Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Shake Shack Third Quarter 2016 Earnings Call. [Operator Instructions] Please note that this conference is being recorded today, November 9, 2016. On the call today we have Randy Garutti, Chief Executive Officer of Shake Shack, and Jeff Uttz, Chief Financial Officer. And now I would like to turn the conference over to Jeff Uttz. Please go ahead, sir.

Thank you, operator, and good evening everyone. By now you should all have access to our third quarter 2016 earnings release. If not, it can be found at Shake Shack.com in the investor relations section. Before we begin our formal remarks tonight, I need to remind everyone that our discussions today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them. Actual results may differ materially from those indicated by these forward-looking statements due to a number of risks and uncertainties, including those discussed in the Risk Factor section of our annual report on Form 10-K which was filed on March 30, 2016. Additionally, any forward-looking statements represent our views only as of today. And we assume no obligation to update any forward-looking statement if our views change. During today’s call, we will discuss non-GAAP financial measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in the earnings release. With that, I would now like to turn the call over to Randy.

Thanks, Jeff. Good evening to everyone, and I want to specifically thank all of you for taking the time on the call today. I’m sure we’re all up late and all have had busy and interesting days. And I want to say thank you for taking the time to be with us tonight to hear what we’re doing and where we are headed. We’re excited to share the results of Q3 and where we are headed. I wanted right to the highlights of Shake Shack’s performance in the third quarter. We are extremely pleased with the growth we have achieved amidst an industry environment that remains challenged. We grew total revenue over last year by 40%, driven by 17 new domestic Company operating Shacks and same Shack sales growth of 2.9%. This growth is on top of last year’s 17.1% comp increase, which was our toughest quarterly compare since becoming public for a two year stack comp of 20%, representing acceleration from the second quarters two year stack comp of 17.4%. More importantly, we delivered another quarter of robust Shack level operating profit margin of 28.8% as we continued to post strong AUVs, executing our multi format growth strategy. We grew adjusted EBITDA by 26.3%, reaching a record $15.2 million. And the third quarter was another quarter of tremendous growth for Shake Shack. We’re poised to deliver even further growth in Q4 and into 2017. Today, Shake Shack is delivering a better guest experience than ever in 110 Shacks throughout 13 countries. On today’s call I want to provide context around the strategic initiatives driving that growth and the investments we are making as we raise guidance for the balance of 2016 and provide our preliminary outlook for 2017, based on our ramped up growth targets. Menu innovation at Shake…

Thanks, Randy. Now I would like to share with all of you the results of our 13-week third quarter which ended gendered September 28, 2016. Total revenue which includes both sales from Company operated Shacks as well as licensing revenue increased 40% to 74.6 million during the third quarter from 53.3 million in the third quarter last quarter last year. Sales from our Company operated Shacks increased 40.2% to 79.1 million during the quarter versus 51.3 million last year. This increase was largely due to the addition of 17 new domestic Company-operated Shacks over the past year, which is a 41% increase in Shack count, as well as growth in same-Shack sales. Same-Shack sales increased 2.9% during the third quarter on top of a 17.1% increase in the prior year, or a stacked two year increase of 20%. The growth for the quarter consisted of a 3.6% increase in price and mix offset by a 0.7% decrease in traffic. Remember our comparable Shack base is still very small with only 26 Shacks in the third quarter. And as a result, our same-Shack sales growth is sensitive to changes from a small number of Shacks. Considering the tremendous traffic growth these Shacks experienced last year with many in the double digits, we are very pleased with the quarter’s performance, especially in the current environment. Average weekly sales for domestic Company-operated Shacks remained strong at $103,000 for both the third quarter of 2015 and third quarter 2016. Licensing revenue increased 34.9% to 2.7 million during the third quarter from 2 million a year ago, driven by a net increase of 13 Shacks, or an increase of 38% since the third quarter of last year, with particularly strong performance in Asia offset by lower revenue from Shacks in the Middle East and the…

