Shake Shack Inc (SHAK) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Shake Shack Fourth Quarter 2017 Earnings Call. (Operator Instructions) Please note that this conference is being recorded today, February 15, 2018.

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 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 fourth quarter 2017 earnings release, which can be found at investor.shakeshack.com in the Financial Info section.

Additionally, we have posted supplemental fourth quarter and fiscal year 2017 earnings materials, which can be found in the Events and Presentations 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, which 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 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 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 our CEO, Randy Garutti.

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

I'm pleased to report that we ended the year with robust fourth quarter momentum, opening 16 new Shacks and returning to positive comp, delivering stronger-than-expected sales and profit, capping off another year of exceptional results.

We delivered full year revenue growth of 34%, beyond our initial and updated guidance, and adjusted EBITDA growth of 29%, driven by the execution of our digital, menu innovation and development strategies. I'm incredibly proud of our teams across the world who made that happen.

As of today, there are 162 Shake Shacks worldwide across 12 countries and 20 U.S. states, plus Washington, D.C.

During our call today, we'll give you an update on our fourth quarter 2017, including some of our key strategic growth initiatives. We'll lay out how we intend to continue to invest in and grow our business through 2018. Additionally, today, we'll share some specifics around our targets for the company longer-term through 2020.

Shake Shack is a growing loyal and connected community. We are relentlessly focused on excellence, experience and hospitality, and we're excited to share our strategic growth plans with you today.

Let me update you on how we wrapped up 2017. On the domestic development front, we opened our 100th Shack in the United States, with 90 company-owned Shacks and 10 domestic licensed by the end of the year. Our opening and training teams worked really hard in the fourth quarter, executing a record number of openings, with 11 new company-operated Shacks, 5 of which opened in the month of December, resulting in 26 new Shacks for fiscal '17 and over 41% unit growth over the prior year.

During the year, we expanded our footprint, both in key existing regions such as New York City, the Mid-Atlantic, Midwest and Texas, among others. As well, we entered a number of key new markets, including Michigan, San Diego, St. Louis and more. 2017 was our biggest year yet for our licensing business with 19 net new Shacks, including 16 internationally across Japan, Korea, the Middle East and the U.K., as well as 3 domestic, at the LAX Airport, Minute Maid Park in Houston, the M&T Bank Stadium in Baltimore. We also entered into new licensing agreement to Shake Shack into Hong Kong, Macau and Shanghai, with nearly 40 Shacks planned over the next decade for this combined region. We're extremely pleased with our performance in Asia so far and we believe there remains significant growth ahead in this region. None of this will be possible without the strength and hard work of our leaders and our teams across the world, underpinned by the foundation of our culture of enlightened hospitality.

We'll talk more about this later on the call. But you can count on us to continue to make significant investments in our people going forward.

With that, I want to turn it over to Tara, who will take you through the details of our '17 results, our '18 guidance, and then I'll come back to give you context around those '18 numbers and our longer-term targets.

Thanks, Randy.

So as you've just heard, we're extremely pleased with our strong finish to 2017. Total revenue for the fourth quarter 2017, which includes sales from both company-operated Shacks as well as licensing revenue, increased 31% to $96.1 million. Sales from our company-operated Shacks also increased 31% to $93.1 million, largely due to addition of 26 new domestic company-operated Shacks since the fourth quarter of 2016.

Licensing revenue increased 28% to $3 million driven by a net increase of 19 Shacks since the same quarter last year, under strong performance of our newer Shacks in South Korea.

For the full year 2017, total revenue increased 34% to $358.8 million. In November, we raised our total revenue guidance for the year, and we're pleased to have exceeded that, primarily driven by the strength of our most recent opening. We opened 11 Shacks in the fourth quarter and are encouraged by their early performance out of the gate. We also delivered a return to positive same-Shack sales, which increased 0.8% during the fourth quarter, consisting of a 2.3% increase in price and mix, partially offset by 1.5% decrease in traffic. This lapped the $0.015 increase in the same quarter in the prior year.

Our comparable Shack base in the fourth quarter included only 43 or roughly half the total number of company-operated Shacks in the system, a majority of which are located in the Northeast region, including New York City.

As a result, our same-Shack sales continued to be influenced by changes from a small number of Shacks. This will lessen over time as we increase both the number and location of Shacks in the base.

In the meantime, however, this metric will continue to show a degree of volatility. In this case, the fourth quarter results benefited from warmer-than-usual weather in the Northeast in October and the strength of the delivery pilots in many of our Shacks.

As we talk about delivery, you may remember, we're taking a long-term perspective to this opportunity and being deliberate and patient about our market tests. We were encouraged by the learnings from each of the pilots, and we do believe we saw some uplift in sales as a result.

Average weekly sales for domestic company-operated Shacks were $85,000 for the fourth quarter 2017 and the average unit volume for all domestic company-operated Shacks was $4.6 million for the full year 2017.

Shack-level operating profit, a non-GAAP measure, grew 30% in the fourth quarter to $23.5 million and Shack-level operating margins were 25.2%. For fiscal 2017, Shack-level operating profit grew 26% to $92.3 million with Shack-level operating margins of 26.6%. Both the fourth quarter and the full year saw operating profits in absolute terms deliver significant growth, while as expected, margins as a percentage of sales declined. The primary reasons for this percentage margin decline are: Labor, which remains a headwind as a result of minimum wage increases and other regulatory factors such a the Fair Work Week in New York. In addition, and as Randy noted, we plan to continue to invest in our teams with confidence as we view our team as the foundation of our success.

