Shake Shack Inc (SHAK) 2018 Q2 法說會逐字稿

Please standby.

Good evening, and welcome to the Shake Shack's Second Quarter 2018 Earnings Conference Call and Webcast.

(Operator Instructions) It is now my pleasure to turn the floor over to Leo Rhodes, Vice President of Finance and Investor Relations.

You may begin.

Thank you, Catherine, and good evening, everyone.

We look forward to discussing our second quarter 2018 results with you today.

Joining me for Shake Shack's conference call are Randy Garutti, our Chief Executive Officer; and Tara Comonte, our Chief Financial Officer.

By now you should all have access to our second quarter 2018 earnings release, which can be found at investor.shakeshack.com in the News section.

Additionally, we have posted second quarter 2018 supplemental earnings material, which can be found in the Events & Presentations section on our site or as an exhibit to our 8-K for the quarter.

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.

Reconciliation to comparable GAAP measures are available in our earnings release and the appendix of our supplemental materials.

We'll begin our call this evening with brief remarks from Randy and Tara before moving to Q&A.

As a reminder, some of our statements made today maybe forward-looking and actual results may differ materially to a number -- 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 February 26, 2018.

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.

Now I'll turn the call over to Randy.

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

Now more than halfway through 2018, I'm pleased to report that Shake Shack continues to deliver strong top and bottom line results as we execute our strategic growth plan.

During the second quarter, we opened 5 more domestic company-operated Shacks and 6 international licensed Shacks.

We delivered year-over-year revenue growth of 27%, including a 1.1% increase in same-Shack sales, and adjusted EBITDA grew by 12.9%.

These results were driven by the strength of both new and existing Shacks as well as by our focus and ongoing commitment to invest across our key digital initiatives and foundational infrastructure.

Shake Shack is a growing, loyal, connected community.

And we are relentlessly focused on excellence, experience and hospitality.

This business statement we share throughout the year represents who we strive to be every day and essential to how we operate across all aspects of our business as we build this company for the long term.

We're committed to executing the core pillars of our strategy, holding ourselves accountable for performance and investing in our business for long-term growth.

We're continuing to execute on a clear and deliberate growth strategy, centered on the following key components.

Our development pipeline remains robust both domestically and across our international license regions.

Although, as Tara will discuss in this current year, the back-end timing of our opening increased a headwind in near-term sales and while this back-end opening schedule tempers our revenue expectation for this year, we're thrilled with this class of Shacks.

And we're looking forward to their contribution into our 2019 and longer term sales growth, along with a really healthy development pipeline for next year.

We're innovating around our core menu, testing new categories and menu items that we believe will continue to delight our guests.

Digital innovation is an area of increasing importance and investment across our business.

We're using digital channels to better connect with our guest in the broad ways in which they experience Shake Shack.

We're making it more convenient than ever, and ultimately using technology to build upon the spirit of hospitality that is core to our company.

And finally, we continue to invest in our foundational infrastructures, both our people and our systems to ensure we can fully support our Shacks through the significant growth that lies ahead.

Turning to our pipeline and development, we continue to focus on delivering compelling returns from domestic growth.

This year, our plan remains on track to open 32 to 35 new domestic company-operated Shacks.

This will have us reaching a 122 to 125 domestic company-operated Shacks by the end of the year.

And consistent with our strategy we've shared with you on previous calls, approximately 20% of our 2018 Shacks will launch in new markets and the remainder will broaden our Shack base across existing markets.

We remain confident on our development and execution plan to deliver our previously stated goal of 200 domestic company-operated Shacks by the end of 2020 and to achieve our longer term target of 450 Shacks.

With just a 102 company-operated Shacks in U.S. today, we have significant runway to expand for many years to come.

As we open more Shacks across the U.S., we continue to witness the incredible strength of our brand.

And we're securing premium real estate, while targeting a strategic mix of about 1/3 urban location, 1/3 freestanding pads and 1/3 shopping and lifestyle centers.

And with every new market we enter, we work hard to immerse ourselves in the communities we're honored to be joined.

And whether it's Charlotte or Denver, our home in New York City, we're humble and thankful that our guests consistently greet us with such a passionate warm welcome.

During the second quarter, we opened 5 domestic company-operated Shacks.

This included our 100th company Shack in the U.S., which perhaps appropriately is in New York City.

We also expanded our footprint in Florida, Connecticut and launched in the important new markets of Charlotte and Cleveland, Ohio.

So far in the third quarter, we've opened in Williamsburg and Brooklyn, and Highlands Ranch, Colorado, our second Shack in the Denver area.

We're really excited to bring Shacks to a number of new markets in the back half of the year.

Over the next 2 quarters, we'll be launching into new markets including, Nashville, Birmingham, Seattle South Lake Union neighborhood and our first Bay Area Shack in Palo Alto.

And in just the last 2.5 years, we've opened 8 Shake Shacks in California.

We remain bullish on the opportunity for continued growth on the West Coast.

As we've shared, California delivers our highest domestic Shack AUV after New York City.

We've got a strong pipeline for growth teed up in this important market.

Internationally, we opened 6 licensed Shacks during the second quarter.

And consistent with previous guidance, we expect to open between 16 and 18 net new licensed Shacks this year in 2018.

We're continuing to grow existing markets, such as South Korea, Japan, and we're preparing for our Shanghai opening as we expand into Mainland, China next year 2019.

