Welcome to the Shake Shack Fourth Quarter 2016 Earnings Call. [Operator Instructions]. Please note that this conference is being recorded today, March 1, 2017. On the call 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 Mr. Jeff Uttz. Please go ahead.

Thank you, Operator and good evening, everyone. By now you should all have access to our fourth quarter 2016 earnings release and if not, it can be found at shakeshack.com in the Investor Relations section. Before we begin our formal remarks, I need to remind everyone that our discussions today will include forward-looking statements. These forward-looking statements are not guarantees of future performance and therefore, you should not 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 Factors section of our various securities filings, including our annual report on Form 10-K for FY '15 and subsequent quarterly reports on Form 10-Q. Additionally, any forward-looking statements represent our views only as of today and we assume no obligation to update any forward-looking statements if our views change. During today's call, we will also discuss non-GAAP financial measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in the earnings release. Now I'd like to turn the call over to Randy.

Thank you, Jeff and good evening to everyone on the call today. I'm really proud of what our team has achieved in our second full year as a public company. I'm especially pleased, given the challenging industry backdrop in retail and restaurants recently. And we've achieved all this while furthering our commitment to growing in premier locations and building even better team member and guest experience that fosters the long term strength of the Shake Shack brand for years ahead. We're still in the early stages of the Shake Shack story, but today we serve guests in 124 Shacks, 17 states in the United States, 13 countries worldwide and we're just getting started. In 2016, we grew total revenue by 41% to over to $268 million. We built a record of 20 company-operated Shacks, increasing our annual domestic company-operated unit openings pace by 54% and beating our recent guidance of 19 Shacks. Our Same-Shack sales increased 4.2% for the year, reaching a two-year stacked comp of 17.5%. And our Shack level op profit grew over $20 million, representing a 39% year-over-year increase. For 2016, our Shack level op profit reached 28.3% and we grew adjusted EBITDA by 36%, reaching a record $50 million. Looking at the fourth quarter, we grew total revenue over last year by 43%, driven mostly by 20 new domestic company-operated Shacks and Same-Shack sales growth of 1.6%. While trends were strong throughout October and November, Same-Shack sales performance softened in December; and this was driven by various factors, primarily the holiday shift contributing approximately 80 Bips of pressure, as well as comparatively colder weather in the Northeast region which makes up a high percentage of sales in our still very limited comp base of just 30 Shacks. Looking ahead into Q1, we'll be comping against another…

Thanks, Randy. I'm excited to share with all of you the results of our fourth quarter and our fiscal year December 28, 2016. Total revenue which includes Shack sales and licensing revenue, increased 43.5% to $73.3 million during the fourth quarter, from $51.1 million in fourth quarter last year. Shack sales increased 43.8% to $70.9 million during the quarter, versus $49.3 million in the prior-year quarter. The increase was driven by the addition of 20 new domestic company-operated Shacks. For FY '16, total revenue increased 40.9% to $268.5 million, compared to $190.6 million in the prior year. If you recall, in November we raised our total revenue guidance for the year to $264 million to $265 million and are pleased to have exceeded that range and in addition, surpassed our 2016 development guidance of 19 domestic company-operated Shack openings. This was based on the additional strength of new openings and also favorable real estate conditions. Same-Shack sales increased 1.6% during the fourth quarter, versus an 11% increase in the same quarter last year. This consisted of a 1.4% decrease in traffic which was more than offset by a 3% increase in price and mix. Remember, our comparable Shack base is still very small, with only 30 Shacks in the fourth quarter, of which approximately 33% are high volume Shacks in the Northeast. As a result, our Same-Shack sales growth is sensitive to changes from a small number of Shacks. With each successive quarter, as we successfully grow around the country, this impact will smooth out. As Randy noted, we're pleased with comps in October and November, but we did experience some softness in December, due to the calendar shift and comparatively unfavorable weather in the Northeast. Average weekly sales for domestic company-operated Shacks increased 1.1% to $90,000 for the fourth…

