Shake Shack Inc. (SHAK) Q1 2017 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Shake Shack First Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded today, May 4, 2017. On the call today, we have Randy Garutti, Chief Executive Officer of Shake Shack; and Josh Omin, Vice President of Finance and Accounting. I'd now like to turn the conference over to Mr. Josh Omin. Please go ahead, sir.

Thank you operator and good evening to everyone. By now you should all have access to our first quarter 2017 earnings release. If not, they 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 annual report on Form 10-K, which was filed on March 13, 2017. Additionally, any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change. During today's call, we will 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 our earnings release. Now I'd like to turn the call over to Randy.

Thank you, Josh, and good evening to everyone on the call today. I would like to begin by introducing you to Josh Omin, our VP of Accounting and Finance, who will be working with me on the call today. Josh, along with Vicki Shih, our VP of Financial Reporting and Technical Accounting, and their teams have done exceptional work over the last few months as we've begun the transition to a new CFO. I'm incredibly proud and thankful for their leadership. And with that, I'm thrilled to announce the appointment of Shake Shack's new CFO, Tara Comonte. Tara brings more than 15 years of leadership in global corporate finance. Tara recently served as Chief Financial and Business Affairs Officer and EVP at Getty Images and previously served as CFO of McCann Worldgroup, the world's largest marketing and communications business as well as being a key founding leader of IPG Media Brands, serving as Global CFO and COO. Tara is an extraordinary leader and communicator, a proud native of Scotland, dedicated mom of three and lives in Brooklyn with her family. I know as soon you meet Tara you'll understand why she was the right choice for Shake Shack. I'm looking forward to partnering with her as she continues the good work of our team and lays the groundwork for the extraordinary growth we have ahead. Tara's start date will be in mid-June, and she will be hitting the ground running. Now turning to the first quarter. We grew total revenue by $23 million or 42% over last year, driven mainly by the opening of 24 new domestic company-operated Shacks, which contributed $24 million to the increase, partially offset by a same-Shack sales decline of 2.5%. This follows a strong 9.9% prior year quarter, including a 7.3% increase in traffic, largely driven by the launch of the ChickenShack and favorable weather in a majority of our comp Shacks regions. On a 2-year basis, we reported a stack comp of 7.4%. We opened seven company-operated domestic Shacks and six net international Shacks during the quarter, setting us up for our strongest year of Shack growth ahead. And with new opportunities everyday we're capitalizing on our brand strength and ramping up our development schedule. And we now expect to open 23 to 24 Shacks in 2017, up from our previous guidance of 22 to 23, for a total unit count growth of over 36%. We also plan to open one additional licensed location for a net 12 licensed Shacks through the end of '17. Now despite these achievements, we are dissatisfied with this quarter's comp results. We witnessed comp trends that were clearly influenced by cold weather in the cities making up the majority of our comp base as well as holiday shifts towards the end of the first quarter and the free burger promotion we ran in connection with the launch of the Shack app, where we gave away nearly 90,000 free burgers, representing approximately $500,000 of burger sales not recognized as revenue, about half of which took place in our comp base. Now let me put this all in perspective. When we spoke to you in early March on our fourth quarter call, our same-Shack sales at that time were positive 2%, right in line with the guidance we gave at that time. During the remainder of period three in March, we experienced colder than average temperatures in the Northeast region compared to last year and also hit with Winter Storm Stella that caused multiple Shack closures and decreased traffic. Now the Northeast region accounts for 17 out of only 32 Shacks or 53% of our still very limited comp base and additionally lapping that Easter holiday break through the last week in March in the prior year that dragged on our comp performance. Now look, just a few factors in a small group of Shacks can lead to large swings in our comp. Since our IPO, we've been consistently reiterating the impact and perception of our small comp base of only 32 Shacks. With that, today, I want to focus on the metrics that matter most in understanding the strength of this company. Our domestic company-operated AUV for 2016 was $5 million. And our four wall Shack level operating profit was 28.3%. Now I want to provide you with a real deeper insight into some of our metrics and why we remain as bullish as ever about the opportunities ahead for the Shake Shack brand. So much has been said about our success here in our home market of New York and whether we could be successful outside of it. So let's begin at home. Today, we have 15 Shacks in New York City. In 2016, they averaged a $7.5 million AUV and Shack level operating profit of just over 30%. So those Shacks make up the bulk of our comp base, and many were down in Q1 because of the factors I just described. In addition, we opened four new Shacks in New York City in 2016: Penn Station, Herald Square, Forest Hills and Fulton Center. And we expect those four Shacks to average an AUV of $7 million in 2017. And those new Shacks likely impacted our NYC comp base in Q1. We will be lapping three of those openings in the next two quarters. So are we a better company because of those four new Shacks? You bet. And you can count on us to keep making those decisions that lead to strengthening our brand and bringing dollars to the top and bottom line. New York City is incredibly strong for us, yet it only makes up 15 of our 72 domestic company operated Shacks today. So can Shake Shack be successful outside of our home market? You bet, and the evidence of that shouts around the country. So let me tell you a little more. The Washington D.C. market, our second most established, with nine domestic company operated Shacks and a great example of how we're executing our multi-format growth strategy. We introduced the brand in the city center at Dupont Circle in 2011 and have since followed with Shacks in the surrounding area, including a licensed Shack in the Nationals baseball stadium as well as reaching deeper in the market with Tysons Corner, Pentagon City and Baltimore, most recently adding 2 more in Logan Circle and the Navy Yard, and we have more growth planned. So importantly as we continue to expand in this market, we've experienced positive growth five years running and achieved a $4.3 million AUV for those domestic company operated Shacks opened as of the end of 2016. Our team in D.C. is poised for growth, operating better than ever and reaching towards the goal of much more opportunity in the region. So now let's look at all markets outside of New York City. Today, we have 57 