Other operating expenses deleveraged, driven mainly by certain fixed expenses and increasing facility cost as our Shacks mature. And most significantly, the introduction of a broader range of unit volume Shacks into the system.

This company started in New York City with industry-leading average unit volumes and operating margins. As we open more Shacks at lower AUVs and generally lower operating margins across the country, we will see these percentage-based metrics continue to come down, at the same time delivering extremely healthy returns and significant absolute dollar growth on both the top and bottom line.

G&A increased during the fourth quarter, primarily due to increased headcounts at our home office to support our ongoing growth; technology development costs related to our digital products; first-phase costs associated with our planned systems upgrades, which we'll talk about in a minute; and noncash deferred rents from our new home office.

Adjusted EBITDA in the fourth quarter grew 31% from the same quarter in the prior year to $14.9 million, and adjusted EBITDA margin was 15.5%. For the full year, adjusted EBITDA increased 29% to $64.7 million, with an adjusted EBITDA margin of 18%.

In the fourth quarter, on an adjusted pro forma basis, we owned $3.9 million or $0.10 per fully exchanged and diluted share compared to $3.3 million or $0.09 in the same quarter last year. On an adjusted pro forma basis for the full year, our net income increased 25% to $21 million or $0.57 per fully exchanged and diluted share compared to $16.8 million or $0.46 from the prior year.

Included within these full year pro forma results is a $600,000 tax benefit or $0.02 per fully exchanged and diluted share due, to the stock-based compensation accounting standards we adopted at the beginning of 2017. This changed the way we account for excess tax benefits associated with stock-based compensation and can result in volatility on the tax line.

Moving on to 2018, which represents another exciting year for Shake Shack, and in many ways, a pivotal one, as we expand at a greater scale than ever before and strengthen our foundation for many more years of growth ahead.

Our guidance for the fiscal 2018 is as follows:

Total revenue of $444 million to $448 million, an increase of approximately 24% to 25% over 2017. Within this total revenue, we expect $12 million to $13 million of licensing revenue. It's important to note that compared to 2017, this particular revenue line is impacted by $500,000 of nonrecurring revenue in 2017 related to the launch of the Shake Shack cookbook; many of our Korean Shacks exiting their honeymoon periods during 2018; and the implementation of the new revenue recognition standard, specifically as it relates to the timing of recognizing upfront territory fees and Shack opening fees which will now generally be recognized over longer periods of time. We will include a like-for-like comparison in our 2018 financial reporting throughout the year.

For fiscal 2018, we expect to open between 32 and 35 new domestic company-operated Shacks, representing a unit growth rate of between 36% and 39%.

It's important to understand that our 2018 development schedule is heavily weighted to the second half of the year, with approximately 70% of our planned openings scheduled for the third and fourth quarters. We're opening more Shacks than we have in previous years, but the sales and profit impact of those openings will not be fully felt until 2019. However, the full impact of the associated preopening costs will hit in 2018, affecting our overall financials for the fiscal year.

16 to 18 net new licensed Shacks, with our international growth focused on Japan, South Korea and our upcoming entry to Hong Kong and Macau in 2018 and Shanghai in 2019.

At the end of the 2018 fiscal year, we expect the average unit volume for all company-operated Shacks to be between $4.1 million and $4.2 million.

At this time and following my earlier comments around the volatility of this metric, we're guiding to flat 2018 same-Shack sales. Inherent within this assumption is a 1.5% to 2% price increase taken in mid December 2017, offset by traffic headwinds.

Shack-level operating profit margin of between 24.5% and 25.5% impacted by 3 major factors:

Flat COGS expectations with slight deleveraging possible depending upon recent market volatility.

Labor continuing to deleverage, as it will for the foreseeable future given the increase in lower-volume Shacks entering the base, minimum wage increases, regulatory pressures and investments in our team. We experienced 120 basis point deleverage in 2017, and we would expect 2018 deleverage to be at a similar level.

Other operating expenses to show slight deleverage based on certain fixed expenses on a broader range of sales volumes, as well as continued increasing facility costs as our Shack base matures.

We expect preopening costs to be between $12 million and $13 million.

Opening in new markets generally carries higher preopening costs than existing markets, particularly in the area of marketing and training. As we move further along in our journey to 450 Shacks, this is an area of spend where we'll start to target increased efficiency, particularly as it relates to existing markets. Until that time, however, our strategy is to create maximum levels of awareness and excitement around Shake Shack coming to a market and for our teams to execute as flawlessly as possible. There's a reason our Shacks hit such high sales levels and guest satisfaction out of the gate, and we'll continue to spend here for those strong results.

On the last call, we talked briefly about the need to ensure our infrastructure and support systems are sufficiently robust and scalable to deliver upon our growth opportunity. Notably, we update our certain core financial and operational systems, which we now refer to as Project Concrete.

The scope of these upgrades for 2018 will include, but may not be limited to, our general ledger and end-to-end supply chain management. We're at an early stage in the process, and we plan to make our selection early in the second quarter.

As you would expect, there's a broad array of solutions and capabilities in the market, and as such, our exact spend has not been finalized.

