Shake Shack Inc. (SHAK) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Shake Shack Second Quarter 2017 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. [Operator Instructions] Please note that this conference is being recorded today, August 3, 2017. On the call today from Shake Shack we have Randy Garutti, Chief Executive Officer; Tara Comonte, Chief Financial Officer; and Josh Omin, Vice President of Finance and Investor Relations. And now, I'll 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 second 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 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. Now more than halfway through 2017 Shake Shack continues to grow profitably and at a rapid pace. The total revenue growth of 37% to $91.3 million in the second quarter. And adjusted EBITDA growth of over 36% to $19.4 million in the same time period. We're continuing to successfully expand Shake Shack both domestically and internationally focusing more than ever on technology enablement and throughput initiatives, personalized and targeted marketing and even more dynamic menu innovation, all while staying true to our mission to stand for something good. With each new Shack we open our overarching goal remains unchanged to be a delevered community gathering place for your hometown, offering classic American favorites may with premium ingredients an unparalleled experience that connects with our guests wherever they are and whenever they want their Shack. And it's rapidly shifting retail moment we're well-positioned to continue the evolution of what it means to experience Shake Shack. This is the moment we've heard of even our guest connection to the in Shack experience while developing new digital channels both and out of Shack to further our opportunity. This quarter we opened four domestic company operate Shacks and three net license Shacks. For the full-year 2017 we remain on track with our previous guidance to open 23 to 24 company operated Shacks and now with more insight into our international pipeline we can raise our previous estimates you open at least 15 net license Shacks. This result in total company operated unit growth of approximately 37% and total license and unit growth of 30% compared to last year. We are pleased with the continued great quality of our expansion and remain excited with the opportunities that lie ahead. We've still barely scratched the surface of the global opportunity in front of us. Following incredibly proud of our top and bottom line growth we did experience a same Shack sales decline the quarter of 1.8% which as we guided to one our last call reflected an improvement from the first quarter albeit not quite to the degree forecast at the time. It's important to be clear again on the factors impacting this matter. Firstly, let's remember the declines on our prior year compare of 4.3% increase. Secondly, due to the dominance of Northeast Shacks in our small comp base, this metric remains disproportionately impacted by regional factors which can swing the base dramatically, particularly weather and which is Northeast in the second quarter and with more rain and was typical for that time a year. In addition our comp base in quarter two includes only 37 or fewer than half the total number Shacks in operation. Give further context for the second quarter Shacks outside of our company's contributed 24.5 million to our year-over-year increase in revenue compare that to the 900,000 that the comp base 1.8% decline represents and you'll see why same Shack sales is not a metric to be looked at in isolation nor overstated at a broader context. If you want to be clear about development strategy and how that may impact the comp base today and going forward. As of the second quarter, New York City remains the largest region in our comp base with 10 New York City Shacks equator over a quarter of the total units in the base and over 40% of the aggregate comp sales. We continue to believe more than ever in the growth opportunity that exists from opening even more Shacks in our hometown. And as we shared on our last call, our AUV of last year in New York City we're over $7 million performance that speaks for itself. As we look at the New York market, we do see clear opportunity ahead open even more of these higher AUV Shacks and grow our overall New York City revenue and profit contributions. We are thrilled to announce, we'll be adding two New York City Shacks in the next few months, at Astor Place as well as further up Chandler near Columbia University on 116 Broadway and we expect each to be highly additive to a composite revenue and profitability. That informs our decisions much more any concern for potential impact to our same Shack base. When great opportunities arise, you can bet we're going to jump on it. Let me give you one more example, last September we opened a second Shack inside the King Crusher Mall in the Philadelphia market. This decision was based on the strength and performance of our first Shack that sits outside the mall on the pathway. So by opening the second Shack, we will grow our overall market there and deliver increased revenue and profits for the long-term. On a combined basis, these two Shacks alone should generate over $6.5 million in sales in 2017 nearly doubling the revenue we had from this location previously. However, only the original Shack is in the comp base and as expected the topline is impacted, when we look at it on a standalone basis. Let me say again, two Shacks within a square mile of each other bringing in over $6.5 million, adding sales and profits, yet creating noise within the comp. This is our first and foremost great real estate opportunities for prime locations. Count on us to make that decision every time. Let's get back to what we are building now because as of this moment we have only 76 company operated Shacks in the U.S. on a road to a much bigger and broader price with the intent to accelerate the number of new Shacks opening next year. That's the focus of this call and the focus of our strategy. During the second quarter, we opened four new domestic company operated Shacks in Long Island, Chicago at West Loop, Orlando, and Lexington, Kentucky, bringing our total for the year-to-date to 11 new Shacks. We have expanded and renovated our fourth ever Shack on Lincoln Road in Miami and have seen a strong uptick in sales and saving on more space. In addition, it's been gratifying to watch our recent entrants and the strength of initial results in smaller markets such as Detroit and Lexington. And every time we open a Shack at new cities across country, it proves again how versatile our brand is gives us further conviction toward the growth we have ahead in diverse markets. In terms of future openings, we will continue to build Shacks where we have secured prime real estate sites and where we see clear and demonstrably growth opportunities. The majority new Shacks will continue to be in existing markets with the balance of new markets across a variety of formats. 