company-operated Shacks across 17 states and D.C. In 2016, the 48 Shacks we had in markets outside of New York City looked very similar to the D.C. average. They had an AUV of $4.2 million and a Shack level operating profit over 27%, industry-leading metrics. Many of these locations are your neighborhood Shacks that are solid performers and showcase both the versatility of our brand and the flexibility of our real estate model. Again, given the focus on comps, we want to share these numbers and help you understand what we're really doing here. One other specific call out, I want to help you understand our strength far afield from our home market. We launched in California last year and we've experienced tremendous success in the Shacks we've opened to-date. Of the four California Shacks currently open, we expect 2017 AUVs of over $5 million. These are just a few stats to help you dive deeper into the Shack story. There is a whole lot of whitespace out there and so many places where we intend to build Shacks with industry-leading metrics. Now let's get back to business. I want to tell you more about the Shack app we introduced in January. We know the world, and our guest preferences are shifting by the minute. So we are more committed than ever to meeting their demands and removing those constraints in the guest experience. The app is just a first step in that evolution. We're really excited about what we're learning, and by no means do we have all the data or all the answers. But now with about four months under our belt, here's what we do know. We gave away nearly 90,000 free burgers during our initial promo lunch. The Shack app has been downloaded over 300,000 times. And post-promotion, the app represents nearly 3% of our total sales in our Shacks, a number we believe will continue to increase over time. The average transaction remains much higher than a regular Shack transaction. Going forward, we'll focus on better managing the stream of order flow that can be challenging at our highest volume Shacks at peak times. We're incorporating early learnings and involving our operations and our kitchens to meet the demands of our app business for the long term. I'm also excited that we're working on the Android version of the app we intend to introduce later this year. All-in, the Shack app is off to a great start and it's just one part of the long-term strategy to meet our guests whenever and wherever they want their Shack. Moving on to menu innovation, which remains a key strategy to driving sales today and over the long term. We're pleased with the guest response to our current offering of barbecue menu items which launched in mid-February and include the Barbecue ShackMeister Burger, Barbecue ChickenShack and Barbecue fries. Together, the barbecue outfield program is currently performing at nearly 6% of total sales since launch. Also, our trio of shakes remains accretive to the category, and we're excited with the current line-up of red velvet, cinnamon dulce de leche and brownie batter. So this summer, we're going to keep it classic and intend to focus our LTO efforts on our classic bacon cheeseburger, an item that's actually never officially been on the menu. We chose to focus on this item since it is well established and loved by our guest, but also allows us this summer to focus on throughput initiatives, with the app and the overall goals to improve our throughput at peak times. Now turning to development. During the first quarter, we opened seven new domestic company-operated Shacks. And we are excited to be raising our 2017 unit count guidance to 23 to 24 new domestic company-operated Shacks. We expect to open four Shacks in Q2. So our opening schedule will again be a little more back-weighted for 2017, with approximately 1/4 of our Shacks in new markets and the remainder in our existing markets. This strategy allows us to capture the opportunities we have in new markets, but to continue to capitalize on growing existing markets and creating those efficiencies in our supply chain, our management and our G&A. Our domestic pipeline is stronger and larger than ever, with a great line-up of Shacks for '17. And it's setting up to be our biggest year of growth yet. During the quarter, we continued our development in the Northeast, opening our third Connecticut Shack in Darien, our third Long Island Shack in Lake Grove in March, and subsequent to the quarter, we opened our fourth Long Island Shack in Melville. These suburban Shacks showcase our new freestanding model that we're going to continue to keep improving upon as we deepen our roots throughout the country and diversify the type of real estate we execute. We also continued our expansion on the West Coast with our fourth Shack in L.A. and Century City. For the remainder of 2017, we plan to open two more Shacks in California, including our first in San Diego, in La Jolla in UTC, towards the end of this year reaching a total of 6 in the market. We are more optimistic than ever about the opportunities ahead in the California market. In Texas, we opened our second Shack in the Dallas market in Plano, in Legacy West. Both Dallas and Houston are set for additional growth this year, and later this year, we'll also move further into Texas with our first Shack in San Antonio. We entered the new market of Detroit during the first quarter with a Shack downtown in the heart of Woodward Avenue. And later this year, we'll grow into the Detroit market with a Shack in Troy, Michigan. So for the remainder of 2017 we've got some exciting growth ahead, entering new markets in St. Louis, Lexington, San Diego, while executing growth in our existing markets in Florida, New York City, D.C., Texas, California and more. And at the same time, we continue to execute on our licensed strategy through key partnerships here and abroad as another avenue of revenue growth. In this first quarter, we opened six net international Shacks. We further our growth in the Middle East with three Shacks opening in Saudi Arabia, one in UAE and one in Kuwait. We continue to grow in the U.K. market, with two Shacks opening during the quarter, one in Canary Wharf and another in Victoria, Nova, bringing our U.K. total to sevcn Shacks. In Asia, which provides a significant opportunity for future growth, our Shacks in Japan continue to perform well. We currently have three Shacks in Tokyo, with plans to grow within our agreement of approximately two Shacks per year in this important market. In South Korea, we just opened our third Shack in Seoul at the fashion center, Doota Mall, and we are continually amazed everyday by the power and success of this brand in Asia. We're looking forward to growing in Korea in 2017 and beyond as we continue to leverage the widespread global appeal for Shake Shack. At home, in our domestic licensed business, following the end of the quarter, we opened at Minute Maid Park in Houston, helping fans cheer on the Astros as we continue to expand in sporting arenas. We're also excited to begin working with HMSHost to grow in airport locations around the country, beginning with the Shack in LAX Airport in Q3. For the remainder of 2017, we expect to open three more licensed Shacks for a total of net 12. With that update, I'll turn it back over to Josh who will take you through the numbers.