We're also thrilled to open our first Shack in Hong Kong at the IFC Mall in May.

This opening was just an incredible moment for our company, fans lining up to greet us and gathering tremendous media coverage across this important region.

In June, we opened our 10th Shack in Japan as well as our first in Osaka, as we continue to expand outside of Tokyo.

This opening completed our current development agreement with our partner in Japan for 10 Shacks in 5 years, which we accomplished in a little over 3. We're pleased to confirm we signed a contract extension for an additional 15 Shacks in Japan through the end of 2024.

Earlier this quarter, we also opened our ninth Shack in London and celebrated the fifth anniversary of our entrance to the U.K. And we shared with you previously that we're very focused on Asia as the primary growth driver for our international business over this next few years.

In addition to our existing agreements, we're really happy to announce the expansion of our global footprint to the Philippines.

In mid-July, we announced our partnership with the SSI Group to open 15 Shacks in the Philippines through 2025.

And our first location is planned for Metro Manila in the spring of next year.

This agreement aligns with our strategy of choosing premier global partners to expand the Shake Shack brand, strengthen our learning and our teams, leverage our supply chain, which will benefit our business over the long term.

As our domestic licensing business continues to grow, we're also focused on premier airport destinations.

Just last week, we announced that we won the bid to open Shake Shack in a brand new Terminal B at New York's LaGuardia Airport.

We're extremely pleased with this progress and are confident that they'll remain significant whitespace across the world for us to meet our goal of a 120 licensed Shacks by the end of 2020.

Now moving on to menu innovation.

Our strategy remains consistent, delivering excellence across our core menu while testing and innovating around it.

During the second quarter, we launched our first ever veggie burger in select test locations.

We've since expanded that launch to 18 Shacks in New York, California and Texas.

This is our own proprietary recipe made from brown rice, black beans and beans that can also be served vegan.

It's still early for the Veggie Shack, but we're pleased with the initial guest feedback.

In addition, in May, we introduced our latest LTO barbecue lineup, featuring a new smoky cheddar cheese on both our barbecue cheddar bacon burger and the barbecue cheddar bacon griddled chicken.

Barbecue is always a guest favorite for us.

And we're pleased to bring this one back for our fans for a few months.

We're also looking forward to bringing back our Hot Chick�n as an LTO later this fall.

Our guests have consistently asked us to bring back this favorite, so we're looking forward to heating up Q4.

In September, we're excited to be opening our first-ever innovation kitchen, which is connected to our new home office in Manhattan.

It will be here that you'll see us test new ideas, launch new menu items, innovate around kitchen design and simulate our digital initiatives in an environment just downstairs from our home office team.

One other commitment to reinforce tonight.

Our mission to Stand for Something Good remains paramount to who we are.

Step-by-step, we work to forward this mission.

We're proud to announce that within the first quarter of 2019, we'll be eliminating all plastic straws from Shake Shacks throughout the country.

We're constantly thinking about packaging and how we can reduce, reuse and make more of it recyclable.

This remains a larger goal for us as we look ahead.

Let's talk about the evolution of the Shake Shack digital experience.

At our core, we believe hospitality occurs when our guests feel like we're on their side.

And as preferences change, we're committed to enhancing the Shake Shack experience, developing tools to allow our guests to engage with us however they want, we're putting control of that experience in their hands.

Digital represents a significant growth opportunity for us.

There's so many new ways we intend to connect with, reward and engage our fans.

I'll provide you with a brief update on some of the key digital initiatives we're focused on right now.

First our mobile app.

We launched about 18 months ago and become a key channel for many of our guests.

We're continuing to iterate to improve this user experience, gradually adding functionality and removing friction.

We've recently launched ASAP ordering across the vast majority of our Shacks.

We'll continue to test new app exclusive offers.

We are pleased to see as the percentage of our app sales continues to increase as well as delivering a higher average check in in-Shack.

In addition, our new Shacks that typically open with a higher percentage of app sales, giving us further confidence that early adoption can lead to a higher use of digital ordering.

Towards the end of the year, we'll be expanding our digital ordering capabilities with the launch of browser-based ordering for mobile and desktop.

This will be a new channel for us and expands our availability to guests who wish to order digitally, but may prefer to do so outside of the app.

Whereas you know, we're also leveraging technology in Shacks.

Astor Place in New York opened in October last year with no cashiers and only kiosk-based orders.

To date, we have now equipped an additional 5 Shacks with a combination of both kiosks and cashiers.

This way, our guests have a choice on how they order and can still use cash when they wish.

We're learning how the kiosk experience changes the flow in the front house, the extent to which it impacts speed of service, kitchen throughput, how it best enhances the guest experience, ability to deliver labor leverage in the future and how ordering behavior may be impacted.

We feel really good about how kiosks are performing at Shake Shack so far.

And like many of our digital initiatives, we're early in this journey and you should expect to see us continue to iterate and experiment from here.

Another important and growing channel for our guest is delivery.

We've been testing this experience.

We had number of integrated pilots with key delivery service partners since September of last year.

A formal partnership or real partnerships are something we may consider.

We're committed to remaining patient until we believe the entire guest experience is of the highest quality, operationally efficient to our Shacks and with economically beneficial terms over the long term.

We're really pleased with the progress of all of our key initiatives as well as our financial results.