2017 will represent a strategically balanced mix of Shacks in urban locations, pre-standing pad sites and continuing to focus on premier shopping and lifestyle centers around the country. During the remainder of 2017, we're excited to enter the new markets of St. Louis and San Diego are further expanding our existing markets including New York City, New Metro area, Washington D.C., Texas, Michigan, California and more. Moving towards 2018, we plan to build yet another great class of Shacks in both new and current markets. Really excited that we'll be officially breaking ground and launching in a number of key new markets among them Milwaukee, Cleveland, Charlotte and Denver. As you've seen from us in the past, with each year as more real estate opportunities become available and our team continues to grow. We have been able to accelerate the number of new Shack openings. And we will provide guidance on this at the end of the year, but at this stage, we do expect to increase the number of new unit openings again in 2018. Moving on to our licensing strategy. We continue to explore and enter into key partnerships both domestically and abroad. As another clear source of revenue growth, we love partnering with premier companies around the globe and we believe especially now and early days of our growth, this asset light model is the best way to grow our overall brand and profit internationally, while maximizing our returns on our own capital here at home. During the quarter, we grow our domestic license business with a new Shack in Minute Maid Park for fans of the Houston Astros. We also opened in LAX Terminal 3, our first Shack we are partnership with HMSHost as we increased our footprint in airport occasions around the country. Internationally, we added two Shacks in Seoul, South Korea bringing our total in that market of four out of a contracted 25 over the next 10 years based on the outstanding reception performance to-date. We're excited about the continued opportunity ahead in Seoul. Recently we celebrate our one year anniversary with an important chef collaboration with Michelin starred chef, Chef Mingoo of Mingles Restaurant and we share this because we want to continue to parlay our fine dining routes into value-added marketing opportunities around the globe, distinguishing Shake Shack from the rest of the pack yet again. Our Shacks in Japan also continue to deliver strong performance with a growing fan base and in July, we opened our fourth Shack in Tokyo in the Shinjuku area, further deepening our presence in the market and making plans for additional steps through the end of this year and into 2018. Given our early success in Asia, we're bullish on our long-term growth opportunity in the region and a few weeks ago, we announced our plans to launch in Hong Kong and Macau. We're in new partnership with Maxim's Caterers Limited together we executed development agreement to open 14 total Shacks in Hong Kong and Macau over the next 10 years. Maxim's is a team responsible for successfully brings Starbucks and Cheesecake Factory to the region will be a tremendous partner for Shake Shack. We're incredibly excited about this partnership and see significant white space to grow the Shake Shack brand in Hong Kong and Macau with an eye towards an even greater opportunity in Mainland China at some point in the future. I want to shift now to the second major piece of our business strategy, the digital evolution of Shake Shack, recognizing we've built this Company on a foundation of community gathering places. We're really excited about the ways we see Shack guests engaging with the next-generation of Shacks. We will be executing on a multi-format strategy focused on the evolution of the digital experience in Shacks, promoting and growing the use of our mobile app by adding features and improving the user experience, carefully considering improving the guests experience of delivery and a strategic push towards more personalized marketing initiatives to drive frequency and spend. In mid-July, we launched the Android version of our Shack out, at our - we are social and community base business in all aspects of those words. Our communities, our guests are increasingly online and mobile is a key means, which will connect with them. The Shack out are still early days really important tool for us to deepen our connection our guests of bringing a new convenience an ease to getting your Shake Shack. Early engagement indicators are encouraging with downloads continue to increase, average check remaining higher viewer of the app and positive retention in return rates of our users. Over time we expect orders made through the app to increase and as learn more will be constantly innovating and updating elements of both the app and in Shack guest experience, as well as evolving our kitchen throughput initiatives as needed for a long-term. I also want to touch on delivering, a topic I know many of you are thinking about. So to-date we have chosen not to form any formal partnerships with third parties in delivery space. We continue to be comfortable with our existing operating relationships throughout the country. We know of course that dialing up delivery availability is a growth opportunity for us. But we will continue to explore options in a thoughtful and consider manner. What's most important to us in this moment is that we don't focus on short-term delivery dollars without ensuring the full Shack experience remains at its best. First and foremost, quality is a key component of the Shake Shack value proposition and it's critical that we maintain that full expression of the Shack experience in delivering model. From that basis packaging is critical to a high quality food and hospitality experience. So right now we're testing new to go in delivery packaging in a few of our Shacks. Kitchen line is also a key consideration of both new and existing Shacks to allow for increased delivery options, more constantly evaluating the best alternatives here. Later in the year, we will be testing out a few new and renovated Shacks with new kitchen flow, the goal of an even better food experience for future digital growth. We believe that even more efficient throughput represents a big opportunity. We will be excited update you on our kitchen enhancement later this year, specifically in our newest NYC Shack Astor Place and others to come. We're going to continue to test and learn as it relates to delivery. As we work to ensure the Shake Shack delivery experience gives that's what they love or they choose to enjoy in the communities of their homes, offices or anywhere else. Here is why we have advantage. The delivery of all types ramping throughout the industry, it's easier than ever to get a convenient delivery of food, but few are as well positioned nimble and carry the branch brand required to be successful. Lastly on the tech front, we're excited to announce that just this week we launched our chatbot, on Twitter direct message and Facebook Messenger, focus initially here is in an area of customer service and our guests can get immediate responses from the chatbot to learn about menu, featured items, nutritional info, hours, and many of their favor questions. It's early stages for sure, but we're having fun with it. This is just another example of how we're testing and innovating in the digital world of Shack. We're always looking for innovative ways to improve hospitality and overall guest experience. I'm really proud of the work of our IT and marketing team as they push ahead. We look forward to sharing more within the coming quarters. Finally, a core strategic pillar driving additional Shack sales in menu invasion. We've got more exciting products in the pipeline than ever and we recently wrapped our barbecue LTOs in May, which included the Barbecue ShackMeister burger, ChickenShack and Barbecue Fries. On June 1, we launched our classic bacon cheeseburger and we're running up to the summer in early fall. I'm really pleased to announce our newest innovation to actually eat for lunch and we've just launched this week the new chicken LTO, featuring our first ever hot chicken. We tested it at selected Shacks over the summer and based on those results we launched it as in app exclusive for the weekend. And we're excited to see how our guest go for hot chicken, we got a lot of fun LTOs in store for later this year and in the next. In the quarters to come will be sharing some of the new categories and exciting category innovation we've got in store from a product perspective. With that, I'll turn it over to Tara Comonte. So I am very pleased to announce is hosting our first earnings call is our CFO. We've had a ton of fun onboarding Tara getting our accumulated with all in Shake Shack. And I am looking forward to you all getting to know her. Now she'll take you through the notes.

