Shake Shack Inc. (SHAK) Q2 2018 Earnings Report, Transcript and Summary

Good evening and welcome to the Shake Shack's Second Quarter 2018 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode and the lines will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Leo Rhodes, Vice President of Finance and Investor Relations. You may begin.

Thank you, Katherine. And good evening to everyone. We look forward to discussing our second quarter 2018 results with you today. Joining me for Shake Shack conference call are Randy Garutti, our Chief Executive Officer and Tara Comonte, our Chief Financial Officer. By now you should all have access to our second quarter 2018 earnings release, which can be found in investor.shakeshack.com, in the news section. Additionally, we have posted second quarter 2018 supplemental earnings materials, which can be found in the Events & Presentations section on our site or as an exhibit to our 8-K for the quarter. During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release, and the appendix of our supplemental materials. We'll begin our call this evening with brief remarks from Randy and Tara before moving to Q&A. As a reminder some of our statements made today may be forward-looking statements and actual results may differ materially from due to a number of risks and uncertainties, including those discussed in the Risk Factors section of our annual report on Form 10-K filed on February 26, 2018. Additionally, any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change. Now I will turn the call to Randy.

Good evening everyone on the call today. Now more than halfway through 2018, I'm pleased to report that Shake Shack continues to deliver strong top and bottom line results as we execute our strategic growth plan. During the second quarter, we opened five more domestic company operated Shacks and six international licensed Shacks. We delivered year over year revenue growth of 27% including a 1.1% increase in same-Shack sales and adjusted EBITDA grew by 12.9%. These results were driven by the strength of both new and existing Shacks as well as by our focus and ongoing commitment to invest across our key digital incentives and foundational infrastructure. Shake Shack is a growing loyal connected community and we are relentlessly focused on excellence, experience, and hospitality. This vision statement we shared throughout the year represents who we strive to be every day and essential to how we operate across all aspects of our business as we build this company for the long term. We are committed to executing the core pillars of our strategy, holding ourselves accountable for performance and investing in our business for long-term growth. We are continuing to execute on a clear and deliberate growth strategy centered on the following key components. Our development pipeline remains robust both domestically and across our international licensed regions. Although as Tara will discuss, in this current year, the backend timing of our opening creates a headwind in near-term sales and while this backend opening schedule tempers our revenue expectations for this year, we're thrilled with this class of Shacks and we are looking forward to their contribution to our 2019 and longer term sales growth, along with a really healthy development pipeline for next year. We are innovating around our core menu, testing new categories and menu items that we believe will continue to delight our guests. Digital innovation is an area of increasing imports and investment across our business. We're using digital channels to better connect with our guests, in broad ways in which they experience Shake Shack. We're making it more convenient than ever and ultimately using technology to build upon the spirit of hospitality that is core to our company. And finally, we're continuing to invest in our foundational infrastructure both our people and our systems to ensure we can fully support our Shacks through the significant growth that lies ahead. Turning to our pipeline, in development, we continue to focus on delivering compelling returns from domestic growth. This year, our plan remains on track to open 32 to 35 new domestic company-operated Shacks. This will have us reaching 122 to 125 domestic company-owned Shacks by the end of the year. And consistent with our strategy we shared with you on previous calls, approximately 20% of our 2018 Shacks will launch in new markets and the remainder will broaden our Shack base across existing markets. We remain confident in our development and execution plans to deliver our previously stated goal of 200 domestic company-operated Shacks by the end of 2020 and to achieve our longer term target of 450 Shacks. With just 102 company-operated Shacks in the US today, we have significant runway to expand for many years to come. As we open more Shacks across the US, we continue to witness the incredible strength of our brand. We are securing premium real estate while targeting a strategic mix about a third urban locations, a third freestanding pads and one-third shopping lifestyle centers. In whatever new market we enter, we work hard to immerse ourselves in the communities we're honored to be joining. And whether it's Charlotte or Denver or our home in New York City, we're humble and thankful that our guests consistently [indiscernible] with such a passionate and warm welcome. During the second quarter, we opened five domestic company-operated Shacks, this included our 100th company Shack in the US which perhaps appropriately is in the New York City. We also expanded our footprint in Florida, Connecticut, and launched in important new market of Charlotte and Cleveland, Ohio. So far in the third quarter we've opened in [indiscernible] Brooklyn and Highlands Ranch Colorado, our second Shack in the Denver area. We're really excited to bring Shacks to a number of new markets in the back half of the year. and over the next two quarters, we'll be launching in the new markets including Nashville, Birmingham, Seattle South Lake Union neighborhood, and our first Bay Area shack in Palo Alto. In just the last two and a half years we've opened eight Shake Shacks in California. We remain bullish on the opportunity for continued growth on the West Coast. And we've shared, California delivers our highest domestic Shack AUV after New York City. We've got strong pipeline for growth teed up in this important market. Internationally, we opened six licensed Shacks during the second quarter. and consistent with previous guidance, we expect to open between sixteen and eighteen net new licensed Shacks this year in 2018. We continue to grow in existing markets in South Korea, Japan, and we're preparing for our Shanghai opening as we expand into Mainland China next year in 2019. We are also thrilled to open our first Shack in Hong Kong at the IFC mall in May. This opening was just incredible