And we believe we're in an incredibly strong position to continue expand and grow, of course, still at the beginning of our journey.

The Shake Shack brand is a powerful one, which Stands for Something Good and proves its strength with every new market and every new country in which we open.

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

Thanks, Randy.

Total revenue for the second quarter 2018, which includes sales from both company-operated Shacks and licensing revenue, increased 27.3% to $116.3 million.

Sales from our company-operated Shacks increased 28.3% to $112.9 million, due primarily to the addition of 25 new domestic company-operated Shacks since the second quarter of 2017.

Licensing revenue increased 2.1% to $3.4 million, driven by a net increase of 20 Shacks since the same quarter last year.

Within our license business, and as Randy mentioned, we remain very pleased with the strength of our Shacks throughout Asia, particularly with our strong early sales in Hong Kong.

Since last quarter, the implementation of the new revenue accounting standard has impacted the timing of the revenue recognition to some of our licensing agreements.

As we did in our first quarter 10-Q, we'll include a comparison in the footnote to show our revenues reported under both the new and the old standard.

We expect a reduction of revenue recognized over the full year to be approximately $500,000, which is consistent with previous expectations and is incorporated in our 2018 revenue guidance.

Same-Shack sales increased 1.1% during the second quarter.

This increase consisted of a 3.7% increase in price and mix, including the 1.5% to 2% price that we took in December, partially offset by a 2.6% decrease in traffic.

Similar to first quarter, price and mix were also positively impacted by our growing digital channel, which typically results in a higher average check within Shack.

And as Randy noted, digital innovations will continue to be an area of increasing importance and investment across our business.

Our comparable Shack base in the second quarter included 50 Shacks, which represented half the total number of company-operated Shacks in the system at that time.

And as we previously talked to, we believe at times the traffic in our existing Shacks may be impacted by the opening of new Shacks near them.

You'll see us continue to expand and open Shacks, where we believe there's an opportunity to increase market share and capture sustainable revenue and profit growth for our entire business, not just the subsection of it.

Average weekly sales for domestic company-operated Shacks were $89,000 for the second quarter and trailing 12-month AUV at the end of the quarter for company-operated Shacks was $4.5 million.

Average unit volumes will continue to decrease over the near term as we expand our total number of Shacks at a broader range of sales volumes.

On that basis and with many more Shacks yet to open this year, we remain on track for our company-operated AUV guidance of $4.1 million to $4.2 million by the end of this year.

Shack-level operating profit, a non-GAAP measure, grew 25.5% in the second quarter to $31.8 million, with Shack-level operating margin at 28.2%.

This included a onetime benefit in occupancy of approximately 70 basis points resulting from a deferred rent adjustment related to certain historical leases with co-tenancy provision.

Food and paper costs as a percentage of Shack sales were flat at 28.1% compared to the prior year.

Within cost of sales, there was a onetime benefit of 30 basis points related to sponsorship retreat for our biannual leadership retreat.

If we were to exclude this onetime item, we would have experienced a 30 basis point increase over the prior year, primarily related to higher beef costs in the quarter.

Labor and related expenses as a percentage of Shack sales increased roughly 80 basis points year-over-year to 26.3%, driven by increases in minimum wage legislation and the introduction of new Shacks to the system.

Other operating expenses as a percentage of Shack sales increased 130 basis points year-over-year to 10.9%, driven mainly by delivery commissions paid during the quarter as part of our current pilot together with repair and maintenance expense as a number of our more mature high-volume Shacks require periodic improvements to continue to meet high-level guest demand.

Occupancy and related expenses as a percentage of Shack sales decreased 140 basis points to 6.6% compared to the prior year.

This decrease included the onetime benefit of approximately 70 basis points related to the noncash deferred rent adjustment, I just mentioned.

Excluding this onetime benefit, occupancy and related expenses would have decreased 70 basis points to 7.3%, driven by an increase in the number of leases that fall under build-to-suit accounting treatment and strength from our top line performance in the second quarter.

G&A increased 30% year-over-year to $12.6 million in the second quarter as we continue to invest across the business, and particularly in our team, we're continuing to execute and deliver on our various growth initiatives.

As Randy mentioned, one of the key pillars within our growth strategy is strengthening our foundational infrastructure, in particular, our key financial and operational systems reporting of Shacks.

We refer to this upgrade initiative as Project Concrete and we spent the first part of this year conducting a detailed RFP, functional due diligence and ultimately a selection process for our future platform.

I'm pleased to confirm that we have now selected workday as our ERP solution.

We are now kicking off the implementation planning and resourcing and we'll move into full deployment work in early September.

We expect the overall cost of the project to increase from previous estimates to now to be between $6 million and $8 million.

As we've gone through the review process, we've chosen to add to the overall scope of the project and upgrade a broader set of systems and infrastructure at this time than we had initially planned and consolidate some of our longer term plans as we finish it now.

Given the timing of our partner selections and depending on the finalization of our implementation planning, we estimate that roughly 1/3 of the spend will occur this year with the remaining 2/3 in 2019.

We'll continue to provide visibility to the overall spend and timing as we get further through the project.

We do continue to expect the majority of these costs to be onetime and primarily OpEx in nature.

Adjusted EBITDA in the second quarter grew 12.9% from the same quarter in the prior year to $21.9 million.