Thanks, Randy. Now I would like to share with all of you the results of our 13-week first quarter ended March 29, 2017. Total revenue, which includes both sales from company-operated Shacks as well as licensing revenue, increased 41.7% to $76.7 million during the first quarter from $54.2 million in the first quarter of last year. Sales from our company-operated Shacks increased 42.2% to $74.2 million during the quarter versus $52.2 million last year. This increase was largely due to the addition of 24 new domestic company-operated Shacks over the past year, which was a 51.1% increase in Shack count, partially offset by same-Shack sales decline of 2.5%. Same-Shack sales decreased 2.5% during the first quarter, lapping a 9.9% increase in the prior year and resulting in a stacked two year increase of 7.4%. The decline in same-Shack sales consisted of a decrease of 3.4% in traffic, offset by a 0.9% increase in price and mix. As a reminder, our comparable Shack base is still very small at 32 Shacks, representing only 45% of our domestic company-operated Shacks. As Randy previously noted, cooler weather in the Northeast, where a significant portion of our Shacks are located, the Easter calendar shift and the free burgers given away during the promotion, of which sales were not recognized as revenue, all provided headwinds to our small and sensitive base. Average weekly sales for domestic company-operated Shacks was $86,000 for the first quarter of 2017, a decrease of 4.4% compared to $90,000 in the prior year quarter. Contributing to this decrease was a 2.5% same-Shack sales decline and the addition of more target-volume Shacks to the system. Licensing revenue increased 28.9% to $2.6 million during the first quarter from $2 million a year ago, driven by a net increase of 15 Shacks or 37% since the first quarter of last year. We saw strong performance in Asia, offset by continued softening in the Middle East due to the economic slowdown in the region as well as the impact of FX headwinds in the U.K. and Turkey. We are encouraged by new Shacks coming into the system as we further diversify our licensed business into Japan and South Korea, but remain cautious in our outlook for the foreseeable future in the Middle East. Now I'd like to give some detail on our expenses for the quarter. Food and paper cost as a percentage of Shack sales decreased 20 basis points to 28.6% compared to 28.8% in the prior year quarter. This improvement was primarily driven by the menu price increase we took at the end of prior year as well as lower commodity costs, primarily in beef, compared to the prior year, offset by roughly 20 basis points of onetime costs associated with the mobile app free burger promotion. Our beef costs have decreased both sequentially quarter-over-quarter and on a year-over-year basis. Beef was down over the prior year first quarter, and our outlook for the remainder of the year is that beef will continue to remain relatively low. And on a full year basis, we expect flat to slight leverage in food and paper over the prior year. Labor and related expenses, as a percentage of Shack sales, increased 240 basis points to 27.6% from 25.2% in the prior year. This was primarily driven by the increases to hourly wages across the system in many of our markets and the strategic investment in our management teams to support the growth that we implemented at the beginning of the year as well as deleverage from negative comps in the entry of more target volume Shacks into the system. Also, as we mentioned on the last call, new Shacks generally carry higher labor costs during the first few months. In this quarter, we opened seven Shacks compared to only three new Shacks in Q1 of last year, which put additional pressure on the line. And lastly, we saw an increase in medical claims for the period. As we have stated in previous calls, due to continued pressure the entire industry is facing in labor costs and as more target volume Shacks come into the system, we expect labor and related expenses to continue to deleverage over the next few years as we invest in the talent we need to grow. Other operating expenses as a percentage of Shack sales increased 90 basis points to 10.3% versus 9.4% in the prior year quarter, driven mainly by the impact of certain fixed operating expenses, deleverage from negative comps and the introduction of more target volume Shacks into the system. Occupancy and related expenses as a percentage of Shack sales remain constant at 8.3% for the first quarter of 2017 and 2016. Shack level operating profit, a non-GAAP measure, grew 26.9% to $18.7 million from $14.7 million last year, mostly due to the flow through captured on the $22 million increase in Shack sales. As a percentage of Shack sales, Shack level operating margins decreased roughly 300 basis points to 25.2%, primarily due to the aforementioned pressures in labor and operating expenses. General and administrative expenses increased $1.6 million to $8.5 million during the first quarter from $6.9 million in the same quarter of 2016. This was primarily driven by increased investment at our home office to support our accelerated growth plans. As a percentage of total revenue, G&A leveraged 170 basis points, decreasing to 11% for the first quarter of 2017 from 12.7% in the first quarter last year. Now we remain on target for the guided $38 million to $40 million in G&A expense this year as we are committed to investing in our teams and the infrastructure needed to execute on our planned unit growth. Moving on to adjusted EBITDA, which grew 28.9% to $12.2 million compared to $9.4 million in the prior year period. As a percentage of total revenues, adjusted EBITDA margin decreased roughly 150 basis points to 15.9% for the first quarter due to the pressures we faced in labor and other operating expenses, offset by the leverage gains in G&A. We recorded net income of $2.3 million or $0.09 per diluted share for the first quarter of 2017 compared to net income of $1.5 million or $0.07 per diluted share for the same period last year. On an adjusted pro forma basis, which excludes non-recurring items and also assumes that all of the outstanding LLC interests were exchanged for Class A common stock, whereby we would no longer present a noncontrolling interest, we earned $3.7 million or $0.10 per fully exchanged and diluted share compared to $2.8 million or $0.08 per fully exchanged and diluted share in the first quarter of last year. Included in these pro forma results was a tax benefit due to higher than expected tax credits, and the adoption of the new accounting standard that changes the way we account for taxes associated with stock-based compensation, which as we highlighted on our last call, created volatility in our tax rate. On a non-GAAP basis, the new standard resulted in a tax benefit of $257,000 or $0.01 per fully exchanged and diluted share. Given the results of the first quarter and further insight into the full year, we are revising our annual guidance for fiscal 2017 as follows: raising our previous total revenue guidance by $2 million to now be between $351 million and $355 million, an increase of approximately 31% over prior year. We are increasing our total expected domestic company operated openings from the previous guidance to be between 23 and 24 Shacks in 2017, representing a company-operated unit growth rate of over 36%. Guidance on licensed openings has increased one unit to 12 net new licensed Shacks. Based on what we experienced in Q1 as well as the current environment, we now expect full year 2017 same-Shack sales growth to be flat. Now taken together, the increase in our annual revenue guidance is a combination of development timing and the addition of one Shack to our guided openings, the increase for the class of 2017 to average at least $3.3 million AUV, an increase from the previously guided at least $3.2 million AUV and the continued strength of our 2016 class. Moving on to expenses. For 2017, guidance remains unchanged for Shack-level operating margin to be between 26.5% and 27.5%, G&A expenses of between $38 million and $40 million, depreciation of approximately $22 million and interest expense of between $1.6 million and $2 million. Due to the new accounting standard we adopted at the beginning of the year that changed how we account for taxes associated with stock-based compensation, we have and continue to expect to experience volatility in the tax rate. As such, our tax rate guidance excludes any potential future tax effects of the new standard. We continue to expect our annual adjusted pro forma effective tax rate, excluding the new standard, to be between 40% and 41%. I hope that this has given you a clearer picture of where we are and where we are going. And with that, I'll turn it back over to Randy for some final points.

