Shake Shack Inc (SHAK) 2018 Q3 法說會逐字稿

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

(Operator Instructions) Please note that this conference is recorded today, November 1, 2018.

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, operator, and good evening, everyone.

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

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

Additionally, we have posted third quarter 2018 supplemental earnings materials, which can be found in the Events and Presentations section of 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.

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

Please note, some of the statements made today may be forward-looking and actual results may differ materially 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.

We'll begin our call this evening with brief remarks from Randy and Tara, before opening the call up to questions.

I'll now turn the call over to Randy.

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

This evening, we'll review on our third quarter financial results, provide a progress update on our key strategic priorities for the year and share our initial thinking for 2019.

We're pleased to report that Shake Shack's overall growth remains strong as we head toward the end of 2018.

The performance of both our new and existing Shacks, the incredible hard work of all of our team members results in us raising our overall revenue guidance for the year and confirming that we remain on track towards our long-term goal to achieve over $700 million in revenue by the end of 2020.

During the third quarter, we opened 7 company-operated and 2 licensed Shacks, generated $119.6 million of revenue and delivered adjusted EBITDA of $21.3 million, with year-on-year increases of nearly 27% and 18%, respectively.

Shake Shack sales were down 0.7% for the quarter as we continue to execute our strategy of long-term overall revenue and profit growth through increasing market share.

We are doing this region by region, Shack by Shack, while delivering industry-leading sales, profitability and return metrics.

Tara will share additional color here, but suffice to say that as a result of this strategy, comp may be down -- or up in some quarters, down in others, although we remain committed to delivering significant top and bottom line growth, regardless of the potential impact in the short term on this 1 isolated metric.

At Shake Shack, we're relentlessly focused on delivering excellence, experience and hospitality in every interaction with our guests.

And underpinning this, we've focused on a few key strategic priorities this year.

First, development, our pipeline for both company-operated and licensed Shacks is supported by a robust and disciplined approach to the identification and evaluation of great real estate.

The timing of this year's openings has been back-weighted and has impacted our total revenue.

However, just take a look at the kind of Shacks we're building.

I actually got back late last night from a trip to San Francisco, where I met with our leadership team, who will be opening a stellar site in Palo Alto.

Last week, I visited our team in Seattle, where we opened a few weeks ago to line down the block.

We continue to build quality Shake Shacks in great sites, with community and experience at the heart of their design and location.

That'll drive our brand for decades to come.

We're encouraged by the early performance of the 2018 class of Shacks and expect to deliver our largest class of Shacks to date in 2019.

Next, on our menu.

We continue to innovate around the core menu, while testing new categories and menu items to drive guest excitement and engagement.

We're thrilled with the recent opening of our Innovation Kitchen as well as the important addition of our new Executive Chef, John Karangis, a talented Union Square Hospitality Group alumnus.

Third, the expansion and evolution of our digital channels and experiences is core to the future growth strategy.

And although we're in early stages, we believe it's growing an important part of how we more meaningfully and frequently engage with our guests in the future.

And finally, our investment in our foundational infrastructure.

We're committed to investing in both our people and our systems, but we have both a strong and efficient base from which to scale as we set our sights on significant continued short- and long-term growth.

Digging a bit deeper into our development progress.

We opened 7 domestic company-operated Shacks during the third quarter, expanding in our hometown of New York, with the opening of our West Village in Willamsburg, Brooklyn Shacks.

We opened our second Denver Shack at Highlands Ranch, and expanded into new markets of Nashville, Tennessee and Birmingham, Alabama.

And so far in the fourth quarter, we've already opened 6 Shacks, including Seattle, Philadelphia, Fort Lauderdale, Greater LA, suburban Minneapolis and Westchester, New York.

And as I mentioned, we're looking forward to launching in the Bay Area in Palo Alto in the coming weeks.

For the full year 2018, we're tightening our previously guided new unit range and expect to open 33 to 34 new company-operated Shacks, ending the year with 123 to 124 company-operated Shacks in total, delivering approximately 37% unit growth over the prior year.

As we shared, the back-end weighted profile in 2018 has had a meaningful impact on our financial results, with our fourth quarter being the most significant in terms of number of new openings.

At this stage, we've 10 to 11 openings remaining, and at least 4 of those are slated for the last couple of weeks of December.

Looking at next year of 2019 development.

We are, once again, increasing our planned number of company-operated Shack openings.

Our preliminary estimate is to open between 36 and 40 domestic company-operated Shacks in 2019, which would represent year-over-year unit growth of between 29% and 32%.

Hitting expectations, the way our permit and construction plans currently lay out, we're likely to have another back-end weighted development schedule, but we'll keep you updated on our revenue expectations as that schedule firms up.

Our target portfolio remains a balance of roughly 80/20 existing to new markets, with 2019 new markets including Providence, Sarasota, Virginia Beach, Salt Lake City, New Orleans and Columbus to name a few.

Now turning to our license business.

2019 represents an increased investment and focus on this important piece of our business.

Years ago, we took a chance to expand internationally long before companies our size would normally do so.

We believe that decision has been one of the more important strategies in the growth of our business.

We really like the balance of licensed and company-operated Shacks.

It's great for our brand.

A capital-light growth model gives rise to so many opportunities for our team to grow.

Most importantly, every time we partner with an extraordinary new company around the world, we learn, we grow and we bring that learning back to the broader company.

Our licensing team, led by Michael Kark, has done extraordinary work this year and we plan to continue to invest in our licensed business for many years of growth ahead.