Thank you, Randy, and hi, everyone. So before we get into the numbers. I would like to take the opportunity to share some initial observations during my first eight weeks here at Shake Shack. Firstly, the passion and believe system at build this company over the last 16 years remains a strong as ever. This version of cycle to taking carava teams or guest I'll community and our supplier s. And in turn we believe it is a best way to both long-term value for our shareholders. As a loyal guest myself I was need exactly special, but our system timing working our Shacks nice truly understand on mission it down for something good. And how that impact all aspect of our business, including the exceptional teams we higher trial and promote the premium ingredients to make up our menu and the community gathering space is equal. Secondly, they knew to this investor has been getting up to speed on restaurant economic and however business model and our Shack line up. And more I find has been in present and very encouraging in relationship wood like ahead. AUD's of over $7 million in New York and over $4 around the rest of the country. With over 28% company operated profit margin is like upside is a best in our industry. And yes, of course, as we accelerated growth se expect these averages to come down, but remain among the highest performance in our business. These kind of results are an incredibly strong validation of our ongoing opportunity and equally strong foundation on which to build. We finally, if I look at our strategies the globe both home and abroad. I am excited for the journey that lies ahead it help straight that strategy with Randy and the rest of the leadership team. Ongoing domestic expansion, entry into new international market constantly innovating in our use of technology to ensure that app or Shack experience in every aspect all represent significant pass the growth. And in terms of the team we will get us, first new company's IC and with such less of energy cash and protest strategic vision and overall ambition with the team here has in state and I am thrilled to join them. So moving on to the results of our 13-week second quarter ended June 28, 2017. Total revenue which includes both sales and company operated Shack as well as licensing revenue increase 37.4% and 91.3%. Sales from our company operated Shake increase 36.6%, $88 million largely due to this look 24 new domestic company operated Shack over the past year. Same Shack's sales decreased 1.8% during the second quarter, last time 4.3 million increase in the prior year quarter and consisted of 4.3 decrease in traffic. Partially offset by a $2.5 increase in pricing mix. And as I reminder our comparable Shack basis still smaller 37 Shack, representing less than half of our domestic company operated Shack. Randy explained in detail the factor impact particularly metrics including but not limited to the fact and less than half tractor in the base. The regional skews therefore curve within the base and the impact of our strategy to continue - the penetrate server existing market. Average weekly sales for domestic company operated Shack $92,000 in the second of 2017. The decrease the prior year quarter resulting from our recent addition of new Shacks in the system. Licensing revenue increased 60.4% to $3.3 million during the second quarter from $2.1 million a year ago, driven by a net increase of 16 Shacks or 34.1% since the second quarter of last year. We saw strong performance in Asia driven by six new Shacks offset by continued softening in the Middle East due to the economic slowdown in that region. We remain cautious and our in the Middle East for the foreseeable future, but extremely encouraged by the new Shacks coming into the system particularly in Japan and Korea as well as the opportunity for further expansion that Randy mentioned with recent addition of Hong Kong and Macau. Finally, licensing revenue during the quarter, we are proud Shack cookbook, which contributed $500,000 of previously deferred royalty revenue recognized in connection with the initial publication of the book, partially offset by expenses related to book production, which appeared in our G&A line. Moving on to expenses for the quarter, food and paper cost as a percentage of Shack sales remains constant with the same quarter last year of 28.1%. Looking forward to the remainder of the year, our expectation of the food and paper cost will remain relatively flat with the second quarter showing slight leverage over the prior year both in Q3 and Q4 and on a full-year basis. Labor and related expenses remain our largest near-term headwind and long-term challenge. As a percentage of Shack sales, labor and related expenses increased 180 basis points to 25.5% from 23.7% in the prior year. Similar to the first quarter, this deleveraging was primarily driven by three factors. Firstly, the opening of more Shacks varies unit volumes some of which that will carry a higher percentage of labor costs in our current base. Secondly, and consistent with the rest of our industry, we are increasingly experiencing regulatory increases to hourly wages in many of our markets and we will continue to do so. This will be compounded by additional regulation including the Fair Work Week legislation in New York City. Implementation of this legislation expected in late November of this year will certainly have some degree of impact on our future labor costs. Thirdly, our labor line will continue to be impacted by our strategic investments in our management team in order to support our ongoing growth. Our business growing is quickly at Shake Shack, it is critical to make sure we have a growing bench of highly trained leaders and to show that we are developing people ahead of our expansion. As mentioned many times in previous calls, the combination of these three factors will lead us to expect labor related expenses to experience to deleverage over the next few years. Other operating expenses as a percentage of Shack sales increased 30 basis points to 9.6% to 9.3% in the prior year quarter, driven mainly by the impact of certain fixed operating expenses, deleverage income and the introduction of broader range of unit volume Shacks into the system. Occupancy and related expenses as a percentage of Shack sales decreased slightly to 8% from 8.1% in the prior year quarter. Shack level operating profit, a non-GAAP