And adjusted EBITDA margin as a percent of total revenue was 18.8%.

In the second quarter, on an adjusted pro forma basis, we earned $11 million or $0.29 per fully exchanged and diluted share compared to $7.3 million or $0.20 in the same quarter last year.

Stock-based compensation had $0.04 benefit on the current quarter.

Moving on to full year expectations, our guidance is as follows.

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

As Randy mentioned, this year's opening schedule is heavily back-end weighted as has increasingly been the case as the year has progressed.

More than 70% of this year's new Shacks will open in the second half of the year with roughly 14 to 16 of those scheduled to open in the fourth quarter and many of those in December.

Our strong economy and resulting high levels of construction activity has caused a lengthening in the permitting and development process in certain markets resulting in a number of projects pushing later in the year.

Page 6 of our supplemental earnings material illustrates the expected timing of our openings by quarter this year compared to last.

We remain confident in executing the plans we've laid out despite this timing shift, however, it will have an impact on our overall revenue for 2018 and this is reflected in our full year revenue guidance, which remains unchanged at $446 million to $450 million, an increase of approximately 24% to 25% over 2017.

We remain on track to open 16 to 18 net new licensed Shacks internationally and expect $12 million to $13 million of licensing revenue, including the estimated $500,000 impact of the new revenues Randy mentioned earlier.

We continue to expect average unit volumes of company-operated Shacks for the full fiscal year to be between $4.1 million and $4.2 million as we add a broader range of AUV Shacks to the system throughout the balance of the year.

We're reiterating our same-Shack sales guidance to be between 0 and 1% for 2018.

Our outlook takes into account our performance to date and increasingly tougher compares as the year progresses as we lack the launch of last year's delivery pilots, which started towards the end of the third quarter 2017 with the majority running in the fourth quarter.

Shack-level operating profit margin guidance for the full year remains at 24.5% to 25.5% impacted by 3 major factors.

Slight deleverage on COGS as a result of the recent trends in our beef pricing, deleverage on the labor line driven by year-on-year increases in hourly wages, our largest class of openings yet and the introduction of lower volume Shacks into the system continuing sequential deleverage as we move through the third and fourth quarters.

Although operating expenses deleverage year-on-year due to the new impact of delivery commissions and increase in facility-related expenses on a broader range of sales volume.

We continue to expect our core G&A expense to be between $49 million and $51 million, exclusive of Project Concrete.

As I mentioned, we now estimate a total Project Concrete investment of approximately $6 million to $8 million across the remainder of this year and well into 2019 based on the system selected and an expanded scope.

As I mentioned, we expect the expense related to implementation to be mostly operating in nature and onetime.

We've set preopening costs to be approximately $13 million, a higher end of previous guidance due to timing delays of some of our 2018 Shacks into Q3 and Q4 as well as additional spending in certain new market launches.

Due to delays in timing of our openings in the back half, we expect depreciation in 2018 to be between $31 million and $32 million compared to our prior guidance of approximately $32 million.

We expect interest expense to be approximately $2.5 million for the fiscal year, higher than our previous guidance of $2 million to $2.2 million, driven by an increase in the number of build-to-suit Shacks in the system combined with strong performance in the number of [variance] in percentage rents.

We continue to expect an adjusted pro forma effective tax rate for [2019] (Sic-see press release "2018") of between 26% and 27%, which excludes any potential tax effects related to the accounting treatment of stock-based compensation.

Before I conclude, I'd like to remind everyone that the new leasing accounting standard that will take effect beginning January '19 and our valuation of the potential impact to as how we will report our operating results.

We have a significant number of real estate leases, which we may or may not be required to report as capital leases on the balance sheet on a go-forward basis.

As previously noted, we're currently assessing the potential impact and we'll provide further visibility as we get closer to the expected date of the new standard.

And with that I'll turn it back to Randy for any closing remarks.

Thanks, Tara.

I want to end today with a note of thanks to our team and update you on how we think about leadership here at Shake Shack.

In May, we gathered over 650 of our Shack leaders.

We welcomed many of our dedicated suppliers and key business partners from around the globe to our Shack leadership retreat.

This year's message centered around connected community.

And I believe that as we grow from a Shack smaller, we'll be more connected than ever before.

There is no question that our industry faces a challenging environment in relation to staffing and rising wages.

None of this will be easy, but we're committed to paying the right wage, offering compelling benefits and providing a great work environment, built upon the hospitality our Shacks have become known for.

Our leaders are working harder than ever to build community gathering places that become a key part of our guests everyday lives and to the lives of our team members.

We're proud to be growing -- proud to be building a company where leaders are training future leaders and we look forward to welcoming you back to Shake Shack soon.

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

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

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

I guess, a question on the cadence of openings for this year.

Is it fair to say that you had some that's opening later in the fourth quarter, that's kind of what it sounds in the (technical difficulty) through the first half of the year, if you're kind of above your expectations, but the revenue reiteration was just really because of those new unit timings?

And then secondarily, how should we think about preopening particularly in that fourth quarter, because you guys have never opened that many locations before in 1 quarter?

Yes.

Sharon, you got it right.

We've really been thrilled with the performance of a few things.

The end of 2017 Shacks have performed strong.

The beginning of 2018 Shacks and specifically, we've called out a couple of those new market launches, Charlotte, Cleveland, Staten Island, New York, some really good starts.