Domestically, in the third quarter, we opened our first Shack in the Atlanta airport, the busiest airport in the world.

And we're also pleased to report that we'll be opening in LaGuardia Airport and Dallas-Fort Worth in the fourth quarter, followed by Cleveland as well as 1 Shack in Denver International Airport in 2019.

Airports now represent a proven, substantial and exciting layer of growth to our license strategy.

I loved the moment earlier this week when I was boarding the plane on my way to San Francisco and watched a parade of Shack bags roll through the aisle.

We're really excited about our airport growth ahead.

Internationally, in the third quarter, we opened our tenth Shack in the U.K. with a new Shack in the City of London.

And later this month, we'll open our second Shack in Hong Kong at Pacific Place following the really strong launch of the brand there earlier this year at the IFC Mall.

For 2018, we expect to open 14 to 16 net licensed Shacks, with 12 already opened, and 2 to 4 Shacks remaining in the fourth quarter.

The lower end of this range is slightly below our initial guidance due to a few potential pushes in opening schedules.

And at times, as you might imagine, opening dates for Shacks in airports and around the world can shift depending on much larger development schedules.

But rest assured, these are great Shacks coming soon.

Our international ambitions continue to grow.

And since our last call, we've entered into new license agreements for both Mexico and Singapore.

We're extremely proud to be working with Grupo Toks, our new partner in Mexico, with an agreement to open 30 Shacks over the next 10 years, with the first Shack planned to open next year.

In Singapore, we'll be building upon the success of our existing relationship with the SPC Group with an agreement for 10 Shacks over the next 5 years, with the first also expected to open next year.

Our entry into Latin America and our continued growth across the Asia Pacific are critical milestones in our global expansion, and we're excited to welcome these new markets and partners into the family.

With licensing agreements now in place in Japan, South Korea, Hong Kong, Shanghai, the Philippines and now Singapore, we remain strategically focused on Asia as an important growth driver of our international business over the next several years.

In order to further support our growth, we'll be opening our first international office in 2019 in Hong Kong.

With our existing footprint and planned future growth in Asia, it makes sense to support both our partners and our operations by deploying our own resources within the region.

For the full year of 2019, we expect to open between 16 and 18 licensed Shacks with a handful of domestic Shacks and the remainder in international markets.

We remain on track to meet our goal of 120 licensed Shacks by the end of 2020.

Now moving on to menu innovation, which is core to everything we do.

Our strategy is to deliver excellence across our core menu, while testing and innovating around it.

In order to better support that strategy, we just opened our Innovation Kitchen in the third quarter.

Located on the lower level of our new West Village Shack and connected to our home office, this new space is now home to our culinary team and serves as the hub for all menu development and innovation across the company.

As I mentioned, we're also thrilled to add John Karangis, our new Executive Chef.

In his role, John will oversee all culinary development for Shake Shack, leading the team in the strategic creation of innovative and exciting new menu items.

Our first Innovation Kitchen test item, our Chick’n Bites, launched in mid-September, exclusively at our new West Village Shack and is now offered in select Shacks in New York City and Arizona.

Chick’n Bites are a menu item we have been asked to add for many years and we're excited about this test to learn more about their potential from our guests over the coming months.

Now let's talk about digital innovation and the evolution of the Shack experience.

We've got a lot happening right now, and we are proud to share it, all of it in the nascent or in various stages of test and grow.

So what do we know at this point?

Well, what we know is convenience is more important than ever to our guests.

The demand to experience Shake Shack through digital channels is significant.

We know that digital channels continue to grow as a percentage of our total sales.

And we know that they generally have a higher average check.

So here's the reality.

None of this is easy.

With the addition of app, delivery, kiosk and now online ordering, we continue to add complexity to our already busy Shacks.

These additional channels can, at times, complicate our kitchens and, at peak times, create certain flow issues in the front of house.

But we love the fact that we're broadening the ways in which guests can experience Shake Shack, but our strategy remains one where we will roll out these channels thoughtfully so we can test, learn and iterate in order to do them really well in the long term.

We're early in the journey here, and we're still evolving these products, along with our Shack kitchens and broader design, to keep learning how to optimize and ensure a great guest experience.

We know we've got a long way to go, but we're excited about the opportunity and growth we believe continued digital expansion represents for our business.

A recent development on the digital front is the introduction of browser-based ordering from mobile and desktop that we're currently testing in just 10 Shacks.

Web-based ordering presents an additional opportunity to expand our reach to even more guests and those who may not wish to use the app.

This channel is just 1-week old, so we'll update you as time goes on and as we have learnings to share.

We're also continuing to retrofit certain existing Shacks and build a select number of new Shacks with our self-order kiosks.

By the end of this year, we'll have approximately 20 Shacks working with kiosks, all of which, except Astor Place, will be operating on a hybrid model retaining at least 1 traditional point of sale that also accepts cash.

Kiosks represent an opportunity for us to enhance the guest experience, streamline flow in the Shacks and potentially help with labor challenges down the road.

We continue to receive high guest experience scores in our Shacks with kiosks, but it's also early in our deployment of this new channel.

As mentioned on prior calls, the demand for Shake Shack to be delivered remains strong and represents an opportunity for us.

Our results included a number of integrated pilots with key delivery service partners.

We're continuing to be patient.

We're evaluating the options of establishing more formal relationships with 1 or more partners.