measure, grew 27.6% and $25.3 million from $19.9 million in the same quarter last year as a result of the strong year-on-year increase in Shack sales. As a percentage of Shack sales, Shack level operating margins decreased roughly 200 basis points to 28.8%, primarily due to the aforementioned contributing factors in labor and other expenses. We are incredibly proud of the team for delivering yet another strong quarter of profit. General and administrative expenses increased $2.2 million to $9.7 million during the second quarter to $7.5 million in the same quarter of 2016 primarily driven by higher payroll expense from increased headcounts to our home office to support our ongoing growth plans and one-time executive transition cost. As a percentage of total revenue, G&A decreased 70 basis points to 10.6% for the second quarter of 2017 from 11.3% in the same quarter last year. We continue to be on target for the guided $38 million to $48 million in G&A expense this year and remain committed to investing in our teams and the infrastructure needed to continue to execute on our growth plan. Adjusted EBITDA grew 36.4% in the quarter. The $19.4 million on adjusted EBITDA margin remain strong at 21.2%, net income in the second quarter with $4.9 million, or $0.19 per diluted share, compared to net income of $3.3 million or $0.14 per diluted share for the same period last year. On an adjusted pro forma basis, which excludes non-recurring items and assumes all outstanding LLC Interests would exchange the Class A common stock whereby we would no longer present, a non-controlling interest, we aren't $7.3 million or $0.29, per fully exchanged and diluted share, compared to $5.2 million or $0.14 per fully exchanged and diluted share in the second quarter of last year. Included within these pro forma results was a tax benefit, due to the new accounting standard with beginning of the first quarter that changed the way we account for excess tax benefits associated with stock-based compensation. On a non-GAAP basis, the new standard resulted within the tax benefit of $165,000 for the quarter or $0.01 per fully exchange diluted share. Following these results for the second quarter by providing annual guidance for fiscal 2017 as follows, we are reiterating our previous total revenue guidance of between $351 million and $355 million, an increase of approximately 31% over the last year. Based on a second quarter results and for all the factors Randy laid out that will continue to impact our same Shack sales metrics. We were updating full-year 2017 to be down between 2% and 3%. This is primarily based on our 2017 results to-date and it's worth reminding you again with that all our metrics, this one can be the most volatile while our comp base continues to grow and diversify regionally. We are reiterating our total expected domestic company operated openings of between 23 and 24 Shacks in 2017, representing a company operated unit growth rate of approximately 37%. As you might expect, dealing with a landlord, developers, and local government, remains a less than exact time when it comes to predicting precise opening dates and opening plan from time-to-time move slightly up or slightly down the calendar and this is why give you a range, and also the reasons that we occasionally update that launch, as we get better visibility to exact timing of openings. With a look towards 2018, and as Randy mentioned, we intend to increase the number of new unit openings and we'll provide updated guidance from that within our overall 2018 guidance in the future call. Due to favorable development timings, specifically in Japan and Korea, we are increasingly guidance for license openings to 15 net new licensed Shacks, up from 12 in our last guidance. And due to strong performance in our Shacks opened year-to-date, I'm confident in our upcoming second half opening, we are increasing our guidance for the class of 2017 Shacks to deliver at least a $3.4 million AUV and this is an increase from our previously guided $3 million. Moving on to our expense guidance, the 2017 guidance remains unchanged for our Shack level operating profit margin between 26.5% and 27.5%, G&A expense between $38 million and $40 million, depreciation of approximately $22 million and interest expense between $1.6 million and $2 million. And for our tax rate, we expect to continue to experience some degree of volatility as a result of potential tax impact associated with the changes to the standard related to accounting and stock-based compensation. And as such, our tax rate guidance excludes benefits potential future tax effects for the new standards. We do however, continue to expect our annual adjusted pro forma effective tax rate, excluding in these standards to between 40% and 41%. So wrapping up and giving you my comments, we will continue to focus on a strong taste of units and revenue growth. Opening Shacks that generate strong operating margins and strong cash on cash returns. On the company born in New York we have industry-leading AUVs and operating profit. And yet our expansion will increasing include units at all levels of both. We are focusing on long-term top and bottom line performance and we'll continue to execute against our clear business strategy and not big attracted by short-term volatility and isolated metrics. We will continue to invest in our infrastructure, our system, our process is our teams to make sure were head of the curve and supporting our expansion and maximizing our ability to scale of effectively and efficiently. And we will continue to innovate and evolve an additional feature to Shake Shack ground and overall guest experience wherever that guest maybe. Now having said all of that and having had a few weeks and earnings process to review highly communicated externally I believe that we have the opportunity to take a look and we share data around some of the key drivers impact from our results to date and our feature results. Our intend is a cost to communicate and share both data points that we believe we most useful and informative is it relative to accessing and understanding our performance post today and in the feature. I look forward to providing additional clarity and data to further understand the long-term Shake Shack story and upcoming financial leasing. And with that, thank you and I will turn back over to Randy to conclude our prepared remarks.