Thanks, Josh. I would like to end today with a reminder that right now we're in the midst of the Great American Shake Sale. This is a month at Shacks very when you donate just $2 in No Kid Hungry, we hit you right back with a free shake for your next visit. This year's Shake Shack should exceed over $2 million raised to end childhood hunger since the inception of this program. If you're in a Shack this month, I'll hope you make a donation for this great cause that our team works so hard to support. Again, I want to welcome our new Chief Financial Officer, Tara Comonte, to Shake Shack and thank our entire team for their good work today and always. And with that, I thank all of you for taking the time to follow our story by joining today's call. Operator, you can go ahead and open the line for questions.

[Operator Instructions].We'll first move to Sharon Zackfia with William Blair.

Hi, good afternoon. Two questions. I guess, first, it sounded like there were a lot of things that impacted the first quarter, but then you lowered the full year comp guidance. So can you talk through the process in lowering that comp guidance? And then secondarily, reiterating the restaurant-level margin while lowering the comp guidance, if you could help us reconcile that.

Yes, you got it, Sharon. Thank you. Look first quarter was tough for those reasons that we mentioned. We don't get into giving mid-quarter guidance, but I can say that comp trends have improved and that what we've seen is consistent with our guidance to be flat through the full year, having a negative in the first quarter. So we will be lapping -- in the first quarter, we lapped 9.9. But as we go through the year, those compares ease a bit. In Q2 of last year, we had a 4 2, 4 3, 2 9 and 1 3 as we go through all those -- all the quarters and through last year. So that's our hope. We see a lot of -- we saw a lot of reasons to feel good about that. But we do want to make sure we're conservative in what we're seeing right now, and again, focusing away from just the comp base, where we clearly explained how we got there. Now as we look at op profit question, we kept our 26.5%, 27.5%, number of reasons. We're seeing outperformance from our class of 2016, continuing to be really strong. And our early openings for 2017 have been stronger than expected, which is part of why we've increased total revenue guidance and feel good about that number for the year. So all that putting in, in a class that we have ahead, we don't think we're going to need to change the op profit guidance at this time.

