remains a balance of -- a balance between further penetration of existing markets and expansion into new markets, with approximately 20% of Shacks next year expected in new markets.

In addition to diversified locations, our openings in 2018 will be multiformat, roughly 1/3 across urban locations, 1/3 freestanding pad type sites and the remainder in premier shopping and lifestyle centers around the country.

We're really excited about 2018, and we'll be launching in a number of great new markets: Cleveland, Charlotte, Denver, Staten Island and Seattle, to name just a few.

As premier real estate opportunities become available and our capacity to scale continues to increase, we're confident in our ability to accelerate the number of new Shack openings year after year.

We talked to you previously about the importance of technology in our ongoing growth strategy, in terms of better connecting with our guests as well as meeting their expectation in an always-on world, where we bring more convenience than ever to the Shake Shack experience.

We continue to innovate and learn through our ever-increasing use of technology, demonstrated well in one of our most recent openings in Astor Place, New York City.

This Shack is a representation of our relentless focus on excellence, experience and hospitality through innovation.

Here, we're going to introduce a number of new concepts, where we'll test and learn as we consider broader rollouts in the future.

Here, we've launched kiosk-only ordering, a cashless environment and an optimized split kitchen for greater throughput.

Each of these also lends themselves well to a future where we expect an increasing proportion of our business to be conducted by the Shack app, as well as through delivery channels.

We also made the decision here to start our team members at $15 per hour at this location, as we continue to take care of our teams first while evolving our business model for the very real pressures of increased minimum wage that will affect us into 2018 and beyond.

And while it's only been a few weeks, we are listening, we're learning and we're encouraged by the early positive guest response and results from the Shack.

Continuing with digital evolution of Shake Shack, we are pleased with the increasing levels of guest engagement and traffic to our app.

Additionally, our average check via the app remains higher than in Shack.

We're seeing encouraging return rates from our app users.

And while still early days for us, we believe the Shack app is a really important tool for us to deepen our connection with our guests, with a strategic push towards more personalized marketing initiatives to drive greater frequency and spend.

Another evolving part of our business is delivery.

As we've mentioned in prior calls, we've chosen to first test and learn.

We continue to listen to guests who prefer Shack brought to them.

And in September and October, we're proud to partner and run integrated pilots with our friends at both DoorDash and Caviar.

So at this point, what do we know?

We know there is growing demand for Shake Shack to be delivered.

And we know that when we choose to do delivery, we want to do it really well.

During these pilots, we tested some new packaging, and additionally, learned about our various Shacks' ability to handle delivery at peak times as well as our partners and the importance of integration from a systems perspective.

In terms of where we ultimately go with delivery, anything we choose to build will be with long-term sustainable economics in order to create a strong and healthy business.

For now, you'll continue to see us approach this area of our business thoughtfully and strategically, and we'll keep you up-to-date as our plans evolve.

Another core strategic pillar for driving guest satisfaction and Shack sales is menu innovation.

During the quarter, we launched the Hot Chick'n LTO and are really pleased with the results, as we continue to test chicken as an expanded menu category.

Also just beginning 2 days ago and available initially only via the Shack app, we're currently leading with chili, burgers dogs and fries, a hearty option for our guests as the temperatures start to cool down.

I really encourage you all to go try some chili.

As always, we've got a lot of fun and creative product innovation and LTOs in the pipeline.

I look forward to sharing more when the time comes.

Finally, to support both our industry-leading and innovation and our continued growth in the spring of '18, we're going to move our corporate office not too far from our current location in Manhattan.

One of the many benefits of our new office will be a dedicated innovation center for menu creation, kitchen design and leadership development and training, as we continue to invest in the strength of our teams and our menu offerings.

In addition, the new office will give us the much needed space for our home office teams who support our ongoing growth plans next year and beyond.

We're excited for you to see it once we're in.

With that, I'll turn you to Tara, who will take you through the numbers.

Thanks, Randy.