At this time, we estimate the 2018 investments of $4 million to $6 million, depending upon the ultimate selection, breadth and timing of implementation work. We would expect a significant portion of this to be onetime in nature, albeit there will be some increase in our recurring costs as a result of a higher caliber platform.

We'll identify Project Concrete spend as a discrete item during 2018, and we will continue to update you on timing and costs as the project gets underway.

We expect our core G&A expense to be between $49 million and $51 million, which will gradually ramp up throughout the year in line with our growth.

Our 2018 G&A spend includes investments across our key strategic growth initiatives to support our 3-year and long-term growth targets. Specifically, investments in our digital innovation, technology and marketing initiatives as we pursue increasing growth from our digital channels; investments in our people from the new home office and training center to our biannual leadership retreat; and investments across multiple other areas of the business to support our growing footprint. All of our G&A investments is targeted in 1 of 2 areas, future revenue growth and future cost leverage.

At this early stage in our journey, we believe it's critical to continue to deploy capital in those areas which will deliver the most significant long-term benefits to the business, and to ensure we fully capture the significant value opportunity that lies ahead.

We expect depreciation in 2018 of approximately $32 million, interest expense of between $2 million and $2.2 million, and we expect to continue to experience some volatility in our tax rate as a result of the accounting treatment to stock-based comp. And as such, our tax rate guidance excludes any potential future tax effects of the standard. We expect our annual adjusted pro forma effective tax rate for 2018 to be between 26% and 27%, a reduction from 40% in 2017.

Staying on the subject of tax reform for a moment. There are 2 components that we believe will have the most significant impact to our business. Firstly, the federal statutory rate reduction, which is a tailwind for our cash flow; and secondly, although we expect to benefit from the full extent and provisions of the bill as it relates to furniture, fixtures and equipment, the new legislation that's currently drafted extends the timing of tax deductions for certain other classes of assets such as leasehold improvement.

Over the next few years, we'll be spending more on leasehold improvements to build new Shacks than ever before. These new assets can be considered to have a 39-year life, and therefore, not eligible for accelerated or full expensing. Meanwhile, these same assets had previously been eligible for accelerated depreciation under the former tax statute.

Taken together, the impact of the rate reduction and changes in timing of tax deductions is expected to result in a modest cash tax benefit over the next couple of years.

We have another incredible year ahead of us. We're confident in our plans, and we're in a strong position to move forward. We have a robust balance sheet, no debt, and we plan to fund our ongoing strategic initiatives, development and investments in the business entirely with internally generated funds, with no need for external financing.

And with that, I'll pass you back to Randy, who will take you through our broader strategic growth plans that accompany these numbers for both 2018 and beyond.

Thanks, Tara.

We're a 1.5 month into 2018 and looking forward to another great year for Shake Shack where we'll be continuing to build upon and execute our strategic growth plans, as well as lay an even stronger foundation to deliver the significant longer-term opportunity we have in our sites. With our biggest class of planned Shacks yet, we expect to end 2018 with 122 to 125 domestic company-operated Shacks and 85 to 87 licensed Shacks. This compares to just 31 and 32, respectively, when we went public 3 years ago.

Longer term, we continue to target 450 domestic company-operated Shacks. At only 20% of that goal today, we are still very early in that journey and have a significant amount of growth ahead of us.

I want to take this opportunity now to share some color around our pace of growth, specifically by the end of 2020. We intend to have more than doubled our current Shack base to at least 200 domestic company-operated Shacks and at least 120 global licensed Shacks. We want to nearly double our total revenue to over $700 million, representing a 25% 3-year CAGR. This is an ambitious and exciting time for Shake Shack with growth plan well beyond levels we imagined possible just a few short years ago. We are both committed and confident in our ability to deliver both those 3-year targets and our longer term growth opportunity.

There are 4 key strategies we'll be executing in order to achieve these plans. First, we want to capitalize on the healthy development pipeline we have, both domestically and across the rest of the world. Second, we're relentlessly focused on our continued digital innovation, better connecting with our guests and making it easier than ever for them to experience Shake Shack on their terms whenever and however they wish. Third, we continue to deliver ongoing menu innovation, focusing on our core as well as category expansion. And finally, ensure a foundational infrastructure. Both our people, our systems are robust and scalable to support the growth that lies ahead. We'll do this all in service of continuing to build and improve the great community gathering experience for our Shack fans who built this brand over the last 14 years. And yes, with some tailwind from tax reform, over the longer term, we have the opportunity to really accelerate our efforts in the coming years, and we intend to.

First, let's talk about our Shacks and our strong pipeline of 32 to 35 Shacks for this year. Our development strategy remains a balance between deeper penetration of existing markets, complemented by about 20% to 25% of Shacks planned as new market launches. Our diversified multiformat approach will continue with roughly 1/3 urban locations, 1/3 freestanding pad sites and the remainder in premier shopping and lifestyle centers. Every year, we gain more confidence in the strength and ability of the Shake Shack brand to travel further and faster, and with that in mind, we've got some important markets planned this year: Seattle, San Francisco, Denver and Charlotte to name just a few.

Internationally, we have another busy year planned, continued growth in our more established markets in the Middle East and the U.K. and significant development in Asia. We're optimistic about our future growth opportunities here as we continue to expand our footprint in Japan and South Korea. And now, later this year, also Hong Kong and Shanghai in 2019. The power of the Shake Shack brand increases with every market we enter. We're confident in our international expansion opportunity in both existing and new markets remain significant for many years to come.