Okay. And then maybe one follow-up. It looks like mix might have been slightly negative for the quarter. Is that just comparing against the ChickenShack? Or is something else happening in the business?

Well, it gets a little bit clouded by the Shack app promotion, Sharon. So if you recall, when you throw $500,000 of free burgers in there, that tweaks that mix a little bit, so we did not take that out. We did not exclude that from that number. So that's a part of it. And I think just some of the trends that we saw, the Easter shift and some of those things, we generally see larger checks around Easter time at holiday breaks and not having that in Q1 was a small piece of that. But that was a part of where we see it. Generally, we've got about 1.5% price flowing through the system right now. So we're pretty close to that, I think, if you exclude the Shack app promotion.

Great. Thank you.

Thank you.

Next question comes from Jake Bartlett with SunTrust.

Great. I'm going to start also with a comp question. I just want to kind of make sure we understand how it progressed. So you mentioned quarter-to-date, when you last talked, you were about 2%. My math is suggesting that March was about negative 11%. If you can maybe just confirm that, make sure that that's what you're trying to communicate. And then when you talked about kind of how you're looking quarter-to-date, would you say it's positive? I just -- I look for -- I'm looking at kind of negative 11%, if that's true, a snap back to being positive. I just want to kind of make sure that's what's happened and put that in the context of easing compares from a year ago and I guess kind of reiterating the question of why you expect flat. Flat to me looks like about 1% comp for the rest of the year, and so I'm a little confused by that.

Back of the envelope you're pretty close, Jake. Thanks. Yes. So when we had our call, looking at the first week of March, we were up 2%, exactly where we thought we would be. March was down, not the number you noted. March was down just over 8%. So when you look at the full base and how that's calculated, that's how we ended up down 2.5% all-in. So March was, in fact, down 8%. And again, January, February, positive too. So as we look forward, again, not getting too far in the mid-quarter guidance, but that trend has improved enough, but we're still going to keep it as a flat. So yes, that does imply a slightly positive expectation for the rest of the year as comp trends and comparison ease.

Okay. Would you offer whether the trend currently is positive?

I think I said it, Jake, in terms of our expectations for the full year, it's too early to say.

Got it. Got it. And then in terms of your promotional strategy, in the past, you've done kind of essentially every six months coming out with a new LTO, but you mentioned this summer kind of doing -- hitting the bacon cheeseburger. Is that a change to the pace that you've had in prior years of kind of maybe doing one in the first half and one in the second half? Any change to the promotional strategy?

Yes. We're going to run them for about -- this year, we're going to do more of a four to five-month run rather than about a six-month run. So the barbecue items will stay with us through all of May. And then what we're going to do in June is return -- go to the classic bacon cheeseburger, and that will probably run for four or five months, depending on where we're at. We've got some other fun stuff we're planning on for the end of the year. But as I said, the real focus for this upcoming group is with the Android version of the app launching later in the year, we expect increased traffic from that, and we want to make sure we're really thinking a lot about throughput. That is one of the challenges of the app. And we want to take this time, during this next about five to six month period, really focus on those initiatives. We're looking at some really cool new ideas in kitchen design for some of our new Shacks. So we'll be testing some of that, learning a little bit and continually tweaking the way that we flow product through the kitchen.

Great. And then last question, on the app side, I believe you're limited to -- limiting now to four orders per -- or four meals per order. Some checks indicated that might change. Is that something that you expect to change? Or do you expect that to have a meaningful impact to...?

Yes, that's the great change. I think one of the important guard rails we put on the app early on was for a four-burger limit. For the very reason I just described, I mean, when these app orders come in, they can overtake the kitchen a little bit, which is great and what we want to see. So we limited that to four. We do expect at some point, I won't commit to when, but at some point, we want to increase that, take out some of that constraint as we continue to get better at it. So yes, I think that's one of the things. I know -- I got three kids, so when I go to Shake Shack, I always want a fifth too. So I feel the pain out there, and it's something we're working on. And we'll remove that at the right time when we can handle a little bit more.

Great. Thank you very much.

Next question comes from Andrew Charles with Cowen and Company.

Great. Thank you. Appreciate the update on the AUVs across the different markets and definitely hope this is something you give on an ongoing and annual basis. Josh, a question for you. If you could provide -- help us quantify the impact of the presumed cannibalization in New York City, so just given on a sales-weighted basis how heavy the New York City comp is for you guys, how much do you think that's impacted overall 1Q for March, however you guys think about it?

We're -- that's not a number that I can give you right now. Again, as Randy noted, those Shacks that we opened during 2016 had an AUV of $7 million, which, on an annual basis, those 4 Shacks, $28 million in an AUV, a decision that we're going to make 10 out of 10 times, even if we give up a couple of points on the comp. To put also that into perspective, the New York City market is actually over a $100 million market for us. And we see that there is probably even more whitespace out there for us, particularly in -- maybe even the outer boroughs. Brooklyn has three right now. Queens has two. We have nothing in Staten Island or the Bronx. So we're still really bullish on New York City as a whole.