Before we get into the numbers, I'd like to take the opportunity to follow up on something I touched on in our call last quarter.

We believe it's important to share whatever additional information will best help you assess and understand our performance both today and going forward.

As a result, in conjunction with today's earnings announcement, we also released a supplemental earnings press presentation, which, as Josh mentioned, can be found in the Events and Presentations section of Investor Relations part of our website.

As I talk through some of our numbers, I'll refer to some of the data we provided and hope that it provides additional clarity to help you further understand our underlying results and the strength of the long-term Shake Shack opportunity.

So the results of our 13-week third quarter ended the 27th September 2017.

Total revenue, which includes both sales from company-operated Shacks as well as licensing revenue, increased 27% to $94.6 million.

Sales from our company-operated Shacks increased 27% to $91.1 million, largely due to the addition of 21 new domestic company-operated Shacks since the third quarter of 2016.

Same-Shack sales decreased 1.6% during the third quarter, lapping a 2.9% increase in the same quarter in the prior year and consisted of a 3.8% decrease in traffic, partially offset by a 2.2% increase in pricing mix.

As a reminder, our comparable Shack base includes only 39 or roughly half the total number of company-operated Shacks.

Furthermore, through the third quarter and as illustrated on Slide 6, 42% of our year-to-date comparable Shack-based sales resides in New York City, and as such, small swings in this market can have an outsized influence on the overall comp base numbers.

Average weekly sales for domestic company-operated Shacks were $91,000 for the third quarter of 2017, with a decrease to the prior year's quarter, resulting primarily from the addition of newer Shacks at various unit volumes to the system.

It's important to recognize the impact that these newer Shacks will have on the overall company average now and over time, while we continue to grow overall revenue in absolute terms.

Licensing revenue increased 30% to $3.5 million during the third quarter from $2.7 million a year ago, driven by a net increase of 17 Shacks since the first quarter of last year, of which 4 were in South Korea.

We remain cautious in our outlook in the Middle East due to ongoing macroeconomic and geopolitical volatility.

Meanwhile, our business in Asia, both in South Korea and Japan remains very strong.

We're optimistic for the future in Asia, as we continue to expand deeper into the region, with Hong Kong, Macau and Shanghai coming into the system in 2018 and '19, respectively.

Moving on to expenses in the third quarter.

Food and paper costs as a percentage of Shack sales decreased slightly to 28.3% compared to 28.4% in the prior year.

Looking forward to the fourth quarter, our expectation is that food and paper costs will slightly deleverage sequentially from Q3 to Q4 and be relatively flat compared to prior year on a full year basis.

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

As a percentage of Shack sales, labor and related expenses increased 80 basis points in the quarter to 26.1% from 25.3% in the same quarter in the prior year.

We reiterate that we will continue to face headwinds going forward on the labor line, driven primarily by 3 factors: firstly, the opening of more Shacks at various unit volumes, some of which, therefore, carry a higher percentage of labor cost in our current base.

So important to note, these Shacks continue to represent industry-leading performance.

Secondly, and consistent with the rest of our industry, we're experiencing more regulatory increases to hourly wages across many of the markets in which we already have a large presence, such as New York City and Washington, D.C., as well as markets we intend to enter in 2018, such as Seattle.

These will be compounded by additional regulations such as the Fair Workweek legislation in New York City.

Implementation of this legislation is expected later this month and will have some degree of impact on our future labor costs.

Thirdly, our labor line will continue to be impacted by our strategic investments in our management teams ahead of accelerated growth next year.

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

Other operating expenses as a percentage of Shack sales increased 90 basis points to 10.1% compared to 9.2% in the prior year quarter, driven mainly by the impact of certain fixed operating expenses 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 8.3% from 8.4% in the prior year quarter.

Shack-level operating profit, a non-GAAP measure, grew 20% to $24.8 million from $20.7 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 approximately 160 basis points to 27.2%.