With all this global growth, we'll continue to see some of the most dynamic and experiential Shacks we've ever built, delivering more community gathering places and more reasons for our guests to visit us again or for the first time.

Moving on to our second strategic pillar, continuing to evolve and innovate our digital products and capabilities. 2017 was a year of learning and building a foundation for our digital channels. We launched our IOS app in January 2017, followed by the Android version in July, and we're continually encouraged by the positive trend throughout our first year in both number of downloads and mobile sales as a percentage of overall sales.

In addition, we remain pleased with the level of repeat guests and the higher average check via the app than traditional in-Shack tickets. The app will remain an increasingly important channel for us, delivering a frictionless user experience and convenience for our guests as well as enabling more personalized and targeted marketing strategies in the future.

In 2018, we're expanding our digital initiatives across the company, investing in people, systems and tools and building on those digital capabilities we laid the foundations for this year.

Moving ahead, you'll see us continue to add functionality to our online experience with desktop and web ordering on the way. We're going to build data management and analytics capabilities to deliver enhanced customer insights, critical to our ongoing digital product road map and our other strategic growth initiatives and to deliver increasingly personalized marketing, allowing us to connect with our existing and potential guests, and to increasingly focus on rewarding our best customers and incentivizing more frequent visits.

In addition to launching and learning through the app, we entered into a number of integrated pilots with key delivery service partners through 2017. In the last 4 months of the year, we conducted pilots with Postmates, DoorDash and Caviar as we further explore guest demand for our food to be delivered. And right now, we're currently testing new delivery packaging at the Shacks, and we'll continue to gather and learn from our guest feedback around this and our other delivery initiatives.

So far in '18, we've continued to explore this new channel for our industry with a multi-partner integrated pilot in January. And for now, we're going to continue to test and learn. We also made sure that if or when the time comes, for us to enter into a formal partnership, that we do so having fully evaluated the criteria important to us and to the guest experience. Included within our criteria is, of course, an acceptable, sustainable economic model in order to build a strong and healthy business for the long term.

Also in the fourth quarter in 2017, we introduced self-serve kiosks for in-Shack ordering in a couple of our New York City locations. Our newest New York Shack at Astor Place in Manhattan opened in October with no cashiers. We built the Shack with 8 kiosks with the user experience similar to the app, resulting in a highly visual, engaging ordering process for our guests.

We're in the early days for kiosks, and we're certainly in a period of testing and learning, but we do believe they represent a potential opportunity for enhanced guest experience as well as an important tool to mitigate increasing labor costs.

Longer term, we're targeting opportunities to redeploy those cost savings to sales-driving initiatives. In the meantime, we're planning a few more kiosk test Shacks in the first half of this year, and we'll update you on our plans and learnings here as we go through the year.

All these digital initiatives are just the beginning for us as we continue to transition to a company that captures our guests' human need to gather in our Shacks, while embracing the opportunity to transition towards a digitally connected hospitality that grows our business wherever and whenever our guests want to have their Shack.

Thirdly, we're as committed as ever to continue innovation across our menu. In 2017, we brought delicious new items, such as the Hot Chick'n, our summer barbecue menu, featured shakes and other items on and off the menu through LTOs and chef collaborations. We recently completed our limited time run on our Texas-style chili, the multi-category approach for hotdogs, fries and burgers. And last month, we rolled out the Griddled Chick’n Club, an all-natural chicken breast, topped with niman ranch smoked bacon, lettuce, tomato and buttermilk herb mayo. We're excited to see how this option potentially expands the chicken category, alongside our already successful fried ChickenShack. It's available across all our domestic company-operated Shacks today, and we'd love to hear what you think once you've tried it.

We'll continue to focus on menu and initiatives that drive excitement, frequency of visits and guest satisfaction, all while staying operationally effective in our Shacks. With our new test kitchen opening this summer at our new home office, we'll have more ability to drive innovation across our menu for years to come.

And finally, it's time to strengthen our infrastructure, our core system and our teams. With 2020 and beyond in our sights, we're at a stage in our growth where some of our existing operational and financial systems in both the home office and our Shacks will benefit from upgrades to support our ongoing expansion plans. We're excited and committed to make this important step effectively and efficiently to scale towards that 3-year 200 Shack goal and beyond.

Our people are and always will be our most important asset, and that's why we're going to continue to invest in hiring, training and developing the best people to execute our growth plans and to provide them with future development opportunity. We are also pleased to be able to expand our employee benefits of this year in '18 in a number of key areas as well as the full rollout of the Shake Shack [Hug Fund], which provides financial assistance to employees who are impacted by unexpected hardship.

We are leaders training future leaders and have so many examples of team members today who have developed into managers, general managers, even area directors. These amazing individuals lead our operation every day and are the heart and soul of our company.

An important and valued part of being a leader at Shake Shack is the opportunity to attend our biannual leadership retreat, a truly special, fantastic event, one that's incredibly important for building on the strength and unity of the Shake Shack culture. And this year, we'll hold our retreat in May and have over 700 of our Shack leaders from around the world come together to celebrate with and learn from each other.

It's also time for us to move to a new Shack home office, not far from our current office here in New York, as well as the much needed space for our growing central team. We're really excited to have finally a dedicated testing center for menu innovation, kitchen design and leadership development. And as a bonus, in the ground floor, we'll be opening a Shack adding to our New York City base. All in all, 2018 is going to be a busy year.