However, at this point, we're working to ensure the entire guest experience is one of the highest quality as well as operationally efficient for our Shacks.

Summing it all up, we're really pleased with the progress of all of our key strategic initiatives, each of which is critical to our continued growth, and we believe we're in a strong position to execute against the significant opportunity ahead.

With that, I want to turn it over to Tara, who'll walk you through our financial results.

Thanks, Randy.

Total revenue for the third quarter 2018, which includes the sales from both company-operated Shacks and licensing revenue, increased 26.5% to $119.6 million.

Sales from our company-operated Shacks increased 27.2% to $115.9 million, due primarily to the addition of 28 new domestic company-operated Shacks since the third quarter of 2017.

Licensing revenue increased 7.3% to $3.8 million, driven by an increase of 17 Shacks since the same quarter last year.

Similar to prior quarters, the implementation of the new revenue accounting standard has impacted the timing of the revenue recognition for some of our licensing agreements.

As we did for the first and second quarters, we'll include a comparison in the footnotes of the 10-Q to show our revenues reported under both the new and old standards.

The impact on the third quarter was $144,000 and we expect the reduction of revenue recognized over the full year to be roughly $500,000, which is consistent with previous expectations and is incorporated into our 2018 guidance.

Same-Shack sales decreased 0.7% during the third quarter.

This decline consisted of a 4% decrease in traffic, partially offset by a 3.3% increase in price and mix, and included the 1.5% to 2% price that we took last December.

Similar to the first half of the year, price and mix were positively impacted by our growing digital channels, which typically result in a higher average check than in Shack.

Although comp is a metric that receives much attention, as we've said previously, we do not believe it is the most useful metric for which to measure our performance.

We're a young company, focused on growing market share and building a strong and healthy business for the long term.

We're proud of our unit level metrics, our internal capital and our overall financial performance, and have taken the opportunity to update and share our trailing 12-month regional AUV and Shack-level operating profit performance on Page 7 of our supplemental materials.

We've shared some additional revenue detail by region on Page 8 of the supplemental materials in order to illustrate some of the current dynamics of our business, particularly as it relates to the relationship between overall revenue growth and comp performance.

For example, as highlighted on Page 8, for the trailing 12-month period in New York City and the Northeast, which are 2 of our more established markets, we've added roughly $15 million and $21 million in new Shack sales at the expense of approximately $700,000 and $400,000 in comp sales, respectively.

On the other hand, in the Southeast and the West regions, we've added roughly $16 million and $25 million in new Shack sales, while also increasing comp sales by $1.9 million and $0.7 million respectively.

Taking a look at our business in total, for the trailing 12 months ending Q3, we've added $93 million in total sales, while also experiencing an overall increase in comp sales of roughly 0.6%.

Comparatively in the third quarter, we added $25 million in new sales, while experiencing a decrease in the same-Shack sales of approximately $0.5 million or 0.7%.

And while none of us prefers to see a lower quarterly comp figure, we do believe this is a metric that will continue to show some degree of volatility for as long as we're aggressively expanding and growing market share.

We believe in that overarching market growth strategy that continues to pay out solid top and bottom line dividends, and we remained squarely focused on building an extraordinary company for the long term.

Average weekly sales for domestic company-operated Shacks was $86,000 for the first quarter of 2018 and our average unit volume for the trailing 12 months was $4.4 million.

As noted on many previous calls, AUV will continue to decrease with the addition of newer Shacks with a broader range of sales.

However, due to the stronger-than-expected performance of some of our newer Shacks this year, we now expect company-operated AUV to be between $4.2 million and $4.3 million by the end of this year, a raise to our previous guidance of $4.1 million to $4.2 million.

Shack-level operating profit, a non-GAAP measure, grew 20.7% in the third quarter to $29.9 million, with Shack-level operating margin of 25.8%.

Food and paper costs as a percentage of Shack sales decreased slightly to 28.2% compared to 28.3% in the prior year.

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

Labor and related expenses as a percentage of Shack sales increased roughly 90 basis points year-over-year to 27%, driven primarily by minimum wage increases and the introduction of new lower-volume Shacks to the system.

Other operating expenses as a percentage of Shack sales increased 150 basis point year-on-year to 11.6%, driven primarily by commissions paid during the quarter related to our current delivery pilots and off-site events, together with the impact of fixed operating expenses spread across lower average unit volume Shacks.

Occupancy and related expenses as a percentage of Shack sales decreased 90 basis points to 7.4% compared to the prior year, primarily due to expense leverage combined with an increase in the number of build-to-suit leases.

Core G&A, excluding Project Concrete and other onetime items, increased 27% year-on-year to $11.7 million in the third quarter, driven by ongoing investments across the business to support our short- and long-term growth plans.

In the third quarter, we also recorded a onetime charge of approximately $1.5 million, of which $1.2 million was related to a legal matter and approximately $300,000 was associated with Project Concrete.

The work on Project Concrete, our ERP upgrade initiative, is progressing very well.

We're now in the thick of implementation, which will continue through much of '19, and we continue to add scope where the business can benefit and it makes economic sense to choose it.

With respect to this project, an accounting standard update released in August changed the treatment for implementation costs associated with client-based software solutions.

As a result of this, we now expect a significant portion of Project Concrete implementation costs to be capitalized versus our initial expectation of costs being mostly operating in nature.

We expect to spend approximately of $1.5 million in onetime G&A and approximately $1 million in capital in 2018, with the remainder of project costs falling into 2019.