To help further understand our domestic company-owned Shack sales and operating profit performance, on Page 7, in the supplemental materials, we have shown our third quarter 2017 trailing 12-month average unit volumes and Shack-level operating profit margin across our different regions.

Some regions are, of course, more mature such as New York City or other newer regions such as the West, may be influenced by more Shacks in their early honeymoon phase.

However, what is clear is the strength of our business, not just in New York City, but across the rest of the country.

As we've modeled and shared for many years, as more Shacks open around the country, AUVs and Shack-level operating profit as a percentage of Shack sales will decline year-over-year, primarily driven by lower volume Shacks every year, making up a gradually higher percentage of our base.

We are a business that started in New York, with industry-leading AUVs and Shack-level profitability.

As we continue to expand and open more Shacks, these metrics will come down, while our absolute top and bottom lines will grow.

In addition, the very real labor pressures that we face today will continue and will have a direct impact on our Shack level and overall profitability going forward.

General and administrative expenses increased $1.3 million to $9.2 million during the third quarter from $7.9 million in the same quarter of 2016, primarily driven by increased headcounts in our home office to support our ongoing and accelerated unit growth plans and technology development costs related to our digital products.

Adjusted EBITDA in the third quarter grew 20% from the same quarter in the prior year to $18.2 million, and adjusted EBITDA margin was strong at 19.2%.

Net income in the third quarter was $5 million or $0.19 per diluted share compared to net income of $3.8 million or $0.15 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 for exchange for Class A common stock, whereby we would no longer present a noncontrolling interest, we own $6.2 million or $0.17 per fully exchanged and diluted share compared to $5.5 million or $0.15 per fully exchanged and diluted share in the third quarter of last year.

Included within these pro forma results is a minimal tax benefit due to new accounting standards we adopted at the beginning of 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 $16,000 for the quarter, which did not impact our earnings per fully exchanged and diluted share.

Following our results for the third quarter, we're providing updated annual guidance for fiscal 2017 as follows.

Including the estimated impact from the hurricane, we expect total revenue of $354 million to $355 million, at the higher end of our previously guided range and an increase of approximately 32% over last year.

Based on improved third quarter results and trends to date, we are updating full year 2017 same-Shack sales to be down to between 1.5% and 2% compared to down 2% to 3% previously.

Our total expected domestic company-operated openings are expected to be 24 to 26 Shacks in 2017, above our prior guidance of 23 to 24 Shacks and representing a company-operated unit growth rate of approximately 38% to 41% from prior year.

As you are all no doubt aware, there are many moving parts in the run up to a Shack opening, many outside of our control.

And as such, there may ultimately be a Shack or 2, which fall out of December and into January.

Due to favorable development timing, we are increasing our guidance for licensed openings to 18 net new licensed Shacks, up from 15 net previously.

We're tightening our guided range for expected Shack-level operating profit margin to between 26.5% and 27% compared to our previous guidance of between 26.5% and 27.5%.

For 2017, guidance remains unchanged for G&A expenses of between $38 million and $40 million.

This implies an increase in the fourth quarter spend over prior quarters driven by a higher number of fourth quarter Shack openings, seasonal increases in professional fees as we close out our fiscal year, noncash deferred rents for our new corporate office and continuation of current technology initiatives.

Additionally, we anticipate investments in the upgrades of certain of our financial and operational systems headed into next year, and expect that some of the initial costs of those investments will occur towards the end of the fourth quarter.

Depreciation guidance of approximately $22 million remains unchanged, and we expect interest expense of between $1.6 million and $1.8 million at the lower end of our previously guided range.

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

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

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

As for full 2018 guidance, we will provide this in detail in our fourth quarter call in February.

However, at this point in time, we would like to share some directional perspectives.

We expect to open between 32 and 45 domestic company-operated Shacks, representing a company-operated unit growth rate of between 36% and 40%.

We also expect 16 to 18 net new licensed Shacks for the year, implying a licensed unit growth rate of approximately 24% to 26%.