We're ambitious. We're committed. We're going to execute the key strategic initiatives I've described. And we know there is significant growth ahead. We are building this company for a long and bright future, and we'll make the necessary investments along the way to ensure we fully capture that opportunity.

This is what you should expect from us as we run hard towards our 3-year target of at least 200 Shacks and over $700 million in total revenue.

Finally, I just want to thank the nearly 5,000 team members who worked so hard to deliver such strong results in '17. We're going to continue to hire and develop world-class leaders for what we believe is a world-class company, with an exceptional opportunity ahead. This is going to be a fun year at Shake Shack. And with that, I want to thank you all for joining the call. And operator, you may go ahead and open the line for questions.

(Operator Instructions) And we'll take our first question today from Jake Bartlett with SunTrust Robinson Humphrey.

This is Kevin Robinson on for Jake Bartlett. Our first question is, do you expect for Project Concrete costs to continue in 2019? And the second question is, why do you expect flat same-store sales? Is it because of a weak start to the year or is it just being conservative?

Kevin, this is Tara. So at the moment, the $4 million to $6 million that we mentioned in our outlook for 2018, we are hoping to spend in 2018. But as I mentioned, we're in really early days of this process and it wouldn't be surprising if some of those costs given it comes to phase implementation, do end up slipping into '19. But at the moment, we're at a stage in the process that we just don't have that level of visibility right now. We just gave you sort of the whole picture.

And look, as we go to doubling the size of the company in the next 3 years, you're going to -- you can expect continued investment from us. The largest chunk of that will be this year. We'll keep you posted throughout the year each quarter how that's tracking and what it looks like for '19. As it pertains to the comp, we were really, really happy with the return to positive comp that we saw in the fourth quarter, really ended the year with a lot of strength. We're happy about that. We're not going to get into talking about first quarter on this call. We'll come back to you in the next call with that. But look, we're remaining cautious. It's been a volatile time for us. We've got our largest class of restaurants coming yet. And as the industry continues to evolve, we're going to remain cautious in our outlook. And for us, that looks like flat guidance at this time. And we're putting a lot of strategies in place to do our best to beat that, but that's the expectation we want to share right now.

And as a reminder, we mentioned this in our prepared remarks. I mean, only around half of our Shacks are actually in that metric. The system -- and it's important to remember that and they're still fairly heavily New York and Northeast dominated.

We'll take our next question from John Glass with Morgan Stanley.

Randy, on your 2020 guidance, if you will, what's the assumed underlying AUV of domestic Shacks at that point and when you look in your model. If you did the simple math, it'd be like $3.5 million and I'm including licensing revenues, maybe below that. How do you think about AUVs over that longer time period?

Yes, John, you're in the range, right, if you look at it. What we wanted to do on this call was break out the difference of trying to get class AUV and more of what the full AUV looks like, right? Today, that sits around mid- to high 4s. That'll come down to low 4s later. If we're sitting here a year from now, that's our expectation. And then that'll continue to come down slightly as we add those low 3s. As you look at the 110 Shacks that we expect, we expect them to be in that long-term average we talked about for a long time in that low 3s average. And that just about gets you to the $700 million mark. And again, there's a lot between here and there that'll get us there. There's a lot of factors. But generally, those are the Shacks we're targeting.

I will say as we look at each class, each one is different, right? We obviously outperformed that in the past few years in '17, significantly outperforming with some strong Shacks and some strong starts. And then this year coming up, we've got San Francisco, Seattle, Charlotte, Denver. We've got some good cities coming up, some great cities that we're excited about. But as you know, we think that average starts to look in the low 3s as the classes move forward towards that larger goal.

That's helpful. And Tara, can you just clarify on the G&A spend, is Project Concrete, is that just the term for the systems upgrade that you're doing and the other investment that you're putting into G&A? That's already be included in the $49 million to $51 million? Is that how you think about it?

Correct. Yes, that is exactly right, John. Project Concrete is just the name we've given it internally so we can sort of ringfence that spend and track it. And as I mentioned, we do expect a decent chunk of that to be onetime in nature. And then the $49 million to $51 million that we guided to on our core G&A includes investment across the board. As we mentioned, our people and our (inaudible) renovation, and our new office and so on and so forth.

And do you think you can leverage G&A in '19 and beyond, excluding those onetime costs? In other words, is that a run rate that you think will grow slower than revenue in out-years?

Yes. I think we do intend. I think as you look at the long-term margin opportunities for Shake Shack, G&A without question is something we intend to lever. We just don't want to do it at the expense of growth opportunities. I don't think there's a lot of companies in our space that intend to double who they are between now and the next 3 years. And it takes investment to do that, and we're not going to miss that opportunity.

We are all about growth. We are all about driving sales and revenue, and we're going to spend what it takes. So while we're very focused on long-term G&A leverage, we don't expect it this year and we'll keep you updated in '19. We're not going to name what that might be in '19, but it's important for us to make these investments right now.

(Operator Instructions) Next, we'll go to John Ivankoe with JPMorgan.

Just a clarification. The $49 million to $51 million of core G&A, does that include or not include the $4 million to $6 million from Project Concrete?

It does not include, John.

Okay, all right. That's what I thought.

And as I mentioned -- sorry, all I was going to say was as I mentioned, that we do expect a significant piece of that $4 million to $6 million to be nonrecurring.