Got you. And then just a question on build-to-suit. Are you steadily seeking out sites that you wouldn't have been able to before and if you have any in place, or at least a site you want to talk about, that would be helpful as we think about potential alternate points of distribution for you guys?

Yes. Here's what we'll say. We're never going to let accounting rules dictate the strategy of the company and certainly not the real estate strategy, right? So we do not take that as a factor into whether we will choose to do a site or not. And it's also not as black and white as what it sounds like when it's called build-to-suit. It's not necessarily just that issue of whether the landlord is building a piece or all the building for you. It takes a lot of other things into account. So it doesn't change overall deal economics, to be clear, right? It's the same cash going out. It's really just on accounting. And again, we take a little bit of a win in the occupancy costs, and we take a little bit more of an uptick in depreciation and interest. So it's really important that you see our guidance on depreciation, and that is a big, big part of it. So here is how we think about real estate. We're finding the best location and the best project or the best piece of that town. And when we look at the 23, 24 Shacks for this year, they're going to be really good.

Great. And just my last question, Randy. Shack app, again, released and you're getting your comments, meeting guests whenever and wherever they want Shack. Just curious to your learnings from the app launch, the operational impact as well as the app itself. Is this changing your thoughts on delivery? Or just where do you stand with the third-party delivery as we continue to see third-party providers provide promotions around your food?

Yes, we're in the same place. We are doing a ton of third-party delivery. Really excited. We've done some fun promotions with Caviar, with Postmates, with DoorDash, all great companies doing great work. And we're still not ready to team up with anyone just yet. We still see a lot of opportunity to improve our own experience with delivery. We want to make sure what our guest is getting is the best possible Shack experience. So we're all for it. But we're not ready to ramp that up yet, especially with the increase of app orders coming in. I mean, it's such a game-changer. I think about it myself. I probably go to Shake Shack, and I go a lot. So -- but I have not -- I order on the app nearly every time now and I just think about it. I think about what does it means for Shake Shack. In Madison Square Park, when I went this week at a lunch meeting at 12 O’clock, and there were probably 50 people online. I preordered my lunch at 11 O’clock. I showed up at 12:00 and I got my food. I could never have had that lunch meeting before today. And that just tells you what a game-changer the opportunity is for so many Shacks that are really busy at peak times. And it's so new. It's such a barely new piece of our business. But we're working on it. We're working on being able to capture that demand, and we're really confident that that's going to continue to grow as we go.

Appreciate the thoughts. Thank you.

Next question comes from John Ivankoe with JPMorgan.

Hi. Thank you. I'd also like to open up with a comp question. At least two times in your prepared remarks, you mentioned the two-year comp trend of 7.4%, and the guidance for the rest of the year would assume a deceleration in that two-year comp trend, which is obviously symbolic in itself. So the question is how you guys are really thinking about same-store sales, thinking about the two-year trend, which, I think, you very rightfully called out was very strong in the first quarter. But when we think about your business and all the different initiatives that you have around digital, around pricing, around mix, around underlying traffic, normal weather, holiday, what have you, what is the right way for us to kind of think about this business for the rest of '17 and longer term in terms of what you're trying to achieve?

Thanks, John. I think, look, we've said for 2.5 years now that we expected Shake Shack to be a low single-digit comp story. This is a company with 72 company-owned restaurants, and we've barely scratched the surface on the 450 that's highly achievable for us. So that is our focus. When you look at what -- let's just take this quarter. We added $24 million to sales versus last year. Yes, that was offset by a negative comp. We are not happy with that. We are not satisfied, nor will we accept that. But there was $24 million added to the story. And that's what we've got happening here at Shake Shack in so many ways with the unique model that you understand well. So look, as we look at the rest of the year, we've lowered that guidance down to flat on a comp basis. And that's kind of the trend that we're seeing and the impact that we're seeing right now. And we want to make sure that we're going to continue to execute on great growth ahead. And again, it's just such a hard number to judge when you have -- I mentioned on the call, 17 out of 32 restaurants in the Northeast. Let me give you some more data. 25 of the 32 range from Boston down to D.C. When you think about whether that's a predictive or indicative measure for the full way to look at our company over the long term, it's clearly not. It's an important measure. Don't get me wrong. As we add more and more Shacks to that comp base, it will be a more important measure. But today, there are so many more important measures, a $5 million AUV last year, a 28% op profit. Those were some pretty strong numbers. And I think that's part of why we really wanted help you understand it. When we talk today about outside of New York and reiterate we average $4.2 million, these are 3,000 square-foot restaurants, you'll be hard pressed to find a whole lot of retail spaces doing those kind of per-square-foot numbers, and 27% op profit of last year, having nothing to do with our New York City strong base. So we feel really good about what we're building, John, and we're going to continue to work on those things that will drive same-Shack sales over time. And we think we've got that in place.

That's great. And definitely understood. And then secondly, if I may shift to the personnel side of your business, both in terms of your ability of attracting or retaining the right level of service employees that you have in the restaurant. Obviously, you're as much of a service business as you are a product business. So can you talk about the different markets that you do business and maybe just Northeast concentration in general in terms of your ability to attract and retain employees and at what cost. And then secondly, if we could shift to the G&A side, you've obviously been spending some pretty good amounts year-on-year for the last several years and maybe even since your inception on the G&A side of your business. And I'm curious, as you think about the model over the next couple of years, when G&A dollar growth really begins to slow down and your revenue grows into what is already a fairly sizable G&A spend per store or as a percentage of revenue.