It's important to note that as certain of our licensed Shacks come off a strong honeymoon period combined with ongoing pressure in the Middle East, sales growth is expected to lag unit growth in our licensed business next year.

As it relates to pricing, we plan to expand our multi-tier pricing model for 2018 based on our geographic footprint.

We estimate this tiered pricing will have the net effect of a 1% to 2% increase, which will be rolled out in mid-December.

Our current view on traffic in 2018 is based on the trends we've experienced over the last few quarters.

On that basis, our preliminary view is that any price increases will likely be offset by traffic headwinds.

We're excited about the scale of our ongoing growth expectations in 2018 and beyond, and we need to ensure that our infrastructure and our support systems are robust and scalable to deliver upon our significant expansion opportunity.

As I just mentioned, we plan to upgrade a number of our financial and operational systems in 2018 in order to support this continued and accelerated global growth.

We'll give more color around the expected impact of this in our February call.

You should expect to see an investment in our 2018 G&A line reflecting this [balance].

Our 2018 G&A will also include our biannual leadership retreat as well as an increase for our new corporate office, training center and test kitchen that Randy mentioned earlier.

We're excited about the opportunities this new space provides us from a testing and innovation perspective.

And in addition, it's a necessary transition for our business at this time, having simply outgrown our original space.

Next year, you will see us continue to invest in our digital products, whether that be apps, kiosks, the use of data and insights, increasingly personalized connections with our guests or the design of our Shacks.

Technology touches all aspects of our business.

We embrace that and firmly believe that continuing to innovate and invest here is critical to meeting our guests' needs and will continue to drive guest satisfaction and sales.

We have always managed this business for the long term and will continue to do so, making the necessary decisions and investments in the short and midterm to drive maximum sustainable growth for years to come.

Depreciation expense will be materially higher in 2018 compared to 2017, primarily as a result of the full year impact from 2017 new Shacks.

The increased development schedule for 2018 and the previously mentioned investments in technology and our new training and menu innovation center.

With a strong cash payback and healthy ongoing return from our Shacks, which we illustrate on Page 9 of the supplemental materials, we will continue to open where we see clear opportunities for growth.

However, in any given period, our results include the full impact of preopening costs of the new Shacks as well as costs for Shacks not yet opened, while only a partial period of Shack sales and profit is generated.

As we increase the pace of openings, this effect is exacerbated, and therefore focused on certain metrics in isolation does not fully represent the strength of the underlying performance of this business.

Our focus remains on the execution of the significant long-term value creation opportunity for Shake Shack.

So to sum up, our third quarter results were strong, and we feel bullish about the continued growth opportunities ahead.

We are committed to an expansion plan that will see us continuing to open Shacks that generate industry-leading AUVs, operating margins and strong cash-on-cash returns.

2018 will represent our biggest year-to-date in many ways, yet will also be a year in which we choose to invest, to ensure that growth can continue at scale for many years to come.

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

And we will continue to innovate, using technology, and evolve the digital future for Shake Shack brand and overall guest experience, wherever that guest may be.

So with that, I'll turn it back over to Randy to conclude our prepared remarks.

Thanks, Tara.

Shake Shack is a growing, loyal and connected community, and we are relentlessly focused on excellence, experience and hospitality.

To continue to deliver on this promise next year and beyond, we are committed to elevating our performance and accountability, more deeply understanding our guests, executing the basics with brilliance every day, building our business infrastructure and driving smart and profitable growth.

We believe we are in an incredibly strong position to continue to expand and grow, leveraging the strength of the Shake Shack brand to execute against a significant opportunity ahead.

With that, I want to thank you all for joining today's call.

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

(Operator Instructions) We will take our first question from Jake Bartlett with SunTrust Bank.

The first question was kind of a near-term one, in trying to understand what the same-store sales guidance for the year really implies for the fourth quarter.

I know sometimes there's weighting difference.

I would think that having Christmas Eve kind of move forward, it gives you a Saturday, and things like that could help.