Yes, loud and clear. I just -- what I thought and then I thought I heard something else and I just wanted to clarify it for, I guess, my benefit as much as anything.

And then secondly, when we look at the number of units that you've talked about in 2020 and the fact that 70% of your units this year are going to be back-end weighted. Do you think we're starting to hit kind of a -- at least a near-term maximum in terms of the number of Shake Shacks that should be developed? I know this year has 32 to 35 and maybe over the next couple of years, you're kind of implying something like 35 to 40. I mean, is it kind of at the level where from an HR and a site and just an overall control perspective that you're beginning to be comfortable with the number of units as opposed to being kind of taking it up on an annual basis which is the way you have been?

Well, John, I'll say this, I don't think there's been a year where I haven't been surprised with our own capabilities and where we can go, right? If you look back very short time ago, we had 30 restaurants, right? We've tripled that in the 3 years since our IPO. And with each year and each successive achievement, we get more and more confident in our ability to go a little bit further and a little bit faster. Again, we restated what we believe is an appropriate target, which puts you around 35-, mid-30 Shacks per year for the next 3 years. I think what we want to do is get through this year and we want to level that off and see how we feel and make sure the real estate opportunities continue to be as great as we believe them to be for the next few years and we'll say what we always said. If we get comfortable with that and we think there's opportunity to ramp that further, we will. But we want to make sure that we can execute on that. That said, we never put a lid or a limit on any opportunity we have for the future, especially the size of the class.

Understood. And that's certainly 1 place where you have consistently beaten and surprised throughout the years.

And then just a couple of small clarifications. You actually did make some progress already in preopening on a per unit basis. I mean, when we look out the next couple of years, what you think the right preopening per unit is for units like Shake Shack? I mean, how are you guys beginning to benchmark that?

Yes. We have and we will continue to. Each time we open, look, when we go into a new market like a couple of years ago in L.A. or this year, San Diego, as we look at some of them that we will spend a significant amount on this year, whenever we're in a new market, we spend a lot of money. I'm fairly confident to say the sales that we capture out of the gate out of Shake Shack selling $5 hamburgers rival anyone's ability to execute out of the gate. That costs money to do so, both with marketing, with team and with intense training.

So long term, this is absolutely a target for us to lever, and we intend to. We're in the mid -- not counting deferred rent a noncash item, okay, we're in the -- you've got to add back because it's significant. But when you count that, we're sort of in this $250,000, a little bit less and per Shack, and it'll start the -- sometimes it's more or sometimes less. But over time, we think that number each year will tick that down a little bit at a time. And even this year, we're going to be testing some shorter opening durations. We usually have a 7- to 9-day training period. As we get in markets where we have 5, 6, 10 Shacks in a market, we can take that down a little bit. So it's absolutely a target for us and something, I think, you'll see us lever over the long term.

That's great. And Tara, just 1 final question for you, and it's a little bit of an education question from my perspective. You mentioned some changes in taxes that you would have to depreciate your leasehold improvement over 39.5 years. Is that the case even if you're lease isn't that long? I mean, I think you probably have basically 0 leases that would go out that far. And are we talking about the difference, in this case, of tax depreciation versus GAAP depreciation? I would assume that GAAP depreciation is still very much aligned in terms of what your lease life is.

Yes, you've got it exactly right. And we believe it to be today, John. I mean, we're still working through this as many people are. But yes, it's really our leasehold improvement -- leasehold improvements that we're focused on here, which is obviously a significant part of our CapEx and which did qualify under these accelerated expensing rules previously and now just the wave of noise written revert to a 39-year life. But you're absolutely right, we're talking about tax depreciation here, not GAAP.

And we'll take our next question from Joshua Long with Piper Jaffray.

I wanted to circle back to what you've learned or seen with the guest engagement on the kiosk side. You mentioned that, that would be something you would be -- maybe leaning into here in 2018 with a couple more units. So just curious on the early reads of what you learned that works, doesn't work or maybe how you're thinking about taking new sites for use of the kiosk going forward to the extent that you'd be willing to share that.

Yes. We're, Josh, we're encouraged by what we're seeing. I'll say that. We pushed everything pretty far with Astor Place, right? We had no cash at all; no cashiers, only kiosks. We really wanted to push that learning to see where it shook out.

What we're going to try in this next phase and we're all about learning here and we'll probably do a handful of Shacks in the coming 2 quarters to test further. What we're going to do there is more of a hybrid approach, where we want to try mostly kiosk with a little bit of cashier. We want to see how people react, what they choose to use, see the impact in cost of accepting dealing with cash versus 100% credit card. So that is still early learning. A couple of things. The feedback's been really good. We're still learning what the check average might be, but what we love about it is over the long term, it's a huge opportunity for us to connect with our guests for us to recognize our guests with hospitality. Over time, to connect it to our app. So we know when Josh shows up for the eighth time at a kiosk at a Shack. These are the long-term strategic goals. And lastly and potentially most importantly, I think there's a lot of important(s), but the biggest one is we've got labor headwinds. We continue to name that for everyone, and we do believe that this will help us redistribute our labor into sales driving initiatives and save labor over the long term. And that's what we're still trying to learn. So it's going to open up a whole lot of fun opportunities for us, but lots of learning to be had.