Thanks Tara. We had a momentum in retail in restaurants where we believe the winners we goes to best combine in authentic experience. With a convenient I will expect to that. Our strategy is clear and outline for you. The ongoing investment in our team will be accelerating growth. Great sights domestically and internationally, we'll be investing more heavily than ever in technology to drive the inline and online Shake experience. We'll working towards a more personalized marketing connection with our existing guests as well as acquiring new guests and will be driving further menu innovation to drive traffic and spend. We believe we're in an incredibly strong position to continue expanding growth, the Shake Shack brand is a powerful one with planning of white space ahead and more focused than ever on continuing deliver against that opportunity. With that, we thank all of you for joining today's call and operator you go ahead and open the line for questions.

Thank you, Randy. [Operator Instructions] Our first question come from Sharon Zackfia with William Blair.

Hi, William Blair, not Baird. A couple of questions I guess Randy you talked a little bit more about cannibalization then I recall you talking in the past is that something that's becoming a more meaningful aspect of your business. And then be in a productivity, the rate there and what you expect to series of that. The result of some sort of out of the ballpark opening that you had this year or is generally everything a little bit better than you expected?

Yes, thanks Sharon. With regard to news Shack impacting current Shacks. We share a little bit of that on the last call and talking about some of that impact specifically in New York that we've talked a little bit you know handful of Shacks and I think said you know over 40% of the comp sales are in New York City. So you know whenever something happens in the New York we feel it right. And now that has happened whether that cannibalization or other factors it's really hard to say. We did want to specifically call on this call the Kingfisher Mall because that's a strategy work we never want to see any Shacks have a decline in sales but when we see that there's a clear operating profit the sales increase opportunity in a Shack may impact another one that's a great real estate opportunity we are managing this company for a lot of dollars not for percentages. We talk about that it's beginning of time. So again with our small comp base small handful of Shacks who can be impacted in a way that that can happen. And then as we noted there we've seen some of them in the couple. When it comes to new unit productivity I wouldn't say there is any Grand Slams in the current base, last year as you know we exceeded some of the guidance that we gave in terms of that AUV. Mostly because we had our first person in California other strong restaurants in California and a few in New York. This year we haven't had those I would say heavy hitter high AUVs, restaurants as we talked about and we've been really happy with the early start and some of the Shacks in Long Island really powerful start in Detroit and Lexington, but again, these are generally smaller markets. So we don't expect those to have similar AUV, but we like the opportunity where we see ahead of the Shacks that are going to come in, we've got about 11 or 12 Shacks to open in the rest of this year. That will be back weighted again. We'll probably have a similar third quarter that we did in the second quarter in terms of unit openings to four to five depending on development. But we are excited about what those look like over the long-term as they run.

Okay. Just one follow-up. Is it fair to say that the comps outside of New York are outpacing New York at this point?

We haven't broken that out Sharon, so we can get back to you on that. I think at this point we haven't decided to break that out. I think it's fair to say that, again of the 37 Shacks some are impacted more than others and it's not necessarily a regional question.

Thank you.

Thank you, Sharon. Our next question will come from Nicole Miller with Piper Jaffray.

Thanks. I appreciate the time. I want to know how the team embracing technology. They've been so great at building relationships locally in their stores that they feel like they can still do that with consumers and what feedback are they giving you in terms of some of your technology initiatives specifically maybe the mall app et cetera?

Nicole, thanks so much for that question because we struggled a lot how to answer that when we talk about hospitality and the birth of this company and Dannie started use 1985. So we are super excited about the new level of the hospitality. We can gain a Shake Shack. I was wondering just this week, I've had the opportunity to have different meetings at Shacks right. And now where I might not have been able to go to Madison Square Park before and have a meeting because I couldn't count on how long it might take me online. Now I can show up and get much Shacks all already to go. So we love the idea that people can walk in, get up, I did had a friend get me up the other day because they went to Penn Station and be able to catch their train because they had - if they had or preordered on the app, grab their food and got their time on time, something you never could have done six months ago in this company, so we love that. With the Shack pod, we never provide instant answers and again that's super new with the mobile app and with the number of things that we also have in store. We're really excited about technology being a leader for us in increasing the hospitality opportunity to Shake Shack.

And just a last one, Tara if you could talk about your first few months now and I know you gave us a little insight on that, but what's more surprising and are maybe more importantly what are the couple biggest opportunities that you're seeing and how are you prioritizing those?

So few months - couple of months, I think probably almost a day actually, so I mean my first couple of months have really - I think [indiscernible] have been sent really trying to get below the business in the Shacks with the operators, with the rest of the leadership team getting to know my team. I'm not sure that anything has massively surprised me and certainly nothing to the negative if anything, my optimism and my excitement what I thought existed here and was just absolutely we confirmed in terms of the growth opportunity, the quality of the product, the culture, the caliber that relates to the leadership around the globe. And so all of those as system validated me as I spent more and more time with more and more people in the company. And in terms of the opportunities, I mean Randy touched on most of them. I mean I think our opportunity to continue to leverage technology across the business is significant. We talk about using technology as it relates to engaging with our consumers and customers and gusts and getting to know them better, but also I'll be looking along with Shack and another operator will be looking at how we continue to use technology and systems to help efficiently scale the back office and the support function to allow the operators to really focus on driving topline growth. So that's why I'll go next. Trying to get more into the back office and making sure that company was growing 35% a year is spending the time and money quite frankly to make sure that we're investing in the infrastructure that will support our future growth, so that was kind of our mix.

Thank you.

You are welcome.

Thank you. And our next question will come from Jake Bartlett with SunTrust.

Great. Thanks for taking the question. I want to begin on the comp guidance for the back half the year will look like the first half of the year, and just kind of delving into that a little bit, weather - you've mentioned that weather has impact, how much of an impact should we expect something like that to be happening in the back half - how conservative guidance is in the back half?

Thanks Jake. I'll take it and say, look when we last talked here at the call in May, we talk about the improvement from comp in Q1 which we saw in April. We had a stronger April that then in May and June declined a little bit. We've seen that kind of trend continue through July, so that's what led us to be a little more conservative about the guidance just based on what we're seeing. Now look, we know we see some better compares as we get into Q3 and Q4, specifically Q4 as the best compare will have. But look knowing what we're doing, knowing the strategy that we're on. We're going to go ahead and give you that that new guidance to be conservative on where we see things going. As we said, we are - certainly the weather was an impact of sometime in Q2, are to say with that a look like moving forward. But again I think the focus of it is, when you look at - we had in $24.5 million on non-comp sales [indiscernible] that's we're going to guide to for the rest of the year for now.

Got it and just to clarify, did you see I mean weather is much going to impact in July, but you're seeing just the same trend that you had in May and June. In July despite whether or not being much any worse in July?