Thanks, Jeff. I'd like to take a moment to address two announcements we made in early January. I'm thrilled to announce Zach Koff has been named Shake Shack's first ever Chief Operating Officer. Zach's been leading operations at Shake Shack over the last six years, since the fourth Shack opened in Miami Beach, Florida. He's built the team and system that run our restaurants today and has been at the foundation of Shake Shack's unique and powerful people culture. I'm excited for Zach to further his impact around the greater strategy and execution of our rapid growth ahead. We also announced that Jeff Uttz will retire as CFO. He will remain in his current role through mid-March to continue overseeing the Company's FY '16 reporting period. And for those of you have known us over the last few years, you've seen we've had a great partnership, a ton of fun and Jeff will be missed. On behalf of myself, our Board of Directors, all of our team members, I wish to thank Jeff for his many contributions during his time here. Jeff set a very high standard, leading Shake Shack through its IPO and beyond and we've been lucky to have him. We have no doubt now that we will find a premier CFO to help lead us through what will be an unparalleled period of growth for our Company. In the meantime, Jeff's built a great leadership team in Josh Helman and Vicky She, who will lead our financial teams as we complete our CFO search. And with that, I want to thank all of you for taking the time to follow our story by joining today's call. Now, Operator, you can go ahead and open the line for questions.

[Operator Instructions]. We will take our first question from Jake Bartlett with SunTrust Robinson Humphrey. Please go ahead.

Great. Thanks for taking the question. First, on the build-to-suit, can you maybe go into more details of how that affects things like free cash flow? Is this a situation where you're not going to be putting up as much money to open the new stores?

Jake, it's Jeff. I'm sorry, I'm choking. It doesn't really, it doesn't change the accounting rules. It doesn't change our strategy.

I'll start while Jeff clears his throat. No, he's good. Don't worry, everybody. He's fine. The way it works, it's not really about free cash flow in the investment, it's really about how the expense is recorded. So where with normal lease, you have the expense recorded fully to occupancy cost, now because of build-to-suit, it's treated differently. And much more of the expense is picked up in our depreciation and interest expense. That's why you've seen us increase depreciation and give you, for the first time, our interest expense number which is much higher than in the past. So unfortunately, it's not a one-for-one trade. It's some fun accounting, so it doesn't necessarily decrease our occupancy costs. But it's not a change to cash, Jake.

Jake, I'm sorry. I've been fighting this cough for like a month. So I apologize. But it also doesn't change, our real estate strategy of what we choose to go into will not be driven by accounting rules. So if something is classified as a build-to-suit, because of where we choose, so be it.

And this is important, because this is so new for Shake Shack. Why is it so new for us? Because we were born in New York and the majority of what we've done over this last few years has been second-generation restaurants turned into Shake Shacks. So that's generally not a build-to-suit lease accounting. So as we go into more of the rest of the country, more pad sites, more things that end up classified build-to-suit, it's a new, a big, new change for Shake Shack. And again, not cash and not performance, not strategy related, it's just accounting and that's why you'll see it tick up in those depreciation and interest numbers this year.

And as the year goes on and units move in and out of the development schedule, that estimate could change, too. The numbers that we gave in the guidance is based on where the development schedule is right now and how they will be classified.

Got it. And then, I understand still the difficult compare in the first quarter could weigh on this first quarter result. Would also the fact that you did the switch over to the new promotions, Barbecued LTOs, mid quarter versus prior when you had done it earlier in the quarter, do you think that's also going to have a weigh on the first quarter results?

We're not going to get into mid quarter guidance at this point, Jake, but look, we're excited about the menu innovation. It goes on top of other great menu innovation that we did last year, as well as the app. But again, we feel like a balanced 2% to 3% for the year is the right answer here. And last year, this was an exciting time. It was incredibly warm in the Northeast for all of Q1. And in the middle of January of last year, we launched the Chicken Shack which we know drove quite a bit of traffic. So it's definitely a tough compare. You also have the Easter switch coming up in March. That's another thing that may or may not impact us. And it did impact us in Q4, with the holiday shift and it may impact us as well in Q1 here. Because Easter was in Q1 last year. It will not be in Q1 this year. And generally, vacations and those sort of things lead favorably to Shake Shack. So that's why we're giving you the comments we did.