Adjusted EBITDA in the third quarter grew 17.5% from the same quarter in the prior year to $21.3 million.

And adjusted EBITDA margin as a percentage of total revenue was 17.8%.

In the third quarter, on an adjusted pro forma basis, we earned $7.9 million or $0.21 per fully exchanged and diluted share compared to $6.2 million or $0.17 in the same quarter last year.

Stock compensation added a $0.01 benefit on current quarter.

Moving on to full year expectations for 2018.

Our updated guidance is as follows: We are raising full year total revenue to be between $450 million and $452 million, an increase to our prior guidance of $446 million to $450 million, representing an increase of approximately 25% to 26% over prior year.

We've tightened our range for new domestic company-operated Shack openings to be between 33 and 34, representing a unit growth rate of over 37% year-on-year.

We expect to open 14 to 16 new licensed Shacks across our domestic and international footprint compared to our previous guidance of 16 to 18 Shacks due to timing shifts in the openings of certain licensed locations.

Based on trends to date, we expect full year license revenue to be approximately $13 million, including the estimated $500,000 impact of the new revenue recognition standard.

We expect average unit volumes for company-operated Shacks to be $4.2 million to $4.3 million for the full year, an increase over our previous guidance of $4.1 million to $4.2 million.

We continue to expect same-Shack sales to be 0 to 1% for the full year, which is consistent with prior guidance, albeit slightly towards the lower end of that range.

Shack-level operating profit margin guidance for the full year remains at 24.5% to 25.5%.

We now expect our core G&A expense to be between $48 million and $50 million, exclusive of Project Concrete and other onetime charges, versus our previous guidance of $49 million to $51 million.

We estimate a Project Concrete spend of roughly $1.5 million within G&A and $1 million in capital spend in 2018.

We expect preopening costs to be approximately $13 million; depreciation of $30 million to $31 million, due to our latest opening schedule, versus our previous guidance of $31 million to $32 million; interest expense of approximately $2.5 million, which is in line with our prior guidance.

We now expect our annual adjusted pro forma effective tax rate for 2018 to be 27% to 28% for the year, which excludes any effect from the accounting treatment for excess tax benefits from stock-based compensation to date.

The increase in rate is primarily driven by the relative impact of tax credits on our larger-than-expected income range.

As for full year 2019, we will provide detailed guidance on our fourth quarter call in February.

However, we'd like to share some directional headlines at this point.

We expect to open between 36 and 40 domestic company-operated Shacks, representing a company-operated unit growth rate of between 29% and 32%.

We also expect to open between 16 and 18 net new licensed Shacks in 2019.

We expect modest headwinds within food and paper costs, driven primarily by expected increases in distribution costs.

We expect continued deleverage on the labor line, driven by the ongoing pressure of a historically low unemployment market, regulatory minimum wage increases and the impact of lower AUV Shacks.

As it relates to G&A, we'll continue to invest across the business, in people, systems and infrastructure to support and scale this business and continue to deliver long-term sustainable growth.

Specific to Project Concrete, we expect to spend approximately $3 million to $4 million in onetime G&A in 2019, with a similar level in CapEx.

Depreciation expense will be higher in 2019 compared to this year, due primarily to our continued unit growth.

A new lease accounting standard becomes effective in Q1 2019, and we're continuing to evaluate its potential impact on our financial statement.

At this stage, we believe there will be some P&L impact, primarily in relation to our existing build-to-suit leases.

Currently, for those build-to-suit Shacks that are open, much of the lease cost is reflected in the depreciation and interest line.

Going forward, all costs will be reflected in the occupancy line.

We also know that all leases will be fully capitalized going forward.

So our balance sheet will significantly expand with both a right-of-use asset and the lease liability.

We'll update you with more specifics in February as part of our 2019 guidance once we've completed our full analysis.

So wrapping up our financials for the quarter, we continue to be pleased with our performance to date and the opportunities that lie ahead.

We have confidence in our financial results, the performance of our Shacks and the investments we're making to drive success for years to come and that will ensure the sustainable long-term health of this business.

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

Thanks, Tara.

Before we move to Q&A, let's just take a quick look at our strategic priorities for next year.

As you can see we're growing quickly, and we remain committed to meeting our near- and long-term financial targets, while remaining focused on excellence, experience and hospitality.

To get there, our leadership team will be focused on going deep on a few key initiatives.

First, committing to excellence in our people.

We all know what this means and how important our team has always been to our company's success.

And more than ever, with unemployment at historic lows, increasingly higher costs and availability of great talent, you can count on this being our leading priority.

We'll be making increased investments in our teams.

Next, consistently delivering a great experience at the Shack.

It's just so important that we keep evolving our guest experience, focused on delivering on the basics day in and day out and maximizing those moments where we connect with our guests.

In addition, we'll be working to cultivate a loyal and connected Shack community, using the platform of the incredible brand that we've built.

We're committed to deeply understanding and connecting with our guests more personally, digitally and face to face.

This focus on experiencing great interactions will continue to strengthen the relationships we have with our guests and what our brand means to them.

And finally, we'll be innovating for future growth.

We're going to do this by investing in our infrastructure, continuously refining how we operate, improving our product offerings and identifying opportunities beyond today's Shake Shack.

All of this, while standing for something good: taking care of our team and focusing many years down the road on the unique opportunity that Shake Shack has around the world.

Thanks again to everyone for joining the call tonight.

And with that, operator, you can please go ahead and open up the line for any questions.