movement for our company, fans lining up to greet us and gathering tremendous media coverage across this important region. In June, we opened our tenth Shack in Japan as well as our first in Osaka as we continue to expand outside of Tokyo. This opening completed our current development agreement with our partner in Japan for ten Shacks in five years, which we accomplished in a little over three. We're pleased to confirm we signed a contract extension for an additional 15 Shacks in Japan through end of 2024. Earlier this quarter, we also opened our ninth Shack in London and celebrated the fifth anniversary of our entrance to the UK. And we shared with you previously that we are very focused on Asia as the primary growth driver for our international business over the next few years. In addition to our existing agreements, we are really happy to announce the expansion of our global footprint to the Philippines. In mid July we announced our partnership with SSI Group to open 15 Shacks in the Philippines through 2025 and our first location is planned for Metro Manila in the Spring of next year. This agreement aligns with our strategy of choosing premier global partners to expand the Shake Shack brand, strengthen our learning and our teams, leverage our supply chain which will benefit our business over the long term. As our domestic licensing business continues to grow, we're also focused on premier airport destinations. Just last week, we announced that we won the bid to open Shake Shack in a brand new Terminal B at New York's LaGuardia airport. We are extremely pleased with this progress and are confident that there remains significant whitespace across the world. For us to meet our goal of 120 licensed Shacks by end of 2020. Now moving onto menu innovation, where our strategy remains consistent, delivering excellence across our core menu, while testing and innovating around it. During the second quarter, we launched our first ever veggie burger in select test locations. We've since expanded that launch to 18 Shacks in New York, California and Texas. This is our own proprietor recipe made from brown rice, black beans, and beans that can also be served vegan. It's early for veggie Shack but we are pleased with the initial guest feedback. In addition, in May, we introduced our latest LTO barbeque lineup featuring a new smokey cheddar cheese on both our barbeque cheddar and bacon burger, and barbeque cheddar and bacon grilled chicken. Barbeque is always a guest favorite for us and we are pleased to bring this on back for our fans for a few months. We are looking forward to bringing back our hot chicken as an LTO later this fall. Our guests have consistently asked us to bring back this favorite, so we're looking forward to heating up Q4. In September, we're excited to be opening our first ever innovation kitchen which is connected to our new home office in Manhattan. It will be here that you'll see us test new ideas, launch new menu items, innovate around kitchen design, and simulate our digital initiatives in an environment just downstairs from our home office team. One other commitment to reinforce tonight, our mission to stand for something good remains to paramount to who we are. Step by step, we work to forward this mission, we're proud to announce that within the first quarter of 2019 we'll be eliminating all plastic straws from Shake Shack throughout the country. We're constantly thinking about packaging and how we can reduce reuse and make more recyclable. This remains a larger goal for us as we look ahead. Let's talk about the evolution of the Shake Shack digital experience. We believe hospitality occurs when our guests feel like we're on their side. As preferences change, we are committed to enhancing the Shake Shack experience, developing tools to allow our guests to engage with us, however they want and putting control of that experience in their hands. Digital represents a significant growth opportunity for us with so many new ways we intend to connect with, reward, and engage our fans. Let me provide you with a brief update on some of the key digital initiatives we are focused on right now. First, our mobile app, which we launched about 18 months ago has become a key channel for many of our guests, we'll continue to iterate and improve this user experience gradually adding functionality and removing friction. We recently launched ASAP ordering across the vast majority of our Shacks. We will continue to test new app exclusive offers. We are pleased to see as a percentage of our app sales continues to increase as well as delivering a higher average check in the shack. In addition, our new Shacks that typically open with a higher percentage of app sales giving us further confidence that early adoption can lead to a higher use of digital order. Towards the end of the year, we'll be expanding our digital ordering capacities with the launch of a browser-based ordering for mobile and desktop. This should be a new channel for us and expands our availability to guest who wish to order digitally but may prefer to do so outside of the app. Whereas you know we're also leveraging technology in Shack. As we're placed in New York, opened in October last year with no cashiers and only kiosk case orderings. To-date, we have now equipped an addition five Shacks with a combination of both kiosk and cashiers. This way our guests have a choice in how they order and can still use cash if they wish. We are learning how the kiosk experience changes the flow in the front-house, the extent to which we are back to speed at service, kitchen throughput, how it best enhances the guest experience, its ability to deliver labor leverage in the future and how ordering behavior may be impacted. We feel really good about how kiosk are performing in Shake Shack so far, but like many of our digital initiatives we are early in this journey and you should expect to see us continue to iterate and experiment from here. Another important and growing channel for our guest is delivery. We have been testing this experience, we had number of integrated pilots with key delivery service partners since September of last year. A formal partnership or partnerships are something we may consider, but we are committed to remaining patient until we believe the entire guest experience is of the highest quality, operationally efficient shacks and with economically beneficial terms for the long term. We are really pleased with the progress of all of our key initiatives as well as our financial results. And we believe we are in an incredibly strong position to continue to expand and grow but we are still at the beginning of our journey. The Shake Shack brand is a powerful one which stands for something good and proves it's strength with every new market and every new country in which we open. With that I will turn over to Tara to take you through the numbers.