Having seen it, I certainly see the picture that you're building there. Curious in just how you think about this as really a tool more so for those higher labor cost markets like your Northeast core base and then we think about kind of using the Shack app to bring some of that convenience and technology to maybe some of the more suburban or lower cost labor markets. Does that -- for the time being, is that how we should think about it and seeing most of those kiosks still kind of in that core Northeast market?

Not entirely. I think our belief is that it's a core part of the very many pieces of our digital innovation strategy, and this is just one of them. Some Shacks may make more sense for, but it's not just about labor. It's really about a guest experience and the opportunity for all the other connection on digital infrastructure. So we'll see. And again, early, we had 1.5 Shacks rolled out with it. So we're going to keep going.

And we'll take our next question from Andrew Charles with Cowen.

A quick housekeeping. How much of the $4 million to $6 million in the Project Concrete costs do you guys plan on adjusting out given the onetime nature?

Andrew, it's honestly too early to say. Any piece of it that is onetime, we will obviously be adjusting for as nonrecurring. But right now, like I said, we're super early days. We're talking to a whole bunch of different potential solution providers. And as you know, there are many different models with systems these days. There's many different ways to try and implement. But either way, within that number, a decent chunk of it will be onetime and anything -- it's classified as onetime, we'll be identifying and carving out adjusted EBITDAs as nonrecurring. And you obviously see that clearly in our reconciliations.

Just to be clear, the truly onetime items will be adjusted out, but things that might be more recurring will be included in the reported G&A?

Correct.

Okay. Moving on, just -- you obviously spoke very favorably and encouraged by the delivery pilots. You guys are progressing obviously with new packaging to obviously accommodate these. So it's truly starting to ramp. I just want to learn a little bit more about what you'd like to see before you really take the pilots and really start to run with them a little bit more. Is it at penetration? Is it finding the right partner? Just, how are you guys thinking about it and what are you looking for before you had -- more materially roll out delivery?

Well, this has been a process of understanding a number of things, starting with our guests' need and desire. So what have we learned? Turns out people really want our food delivered, so that's great. It's our #1 focus is a great guest experience. That has a million pieces to it, most of which is about time, right? Some of which is about packaging. Some of it is about heat retention. A lot of it, then, is about our partner choices, and that differs in strength regionally. It differs in strength by partner. And we've got to have great tech integration within that to make sure that it's a seamless experience for the guest, for the courier and for whoever we choose to partner with.

So bottom line for us is we are a coveted delivery partner for delivery companies. We drive traffic. We help engagement, and we like it. So we want to make sure all the things that happen for us that can ultimately drive sales are there for the long term before we go forward with any official partnerships.

In the meantime, we're going to keep testing, keep tweaking a little bit and make sure we can meet the demand that's out there in a really great way.

Got it. And my last question is you talked about similar deleverage in 2018 on labor margin line. How much of that would you say is due to the New York Fair Workweek Act?

We haven't broken it out. It's really hard to say. Fair Workweek rate is significant, but it is early. We've only been dealing with it for less than 3 months. So the biggest pieces of that number are about minimum wage increases, which are happening in the majority of markets by which we operate. And it's about the various levels of Shacks. As we've always said when we bring in the $3 million Shack AUV, that carries a higher labor percentage of sales and that equals pressure on the percentage line. And that's a dynamic of Shake Shack that we talked about for years that we expect to continue.

We'll take our next question from Jeffrey Bernstein with Barclays.

A couple of questions. One, just following up on the labor. I think you said in '18, it'll be similar to '17, so down or deleverage 120 basis points or so. I'm just wondering, what are you modeling in terms of the expected inflation in total as a percent? And then I'm just wondering, qualitatively, how much do you think of that is due to regulation that you're forced to comply with versus your own discretion in terms of just keeping ahead of the competition?

Yes. I think we were looking at about mid-single digits inflation, if you look at it that way across the Shacks, nearly all of which is minimum wage increases, so mandated increases. We have -- look at where our company is: New York, New York area, Boston, Connecticut, Mid-Atlantic, California, Chicago. Pretty much named the vast majority of our company. All of those places have increases in minimum wage, this year, next year. And we'll be opening in Seattle, San Francisco and other high minimum-wage states. We love that. We think we do the best sales in places like that. That's where we're going to keep going. It's not an issue for us, it's just -- it is an impact. So all of that combined, we additionally continue to pay more to our managers, right, to our shift managers, make a higher hourly wage than minimums, of course, and to our managers. All of that impacts the labor line, which is part of why we're guiding the way we're guiding. And again, this is where we're going to invest in our team where we're excited to invest and make sure we have great people and even great Shacks. We're building sales and the kind of amazing numbers that we continue to build. We -- even with that, we're delivering really strong (inaudible) profits across the company.

Got it. And as you think about the tax rate benefit, Tara, I'm just wondering how you think about flowing through the significantly lower tax to EPS in '18 or how you balance it, I guess, with maybe reinvesting in labor. I know you talk about the how people are the most important asset. I'm just wondering how you balance those 2 things and how we should expect you to spend some of that tax savings whether some of it does go back into the labor line?

Okay. Yes. So I mean, as I said, we obviously do have the benefit from the rate change, but we've also got a couple of fairly major moving parts with this accelerated expensing that I talked about where we had assets that qualified for generally a 15-year life and now we'll revert to a 39-year life. So when we look at our cash flow,versus EPS, we look at our cash flow, we are only expecting a modest positive impact from cash reform over the next couple of years. But it's a tailwind nonetheless, and it certainly allows us to continue to invest with confidence in the business.