(Operator Instructions) And we'll take our first question from Nicole Miller with Piper Jaffray.

Could you start talking a little bit about the top line, first, and the price that you had in the quarter, and if there's any comments about price versus mix?

And then when you think about the environment that you've outlined and there's some inflation, how much do you need to take to keep up?

And how much pricing power do you feel that you have?

Thanks, Nicole.

So right now, we've got about 1.5% to 2% price running through the system from the decision we made last December.

We will give official guidance on this later in the year.

But generally, we are expecting about 1.5% price though the system into 2019.

So look, if you look at the 15 years almost that Shake Shack has existed, we have been in the range of 1.5% to 2% pricing nearly every year that entire time.

We've never taken the price that we could and we've always taken the price that we believe we should.

We have a very long-term view on this business, and we're not just going to take price just because.

We think we have great pricing power.

And what we were doing, we'll continue to expand and be a little bit smarter year-after-year about price.

We're going to add another tier or 2 this year.

And we'll have some regions that will go up 2% to 3%, some regions that will go up less than 1%.

And all of that is balanced on pricing studies, pricing feelings that we have and anything that we think makes it a great experience for the long term for our guests.

And look, we'd have to take a lot more than that to offset the continued pressures here, right?

So we continue to tell the world that we will keep growing this top line, keep growing our bottom line.

We have not given any op profit guidance for next year.

But as we've said for many years, it is likely that op profit, over time, for the next few years, will continue to decline a little bit before it levels off and our business reaches more of a normal run rate stance.

So with all that, we're going to be -- continue being cautious.

Look, you read every day now about high inflation coming and opportunities.

If we see more opportunity where we can take a little bit more price next year, we may choose to do so, but as of now, plan for the end of December, about another 1.5 points coming our way.

That's very helpful.

And just a last question, congratulations on the Innovation Kitchen being open.

If I did the math right on comp, you did have positive mix.

So I wanted to confirm that and then also understand if there's things you're doing in that kitchen around menu innovation that can benefit mix shift and also maybe potentially expand day parts.

Yes, absolutely.

And I think we've shown for years now, the opportunity to take a little bit of price and continue to expand on mix.

Now there's a lot in there, okay?

There's digital channels which are increasing as a percentage of sales and continue to have a higher mix attachment to the higher overall check, right?

But when we look at the mix percentage and menu innovation, we've got a few things that we're looking at.

We've got our Veggie Shack, which is testing in about 20 Shacks.

We've got our Chick’n Bites, which are testing just in 3 Shacks here in New York and a few in Arizona.

That could be an opportunity for us.

That's a brand-new innovation, a brand-new item.

But we're not rushing to get that out.

It's really new for us.

And then we're going to continue to go around the core.

Right now, we're running an LTO with our Hot Chick'n, which was one of our favorite-ever LTOs that we ran last year.

So much so that we rarely bring an LTO back, but that one we did.

That's got a little bit of a premium price.

So we think we can do -- continue to engineer some good opportunity to drive price mix, while keeping our overall value in a really strong place.

And we'll move on to Jake Bartlett with SunTrust.

Tara, maybe first question on the guidance for same-store sales.

You mentioned being towards the lower end of the annual range.

My math is that, that could have -- that implies roughly a negative 2% in the fourth quarter.

Just want to confirm that you do expect a deceleration from what we saw in the third?

Jake, so when we look at comp, I mean, first of all, we continue to say it, but it will be a volatile metric for us.

And so we'll update you as each quarter goes on, basically, based on what we're seeing sort of performance to date, which is reflected in that commentary.

In addition, you may remember, we started our delivery pilots in earnest at the beginning of Q4 rather than very, very tail end of Q3 last year.

And so that's going to have a meaningful impact on the comp for Q4 coming up.

Got it.

And then just digging into the -- kind of the idea that cannibalization is having a big impact on the negative comps now but the volatility -- the difference between the second quarter is about 180 basis points.

And I guess I'm struggling to understand which stores would have kind of caused that much of a differential.

I mean, is it really -- opening in Williamsburg, Brooklyn going have that much of an impact or Staten Island kind of early in the second quarter?

So I just want to kind of dig into exactly how confident you are that it is the cannibalization that's having the impact.

And also, whether you can just kind of dig in to whether there's any other factors like promotions or weather, I think it was pretty rainy in the quarter.

And then I have 1 more follow-up.

It's a little bit of a cumulative impact of a number of things.

As we see it, look, we're continuing to grow so much of this business.

If you look at some of the supplementals that we shared in the deck, the New York City and Northeast still makes up nearly 2/3 of our comp base sales.

And we opened a lot of restaurants in those 2 markets.

We added a lot of sales.

So look, we never want to have a negative comp.

It's not something we ever are happy with.

And we're always going to drive towards our strategies of having that be positive, and we will not rest on that.

That said, when we add nearly $35 million in this last 12 months in just those 2 regions and we lose a little bit on comp, that may happen from time to time as we're still in this really early phase of filling some of these markets.

Also, if you really look at the data that we shared, sometimes the opposite effect happens, right?

We're showing the opposite effect in the Southeast and in our West regions that are new regions -- newer regions for us, where we can continue to show the opposite.

So I think it's really a region-by-region, Shack-by-Shack conversation.

If you look over the course of the trailing 12, we have a positive comp.

If you look over the course of the last couple years, we've had slight ups and downs in the comp base, and we've added a heck of a lot of sales.