But maybe to help us understand, it looks to me like the range could be anywhere between negative 2% or flat.

But if you can get us a little closer, that would be helpful.

Thanks, Jake.

I mean, as you saw, we more cautiously guided to negative 2% to 3% last quarter.

We brought that up now to 1.5% to 2%.

We're right around that 2% mark right now, at the end of the third quarter.

So we've tightened that range based on the trends that we've been seeing a little bit.

As you said, let's hope we get a little bit of benefit of a better timing of holidays this year that we know impacted us in a more negative this year, but we'll see.

So we are not going to break out the cadence of that just yet.

But again, the trends improved from the first half of the year.

And we've noted that the other thing we've seen clearly is a little bit better weather so far this fall in the Northeast.

So that's been part of that trend to change that guidance.

Great.

And then when you think about the drag to or the negative traffic that you're kind of building in for '18, it has been a little bit worse than what you're guiding to in '17.

Is some of that maybe less of a drag from cannibalization?

Or any way to kind of frame how much you think cannibalization has been hurting?

What's it going to look like in '18, given where that you know where those are going to open, or are they going to open in close proximity to comp stores?

Or any help on that front would be...

Well, a couple of ways to think about that, Jake.

First of all, we'll give you an appropriate full year guidance on our next call.

We just want to give you direction.

I think it's too early to say what next year looks like as we sit here in November.

The trends from this year on the negative traffic, we want to hope that we can turn that around.

But at this point, we're going to remain cautious.

And as we look at everything with a bigger class, our hope is that any potential cannibalization smooths out and continues to smooth out over time as the comp base gets bigger, we'll add 4 more Shacks this quarter, and in the year over 40, but it's still a small base and still very much impacting by regional swings.

So as we add those 32 to 35 more Shacks next year, our hope is that with each step up in each year with a larger class, we continue to have a little bit less volatility, but we'll give proper guidance on that coming up.

Great.

And then lastly, I don't think I heard you update what your expected AUVs are for the '17 class.

I think last we heard, it was 3.4.

Maybe if you could update that, if you haven't yet, and then maybe give us an idea of what you're expecting for 2018 openings.

Yes.

What we chose to do, Jake, I don't know if you got a chance to see it, but we added a lot of supplemental numbers this time.

I encourage you to look at that.

It's posted on our IR site.

And what we did there is we gave quite a bit more information than we've ever given, regionally on AUVs, and what we wanted to do instead of taking a moment-in-time, snapshot AUV, that is reflected in our average weekly sales that we noted in the script here.

If you look at it, we did a trailing 12 months in that supplemental pack.

I think that'll be more helpful to you as you look at it.

But look, as you've said, for many years, if we continue to add Shacks at all kinds of volumes, especially with our largest class of Shacks yet, both '17 and then hitting '18 again, we expect that AUV number to decline.

So I think that's the best way for you to look at it for the '17 class in that supplement.

We will go next to Andrew Charles with Cowen and Company.

I want to just follow-up on that last question as well, just on the first year sales volumes, and I appreciate the detail on the presentation, but those mostly look like they're existing Shacks that been opened for more than a period of a year.

So is it wrong to think that $3.4 million isn't the right number?

I mean, just the revenue guidance, it was, reached the high end of the range relative to the increase that you saw in the -- that you guys did in the unit growth as well as in the same-store sales?

Well, we haven't changed it.

But just to be clear, when you look at the supplement, it includes all Shacks.

So the 79 Shacks that are open at the end of Q3.

So those are in there for the short time period that they have.

So, yes, we haven't -- we just haven't updated you on that number for the '17.

So you should stay in that similar range.

Again, Andrew, we've got -- we just opened a few restaurants.

We've got between 3 to 5 to go.

So there's so much of the class here is going to happen in the fourth quarter.

So we'll update you when we can on how that -- how those early openings go.

We continue to be encouraged, though, by the new Shacks.

We look at -- we just opened in San Diego.