So that's part of the solid beat for the first half of the year.

The unfortunate reality for timing just really is that, way more than we expected of our Shacks are going to open in the third and fourth quarter, with the vast majority of those in the fourth quarter, with the majority of those in December.

So it will be a big push for us at the end of the year.

We're really expecting a busy holiday season for our kids.

So we're in good shape to do it.

As Tara mentioned, there's just been some questions, some issues on permitting, it's taking longer, construction on both landlords' work to deliver to us.

And then sometimes our own permit is getting ready and has just been delayed from what we expected.

So that's the unfortunate reality.

But you know what, this is not 1 quarter of a company here, we're really excited that all these Shacks as we said, there's 32 to 35 will be getting in this year.

And they're going to make a great contribution for a long term.

As it pertains to startup costs, you should kind of read into that the same guidance I just gave.

Most of those are going to happen really towards the end, the fourth quarter and towards the end of the fourth quarter, which is part of why we raised startup a little bit.

We had that happen yet, some noncash deferred rent that builds up a little more than we expected.

So that's part of why startup cost ends up being a little higher than that and it will inch up more at the end of the year.

We'll continue on to Joshua Long with Piper Jaffray.

Obviously, the brand has very strong following and really speaks to both the New York heritage, but then also you go across the nation.

I was curious in just how you think about that now that you have a growing base outside of New York, California, you mentioned having strong unit volume.

What you've learnt there in terms of really taking Shack into new -- and then maybe preparing new markets for 2019, 2020 and beyond pipeline just in terms of staffing or getting the brand ramped up and ready to go?

Thanks, Josh.

Not just in the United States but also globally.

We have this opportunity, being the strength of the brand and our history, it really gives us a chance to do something special when we open in new markets.

And just a couple of examples, this last quarter, we did a pop-up in Seattle.

We opened at one of the finest restaurants in Seattle.

We did a pop-up for 1 day in their parking lot.

Nearly 3,000 people showed up just for a 4-hour pop-up.

It's extraordinary what can happen for Shake Shack.

And some of the openings that we've had, if you follow along and you look at what's happened, some of those that I've mentioned in Charlotte, Denver, this year, 2 shacks in Denver.

Both of them really, really strong starts.

It's part of why we invest a lot in the start-up cost line that you see so we can capture that opportunity out of the gate, and it's also part of how we've been able to keep these strong AUVs, continuing to go for the company over the long term.

And meanwhile, our business strategy means about 80% of those Shacks that we open will be in existing markets.

We love that, too.

We love going deeper into existing markets because it helps our teams, it helps our supply chain.

And we've barely scratched the surface.

You look at us having 102 restaurants in this country.

I mean, we barely scratched the surface on those economies of scale.

So we really have so much opportunity down the road there, but we love new markets.

This coming month, next couple of months, we're going to open in Nashville, Tennessee; Birmingham, Alabama.

And then later in the fourth quarter in Seattle and the Bay Area in Palo Alto.

So we like that balance.

We really think it's a good thing for the brand and for our national expansion.

To your question about the learning, as we've noted in previous quarters, our numbers are strong everywhere we've gone.

We've shared that information.

And especially in California, as I noted, we're really excited to continue so much of the strength.

So we're excited about the future and where we're headed in development.

Great.

And it's particularly exciting to hear about the increasing scope and opportunity for project.

Obviously, it's still early on in that.

Just curious how you would characterize some of those additions that you had in there in terms of just really supporting that long-term pipeline and targets that you had.

I mean, does that allow you to do things?

Or does this -- maybe do things more in the right way as you go through in really building the brand for the long term?

Yes.

Josh, it's Tara.

We're really excited to really get into this project properly.

And as you rightly point out, as we went through a very detailed, diligence process, we decided to expand the scope to get more done at one point in time for a whole host of reasons, mostly to do with sort of distraction and disruption of the business and just bring -- as well as to get the benefits, too.

So one of the examples where we expanded scope is in our HR systems, which we're not originally in scope but we had talked about potentially being.

And so it's a very broad upgrade initiative that expands financial systems, and it touches both back-office and the Shacks, our operational systems in relation to some of our procurement processes that touch the back office and the Shack, and the same with HR.

And I know there are a number of add-on areas.

And the objective is sort of multi-faceted.

One of the things we're very focused on doing is making sure that we're not putting any administrative burden on our Shacks that we don't have to because we want our operators focused on delivering a great guest experience.

And so we will use technology where we can to lessen that burden.

We also want to be adding cost in an efficient and an effective manner for the long term.

And again, obviously, technology will help us leverage our cost base, where we're adding and using tech rather than continuing to add the same proportion of heads.

And finally, yes, I think -- I feel I think it's an enabler to the top line growth.

I think having efficient, scalable, flexible systems allow you to get far greater insight into the business and allow you to speed up the rate of decision-making as we (inaudible) finished it.

So we're really -- yes, we're excited to get going.

I mean, it will take us into next year now, but we feel very good about it.

And I'll just jump in on that, Josh.

It's just reiterating the way we run this company from day 1. We're thinking about everything from a very long term.

We're adding systems that will support a much, much bigger company.

We've talked to you about doubling our sales and our units in less than 3 years in this current time frame that we're looking at.

We have just over 180 shacks worldwide, and that is a small number compared to where we're headed.