Okay. So let's start with the team. Every market's different, John. And every market is affected by a rising minimum wage. Look, a lot of our markets will soon see $13, $14 and $15 minimum wage. Our average wage across Shake Shack is about $13 right now, starting. And that is -- that's a great number. We want to pay people a great wage. You see that in our payroll. You see our investment in the human beings that we want to try to find. And every market's different. I was just in Orlando last week and we're opening our third Shack in that market in a couple of weeks. And we had 500 people come out for hourly entry-level jobs. Now that's not every market. Everyone is different. But I was blown away talking to our management team, understanding that. So I think as the Shack story gets going and people understand the ethos of enlightened hospitality that built this place, we are always going to focus on making the decision to build the talent that will drive our sales. And we're going to pay people right. And as you've seen, that impacts the payroll line. So that's our commitment. It's changing every minute. I wouldn't say that we're having any easier or harder time than we ever had today than we have in the past. I'd say it's a similar market for our employee. And we're continuing to find great leadership and management that will lead those teams to the next place. In terms of G&A, I think you noted that G&A is going to be a good opportunity for leverage for us over the long term. As we've said, yes, we spend some good dollars here. We had -- even had a little bit of leverage this year, in this quarter. We expect a little bit through the full year as sales continue to grow. But we're also now trying to look at that number too hard and take away the things that might stumped [ph] our growth. We're going to add the G&A that we need to continue to accelerate development as we have in the past, and that's our commitment. There's a lot of expenses for whether it's IT or team or new regions, and we're going to keep doing that with our strategy of opening about quarter of our restaurants in new markets. That costs money. We've got great operators who need to be running those restaurants. And that's part of our G&A commitment. So I do think we'll leverage it over time, but we're not going to hold back and certainly miss an opportunity because of that.

It's something that may be interesting over time, and maybe I haven't asked the question in this way, but do you think about incremental G&A dollars necessary per new store opening? Does it ever make sense to start to benchmark the business in that way?

We haven't done it other than the op side, John. We do think about it when we think about area directors, marketing and some of -- and training and some of the initial things that really support a new region. So like let's take L.A, right? When we opened in L.A. last year, we had one person who was out there, right? That was one restaurant supporting that area director. Now we have four, with two more on the books, on the way. And we have someone from development, we have someone from HR. We're building a team out there in L.A. to support what we expect to do in California. So it's always sort of a bigger hit initially and then over time. But that's a number we can look at. We can -- let us take some time to think on how to communicate that with you in the future.

All right. Thank you.

Next question comes from John Zolidis with Buckingham Research.

Hi. Good afternoon.

Hello.

So I want to ask a little bit about the long-term AUV and Shack-level margin targets you provided. In light of some of the detail you just gave us, New York City being $100 million market or about a third of the business today, but the outside of New York stores doing $4.2 million AUV and 27% Shack-level margin, that just compares pretty interestingly to the guidance for $3 million AUV then 20% Shack-level margins. I just don't -- I guess I don't see how the new units you're going to open up are going to dilute the existing base to that extent. Can you talk a little bit about the assumptions you're using or the analysis you've done on some of these other smaller markets that have provided that? Thank you.

Yes so -- absolutely, John. And so let's be clear. We're not saying that the eventual AUV and op profit will get down to those numbers. So not an expectation that it dilutes it to that extent. Today, what we've got, anything and what we do for you each year as we look at that class and we take a look at it, right, last year's class clearly outperformed those metrics and we communicated that. And we look at this year and the early things we're seeing, great starts in Detroit, in Connecticut and some of the others. That gets us up to a $3.3 million average and at least 21%. And over the long term, we said, yes, keeping your model, when we open those at least 23, 24, a year at this stage in the next few years, let's look at those at that $3 million, 20% AUV. That's our conservative way of looking at it. We want to continue to accelerate growth as we have. And there's a lot of places we haven't been yet. We have Shacks at all levels of sales that are continuing to do well. It's what's encouraged us so much towards the real opportunity here. So yes, we've said, over time, you should expect a slightly declining AUV and a slightly declining op profit. But we don't expect to be a $3 million AUV company-wide or a 20% op profit company-wide in any time in the foreseeable future.

Okay. Thanks for that color. And then maybe just to help us with modeling. This is a -- such a challenging modeling situation. When you look at occupancy, as you move into other markets, obviously, New York City is probably the most expensive market. And so occupancy dollars on a per-store or per-square-foot basis are going to be a lot lower. Are you going to maintain occupancy around the same percentage of sales? Or will that increase or decrease as you move into some of these other markets?