Yes, similar trend today to Q3 that led us to that guidance for the year.

Okay and then is there any impact and what are things about your small comp basis that it's actually now starting to grow pretty quickly, any impact you expect from that? Could you gauge the new stores entering the comp base? How they are impacting the comp? Is that part of what maybe some of the headwind we're seeing here?

Well as we would say that's pretty balanced reporting when you look at our new Shacks coming in and the rest of the year, we have about six Shacks coming in the comp base. Next year, it will add 18. So when you look at how it's still a very small comp base. Look it gets more regionally diverse and Shack diverse as we go through this next few years. But with only six coming in, I wouldn't tell you that there's anything that's really telling about the reason or coming class or the 18 is necessarily that will be coming into next year.

Okay and then lastly on digital, I think you mentioned in the last quarter, what percentage of sales it had been and maybe if you can just give us what it is now and maybe what impact some of the changes you've made like increasing the order size limits, launching Android, any kind of just idea of the trajectory of the digital sales would be helpful?

Yes, So Jake I said a little bit in my comments. We're not going to give a number this quarter. I think what we really want to do is learn. We just launched Android. There is so much to go yet. Last quarter with brand new, we want to give you the earliest data we had. So we'll keep updating you. What we know is downloads are increasing. We've had some fun in app exclusive type of thing that driven some interesting results. We do know our average Shacks are little bit higher in the app, continue to see that and we continue to see the churn rate that impressive. So we like what we're seeing and we'll keep you updated as we have. I think telling more time metrics down the road.

Got it. Thank you very much.

Thank you. Our next question will come from John Ivankoe with JPMorgan.

[Question Inaudible]

Yes, thanks John, it's hard to say where the competition is pointing out. Look we live in our long many decades of a lot of great food being available to people at all the time. Right I don't think that's changing I think there is more, more great food I think important note that we're making is the yield by which you can obtain that through. Now you look at the shifting retail landscape is more, more food being brought to you or being ready when you're ready. So when we look at our initiatives through capture the greatest amount of our share of your dining time we're looking at tech to be a big part of that answer. Also you know we've always said and we continue to believe our guest is not your typical fast food customer. Everything we've seen the Shack we build you want to be premier experience in your neighborhood and I believe we're continuing to do that better than ever. So that when you see a great burger or Shack or fries or all the other things we serve you come to Shake Shack. When it come to the quality of our labor you know I think it's really been consistent. I am not incredibly proud of our team when people are asked me what keeps you up and night and what stops this amazing party from continuing at Shake Shack I always say. The answer we give today will be the same answer I give you 10 years from now. Team, team, team, team, that is why our labor that we're investing more of that not just what we pay but how we find people, the number of great leaders we need to find in develop our training team led by Peggy Rubenzer and her incredible team. There just to a board leadership development than ever. Scaling hospitality in a way that has been our sweet spot for a very long time in this company. So we're bullish on that I don't think there's been any difference in the quality as we go. We just need to continue to invest in retaining the excellent hospitality our team goings every day.

Sounds great. Thank you. And then secondly, as you settled on the design in place that presumably increases your peak hour production capacity. Is there a retrofit opportunity for your existing stores and gets a relatively easy retrofit for existing stores to reconfigure the equipment or add something or move something around without complete kitchen redesign. So just give us some insight [indiscernible] what you wanted to be an application to be existing at yourself.

Hi, loved to tell you it's easy. Nothing's easy especially when it comes to show many of our Shacks being in urban locations. So yes on asset place you got some really core initiatives that you'll see there and we'll share that when that opens later this year. We are already doing some remodels going to be towards the end of this year add some existing Shack not the full program but there are various people of that will be renovating a little bit of operating side Shack down in battery Park as well here in New York. To get some learning's on what that exact question can look like in terms of increased people. So we're constantly learning, constantly innovative at least version of Shacks out there, but we want to learn a lot of asset place. So whatever we learn is not to be easy just turn down we think take time and they will - they will take time over time but we do feel really good about their program.

All right. Thank you.

Thank you, John. Our next question will come from Alton Stump with Longbow Research.

Hi, thank you and good afternoon.

Hi, Alton.

Hi, Alton.

[Question Inaudible]

Sure, it say almost still developing our plan. If you look at our history last year we did about 20 Shacks right this year will be 23, 24 you know before last in 2015 with 13 Shacks. So you are seeing demonstration of when we feel great about our opportunity we will continue to grow that. So real estate is there for us, premier sites, great cities are therefore. You will see as branch out to a lot of new cities next year and beyond some of which I mentioned we are continue to be a coverage tenant for land lords around the country. So we are get back to tighter number, we are going to be smart, we are going measured, but we intend accelerate.

That's helpful. Thanks. And then I guess just a second follow-up just on the DeCosta front, any concern there to keep kind of backup, but I don't know what you guys - necessarily tied exactly into and regular prices sort of speaks. Any thoughts on how that could impact margins in the back half or even in 2018?

Yes. We were essentially expecting flat for the last year, not a whole lot of leverage versus last year or sequentially. Beef has been up a little bit in Q2, we have to balance that out with some other wins. Those things went down through the end of the year. So we've been slightly down from last year, but basically flat, so our hope is that beef continues to kind of stay where it is or go down. But that overall we're expecting near flat cost line for now.

Got it. Thanks Randy.

Thank you. Our next question will come from Nick Setyan with Wedbush Securities.

Thanks guys. I mean you guys have kind of comment on the cannibalization potentially from the upcoming two stores. First, what exactly the dates, when are they going to open? And second, does the guidance in the second half in terms of the comp incorporate the potential cannibalization there or that just you are taking the July trend and you are moving that forward?