And now is the time to get some foundational solid infrastructure that we can really grow it and ramp up our opportunities as we go down the road.

Okay.

Operator, I was just going to take the opportunity to just clarify something in my prepared remarks.

I believe I said 2019 when I should have said 2018 as it relates to adjusted pro forma effective tax rate going up to 26% to 27%.

So that was a 2018 guidance as reflected in our earnings release that we posted earlier.

Thanks, Julie.

And we'll go to Jake Bartlett with SunTrust.

The first is just a clarity on the revenue guidance.

It sounds like the development is significantly more back-end weighted than you thought, but you kept the -- all the other metrics.

How should we think about that in terms of the average unit volume target that you have?

Yes, we don't know that yet.

I mean, we've had some strong performance.

We'll see if we can get to the high end of that range.

It's still -- we're holding it right now on AUVs, Jake, because we literally have 20, 22 restaurants to go yet.

So there's a whole lot that's going to go into an AUV calculation when you add all those restaurants.

So you look at the opportunity to raise from what we beat in this last quarter.

It's just really completely impacted by development schedule and all that timing.

So that's really how we're thinking about it.

These restaurants will open.

They'll open well.

They'll be great Shacks, but we just won't get the full benefit, the full year, that we had hoped for.

All of that said, we target everything -- we shared this before.

We've got that target -- we're about $4.5 million currently on our AUV.

We think that'll be in the $4.1 million to $4.2 million range by the end of this year, and we'll see.

We'll keep you posted if we can beat that.

Got it.

Got it.

And then as you look at your pipeline for '19, should we expect a similar level of back-end loading?

Or do you feel more comfortable that it's a little more evenly weighted throughout the quarters?

I've been doing this long enough to say that I never had that expectation.

And somehow almost every year, most companies, like ours, end up with a back-weighted schedule.

I'm not sure even though we do everything in our power to change that reality that, that changes.

Right now we're going to gun towards a very balanced 2019 in a similar number of Shacks that we build this year.

We'll get back down on that as we -- as that class firms up.

What we do know is that it's really looking like a solid class.

We think it'll be roughly, again, in 2019 a similar strategy of about 1/5 of those in new markets.

We got a lot of fun new markets we'll be adding next year hopefully and going deep in the markets that we're excited about here.

So we'll keep you posted.

Got to have a solid fourth quarter here and get these Shacks open and running.

Got it.

Got it.

And to the technology and your initiatives and basically delivery.

You talked about how really in the late fourth -- well, the fourth quarter last year, the biggest impact.

But you started to have so many pilots it was having a major impact.

Were there less stores impacted by your pilots -- pilots you're testing in the second quarter here?

Or was it the same -- has it been pretty consistent?

And I'm kind of thinking of a 50% number, and maybe if you can confirm that or just let us know whether that's been fluctuating as you've been testing.

It has fluctuated.

It's dependent on the partner.

It's dependent on the pilot.

Today, the majority of our Shacks are doing delivery pilots with a few partners.

In these quarters -- these past couple of quarters, we've done 4 different partner tests.

Some on, some off.

Currently, we're running with 3, and that is in the majority of Shacks.

So look, as it pertains to delivery, we're really excited about delivery, and our strategy has not changed here.

We believe that there is an increasing guest demand for it.

We believe we have a lot of work to do to make it an excellent hospitality experience for our guests who choose to order that way and for our guests who are in the Shack.

It's a growing and an exciting opportunity for us but one that we are being patient with.

We want to make sure we have the right partner or partners depending on how we do it, and we're going to keep discussing that to make sure it's a really good long-term business.

We are patient.

We're not just jumping at sales that might be there for us if we don't think we can do it the right way.

And we still want to learn.

We want to do it well, and we want to do it well for a really long time.

Our next question comes from John Ivankoe with JPMorgan.

The question on the labor market and the labor outlook, I guess, the next 18 months.

Is there anything that you're -- to enhance some of your current HR practices to attract and retain the labor force that you need both in new stores over that time frame?

You're obviously going to get a lot of revenue.

You need a lot of people.

And then secondly into that, you did mention that over time, the self-order kiosk may help reduce labor cost.

I mean, does that -- I think you implied that in your prepared remarks.

I mean, is that what you're seeing in some of your early tests?

And I guess, at this point, what are you looking for to see in terms of making self-order kiosks in most, if not all, of your install base in the U.S.?

Thanks, John.

On the labor, look, it is no surprise.

We are living in good economic times, low unemployment.

That means it's harder than ever for us to find teams.

Let me give an example of how we're doing this and how we're thinking about it.

We're going to open in Nashville, Tennessee.

Minimum wage is $7.25.

We're going to start people, start at $13 an hour.

That's what it takes to get a great team member that can build and bring the hospitality that Shake Shack will bring to that market.

And we're super excited to pay that.

But that's a high rate, right?

It impacts our labor line over time.

We have a number of our markets in the most expensive wage rates in America with New York City, California, D.C., Chicago, the Northeast.

I mean, all of our major markets are increasing, going to continue to increase.

So what are we doing about it?

You know what, we're continuing to be a great employment brand.

We're continuing to offer solid benefits, solid starting rates.

Most importantly, opportunity to develop.

Please come to our leadership retreat this year, and you see the impact of the leaders of our company and where they came from.

So many of them are the people who started in our early jobs, who have now grown.