Okay. And then on that point, have you been able to quantify the impact of the holiday shifts or the weather that you mentioned in December?

Yes, we quantified -- hard to quantify weather exactly, but we quantified for the holiday shift by about 80 Bips. So it was significant. You basically lost two Saturdays and Sundays relative to last year. You saw everybody else talking about the same thing. That was an impact on that comp number in Q4.

Okay. And that 80 Bips for the whole quarter.

That's right.

Okay. And then lastly, the app, maybe just go into whether you think that, what your experience has been so far and whether you think this is going to be a material traffic driver in 2017 or if it's something that will build over time as it becomes adopted or what are your expectations to how this is going to change the trajectory of sales?

Well, we're really excited about it. I think there's no question the expectation will be for the Shack of the future where, if you choose to order that way and you want to do it, you should be able to do it and pick up your food without those friction points. Not everybody is going to take us up on that, as you've seen and at any other company who's leading with a great experience. Our whole world here is based on the community gathering experience of Shake Shack. The app is just one tool to make that better for our guests. It is way too early to comment on what it might mean. What we did see in that first six weeks of the promo was it took nearly 6% of our total transactions. That's a huge number to come out of nowhere with. Now again, as I mentioned, that should decline. When we stop giving away free burgers for downloads, we expect that to decline over time. It is our expectation that then it will come back up. And I think it's going to continue every day to be more and more a piece of our life here at Shake Shack that we're going to continue to work a lot on. And as I said, our incredible team who built the app custom has just been doing fabulous work. So it's pretty exciting.

We will take our next question from Sharon Zackfia with William Blair. Please go ahead.

This is Matt Curtis on for Sharon. Now that you have the new pricing tiers in place, are you guys comfortable with where you are right now on labor costs or are you evaluating another price increase for later this year?

No, we do not intend another price increase. But as we said, labor was quite up in Q4 and we've guided that quite clearly for you that labor is going to be up and we had a lot of minimum wage increases here in 2017. We're going to have them again in 2018 and 2019. And we do business and the majority of our businesses will be in the highest minimum wage areas. We'll also continue to pay our managers better. And as I said, we're playing offense. We're building the best team we can to continue to ramp up growth. You look at 40% sales growth that we posted for last year, we're doing that with the great human beings who lead our restaurants. And we're going to pay them. And that will be part of what's baked into our op profit of 26.5%, 27.5% for the full year here this year. Labor pressure continues, for sure.

Okay. And maybe a related question. What's the customer reaction been like to the new price tiers? Has there been any noticeable impact on traffic in the markets where you raised prices?

Well, we're not going to comment on traffic yet mid quarter, but we really haven't heard a whole lot. And we do this really judiciously. We mostly raised prices on some of our burgers, didn't really touch fries, didn't really touch most of our frozen custard shakes. So it was really not a huge increase. It's under 2%. In some markets, we didn't increase at all. In others, the average, as we've said, is in that 1.5% to 2% price range. So that's not a huge number and a huge impact, so we don't expect there to be a guest perception necessarily at this stage, at least we haven't heard it.

Okay. Fair enough. And maybe one last one for me. On the increased G&A guidance for 2017, the fourth quarter G&A looked like it came in a little bit light, so did something shift into 2017 or is something else driving the guidance increase?

Not necessarily. That's mostly based on some of the technology we expect, the money we expect to spend to drive the app. We'll be spending a lot of money on that. And then just general bulking up our teams for the increased growth. As we add more Shacks, we add more operators, we add more area directors that hit our G&A. We're building our team. And we've got a lot to do here to continue to ramp our systems and our team to meet that high growth percentage we're hitting.