Thanks, Jeff. I want to close up today by taking a moment to share with you some highlights from our recent Shake Shack leadership retreat. Every year we gather our leaders from around the Shack world. And what began as 18 of us in 2009 has transformed into nearly 500 leaders over six days. It’s the moment we all come together, calibrate our vision, align our strategy, share learning’s and best practices, and head back into our Shack stronger and more inspired than ever. The energy, camaraderie and leadership that is created during this week is a big part of who we are and how we do. Amazingly over the years, the team is more connected and more intimate than ever. And we continue to advance our culture as we grow. This is what permits us to achieve a central core mission. The bigger we get, the smaller we need to act. As Jeff mentioned we’re investing in our teams at all levels. As we look ahead to the opportunity in front of us, our culture begins and flourishes within our team. This team is what has made our Company great, and what it will take us forward. I am incredibly thankful for their leadership and hard work every single day. You will see that investment in their expectations of higher payroll moving forward. We have lead this Company from the beginning with a long term view. And we believe this investment today will help us reach our long term goals. Before we go to Q&A, I just want to tell you how excited we are to publicly welcome Josh Silverman to Shake Shacks Board of Directors. Josh co founded and led Evite, helped build eBay’s international business, led Skype as its CEO, and most recently led Consumer Products and Services at American Express. His insight and background are an incredible strategic addition to our Board as we look towards the next generation of Shake Shack guests and fans. With that I want to thank you all again for taking the time on this long day to join our call. Operator, you can go ahead now and open the line for questions.

Thank you. [Operator Instructions] And will take our first question from Sharon Zackfia with William Blair.

Hi. It’s Matt Curtis on for Sharon. Just starting on, I guess, price and check. Could you break out the components of average check into price and mix for the third quarter? Then you also mentioned you’re starting pricing tiers next year. Could you explain, basically, how many tiers there will be? And how big the pricing disparities are going to be?

On the breakdown between price and mix, we typically do not break that out. But we have a about a 0.5% price increase from last year. We have talked about that. That is the price component that you see on the same Shack sales. Then talking about the tier pricing structure. What we have done is we’ve looked at our Shacks and we determined that there are some Shacks where we have more pricing power than other Shacks. It is not necessarily region. But we have broken it down into three tiers and believe in some tiers we can take a little bit more price than we can in other tiers. And in some tiers there’s going to be a lot of items where we may not take any price at all. But after we average that all out and we have tiered this out, it comes to about a 1.5% to 2% menu price increase.

I guess one more question. On the depreciation for 2017, it looks like the growth in dollars is going to be accelerating next year. And it looks like it’s going to be actually outpacing unit growth. So what are some of the factors that may be driving this?

There’s some corporate expenditure in there. But it is really just the ramped up growth. There are a few Shacks in there. We have gone from 19 in 2016 to 21 to 22 in 2017. So the average cost to build a Shack, we do not expect to change significantly in 2017, might be up a little bit as construction costs climb, but not significantly. But that’s going to be the increase in dollars that you’re seeing from 2016 to 2017 in our guidance.

[Operator Instructions] We'll go next to Jake Bartlett with SunTrust.

Great. Thanks for taking the question. I had a question about LTOs and the ability to execute on them. You had a fair amount of them in this third quarter. Talking about your plan going forward, it sounds like you are adding more regular ones, doubling up on the chicken, the burger and then doing the more regular seasonal shakes. The question is, just being able to execute that, given the high level of throughput?

If you look at LTOs and what we have done over the years now, our core menu has really remained almost exactly the same, outside of the addition of the Chicken Shack earlier this year. When we do a burger LTO, something else comes off. So we generally do not tap the kitchen and hurt our throughput while we do that. We did a few smaller things this quarter. We had Shacktober Fest, which is an annual thing we have done since the beginning of Shake Shack. We have done smaller beverage specials. And we are going to return in Q4 to the trio of shakes. We are really excited about next year doing just a few things and doing them really well. So the real only difference here is -- for next year is we are going to replace the Bacon Cheddar Shack with Barbecue ShackMeister, which is going to be a tweaked version of a classic that was really successful for us in 2015, as well as adding the Barbecue Chicken, which operationally, it’s really a pick-up for us. We feel like we’re adding a lot of opportunity for guests to do new things without at all challenging the operational system right now.