We've got Astor Place.

We've got Morningside Heights in New York.

And then we're -- and it's balanced out.

So you've got sort of Shacks across the spectrum of sales that have continued in '17.

But we obviously like the class, and we like the look of 2018.

Yes.

On the change in AWS, you guys have seen a little bit of a dip down there.

And so, is this the right level, this down 11.7 that we calculated, is that the right level to think about going forward just based on mix for next year?

Well, I think that level will continue to come down, right?

We've said that for a long time.

You look at that around the high 4s today, when you add those numbers in today.

But we absolutely expect that to come down.

And we'll give you a class mix as we look at '18.

We're continuing to -- looking at hitting along those long-term $3-ish million Shacks, and we'll update you better on that at the next guidance, when we look at next year.

Just my last question is, just -- Randy, how widespread is the delivery pilot?

And as you kind of think about expanding it, is one of the factors or one of the inhibiting factors, your digital order mix, I mean, can you talk more about where that trend -- I think when you first launched, it was around 3%.

I think you launched the Android platform.

Just curious what's that running at the end of the quarter?

Yes.

So we haven't gotten any of the exact numbers.

What we could say is, that Shack app mobile continues to grow as a percentage of sales.

We're encouraged by that.

And the delivery -- 2 major delivery pilots we did, with DoorDash and Caviar.

It was certainly not all of our Shacks.

Roughly about half the Shacks were impacted between the 2.

So as I said in my remarks, we -- it's very clear, people want Shake Shack delivered.

And we're working patiently to make sure we continue to test and learn and see who the best partner or partners may be, depending on the region.

That's part of what these tests have been all about.

We'll go next to Sharon Zackfia with William Blair.

I guess a few questions.

First, on labor.

It actually looked much better controlled in the September quarter, kind of a similar comp to the second quarter, but much less deleveraged.

So just curious if there's anything new you're doing there to help control some of the labor pressure that you're seeing?

And then looking at the regional information that you gave in the supplemental documents, I guess I'm just curious, like the Midwest operating profit looks really good.

Kind of what's going on in the Midwest?

Well, Sharon, you live there, first of all.

So that's -- so, some of our favorite Shacks there.

What's going on in the Midwest?

We've got a couple of things happening in there.

We've got very favorable supply chain in the Midwest, right, being in the center of the country.

We have some of our best costs of goods happening in those Shacks.

Those are Shacks that are continuing to grow, and it's specifically are some really good starts.

Some of our Chicago Shacks are strong, but we had a really good start in Detroit this year, and as we grow in Minnesota.

We're just -- it's been a good region for us.

So -- and then yes, so that's what's here, we've got -- AUVs are really high.

On your comp question, a couple of things.

The -- when the comp is better, it always looks better.

So that was at negative 1 6 this quarter, an improvement.

We look a little bit better.

We're getting better as we keep managing our Shacks better, and that's an ongoing process.

We're just going to continue to try to find little always here and there.

There's no major revolution.

But that said, next year, we've got massive minimum wage increases coming.

We've got different legislation coming, and we'll get back to you on guidance for that for next year, but we do expect labor to continue to increase next year and beyond.

So, I'm happy with the way the team's managing this quarter but not something we think is going to get any better in the near term.

I guess, Randy, when you talk about kind of optimal labor within the stores, and not just from a cost standpoint, but just in execution, is that coming in your organization more from the top down, or do you have kind of a more entrepreneurial bench, where the managers are getting together in regions and sharing information?

Yes, it's option B there.

We've got some incredible area directors, some regional directors of ops who -- they get together all the time.

Today, our team was in the office talking about this very question and how we're going to grapple with next year, how we're going to bonus our teams, how we're going to incentivize them, and not cut labor for the wrong reasons.

We're the kind of company, as you've seen, we like to drive sales.

But we've got very real labor pressures, so we're going to keep finding different ways to run our restaurants.

Ultimately, the learning we continue to have is at our lower-volume Shacks, right?