So I think that's really the point that we see, it's for our balanced approach to market share.

Got it.

And then last question on delivery.

Have you -- at this point, been testing it for a little over a year.

Have you concluded that it is a good thing for you to do, meaning that the economics have proven themselves out, now you're just kind of working to pick a partner to move forward with?

Or is there some -- is it still in question in terms of the incrementality that the profitability of that part of the business, maybe the additional complexity it's adding?

Just trying to gauge where you are.

Well, yes, I'm going to -- look, we believe what's more important, we want to listen to our guests.

Our guests are telling us more and more that they, at times, would appreciate us bringing their Shake Shack to them, whether that's home or to the office.

We want to meet that demand.

We think that demand is only going to continue to increase in this next few years.

What we want to make sure we do is have a long-term, great business model that balances that great guest experience, and we still have work to do there, which is why we haven't chosen a single partner or multiple partners, yet.

We really are learning a lot in the last 4 quarters of testing with various partners, seeing who's got strength in what region and why, and we believe there's still some learning to go there before we would lock down anything.

And when we do, it's needs to be a compelling long-term opportunity for us.

Moving on to Sharon Zackfia with William Blair.

So Randy, a follow-up on that.

I think on the digital side, which would encompass delivery, in your comments, it sounded like perhaps there were some operational dynamics that were holding you back a little bit on the digital side.

Could you talk about what you guys can do with the kitchen, with labor, with the back of house and maybe even the front of house to help expedite, for those consumers to want to use digital, to come pick up but also those that would like to use delivery?

Absolutely, Sharon.

I mean, you go back just a couple of short years, the only way you got your Shake Jack was you stood in line, you talked to a human being, you waited and then we gave we you a buzz when it was ready.

Today, that exists.

Delivery people on bikes and cars with big bags exist.

You have people who are getting an alert on their phone if they ordered on our app or on our kiosk.

And sometimes you have people who may not choose to get give a phone number, so we're using their name.

So you've kind of opened up this various channels of the way people can get to their Shake Shack, and as much as well as some of the packaging that gets added, certainly, for the delivery piece.

Now we just added online ordering, which we're super excited about.

I think that's going to be a great channel for us down the road.

And I think all of that is a long way of saying, we've got to work through those challenges.

It's not without its challenges, especially for some of the existing very high-volume Shacks and some of those that make up our comp base, right?

These restaurants are busy and the pick-up area didn't magically get any bigger.

So what we're doing, as you look at some of the new Shacks, you look at our West Village Shack here, the Innovation Kitchen, some of the others recently are really trying to expand that pickup area, trying to make guest-flow as comfortable as possible, trying to separate some of the out-of-Shack dining experience with delivery from the in-Shack and make it as seamless as possible to experience.

But what we're acknowledging, it's part of why I put this in the comments, that it's going to take some time.

It's going to take some evolution.

There are channels that we haven't even invented yet that we're looking forward to thinking through that will evolve the way in which you will move through and get your Shake Shack.

And you've got to be flexible.

We've got to be willing to invest, and you'll see that in many of our comments on the investments we want to make.

And we've got to learn.

We've got to learn how it works when all of a sudden you have 4 new channels.

So our operators are doing a great job.

They've got a lot to do.

And it will be something we'll be working on, I think, for a long time.

Are you at the point yet where you're doing any segmentation or anything to try to drive traffic from those folks who are using digital ordering?

Yes, a little bit.

More and more, we're experimenting with various segmentation.

We've gotten a lot smarter on that.

So much of our new data, both from our big social media following that we have with our apps, gives us opportunity to reach out to people in new ways that we hadn't been able to do before.

And we're trying some really cool things.

These are small and not material to our business but they're indicative of Shake Shack.

You just look at a couple of weeks ago.

We ran a quick thing on Bumble, a dating app, which was so fun.

It was an opportunity to take a date to Shake Shack and get a burger -- buy a burger, get a burger.

And a lot of people took us up on it.

It was a really cool, fun thing that was so on brand for us, so on brand with who we believe our guest is, and it allowed us to connect in a way that felt just really personal.

And that's the way we're going to use our digital channel as we go forward.

But again, we are just, just getting started.

We have so much opportunity in the future on that.

Yes, Sharon, it's Tara.

If I could just add to that.

I think what you're touching on and the ability to do that is a big part of where you'll continue to see us invest across the business.

When we talk about investing in people and systems, it's not just back-of-house ERPs, things like building out guest data insights, capabilities, whether that be as part of our tech infrastructure or building that relatively new muscle for the company within the marketing organization.

So it's certainly high on our priority list.

We think it's super powerful and there's a whole bunch of value in that today and going forward.

But again, it's where you'll see us continue to build that out over the coming years.

And we'll take Chris O'Cull with Stifel.

Randy, I appreciate the importance in investing in menu innovation, but what aspects of menu innovation are you expecting to improve with the new kitchen and the new culinary leadership?

I mean, should we expect more items that are testing, regional variation, et cetera?

If you could comment on that?

Thanks, Chris.

Again, welcome to the call and thanks for taking an interest in Shake Shack.

I think it's all the above.

Most notably is time to market.

We literally have been doing menu innovation in the basement of Shack kitchens around New York City all these years.

It takes some time.

It takes effort and then you've got to open a restaurant.

Now we finally have our own kitchen, we have a brand-new chef who is not replacing.

He is a new position in addition to the great culinary direction we've had on our team for years.