Great. I have a question about the 2017 opening class and the composition. How many stores are going to be in new markets versus existing? Maybe flagship stores versus more infill? And then also in that context, if you could share with the AUV for the 2016 store class is expected to be by the end of the year? I think the last stated at 3.6 but maybe there’s a revision there.

Okay, starting with the class. In the past we have talked about, in the last two years we’ve done roughly one-third new markets with two-thirds filling in existing. That percentage will come down a bit, as now we fill out LA, we fill out Texas. We are going to have more of about 25% new markets, those are going to be as we mentioned in Detroit, St. Louis, San Diego, some of the smaller markets there, not all LA-based. In terms of flagship, it’s hard to say what defines a flagship. When we talk about flagship, it may or may not be a high volume Shack but it may be the flagship for that city. So our expectations for next year, as Jeff noted, are about 3.2 million for the class of 2017. That will be down from this year. The last time we reported to you was about 3.6. And we have not updated that. We are performing a little bit above that for the class of 2016 because we have had some heavy hitters. We have had West Hollywood perform great. We’ve had strong Shacks opening in California. We have had Herald Square and Fulton Center here in New York. And we are about to open Penn Station. That was originally a class of ‘17 plan. It’s going to get opened in December. So that will now become a class of ‘16. So it will evolve. But we are really excited about the breadth of the class of ‘17 and how well we think they are going to do. And as we keep talking on all of these calls, we’re [indiscernible] everyone to understand the long-term growth opportunity of Shake Shack. We have ramped that up to 3.2 million from previously stated $ million and 21% op profit. We are excited about that class. It’s going to be a great group of restaurants.

Then real quickly. Just a more a near-term question. The annual guidance range in 2016 is still pretty wide with one quarter left. Should we read anything into that? You could -- it could be negative, it could be positive strongly, anything we should read into the guidance for the [Multiple Speakers]

No. A lot of it is we have a few restaurants to open yet. So we have a little ways to go on that, Penn Station, it depends, do we get two weeks, three weeks, four weeks out of that restaurant. And we have a couple coming. We’re going to open at the MGM, a brand-new beautiful place near DC. And it is hard to say what that restaurant is going to do out of the gate. So it is mostly about the development schedule and the fact that we have seven weeks left of what has been an interesting year in the industry. So we’re going to give that guidance. It is a little bit of a range now, but as you can see it’s greatly increased from our previous.

Jake, it’s Jeff. The range of $264 million to $265 million for the year, the reason for the $1 million range is exactly what Randy said. It’s just a moving target on development and opening dates. And it’s just with a few irons in the fire. So it’s hard to narrow that down any further right now.

We will take our next question from John Zolidis with Buckingham Research.

Wanted to ask about breakfast. You mentioned that that was going to be in the Penn Station store. I know it is in some of the airport locations. Can you talk about any specific challenges with having breakfast in the stores. And then how much does that contribute to the sales volumes?

Well, it is only in a couple stores. We have the three airports, two here in U.S., one in Dubai. And then we have the two train stations, as well as the third. The most recent one was in Fulton Center, which is not really a train station. But we talked a bit about that on the last call. Penn Station, we think it’s going to be busy all day long and we want to capture the opportunity, so not a lot of challenges. We designed that menu to work seamlessly with our equipment, with the way that we produce things, and flat out be really yummy. We are excited about that. We sell a lot of coffee, sell a lot of egg and fresh sausage sandwiches, with bacon, egg and cheese probably being the leading item that we sell. It is also going to give us an opportunity in locations like that. You end up with a grab-and-go type of situation that we do not have a traditional Shack. We are learning about that. That is all new for us. And the opportunity to drive sales and innovation there has been a lot of fun. So we will be trying out some new things at Penn Station, being such a busy place that people are literally running through and creating really kind of a safe, nice, beautiful, warm place in the midst of a pretty busy hallway. So no further plans at all for breakfast beyond those transit centers today. We will certainly keep you posted if we choose to drive that any further.