We run Shacks on, with a high AUV, in the $4 million range.

We know that we'll be running Shacks in the $3 million range as we open more and more, and getting those Shacks, which have a higher labor cost percentage, getting those to be more optimal than they are today is the projects that we're working on.

But again, we're always going to do that through the goal of driving sales first.

We'll go next to Alexander Mergard with JPMorgan.

The first one is on the Fair Workweek laws being enacted in New York at the end this month.

Can you talk about what you're doing to prepare in advance for this law?

And finally, perhaps any lessons or silver linings learned here that you could apply to the rest of your system?

Yes, okay.

Fair Workweek, we are at the whim of the city on this.

We don't know exactly all the rules.

As we understand it best, the city is, right now, with city council trying to write those rules and figure out exactly how that should work.

We generally understand that it's heavily penalizing for schedule changes within 2 weeks of the schedule.

So we've got a lot of work to do.

Look, we've always taken care of our team.

We post schedules.

We rarely make changes.

But these things are different.

This takes away a lot of the flexibility of a restaurant operator's opportunity to be more nimble with the payroll from time to time.

So we've got a lot to think about.

We are waiting on that.

We expect it next month, as the last communication we've heard, but that may or may not get pushed out.

So we'll see, and we'll all be waiting to see how this is going to be handled.

But it's significant.

With so many Shacks in New York, when this hits, it'll be a new cost for us and it'll be a new way we have to manage.

And we'll just keep sharing.

When we move to Seattle next year, there's a similar legislation that exists there.

And we'll grapple with that then.

Look, it's not going to stop us from going to high labor markets.

We like high labor markets, because they generally mean high sales.

That may impact our op profit, and we'll keep you posted on that.

But we've got a lot of work to do as operators to optimize this opportunity.

Got it.

No, appreciate the color.

And then the second question is on your Astor Place opening.

For that unit, or even units similar to that in the future, are you targeting a different store AUV or margin for these units that might differ from your traditional economic model?

It's too early to say.

AUV really depends on the location.

Obviously, we hope, with some of the stuff that we can improve some throughput.

Over time, you'll remember, we're starting people at $15 an hour.

So our hope and our plan is to get these AUVs and op profits in a similar range as they are today, while payroll increases go up dramatically.

So it is one of our strategies to offset.

But again, we got one Shack.

We have no real plan yet for a second Shack.

We're going to work at it.

It's way too early to really understand how it's working, just yet.

What I can tell you is, many times I've stood there myself and watched it happening and talked to guests as it happens, people really like it.

We're getting a lot of favorable feedback.

Operators like it.

It just allows our team to spend their time on hospitality instead of the technical stuff and working in the kitchen.

So it's working so far.

We'll keep you posted.

(Operator Instructions) We'll take our next question from John Glass with Morgan Stanley.

I also want to thank you for all the detail both in the presentation, Tara, as well as your outlook for '18.

I am, though, trying to make sense of it, just at a level, understanding you don't want to give guidance until next quarter.

But directionally, is this a year emergence or definitively going down, maybe degree of magnitude, at least for a cost like a G&A, which maybe is less dependent on sales and other things you can't necessarily predict.

Can you give us sort of order of magnitude of increase that you expect, given all the things that you're changing?

John, it's a bit too early to give you an order of magnitude.

And as we said, we will give you full guidance, obviously, in February.

At this point when it comes to G&A and when it comes to the system and operational support systems upgrades, I was talking about really just in the early stages of discovery and assessment.

I mean, as I mentioned in my prepared remarks, yes, you shouldn't assume G&A will go up next year.

It could go up quite significantly as we look to really scale these -- to make sure that they are adequately robust to take advantage of that growth opportunity.

We also, as I mentioned, we have the retreat for our managers and above, for our leaders, that we have once every 2 years, moving into our new office that Randy touched on.

And so generally speaking, across the board, it is a year of investments.

And then, a sort of normal course of business within the Shacks, we just touched on this as well as, at length, labor will continue to go up.