We will take our next question from Alton Stump with Longbow Research. Please go ahead.

As I talk about store growth which I always do at the heart of the Shake Shack story and if I recall, when you guys IPO'ed, you had talked at that time about doing 10 units. A company here actually stayed in the U.S. actually just doubled that number. Is there any reason to believe the current guidance which you just raised again for 2017 at 22 to 23, but is there any potential upside to that number, given the fact that you guys have been beating almost every quarter over the last 10 to 12 months anyway?

Not yet, Alton. We always -- you've seen a pattern of us making sure, as we believe those sites can get leases signed and they're great sites, we'll certainly update you on that. Look, 22 to 23 is by far the largest year we've ever had. We feel really good about the class of 2017 that's coming in. We've talked about that. But it's still too early to say that. There's a lot of things that can happen here in just the beginning of March. And look, we're very disciplined. As you know, you're right, you said it. The long term story for Shake Shack is the growth of the Shack unit that has great unit economics and continue, that will continue to drive our future. We want our development team out there finding the best sites, not just trying to hit a number. And that's how we manage it. We manage it through quality real estate with the best developers in the best sites around the country where we can do the best sales. That's what we've done. That's what we're going to continue to do. So if we're going to increase that, we will certainly let you know when we feel comfortable with that.

Thanks, Randy. And then just on the new store AUV which continues to impress, it's at over $4 million, I think, at the quarter, if I recall, over the last 12 months, is there anything that, as I look ahead to next year and beyond, as to why it will come down to $3.2 million or -- I know your guidance is for at least $3.2 million -- but is it a matter of, is it the higher percentage of stores in your existing markets this year versus what you did in 2016 or is there anything else I should be thinking about as I model out new store productivity going forward?

Yes, it's a great question. The reason it was high in 2016 and again, our AUV is nearly $5 million right now, as we've said since day one, that will come down. Why was it so good in 2016? We outperformed in a few high volumes Shacks. You look at our West Hollywood, you look at Penn Station starting off, you look at Herald Square, Fulton Center. We opened three big Shacks in New York City and then we started to hit California pretty hard. So those were high volumes that drove that AUV a lot higher. But if you look at the class of 2017, we will have that same number. That's why we're telling you $3.2 million. That's a number we feel really comfortable with for the year. So you should model $3.2 million, on average, run rate for those Shacks for this year, because there's really not any of those, not as many, certainly, as the heavy hitting high volume Shacks as we had in 2016.

We will take our next question from Courtney Yakavonis with Morgan Stanley. Please go ahead.

Hello, guys. I just had one quick follow-up on the build -to-suit and I think you said that it wasn't exactly one for one coming out of occupancy and into interest. But does that mean effectively that the restaurant margin would have decreased had that change not gone into effect in your guidance?

Courtney, we give the depreciation, we give the interest which are two of the big lines effects. And then the occupancy effect is built into the Shack level operating profit guidance that we gave. So we're not going to give specific guidance on the occupancy line. But when you look at our Shack operating profit guidance, it is built into that. And that number remained the same as we gave in November.

And that's mostly due to labor being up and as we said, rent being down. But again, it's kind of like a mortgage, like the way this build-to-suit accounting works, it's not, you don't win as much on the occupancy line as you lose on the depreciation interest lines, initially. So that's what it looks like over time and it's just a greater impact to us, because we're still a small base of Shacks. And when you have a number of those headed towards our future development, it's just going to have a greater impact on those below the line. This is yet another reason why we encourage you to continue to look at adjusted EBITDA as a measure as we report it. Because it's one of the best ways that we look at how we're growing the company in the true, successful way. GAAP accounting sometimes can confuse an issue like this, especially as it pertains to build-to-suit.

Got you. And then I know you addressed how you won't have as many high volume hitting openings next year, but I think you started opening some pad formats. Just curious how many we should be expecting in the units that you will be building for next year and if there's any difference in sales or the cost to build that we should be thinking as we model it in?