Great. I look forward to trying it. One follow-up question, if I may. You mentioned about one-third of the stores were in new markets. There’s been a lot of discussion within the restaurant industry about the state of the consumer and a lot of restaurants seeing the consumer pulling back. Do you see any difference in the reception to the brand in the new markets versus your existing markets in terms of how willing the consumer is to spend money and come out and enjoy the product?

Not really. I think that question is best answered over the long term. I spent last week in Dallas and Houston visiting our Shack that had opened in Dallas that is just one of the most beautiful Shacks we have ever designed. They are doing great. Then the next day, that was last week on Friday we opened in Houston. And the lines stretched probably 100 people deep for the entire day and through the weekend. So there is a brand power that Shake Shack brings. We always start really big, as we have talked about a lot on these calls. We generally, in the new market launches, see a dip in year two. And then that generally grows back at a low single-digit comp in year three. That’s been the history of our Company thus far. But each market is new. Each one is different. Each one receives us excitedly, and then we have to earn it one burger at a time. And that is what we are trying to do. I think the sustained success of so many of the new markets, I think really just purely eliminates the story that we have talked about for two years about whether this is a Manhattan-based Company or not. We happen to live here and have a great business here. But, boy, we are doing really well across the country right now.

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

Great. Thank you. Randy, I want to get your updated thoughts on delivery. During the quarter the Chicago Athletic Association Hotel piloted delivery using hotel staff to complete the order to guest. And last night I saw that DoorDash did a free delivery of Shake Shack. So when we think about the recent mobile app pilot, can you talk about your stance on third-party delivery has evolved?

Absolutely. This is part of my comments of meeting people where they are. Today we have no official partnerships with any delivery service. We work often with Postmates and DoorDash as our largest. And they are just doing their thing. They’re people are ordering on their app and they are coming in and delivering Shake Shack. Every now and then, and yesterday is the best example, we work with DoorDash and we said, hey, why don’t you guys feature us, see what happens on election night when people want to sit home? And we made it easy to do so. And we had an extraordinary response on an opportunity night. We are excited about delivery. But we are not jumping in with one partner at this time. We are still discovering, there are so many great players out there that are disrupting the market every day from Amazon, GrubHub, and Uber and everyone else. We are taking a lot of time to get to know each company, where it is headed and how it might fit. I believe over the long term we will continue to do more and more delivery through third parties. And it remains to be seen how we will choose to do that. Today the app is only for pickup, and that is our intention at this time. Nothing beyond that. But that said, there is no question, the consumer is moving towards a bring it to me or get it ready for me more mentality every day. And that is part of the digital revolution of our brand that we are super excited about.

Well said. And Jeff, when you look at the labor dollars per Company Shack, I saw that labor hours were up about 7% this quarter, which is a pretty big acceleration from the first half of the year, which occurred after the wage increases were put in place. Can you talk about the incremental benefits put in place in Q3? Or anything else we should be aware due to the acceleration of labor costs, too?

A lot of that, Andrew, that line of labor and other benefits is medical. We had some medical claims this quarter that were one-time large stop-loss type claims that hit the medical line and contributed to a good portion of that increase.

Additionally we are ramping up more managers for growth. We have to be fully staffed. We’re preparing for some increases coming in January. That is part of the guidance we gave on the labor line pressure in the next year.

Great. My last question is a clarification. Is the Penn Station store, is that going to be Company or is that licensed?

That is a Company-owned Shack.

Okay. Is that a little bit of a change? I know you’re doing the HMS licensing deal in airports, and obviously you’ve got Grand Central and a few other, I think in DC as well you have another train location. Is that a little bit of a change in strategy for you guys, just given the other stores are licensed in transit centers?

No, not really. Here’s the deal. Our strategy is, if we can own it in this country, we’re going to own it. We love the return and we want to make a lot of money. In this case in Penn Station, as well as in Fulton Center or Grand Central, we can own those. It is a different scenario when we go to an airport or a baseball stadium where teams or more complicated contracts are involved. In those cases we will work with license partners. And that is the intention with HMS Host as we hope to grow in airport locations around the country.

That is great. Thanks you guys.

Our next question will go to John Ivankoe with JP Morgan.

Hi, Thank you. Two if I may, and both on the same theme of the wherever, however. Are you guys sketching out a drive through at any point? Is it on the table or off the table?