So I think, clearly, there will be margin pressures next year as a result of those things, for sure.

But we'll give you more color and as much color as we hope we can on February.

And then on the unit economics that you provided for new stores, that's sort of hypothetical, that is the same, I believe, is what you sort of talked about 2 or 3 years ago for IPO process.

And I would have thought just given the success and maybe more refinements, some of those numbers would've changed and maybe can just talk about -- and maybe this is repeating an old question asked earlier already.

But just -- is the class of '17 well above that range?

Is the class of '16 and '17 that we haven't been able to see in the comp base still well above that $2.8 million to $3.2 million range?

Yes.

John, great question.

Yes, they are, both in '16 and '17.

Obviously, we're incredibly proud that we have, over the last few years since the IPO, greatly outperformed these metrics.

So what we're trying to do on that slide is an illustrative look at how good the returns of this business are at those metrics at that $3 million Shack.

So clearly, when you look back, we've outperformed that in every nearly way.

And we've had some tremendous, both Year 1 and long-term, cash-on-cash returns and free cash flow.

So what we wanted to do here is say as we look at these, and, look, we will have a lot of $3 million Shacks.

We have many now.

As we open more and more on scale, we expect a lot more of them.

The point of that slide is to just say, "And they're a really good business."

I think, John, it's important to note, I mean, this slide is illustrative.

It helps us to continue to tell the story around those returns.

So as I said, this is a business started in New York with super-high AUVs and levels of profitability and therefore super-high cash on cash returns, and you can see that and this is only the 2016 fiscal result on the left-hand side.

And as we talk about accelerating unit openings, the impact of that has -- that impact are current year fiscal, both in terms of pre-opening and in terms of partial year of those Shack sales to which those full pre-opening costs relate.

However, when you look at these cash on cash returns, clearly, even if they drag on your current fiscal, it makes a ton of sense to do, because even in a projected new unit metric model of $2.8 million to $3 million, you're still talking about 34% illustrative cash on cash return.

So there's also a lot between the left-hand side and the right-hand side of this chart, between a 5 and 2.8 to 3.2.

And as Randy said, we've got every class here as we have a mixed bag of different AUVs.

It's not as if we're just suddenly going to only be adding a 2.8 or a 3.2.

There's a lot in between.

Last one, I promise.

Your domestic company-operated Shacks by region was very helpful as well.

Why wouldn't you -- I mean, your Midwest returns or cash out -- cash in the door is so much higher than most other regions outside of New York, you would think that, that would skew your development to that region, right?

Just as business (inaudible)

Yes, we're doing -- we're doing the work, John.

Well, I think the development can be balanced, right?

That's really good news.

But we -- last week, we opened another one in Troy, just outside of Detroit, we had a tremendous start earlier this year in Detroit, so we opened in Troy.

In that suburb, we're doing St.

Louis.

We're doing to do quite a few.

So it's a very small market today, only 7 Shacks in that Midwest market.

And we absolutely intend to grow it.

There are no further questions at this time.

I'd like to turn the conference back over to management for any additional or closing comments at this time.

Thanks.

I'll close.

Just want to say, I just got back last night, had a great opportunity to be with our team in the Middle East.

We had a trip with our international partners through Kuwait, Abu Dhabi and Dubai.

Saw about 20 Shake Shacks in the last week.

Just reminded how hard our teams work around the globe, how great that region is, even though it has struggled as a region, but we have a lot of confidence in our opportunity with our partners there and beyond.

I just wanted to note that how exciting and amazing it is to us, that in 2011, we opened our first international Shack in Dubai, where we had under 10 Shacks.

And today, we have 33, just in the Middle East alone.

So pretty exciting time.

I wanted to say thanks to our team abroad, and at home, and thanks to everyone for taking the time to be with us on the call.

We appreciate it.

Ladies and gentlemen, this does conclude today's conference.

We thank you for your participation.

You may now disconnect.