So he comes with a fine dining background having cooked at Union Square Café and then also having done it at serious volumes with Union Square Events, our events company.

So John's expertise, we're really excited about.

I think what we expect is, number one, continue the commitment to improving our core menu.

How do we do things better?

How do we make them smarter?

How do we do things in the most effective way behind our line to make them great and impact throughput over time?

Once we're -- in addition to that, John's going to be endlessly creative with the team.

And we are looking at new things like Chick’n Bites.

That's a whole new category for us.

I'm not sure what we'll do with that yet.

It's way too early to say.

But we're getting some great feedback from our guests.

And it opens up a whole new opportunity for -- potentially, for snacking in the afternoon or in addition, for a shift from a kid who may have gotten a hot dog before and, I think, for frequency.

So all of that, I think Shake Shack being Shake Shack and coming from where we come, we have an opportunity and a license to do a lot of things.

Most of that will focus around our core, but I think we've got opportunity to have some fun.

And we've always done that, but this will, I think, really firepower that to a new level.

That's helpful.

And then just 1 last one.

When I think of the Shacks in the Southeast and Midwest, I would think they would have very large trade areas.

I'm based here in Nashville, and, I don't know, I guess, the trade area drive time in Nashville might be 20 to 30 minutes.

So I'm trying to understand how you view delivery in these types of markets where you could have such large drive-time trade areas?

Yes, we're seeing some real interesting data on that.

There are some throughout the country that are sort of typical suburban that we are amazed at the delivery opportunity there.

And it's not so much -- we've got to be careful, also we want to have a tight radius on these things, right?

We don't want it driven for an hour even if a delivery company would take that up.

We want to make sure we really balance the sales with giving a great experience.

So we're going to keep those radiuses pretty tight to make sure that it's a tight time frame and a really good product.

But I do think you're spot on in saying that as you go around the country or a different situation from us sitting here in New York or the urban centers, there's opportunity to reach people who you may not have reached before, either at their office or at their home.

And we think that's part of the long-term opportunity for delivery and digital in general.

And we'll take Andrew Charles with Cowen.

It's actually Brian Vieten on for Andrew.

Just on the traffic figures.

So recognizing the comp base is still -- it's still small, the 2-year traffic is kind of down mid-single digits year-to-date.

As you guys have sort of gotten to know your customers more and experimented with new ways to engage with customers through digital channels, is there any measurable impact from order -- I guess, order consolidation, perhaps manifested in more entrées per transaction or something to that effect?

Yes, it's something we're watching.

I mean, there's no question when you have a growing percentage of digital orders that are generally a larger order, we're looking at how that is impacting things.

But look, overall, when we look at traffic, we look at comp, we're going to remain consistent with our commentary here and our results have remained consistent.

Today, it's only -- as of this quarter, only 54 Shacks in the comp base.

That is less -- right around half, but a few more to be added, too, the end of the year.

So it's just something that we're going to see be variable in the near term.

When we have Shacks that continue to have long honeymoons, when we open in these big huge exciting -- we just opened in Seattle a couple of weeks ago.

It's crazy, the line was down the block.

It's super exciting.

I guarantee you, at this time next year, it won't be the same kind of thing as it is right now.

It'll level off into just being a great business.

And that's just something we've got to go up and down with over time.

And as you look at all the data we gave, we've had our ups, we've had our downs, and I think that'll balance out, all of which, leading to really high AUVs.

That's what we're focused on, high AUVs, high sales in general, and high op profits.

So we're pretty confident about where it's headed.

And now we'll take John Ivankoe with JPMorgan.

This is actually [Andrew] on for John.

My question is about Project Concrete.

I'm just wondering is there any other sustained costs on G&A beyond the $3 million to $4 million onetime in 2019?

And then, if you could just kind of talk about the benefits you guys expect from the work, the ERP system going forward?

Yes, hey.

So we'll give some level of detail in our 2019 guidance, when we guide to G&A in February.

But when you upgrade a system, which we're doing, it tends to cost you a bit more on an annual basis going forward.

So that may be wrapped up in there.

The bulk of the cost is in the onetime, which we've shared with you.

In terms of -- in terms of the benefits, there are multiple benefits across the system, both from ability to scale more effectively, ability to scale more efficiently, taking -- lowering the need to add people and using technology instead and importantly, taking admin out of our Shacks, and that was one of the priorities that really kicked off this whole project, which is, as a pretty small company still today, we've done a great job building this company to where it is without investing significantly in infrastructure when it comes to back-office systems.

And on occasion, we can put undue burden on our Shack managers, when it comes to some of the back-office activities, particularly when it comes to some of the people activities, hiring and managing and so forth and also on what we call our procure-to-take process.

So we're looking to take as much of that admin out of the front of house as possible, so that our operators can really focus on what we want them to do, which is deliver great hospitality and a great guest experience in the Shacks.

So we're excited, but it's a big list.

It's going to impact everyone in the company, but everyone is super excited about it.

And it's the right time for us to do it.

We could probably have delayed a couple of years or a few years, but we want to do it now before we're too big.

Because, when you do these sorts of things, they can be a distraction, and they are expensive, and the bigger you are, the more those inflate.

So we feel that this is really great time for us to be doing it, while we're the sort of 100-ish Shacks and as I say, it will take us through this year and into -- and through much of next year, but we're really excited about the quality of infrastructure and automation that we'll be left with.

Up next is Jeffrey Bernstein with Barclays.