Well, a couple things. There's about a handful. They're not necessarily, you shouldn't think of pads necessarily as higher or lower volume or higher or lower build out costs. It really depends on the site. On average, we expect to spend about $2 million per Shack this year. That's been our trend. Even with inflation and construction costs, we've been continuing to find better ways to save some money to hold that line. So we'll be around $2 million for the class of 2017 of build out. Some of those are pads. So I'd call it a handful of pads. And it will absolutely depend on the site. So we did one at the end of the year in Christiana, Delaware. We did one in Darien, Connecticut in January. We'll do another pad in Melville, Long Island coming up here and then we may have some later in the year. So because of our multi format strategy, we don't want to do all pads. We don't want to do all malls. We don't want to do all of anything. We've got a really diverse strategy that continues to spread out the kind of Shacks that we do.

Got you. And then just finally, what percentage of your footprint is in malls right now? And did you see any impact from holiday traffic on your sales?

Well, there's very few in traditional malls. It's less than 10% of our footprint. We're in a lot of great lifestyle centers that you may not classify as a traditional mall. Those malls that we're in are really the premier A malls in the country, with Century City, Garden State Plaza New Jersey, King of Prussia. So when you look at traditional malls, we obviously know traffic continues to be down in all retail and restaurants generally in malls. But that's a small part of our business. We do want to keep growing in malls, in the best ones, at the best times, with the best developers. But it is not our strategy to become a mall brand, certainly. But we like that it's a piece of what we do.

We will take our next question from John Ivankoe with JPMorgan. Please go ahead.

This is Michael on for John. I just had a question, you made a comment about Shack of the future and presumably that's about store design evolving over time. And with the Shack App launch, how does store design change for Shack going forward?

It's a great question, Michael. It's really about making sure that the guest, the community gathering guest experience at Shake Shack only gets better. How that happens, the only thing we're excited to talk to you about is the app right now. And that's a shift. You need a little bit of a different kitchen flow, you need some space for those people to come pick up and you start to see a very small, but I expect to grow over time, transition from people waiting on line to people waiting to pick up. So as we think about that, we're right now in the conversations of the next Shack models and how they're going to feel. I don't think you're going to see a material difference, a notable difference necessarily for you as a guest walking in. But for us and how we prepare food, how we move through the kitchen, that's our goal. And we've got a lot to learn. It's way too early to even tell you what exactly those plans are, but we know that we've got to continue to find space at peak times. We've got to continue to allow for more app orders to come in as people transition to that form of ordering. So we're excited about it and there's a lot of work to do. It's real early. All right.

We will take our next question from Nick Setyan with Wedbush Securities. Please go ahead.

As more and more stores come into the comp this year and you've got maybe a bigger data set, has your thinking evolved at all around year two and year three growth rates of those stores? Are you still seeing those stores enter the comp base years three up?

So generally we continue to see evidence of and we continue to model and encourage you to model whatever Shack does in year one, we generally see the sophomore year of Shack down 5%. And then, as long term expectations of up 2% to 3% has not changed. There's all kinds of different variables that get involved with that. You're going to open in West Hollywood last year, it's going to be a huge opening, that Shack will likely be down a lot more than 5%. It was just a huge opening. But those second, third, fourth Shacks in the LA area, they may be up. They may be down less than 5%. But what it works out to generally over this last few years for us is a negative 5% the sophomore year and as it comes out in year three, a plus 2% to 3%. And that's where we've always said the long term Shack growth story is a low single-digit comp with exciting sales in unit growth. That's the story.

You touched on [indiscernible] the other operating and occupancy deleverage, is there anything that was one-time in nature in terms of deleverage there that may not repeat going forward?

No, it was really just driven by more of those target volume Shacks coming in and driving those -- we have the same costs at each Shack, for the most part and some of the fixed costs and as a percentage of sales, unfortunately comes in a little bit higher when you have lower volume. And I say lower volume, it's target volume and so $3 million to $3.2 million, as we talked about. But there are more and more of those coming into the system which will affect that line over time. And also, that's why our guidance is where it is on Shack level operating profit for the full year of 2017, as well, the 26%% to 27.5% builds in those target volume checks coming in and affecting a lot of those fixed costs.