Changed their lives through Shake Shack and learning to be leaders.

So as we grow, we're going need a lot of leaders, going to need a lot of people, and we're going to pay for them.

There's also just fun things we're experimenting with, right?

We're thinking about how to schedule.

We're thinking about how to work with today's workforce of a gig economy and people who need more flexibility because frankly there's a lot of opportunities of jobs where they can get it.

And we've got to be more flexible to meet their needs.

We've got to make sure our Shacks can provide that, and that is what we're working on for the long term.

When it comes to kiosks, it's absolutely one of our goals, to decrease the payroll over time, the number of people that we need.

We have not stressed that in these early days.

Of course, that's a long-term goal.

What really we're trying with the kiosks is make sure our guests love it.

I will say we've gotten some of our highest marks from our guest surveys on the experience of the kiosk even versus our other channels with which you can order.

So that's encouraging.

People like it.

But we only have, again, today 5 Shacks that offer it, and 4 of those really just came out -- excuse me, 6 Shacks, and 5 of those just were added.

And we are -- we have a lot to learn before we do any further rollouts.

So we have no plans for any further rollout the rest of this year.

What you will see is some of our newer Shacks open with them, not all, but some.

So for instance, our West Village Shack here in our home office.

We'll have kiosks.

We're going to do some -- in some of our newer markets that have higher labor cost, such as the Bay Area and Seattle.

Now we'll test it in some of those new markets with the ultimate goal of guest experience, guest experience, guest experience.

Secondarily, once we know we got that right, we'll work on making sure the efficiency of our team is built towards driving revenue in a way that people really want us to do.

So we're excited about it.

Lot to learn, a lot to do, and we're going to take our time on that one.

We'll continue on to John Glass with Morgan Stanley.

Randy, if I think I heard you correctly on delivery, you said the majority of Shacks already actually offer delivery.

So what is the difference, I guess, between a test and a rollout?

Is it just you're not -- so you're letting demand accrue naturally?

In other words, if you say we're now rolling it out is maybe you don't get as much sales lift because you are already doing it effectively.

That may be the case.

It depends on the ultimate partner or partners that we choose, John.

So you're right in saying that -- what we have done only a couple of times during these pilots over the last year is a couple of promotions.

Those have generally lasted a week or 2. For the most part, we're just running as a normal restaurant on their platform.

So we do think as we think about the potential, we're not giving a time frame for that because we still want to be patient about it in discussing this with potential partners.

But we do think that there's opportunity for increase in that over time once we can clarify with our guests, with people which channel or channels they can count on.

It's been -- the good side of our testing is we're learning a lot.

The challenge to it is it's a little bit of up and down for our guests who have seen us come in and out of the various platforms.

So as I said, it's about getting the ops right, getting the experience right.

We've got new packaging happening.

We've got new packaging coming.

There's a lot of different ways we're thinking about how to get a french fry to your home as well as we possibly can.

How to get a frozen shake to your home in a way that you're excited about it.

So we want to work on all those basics first to make sure the foundation of it is there.

I'm very confident that the level of delivery we're doing today over the long term can and should increase in the future, but that's a little bit further out from near-term expectations.

That's helpful.

And then just 2 follow-up financial questions.

You didn't raise restaurant level margin guidance.

I assume that does (inaudible) that you called out this quarter.

And the fact that you're opening stores later this year, I would think would benefit margins.

Is there some offset to that, perhaps labor?

Or do you just maybe feel more comfortable at the high end based on that?

John, you cut out a little bit in the middle of that question.

But we're sticking with a 24.5% to 25.5% operating margin guidance, and I don't think there was any real new news in that to say.

We have some moving parts, and together, they result in us holding that guidance flat.

So we -- as we mentioned, we had some increasing beef pricing -- prices towards the end of Q2, and we think that may continue.

So we think that perhaps from flat, we may have some slight new leverage in our own costs.

We'll continue, as we talked to, the sequential deleverage in labor.

Same with other OpEx for the reasons we mentioned, not least delivery commissions, which Randy just talked to.

And so -- but we've got some leverage for various reasons within occupancy.

So all of those is sort of netting out.

We still stand by the 24.5% to 25.5%.

As to your point, we've got a lot of Shacks still priced at the back half.

Right.

And just on G&A, were there any mature concrete costs this quarter?

Or are they really all coming in the fourth quarter?

No, nothing material.

You'll see in some of our adjustments in the earnings release and in the Q. We identified those.

There was nothing of huge note this quarter.

So I think that we'll really start to see the majority of those costs kick into implementation, which, as I mentioned, we expect to start in early September.

Our next question will come from Andrew Charles with Cowen.

Randy, look at the LTOs you've run so far this year around Griddled Chick�n and piloting the veggie burger, is there a wellness bend to the menu innovation of the brand that's starting to embark upon?

You know what, I think, it's balanced, mostly, it's listening to our guests.

So veggie is a really new thing for us.

It's a test.

It's an LTO.

It's something we really want to learn.

We, number one, want something to be yummy.

We want it to taste good, and we want it to become essential to your life that when you go there, you can be excited.

So I think when you think about veggie or other new categories that we might think about down the line, we want them to be impactful.

We want them to drive traffic over the long term.

So veggie is a kind of thing that, depending on how it goes, we want to hear from our guests that they may not have come otherwise, right?