This is actually Jeff Priester on for Jeff Bernstein.

When you guys are thinking about the menu innovation items that could be coming out of the Innovation Kitchen, how do you think about the rollout time line?

And also, are you looking for more LTO items or more menu items?

And on your menu, how much space do you think you actually have to add full-time items?

And then I have one follow-up.

Yes, it's a great question.

I think the answer to the timing really depends.

We -- what we can do now is do a lot more testing.

For instance, Chick’n Bites are doing New York City and Arizona, of all places, 2 completely different markets, so.

And sometimes, we may not choose to have a view towards rolling things out superfast.

We may think to have out things regional.

So right now, we've been testing our Veggie Shack in just a few markets around the country in places that we've gotten more feedback about the desire for a veggie burger.

So I think that's really dependent on the item.

And as it pertains to the whole menu, we don't want to keep adding and adding and adding.

You've got to take things off from time to time.

We've been pretty focused on that for a decade.

We have been very strict about just increasing the size of the menu.

Really Chick'n Shack has been the main thing ever that has really been added to the menu as a new category.

So as we think about other things, we'll be cautious about that.

We'll make sure that we feel good about the throughput.

There's little things that we do to balance it.

Just this year, we actually took off peanut butter, just for a number of operational, food safety reasons.

That was a tough decision.

We have a lot of people who love peanut butter, including me and my kids.

But the reality is that it was something that we just decided was not worth having on the menu after all of the thinking about it.

And it opens up time and throughput opportunity for us to do a little bit better on our other shakes that may have a greater opportunity to sell more.

Great.

And then Tara, on the implied fourth quarter G&A, that's a relatively wide range for just 1 quarter.

Can you give us some of the puts and takes as to what would cause you to end up at both the high and the low end of that range?

Yes.

I mean, some of it is people.

As you know, we are hiring across most aspects of the business.

Sometimes we hire to our planned schedule, and sometimes it takes longer to hire.

We also have just so many growth initiatives going on across the company right now, they don't necessarily all end up falling where they were originally planned to fall, so some may fall out of Q4 and into Q1.

We tend to have a little bit of step up in Q4, when it comes to things like year-end professional fees, NOA.

But I would say a lot of it is in the growth -- are in the growth initiatives and when they actually kick off and the speed with which they scale.

So based off that commentary, it seems as though you would think you're going to be towards the higher end of that range unless things start to get pushed later in the year into the next quarter?

Yes, I mean, we gave the range because right now, the range is our best estimate.

So yes, we'll -- I guess, when we talk to you in February, we'll know where we ended up.

But right now, we've got a lot of moving pieces across the organization.

There's a lot of activity and a lot of investment and so hence the range.

This is not -- we are not in steady state.

We're building and investing for long-term growth, and that's why there is a range in a line item like that.

And we'll move on to Nick Setyan for Wedbush Securities.

This is actually Marshall on for Nick.

I had a question on delivery, similar to those asked already.

But would you be able to share where you are today in terms of number of units as well as your plans on rolling out to additional units?

Yes, I mean, delivery -- so, the question's the coverage of delivery across the system?

Yes, correct.

Yes.

I mean, it's differs slightly sort of partner-to-partner, depending on who we've got on at any point in time.

But generally speaking, we've got the vast majority of our units covered by delivery.

And up next, we'll have Karen Holthouse with Goldman Sachs.

This is actually Jared on for Karen today.

I wanted to just ask a question, I guess, sort of related to the comp and the traffic.

We've seen a lot of the QSRs that have already reported continue to talk about the sort of value wars in the industry and some pretty tough competition.

And I know you guys might be somewhat of a higher tier than the McDonald's of the world, but are you seeing any pressure from those outsized competition?

We've always believed that our competition is a little bit different than that.

That's not to say that we don't, of course, compete with anyone selling food anywhere.

But I think, generally, we focus on the premium experience that Shake Shack has always brought.

The ingredients that we use, there's just a great report out that gave us an A versus some other brands compared to -- in how that we use no hormones, no antibiotics in all of our proteins.

We make investments that way.

It has never been our approach to compete by price.

We know we're a little more expensive.

We know we're worth it.

And we know our product has a really great degree of premium.

And we're taking -- as I talked about earlier, we're a little bit more patient on how much price we do take when we charge for those things because we want to make sure we remain a great value in the midst of all that.

Great.

And if I could just follow up on one kind of switching gears.

Labor, obviously, is a topic of concern as well across the industry.

Can you guys talk about how you're thinking about that into 2019?

Yes, we think it's going to continue to go up.

We've seem kind of roughly mid-single-digit increases in wages around our system.

We expect a similar amount again next year.

You've got many places where minimum wages are going up significantly.

And then places where it is or is not, you still end up paying a certain premium amount to get the kind of team members that we really like to have at Shake Shack.

It's a competitive environment.

There's a lot of on-demand jobs that have begun to compete with traditional restaurant jobs and workers.

And it's made it a challenge for our team.

Without a doubt, it's one of our greatest challenges, probably always will be, and yet something we love to focus on, something we love to invest in and the kind of strategy that we know we've got to win on.

So we're expecting higher costs and a lot of challenges, especially as we ramp up growth, but we are going to go ahead and get that done and bring on some great people to our team.

And there are no further questions.

I'd like to turn the call back over to Randy Garutti.

Just want to say thanks, everyone, for being on the call with us tonight.

And we'll look forward to welcome you to a Shake Shack soon.

Have a great night.