So -- and for those investments, to a degree, are investments that we would've been making regardless. So as you rightly point out, in our people, in our retreat, in our training, in our groove, and our systems upgrades and particularly the marketing and technology as it relates to that digital innovation the genesis of what -- that Randy laid out.

Got it. And just lastly, Tara, the confidence around achieving that restaurant margin, I mean, especially you're talking about labor being down [120]. I think at the midpoint, you're talking about restaurant margins down maybe [150] or so. So considering the flattish type comp and I guess the lack of commodity deflationary [longer] and the modest pricing, I mean, how comfortable are you with that restaurant margin range?

Well, I mean, as of today, this is our estimate for the year. So we're approaching the year with confidence. We feel good about our plans. We feel good about our step up in development schedule. We've explained to you the volatility around that comp number, in particular. And so no, we're full steam ahead. But as things change and our level of confidence increases or decreases or those numbers, we believe, will change, we'll update you as the year goes on, but we feel good about these numbers today.

And we'll take our next question from Andy Barish with Jefferies.

Just a couple of things on -- any more color just on why the pipeline is pushing a little more second half than you've seen historically?

Well, I'd love to tell you that it was true historically. I mean, if you look at this year, we opened 5 restaurants in the 2 weeks right before the holidays in December and 11 in the quarter. So 11 of our 26 in the quarter. I'm not sure why the retail restaurant industry -- industry for whatever reason, we've seen that -- give birth more often in the second half of the year, but that is how we do it.

Look, we wish we could smooth it out a little bit better. Sometimes it is what it is. It's almost entirely based on the timing of landlord's developments and our ability to get in and execute.

We have a great construction development team who's ready to pounce as soon as we can get in. We got a great design team that's designing our restaurants ready to go.

So this year just happened to be a little more of an extreme and much more heavily-weighted towards that back half of the year. And that impacts our sales. That impacts the expectations we have for total sales for the year. But here's the good news, by the end of that time next year, even though it's back-weighted, we'll have all those restaurants running into 2019.

Got you. And then just finally, a little more color on the same-store sales, both for the 4Q, anything holiday-related in terms of a call out, the shift there, or -- and then looking forward, just on the negative traffic for the year, can you give us a sense of what the primary issues are there? Is it cannibalization? Are you willing to sort of quantify that aspect of what's going on or maybe a little more color just on the negative traffic?

Sure. As of Q4, as it relates to that question, I think the holidays didn't really change much this year in terms of its impact on us. So it was really -- Tara mentioned in her remarks about whether the warmer weather in October helped out a bit, but that balanced out through the quarter. It really was the delivery that, that -- in relation to everything else, that gave us a good little pop. And -- but when we look at our expectations for this year in negative traffic, it's just being cautious and making sure we're balanced. There's that obviously happening in our industry. We had last year a little bit of negative traffic. So we want to make sure we can -- we're going to achieve the results we want to. We think getting us flat overall, when we look at that comp number, is good. But again, it's all based on a small and still Northeast-weighted. If you look at the supplemental materials we gave today, 41% of our sales were in the Northeast New York region in the comp base. And that's not a well distributed base, and that'll continue through this year.

The main focus we have is market share. We've talked about this in previous calls. We want to capture as much sales in a market as possible. Sometimes that means some of our Shacks in that market might take a little hit, but at the numbers that we do, that's a great decision and a great trade every single time and we're going to keep on doing it.

And we'll take a follow-up from John Ivankoe with JPMorgan.

The questions on delivery. Tara, I think it was you in your prepared remarks talked about delivery actually being additive to comps for the quarter. I was wondering if you could -- if not necessarily quantify it for the system, could you quantify it in the stores that you're particularly focused on for delivery in the fourth quarter? And I do know that there were some weekly promotions, which were run that presumably drove a lot of delivery sales, if there is a way to kind of talk about how much these stores would have benefited from delivery, both in the normal weeks and the promotional weeks, just seeing how much of a sales lift your control group actually got from the efforts.

Yes. I mean, the only thing we've got to remember is that delivery is happening to us and has been for a period of time already. So what we're really talking about here when we do these pilots, the integrated pilots, where we are partnering with these delivery service providers to have the orders pass through into our POS. And so on that basis, the remarks that I gave were more -- they were sort of more general color. We definitely felt that they went really well in the fourth quarter, and we felt that there was clearly some sales that -- some positive sales impact from that. We haven't quantified it. And quite frankly, it's virtually impossible to quantify because you can't see the starting point because a delivery guy turns up and joins the Shake Shack line like everyone else does today outside of these pilots.

John, I'll just add. When you look at it, we're not going to break it out Shack by Shack, obviously, but this is the very reason we're doing the pilots, right, because there's been some really good and interesting learning and surprises from Shacks that we may not have expected that would be strong in delivery or weaker in delivery. And that's part why we've extended our learning here to make sure as we grow this as an important channel for our business, we know and can learn from who's going to do what and with what impact moving forward.

And that will conclude today's question-and-answer session. I'd now like to turn the conference back over to Randy Garutti for any additional or closing remarks.

I just want to say thanks again to our team and to everyone who ended the year with really strong momentum. We're excited for '18 and beyond, and we'll look forward to being in touch. Thanks for taking the time with us on this call today. Take care.

Thank you.

And that does conclude today's conference. Thank you for your participation, and you may now disconnect.