We never know exactly. I wouldn't say there is any necessary plan to where the other things, you never know exactly. I wouldn't say there's any necessary plan to cannibalization any time. Nick, we continue to see a balance there, so we're just kind of moving forward with our expectation what we've seen first half - first seven period. We are going to look at it, our guidance is actually up. When you look at the 2017 AUV by balancing out some of the comments, so we've got a great class in 2017. And at the same time even with that comp question, we've been holding our revenue guidance solid. So we wouldn't get there. And again, we never really plan cannibalization, so it's hard to give you a date on anything other than saying that - look over time we may make real big decisions that may in fact. We've got a lot of evidence for many years now that second and third and fourth Shacks and regions give the opposite cannibalization to continue to grow the market. So we expect that to be over time. And we're much more focused on adding as we did this quarter $24 million sales in non-comp opportunity. That is the extraordinary growth percentage that we want everybody focused on what we're achieving here at Shake Shack.

Okay. And then in terms of the unit level margin guidance for the year, maintaining. Flat year-over-year margins in the second half more or less get to the midpoints of your annual unit level margins guidance. So I guess as we are to expect continued deleverage in the second half on labor particularly, what are kind of the variables there on some of those line items that gets us to the midpoint of that guidance at the level?

Well, the flattish comp are labor, we don't really expect to return additional deleverage in labor this year, I will comment specifically on that a little as we look ahead at years to come - we will have a lot of minimal wage increases in next year and coming. So most of that we think will hold for this year generally, but what we've been incredibly proud off even with some of those Shacks having comp decline and team has done a such good work of extraordinary profit for this company for the first half of the year, and again, last quarter over 28% operating profit amidst that shifting environment. So we are really proud of that. That's where it gets us to hold our expectation for the year.

Got it. And just to be clear, you are not expecting as much deleveraging in the second half?

That's right. That comment is more towards the longer term as we look into the years to come and changes that are coming.

Got it. Thank you.

Thank you, Nick. Our next question will come from Jeff Bernstein with Barclays.

Great. Thank you very much. Two questions, one just on the traffic component of the comp, you said it was down to 4% range, which I guess slipping a little bit from the past two quarters. I'm just wondering when you think about that decline and coming to that would you say maybe capacity constrained which is a great problem to have and maybe your technology helps versus how much of that would you say is the broader challenges in the retail or consumer landscape, maybe the consumers pulling back on the brand. How do you split those two up just to give you comfort that it's not a further problem?

Well, not exactly sure on that Jeff. I mean it's hard to quantify where that traffic shifts, right. We've shifted somewhere traffic in mobile that's a small percentage here. We know we continue to find ways with much we can to drive new traffic. But I mean it's mostly a factor of the same things I talked about in the overall comp discussions here. So it's hard to say I mean we're constantly doing more brand research and customers study. The brand when we study, it remains a beloved brand our social, our impressions that we get on social or higher than they've ever been continue to be really beloved brand. So we don't think it's anything about that other than really just the shifting that we've seen based on the recent upset. And again we're only talking about a small base of restaurants here. So let's not overtake that comment and what it means for the broader company.

Understood and then just on the labor side, just wondering I mean with the pressure you're seeing, just wondering how you think about mitigating it? Whether maybe you have some course in opportunity is or whether some of this technology helped ease that or maybe there's more potential pricing was still keeping good value, I mean obviously the way everyone's pushing everybody. But I'm just wondering whether we just kind of assume this is kind of a normal where you have some things that could potentially offset?

Yes, that's the right question. We are constantly evaluating and then testing new things and just a way we schedule the way that we open and close our restaurants and the way that we most effectively lead our teams, getting our teams, the hours that they need that work for the business. So constantly looking at the evaluation of that, price will be some of it. As we said, we expect to take some price next year. At the end of this year as we usually time it and that will be based mostly on the questions of labor and that will be a market-by-market and tier decision. So I think we will continue to find ways to offset as much as possible. But we do expect to deleverage in that line.

Got it and just do you see any difference in your stores performance to indicate that maybe it is more the retail landscape or the mall based or you see anything when you read the results of your stores to demonstrate what stores maybe that doing better than others? Is there any common thread there?

Not really, we've got a very small percentage of our restaurants today that are what you would classify as a mall and even last moving forward of that. We've got and look at the years to come kind of we always focus on a lot of different types, mostly that's urban that's the lead of our company today. There is a lot of more and more freestanding pads, some of those really premier shopping lifestyle centers and traditional mall. And we'll be doing a large amount of three to four of those different categories as well as some others. We've seen some great growth in outlet mall and - as we talked about. So there is no real common thread that we would say that would carry that trend today in our Shacks.

Understood, thank you.

Thank you. And our next question will come from Andrew Charles with Cowen and Company

Great, thank you and congrats on your role. Randy, you made several references to more personalized marketing, so philosophically do you think a loyalty program could fit within the Shack brand and if so what could it look like?

Yes, that's a great question. We debate that a lot. We've talked a lot here. We do believe that reaching guests where they are? How they use Shake Shack and finding ways to have them do it more often. It's our ultimate goal. We're doing more targeted posting than ever more targeted marketing opportunities than ever such as launching the Hot Chick'n in the app only. We've earning so much day-by-day about our guests with more and more use of technology. So we never say never in this Company. We continue to think about what traffic driving initiatives we have in store and we'll keep you posted if we choose to go with a traditional loyalty or any type of program. But we see a lot of opportunity to get to know our guests and target them more directly in the future.

That's great. And in the spirit of technology, I know you're not giving numbers, but it's safe to say you're seeing the increase in mobile app mix from the iPhone, once you roll of the initial burger giveaway?

We're not giving that number just yet, but again we continue to be encouraged with the retention and return rate that we've seen here. So it's just so early with so many initiatives happening that we want to balance that number out over time and give you some better data.