And lastly, in terms of the cadence of the openings in 2017, is it going to be as backend loaded or more even as the year progresses?

We've got three open so far. We should have a pretty strong in in the first and second quarter. But more of the 23 will likely open towards the back half, so I think, I would say slightly back weighted.

We will take our next question from Jake Bartlett with SunTrust. Please go ahead.

I had a quick question. I was in Toronto in January and it was actually the same day that you doing pop-up with, mispronounce it, Momofuku. So that just made me wonder, one, what you're doing up there, doing pop-ups? Are you looking at Canada as more of a growth market? And then also, the 450 target we have, that's really just U.S., correct? And anything in Canada is additive that?

Yes, so the 450 is just domestic company-operated in the U.S.. Anything in Canada would be addition. We have zero plans to do it. I'm glad you were there that day. And I don't know if you walked by and saw it, it was crazy and amazing. And it literally happened -- David Chang is a friend and one of the most talented chefs in the world and we were just saying, wouldn't it be fun to create some madness up at your restaurant in Canada, you guys have a lot of fun up there, we've never sold a Shack burger in Canada, let's get up there and do it and see what Canada thinks. And we learned real quick what Canada thinks. We had a great day, teamed up with his amazing team and our team and we just had a blast. And Jake, that's part of our fine dining heritage. We just like doing cool stuff like that. We spend a lot of effort, time and money just fostering the power of the unique Shake Shack brand. We're not just selling burgers in this company. We have a brand that is extremely powerful for reasons like that. And that's the kind of fun stuff we're going to continue to do whenever we have the chance. And hey, maybe someday we'll go to Canada, but today, zero plans.

We will take our next question from Karen Holthouse with Goldman Sachs. Please go ahead.

This actually Gregg Ormond for Karen today. So related to the mobile app, I was just wondering which line item the food cost related to the promotions are going to hit and if you have an estimate for how much the impact is going to be and whether that's baked into the restaurant margin guidance?

The cost of the free burgers will be in cost of goods sold. And we haven't given any guidance as to what the impact of that will be, perhaps 20, 30 Bips to cost of goods sold. But yes, the revenue associated with the free burgers is comped out on the revenue line, so that's a net of zero, but then the cost of the free burger ends up in cost of goods sold.

Okay. And then, again related to the mobile app, I was wondering if you had any feedback from the store managers related to the app rollout, whether they're noticing any operational impacts and whether they're able to share any best practices?

Yes, I think there's a lot of feedback, believe me. The good news is it's working real well. I think the greatest challenge for them is when you're at peak time and you've got a line out the door and you've got a line in the cloud coming in through apps, it's busy. It's real busy. I've been in many Shacks during those peak times watching it myself and with Zach, our COO, spending most of his time with his operators, just saying, okay, this is great news, a lot of people want to use Shake Shack in a lot of various ways, now how are we going to take care of all of them? So I think the teams are really excited about it. They understand and know what a great new transition for our business this will be. But it's not without its challenges and it's going to take time. It's going to take time to figure that out. That's a step we're working on to make it a great experience for our team, too. The good news is, a lot of people seem to want to order on the app.

Okay. And then one final question around labor. I was just wondering how much exactly was wage inflation in the fourth quarter and then more broadly for 2016?

Wage inflation for the fourth quarter, we hadn't really quoted the number in the past, but mid to high single digits for us.

It appears there are no further questions at this time. Mr. Randy Garutti, I'd like to turn the conference back over to you for any additional or closing remarks.

I just want to thank everyone for being on the call again. And again, want to end by thanking Jeff Uttz for nearly four years of incredible service to Shake Shack and wish him the best in the next phase of his life. So thanks to all and we'll look forward to seeing you out there. Take care.

And that does conclude today's presentation. Thank you for your participation. You may now disconnect.