No, nothing on the table at all, John. We have never sketched that out. We never say never. If I had a crystal ball I would say that drive through, as you know, it’s got to evolve. So if ever we see it more as a pick up, drive up type of scenario where certain Shacks are going to have certain of those more mobile drive up to Shacks will have at pickup parking spaces. We are trying to do that whenever we can for the future, and make it easy to get in and out of there, if that is the way you want. But we do not want to undo what made Shake Shack great. And that is you have to come. You have to enjoy it. It’s a community gathering experience. And when we talk about wherever, whenever that is on top of our strategy of continuing to be your community gathering place. That does not change. I want to be very clear about that and make sure everyone understands. We’re going to do that better than ever. But if you choose that that’s not for you on that day, we want to make it accessible to you. And that is the plan with the app and our digital platform as we go into this next few years.

Understood. Thank you. Obviously the benefits of the app to everybody is very, very clear, especially during off peak periods where you do not have to wait for the food to cook. But the question is, at peak periods where the lines are long and the kitchen appears very busy, the kitchen in some cases actually appears at capacity, maybe I’m wrong. Can you talk about how much peak hour capacity that you think the app could potentially add, even if it is just a hypothetical guess at this point? I know you, Randy. It would not be a guess. You must have a specific thought in that way,

You know I do, but I’m not going to share it at this point. But I will say, John, you have identified the very reason it took us to get to the stage were at. We have busy restaurants that are really busy at peak time. That is part of also why you see an increase in labor for us for next year. We’re going to be adding labor, not subtracting, because of technology. This is not to get rid of human beings. We’re going to actually need more hands in order to do this. Is you go to again, it has only been a couple weeks. So there is so little data to be had. My impression is that peak time will be the greatest use of the app. And that is where we will continue to evolve our systems to make that happen so that the guests who decide to come inside will still have a great experience, and those that choose to be on the app get it in the form that you will. I do believe, John, that we will slowly, over some period of a long time, convert people, a higher percentage, over towards the app. But that is going to be a multiyear run. And it’s really too early to say how that’s going to play out.

[Operator Instructions] We'll go next to Jeffrey Bernstein with Barclays.

Great. Thank you very much. Two questions. One, as you think about the unit growth outlook, the 35% plus, I think you said, in 2017, it’s already lapping 40% some odd in 2016. I am wondering how you even think about the guardrails around that? Whether it is the limitations, more people or real estate. I think you made mention in your comments that maybe it is less likely real estate because of the shifting landscape and all the opportunities you now seeing with the retail challenges. I am just wondering how you arrive at the number you arrive at? And what keeps that from going higher or lower. It seems like you bump it up as you go through the year, regardless. But any type of guardrail color would be very helpful.

It is really three things. Some of those things we have been talking about, really, since the IPO. And the message is clearly the same. Number one, it starts with our team. Do we have the team in place to grow? Do we have people who are excited to move to Detroit, to move to St. Louis, to get us going in Las Vegas, or wherever we choose to open so that the Shack culture goes? We will need more people than ever. We will need to train and retain them better than ever. That will always be our biggest challenging, and it is where we’re putting a lot of resources right now. Always have, but really bulking up right now to prepare for that growth. The second thing will be real estate. I want to make sure that we are always capturing the great real estate that is available to us. As I mentioned today, we are in a really strong position with landlords. We have great sites everywhere we go. And we can be patient. Look, we could open 50 restaurants next year. We won’t. We shouldn’t. Next year the right number is 21 and 22 as of right now. And we’re going to had to make sure that those 21 and 22 are great Shacks that advance our Company. The last thing is the supply chain. And we have got more and more comfortable with that as we have gone. That is one of the places that we have obviously shown great results this year. We’ve benefited from a good commodity market. And we’ve made some great bulk and volume supply chain decisions that have helped us there. I feel really good about where the supply chain is. And the further we grow, that actually gets a little easier for us right now. And we are benefiting from that scale. That is the guardrails. If you sat on our real estate committee, Jeff, you would see us sit there, and we are really tough. We turn down a lot of ideas, a lot of deals. We make sure that everyone we do, we’re going to be proud about when we’re talking about it next year.