Thanks guys.

Thank you. And our next question will come from John Glass with Morgan Stanley.

Thanks very much. First, I wanted ask about the average weekly sales you report. That's probably the best metric to use. I know your comp base is small, so that's probably the most all-encompassing and so that decline this year, year-over-year by about 9% or 10% versus last year. But you raised your new store productivity goal. So it was lower last year with absolute numbers are lower this year and average with the sales basis. How do those fit together? We just need to be conservative a year-ago or can you talk about maybe the types of opening your experiencing this year versus last year that's explain that difference?

Yes, John thanks. When you look at it, in the primary driver of that average weekly sales number right now is the addition of Shacks that all volumes, right. Again we increased as we said our 2017 guidance, but that's at a $3.4 million number, right on a previous AUV around $5 million. That's the full expectation and actually as we've said we've exceeded that expectation most years here. But we continue to look at the long-term seeing slowly declining AUV. That's our target. That's what we're after. And we are targeting Shacks at all levels of sales. So when you look at last year, in terms of guidance we gave and then the clear out performance on AUV basis that was a heavy hitting class in 2016 that we had. In 2015 class didn't have a West Hollywood and then if you Shacks in New York City, like 2016 did and similarly the 2017. So we add that number, again we expect it to slowly decline over time as we've guided you.

Okay, and then just you mentioned the cannibalization into the pressure, did you quantify that? Just help us understand when you do put store that close together with the impact is?

No, we haven't quantified it. The way we quantify it is, so really good business decision and we're not going to allow the - we're going to add dollars to the business in the top and bottom line part of them and if that sets a percentage, we're going to be okay with that. And that's the case in this particular restaurant, and we're making some of those from time-to-time throughout Shake Shack. But when you can get more than $6.5 million of Shack burgers within a square-mile replace that opportunity.

Okay, well said. And one more on the line items in the P&L, you actually got better productivity out of the non-food items on a per store basis, so down more year-over-year than the first quarter and in some cases down versus up so labor, but also the other operating - the occupancy. Is that part of I know there is movement around stores - is that the part of either better efficiency in store openings or concerned effort like you mentioned labor scheduling or the things you're doing that are actually improving those metrics specifically what are they if you were doing them?

There's things up and down to P&L. There is also things outside of the Shack level of profit such as startup cost in the way we continue to open restaurants more effectively. I am not sure you are referring to that as much as you are above the Shack of our profit line, but the team is constantly - we consider and even with labor increasing how we do those things. So we've got a lot of opportunity across the P&L over time as we go. It also helps when we get a little more deep in this market. We have talked about this a little bit in the past, as we get number Shacks in each market, we can leverage some of those things. It helps the overall P&L when we get a little bit of those population continuing to grow. I'm not sure that answer your question, but I just want to make sure that the…

Yes, I think that helps. Thank you.

Thank you. And from Jefferies, we will hear from Andy Barish.

Yes. Just a question on the G&A side, the 2Q had a significant amount of leverage and t the full-year guide doesn't imply certainly that amount, was there something timing wise in the 2Q G&A numbers maybe was a little bit better, just some color there?

Andy, there was a little bit of that timing, we do that full-year guidance and that's what we intend to spend through the full-year. In order to hit the accelerated growth we've talked about in terms of Shack number units for next year and the technology, the marketing, the menu innovation all the real pillars of our strategy that we've discussed. We're going to need to spend some more money in G&A, so we are happy with the team and how we've leveraged a little bit this year in that number. We know that when you look at your Shake Shack over the long-term, G&A leverage is a great opportunity for us. However, we are not focused on that number today. We are focused on driving top and bottom line opportunity within our restaurants. So we will continue to invest. We will continue to guide you on that to help you understand, but expect us to make continued big investments in our team and our technology that will help drive the bigger picture over the long-term.

Thank you.

Thank you, Andy. Our next question will come from Karen Holthouse with Goldman Sachs.

Hi, question on the labor line. We've seen a couple of your impression I guess number one is there level that you could get to that maybe make you think about a different sort of pricing trajectory particularly in markets that you're seeing outsized wage increases. And then if you're looking at that the labor refresh right presume you're seeing a similar sort of delta or similar pressure on new units and just could maybe help us think through how that impacts the high level unit economic model which you know at this point really hasn't been updated since - really since the IPO. Thanks.

Thanks Karen. As we look at labor right now we do you price generally these days on the labor model. So when you see an increase for Washington DC minimal wage right now we take at price there. So we've got the regional pricing tiers are generally set to offset as much as possible from the labor. But we never take enough price to fully offset in this last couple of years. That's is not our intention even moving forward we want to make sure we continue to incredible value our guest free actually check to that. So in terms of meaning it's we always have the expectations at very new units have a high labor in their first year. We have guided as you know towards that long-term 20% economic model at Shake Shack little obviously without perform that this quarter at 28% when never we have higher sales restaurants some generally have a higher profit percentage. But we do expect a lot of $3 plus million Shacks over the long-term as you head to a huge opportunity in front of us will barely 20% there on our stated number 450 Shacks just in this country over the long-term. So we still going to lot of continued going labor pressure of changing and we got and we look we got an issue of non-stop Shack offset some of that over time. But as you find the new balance if we think that's going to be a long-term different new economic model, we will update on that.

Great. Thank you.

Ladies and gentlemen, that concludes today's question-and-answer session. Mr. Garutti, at this time I will turn the conference back over to you for any additional or closing remarks.

Well, thanks everybody on the call again today. We really excited about where were at you got a lot of work to do and we will just always want to take thanks to our great team is out there taking care of guests and our communities and our suppliers and our shareholders. So thanks again and we will soon the Shack.

Thank you.

Thank you. And again, ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.