With certain things, we want it to be -- maybe I shifted.

Or maybe I'll come a little more often because today I'm not eating meat, and I love Shake Shack, so I want to try a veggie burger.

So it's only in 18 locations right now, so it's really a minimal test.

It's some of California, New York and Texas really is where it's centered.

But people are liking it.

I really like it.

It's a great item, and this is kind of what we're excited about here, Andrew, is seeing the test kitchen, the innovation kitchen come to life because it's really there starting in the fourth quarter here that we'll start to see the opportunity to really test some things, to have some fun downstairs right here, to do a lot more of the local items, maybe even be able to test some of the things that we might choose to do internationally.

We've got a lot of different ideas.

So we're excited about innovation.

We're not short of ideas around here, but we're pretty balanced about how many things we want going at once.

Very good.

And then can you walk us through the monthly cadence of sales?

Is it wrong to think that April is softer than the overall quarter due to an earlier Easter this year that presumably pulled forward some of the high volume spring break season business into March?

Andrew, we don't break down the quarter.

I mean, we did -- on your Easter point, I think we talked at the end of the last quarter potentially impacting to the tune of a couple of days, but nothing material.

We will now go to Jeffrey Bernstein with Barclays.

Just following up on the cost pressures, just looking at the labor line more specifically.

It seemed like in the first quarter, you did a great job with only modest deleverage.

And then this quarter, it was up much more meaningfully.

So I'm just wondering, was there a change in the basket of inflation from a labor standpoint in the quarter?

And then maybe what's your outlook for that basket guess?

And as you think about that, I mean, do you want to be a kind of employer of choice?

How much of the wage inflation do you think is your own choice to pay well above the wage versus how much is driven by the regulation?

And then I have one follow-up.

I think there's a lot in there, but a lot of it is driven by wage inflation on mandated things.

Also, different kinds of regulations like we've talked about Fair Workweek in New York and other things that have happened.

So there are many markets where we pay above minimum wage.

There are some that we pay at minimum wage.

These are generally the higher increasing ones like New York.

But again, our goal always with our team is to get you out of that wage, get you to a shift manager wage that's materially higher, get you into a promotion, get you to manager.

And that's been the method that we really used here.

So -- but it's real work.

Look, it's a changing economy.

It's hard.

It's always been hard.

We've been selling Shack burgers and hotdogs since 2001.

This is 17 years into making the story, and this question has never been an easy one.

And I'm pretty certain that 10 years from now when we're talking, it will still be a hard one.

It just got different flavors right now.

So we're doing our best to react market-by-market.

The best way we can do that is hiring great leaders that provide a great work environment, and we'll work on it.

But there's exterior pressures that continue to grow.

Great.

And when you just think about the pricing when you're sitting in that type of -- and I think you mentioned that you took sub-2% pricing back in December of '17.

Just wondering what's your outlook as you look to the back half of '18.

Maybe if you can frame it as to how much pricing you would think you'd need to hold the margin flat?

Or do you even think you have pricing power here to take if you wanted to offset some of the labor?

Well, a couple things in there.

I'll leave no intention at this stage of taking any price for the rest of this year.

We generally take price around the 1% to 2% range annually.

That's been the cadence for the most part over this last decade for Shake Shack, even longer.

So it's hard to say what we'll do this year just yet.

We're not -- we haven't given that guidance yet.

We'll keep an eye on it.

I believe as a brand, we continue to have a lot of pricing power.

But there's a difference between what we could take and what we should take.

I have said that for many years.

We are -- we do not intend to take enough leverage, enough to offset labor entirely.

Labor is probably a mid- to high single-digit increase year-over-year, and that continues -- that expectation continues for a number of years.

So we probably -- we do not expect to take enough price.

So we'll have to work on other things as we have and as we've guided you over the long term for this brand.

We've got a number of tiers on pricing now, so we use that strategically region-by-region, and we think we'll take price over time as we grow.

We'll now hear from Andy Barish with Jefferies.

I think historically menu innovation has been a traffic driver -- I'm sorry, a check driver for you.

And now it kind of feels like digital delivery is driving some of the step-up in mix that we've seen.

Is there any reason to think that these levels aren't going to continue for any foreseeable future as you grow those channels?

If you look at the past few years, you're absolutely right.

Well, not just menu innovation, menu mix, menu shift, the way that we sold things.

We've been able to successfully continue to grow our check beyond our menu pricing increases and some smart decision-making by the team on that and some of the things we offer.

Yes, digital is an increasing part of that because, as we've said, the digital channels generally so far have had a higher average check.

I don't see any near-term end to that phenomenon because we do believe over time digital as a percentage will continue to increase, and we continue to believe that we're going to offer compelling menu innovation that will drive that.

You may have some quarters that menu innovation is up as accretive to that, and some of that is down.

But overall, we're only going to be thinking about menu innovations to drive frequency, to drive overall sales.

But we do think that digital has a big opportunity to go up from here.

We have no additional questions in the queue.

I'd like to turn the floor back over to our speakers for any additional or closing remarks.

I just wanted to say thank you to everyone.

Appreciate your support for Shake Shack, and we look forward to seeing you at a Shake Shack soon.

Thanks, everyone.

Have a great night.

Thank you.

Ladies and gentlemen, again, that does conclude today's conference.

Thank you again for your participation.

You may now disconnect.