Got it. My other question was more on the margin side and related pricing, perhaps. It looks like the margin you are talking about for next year in that 27% range, maybe some pressure on the margin. You talked about the labor cost pressures. I am wondering, when you think about the margin for next year, I think you mentioned pricing of 1.5% to 2%. I am questioning what drives that decision? I would presume that there is potential to take more to help better protect your margin. I am wondering whether it is consumer constraints that drives that, or competition, or you really think that is all you need? How do you think about pricing when you’re looking at a year where you’re going to see some restaurant margin pressure?

Yes, Jeff. We talked about the tiered pricing model that we’re putting into place. What we did -- and I mentioned this -- it’s not regionally. It is by market, though. It is not like we’d have one Shack in, say, DC at one price and a Shack down the street in DC at a different price. It is by market but it is not necessarily wide regionally. What we did is we looked at where we can take the price. We still want to keep the same value equation and really do not want to risk that. And the value equation that our guests get at Shake Shack. And is the 1.5% 2 to 2% going to be enough to completely offset the labor pressures? It is not. We know that. At a 1.5% to 2%, we took 1.5% this year, and you remember the year before we took a lot more than that. We took 6%, and it was a lot. When you look at over three years, that is 8%, 9%. And that is quite a bit. So we need to be really careful on how much we take. When you look at the margin that we are forecasting for 2017 in our guidance, most of that is labor. But it is also target volume Shacks and $3.2 million Shacks coming into the system, which is going to have an impact on the fixed costs associated with those Shacks. There’s going to be a pressure on a lot of lines. And that is why we have given the guidance that we have given with the shack level profit where it is.

We have about 27% guidance for next year.

Understood.

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

Hi. This is Courtney [ph] on for John. Two quick questions on the comp. Obviously this is the first quarter that you guys have had negative traffic since I think you removed crinkle cut fries two years ago. Just [Indiscernible] this is going to be the new normal as you look ahead? Obviously you are locking pretty tough traffic compares for the next two quarters. So should we be expecting to see that, or have you seen those traffic trends improve so far? And then just a question on the LTOs, obviously running a higher price point for the Baconater. And just wondering if we should be expecting those price points closer to $7 and to continue to see that higher traffic?

Okay. On the traffic, here is how we think about it. For the most part, we are up against over 8% traffic increase in the comp base in last year in this quarter, a 17% total comp. I have talked about this in every call, whether we have had double digit or low single digit comps. The same story continues in my mind. The comp is not the best way to measure the success and growth of this Company. It will take a long time before I think it really is. Today, there are in this quarter there are 26 Shacks in the comp base, less than half of our Shacks. It is not going to it does not make up nearly enough of a number in our mind for us to be concerned about a small negative traffic number that ultimately may contribute to a larger number. We feel good about where it is. We feel like in our small comp base a handful of Shacks can have a large impact. And they did last year and they did this year. So as we look forward, that is where we’re continuing to guide through the end of the year, 4% to 5% as an annual number. And as we look at next year, some of the guidance that we have talked about all along here, in that low single digit, 2% to 3% number. As it pertains to the bacon question, the Bacon Cheddar Shack is our current LTO at $6.89. Next year’s will be a little lower than that excuse me, the first half of next year it will be a little lower. We have not determined or finalized what the later in the year LTOs will be. But we think when we create an item that can garner that, like the Bacon Cheddar Shack has at $6.89, it’s got [Indiscernible] ranch, all natural no hormone no antibiotic bacon with a amazing Wisconsin aged white cheddar cheese sauce. We need to charge for that. The good news is, it’s has been our most successful item in both quantity and total sales. So we have seen that people are willing to pay for a higher end item. We will keep making sure we give everyday value here and making sure that people feel great about the balance of those items.

That concludes today’s question and answer session. At this time I will turn the conference back over to Mr. Randy Garutti for any final remarks.

Thanks again, everybody. Really, truly appreciate your time. Thanks to our team who’s working hard today. And we look forward to talking to you soon. Cheers.

This does conclude today’s conference. Thank you for your participation. You may now disconnect.