Yes. Here's what's happening. When we go into other markets, it's easy to say, yes, of course, New York should have a higher occupancy. That's true in some cases. But we also have some pretty good sales here, right? So it actually balances out quite a bit. And as we go to different markets, we're still going after the best site in that market. And the good news for Shake Shack is with every great developer, whether it's a mall or an urban space or whatever, we can get the sites that we want, but they don't come free. So we're in this mid-8s range on occupancy. We expect to stay there. I think it's going to be balanced. I think we're going to have some 10. We're going to have some 6s. And that's what our performance would look like this year, that full range. So I would expect, over the long-term, we're in that mid-8s range for our long-term model in occupancy. So don't expect a whole lot of leverage on that even as we go because we're still going to go after and capture some amazing sites, and those are not cheap.

Great. Thanks a lot. And I look forward to meeting there [ph].

We next move to John Glass with Morgan Stanley.

Hi. Thanks. First, you talked about cannibalization in the New York market. Have you seen a cannibalization in the other early-stage markets or later markets, meaning you entered earlier, for example, D.C. or Connecticut? Has that been an impact on sales of existing units?

Not really, John. From time to time, and it really more depends on the rate of opening, right? As you know the story, let's just take Philadelphia, right? We opened our first one in Philadelphia a few years ago. In year two, that restaurant's almost inevitably down, right? Our sophomore class is, we've said, generally down about 5% of the class. Some of those are down, and they're often just down because the excitement of that first year kind of comes off. And then you also open a second Shack or a third Shack in that next year or two around it. So it's really hard to quantify whether that's happened, but we don't believe we've seen a whole lot of evidence of cannibalization. And again, even in New York, it's hard to quantify whether that impact was part of that or just part of the Q1 stuff that we've noted. We'll now a little more as we lap some of those openings later on this year. But that's a trade we make every day, right? That is a trade. We just opened in Dupont Circle and Logan Circle a mile from Dupont Circle, so another amazing Shack. Hard to say whether that's going to have an impact on the Dupont Circle or others in the market. But what we do know is, with our business model that is the trade you make every day. And we're really excited to continue to grow a lot of those, and we have so much runway. I think one of the strengths of the Shack brand is we don't have to go so far so early. We can grow to virtually any market and really have a good impact on that start and then continue to grow that slowly over the long term.

I just want to add -- yes, I was just going to add, interestingly, in the D.C. market that we highlighted in the prepared remarks, since inception of Dupont Circle in 2011, our six-year CAGR is actually positive, which just kind of shows you the strength of that market from Shack 1 to Shack 7.

Thanks for that. And just on your confidence in the margins for the year being similar to what you thought at the beginning of the year despite the first quarter, maybe just help understand that. You said that there's pressure from new Shacks and maybe just give us a sense of how long the maturation curve to get back to a more normalized margin as in a new Shack. And even still, you're still opening more Shacks this year than you did last year. So why wouldn't that pressure be continuous throughout the year? Why would maturations of some Shacks are just going to be offset by the newer Shacks opened later in the year? So maybe just more detail on why you really do think your margins get back to where you thought they would be at the beginning of the year or late last year.

A few things. I mean, everything's baked into that, John. We said a slight bit of leverage maybe on the food line might help us out a little bit on that. Labor continuing to be up, as we know. But in Q2 here, we expect to open just four restaurants. That's a little bit lighter pressure on that. There's going to be a lot more of it back-weighted in Q4, so we may have a similar feeling on Q4 as we did last time. The build-to-suit, you pick up a little bit there in occupancy. And all of that kind of lends us to shooting for that 26.5% to 27.5%. And in fairness, we've kept that range, and we're probably more at the middle of that range in our expectations. On previous calls, they may have been more at the higher end of that range. Expectation, I think given this previous one, we're probably more shooting for the middle of that range. And that's kind of how we see it for the rest of the year.

But just how long does it take a Shack from opening to get back to the industry average? How long does that take?

Thanks, John. Sorry, I missed that. Yes, it depends on the Shack. Some, it's a month or two, and we're rocking and rolling and then it's kind of normal. When we open in a New York market or even the D.C. markets, we just opened a couple and a couple on Long Island, those kind of pop back a little earlier because when we open some a little further a field that they kind of have a little bit more time. So it is a more three to six month trend, I would say, on Shacks that need a little more time to ramp.

Okay. Thank you.

[Operator Instructions]. We next move to Karen Holthouse with Goldman Sachs.

This is actually Greg Lum on for Karen today. I had a couple of quick housekeeping questions. So the first is more of a clarification question. And you guys mentioned that new company Shacks growth represented about $24 million of the increased revenues. Is this referring to the year-over-year revenue increase from all the units not included in the comp base? Or is it just the new Shacks versus the prior year?

Yes, to clarify, that is what we call internally a freshman Shack, so Shacks that have been opened less than 12 months, so had nothing to -- no year-over-year.

Okay. And then are you guys willing to size what the impact of the Easter shift was in 1Q and what the related benefit in 2Q would be?

No, we're not quantifying that just yet. It's hard to say. I mean, it's wrapped up in a lot of number of factors. It did impact us there, and it was part of the improved trend we've seen in Q2.

Thank you.

There are no further questions in queue. I'd like to turn the conference back over to management for closing or additional remarks.

Yes, I just want to thank our team again, really looking forward to the Great American Shake Sale. And I hope you'll come by the Shack and see us soon. All right, have a great night.

Thank you, ladies and gentlemen. That does conclude today's conference. We thank you for your participation. You may now disconnect.