Thanks, Randy. Total revenue for second quarter of 2018 which includes sales from both company operated Shacks and licensing revenue increased 27.3% to $116.3 million. Sales from our company operated Shacks increased 28.3% to $112.9 million due primarily to the addition of 25 new domestic company operated Shacks since the second quarter of 2017. Licensing revenue increased 2.1% to $3.4 million driven by a net increase of 20 Shacks since the same quarter last year. Within our license business, and as Randy mentioned, we remain very pleased with the strength of our Shacks throughout Asia, particularly with our strong early start in Hong Kong. Similar to last quarter, the implementation of the new revenue accounting standard has impacted the timing of the revenue recognitions of some of our licensing agreements. As we did in our first quarter 10-Q, we include a comparison in the footnote to show our revenues reported under both the new and old standard. We expect the reduction of revenue recognized over the full year to be approximately $500,000, which is consistent with previous expectations and is incorporated in our 2018 revenue guidance. Same-Shack sales increased 1.1% during the second quarter. This increase consisted of a 3.7% increase in price and mix, including the 1.5% to 2% price that we took in December partially offset by a 2.6% decrease in traffic. Similar to the third quarter, price and mix were also positively impacted by our growing digital channel which typically result in a higher average check than in Shack. And as Randy noted, digital innovation will continue to be an area of increasing importance and investment across our business. Our comparable Shake base in the second quarter included 50 Shacks which represents the half the total number of company-operated Shacks in the system at that time. And as we previous talked to, we believe at times the traffic in our existing Shacks may be impacted by the opening of new Shacks near them. You'll see us continue to expand and open Shacks where we believe there is an opportunity to increase market share and captures sustainable revenue and profit growth for our entire business not just a subsection of it. Average weekly sales for domestic company operated Shacks were $89,000 for the second quarter and trailing 12-month AUV at the end of the quarter for company-operated Shacks was $4.5 million. Average unit volumes will continue to decrease over the near term as we expand our total number of Shacks at a broader range of sales volumes. On that basis and with many more Shacks yet to open this year, we remain on track from company-operated AUV guidance of $4.1 million to $4.2 million by the end of this year. Shack-level operating profit, a non-GAAP measure, grew 25.5% in the second quarter to $31.8 million with Shack-level operating margin at 28.2%. this include a one-time benefit and occupancy of approximately 70 basis points resulting from a deferred rent adjustment related to certain historical leases with co-tenancy provisions. Food and paper costs as a percentage of Shack sales were flat at 28.1% compared to the prior year. Within cost of sales there was a one-time benefit of 30 basis points related to sponsorship retreats for our bi-annual leadership retreat. If we were to exclude this one-time item, we would have experienced a 30 basis point increase over the prior year primarily related to higher [indiscernible] cost in the quarter. Labor and related expenses as a percentage of Shack sales increased roughly 80 basis points year over year to 26.3% driven by increases in minimum wage legislations and the introduction of new Shacks and system. Other operating expenses as a percentage of Shack sales increased 130 basis points year over year to 10.9% driven mainly by delivery commissions paid during the quarter as part of our current pilot together with repair and maintenance expense as a number of our more mature high volume Shacks require periodic improvements to continue to meet high level guest demand. Occupancy and related expenses as a percentage of Shack sales decreased 140 basis points to 6.6% compared to the prior year. This decrease included one-time benefit of approximately 70 basis points related to non-cash deferred rent adjustment I just mentioned. Excluding this one-time benefit, occupancy and related expenses would have decreased 70 basis points to 7.3% driven by an increase in the number of leases that fall under build to suit accounting treatment and strength from our top-line performance in the second quarter. G&A increased 30% year over year to $12.6 million in the second quarter as we continue to invest across the business, particularly in our teams to continue to execute and deliver on our various growth initiatives. As Randy mentioned, one of the key pillars within our growth strategy is strengthening our foundational infrastructure in particular our key financial and operational systems reporting our shacks. We refer to this upgrade initiative as Project Concrete and we spent the first part of this year conducting a detailed RFP, functional due diligence and ultimately a selection process for our future platforms. I am pleased to confirm that we have now selected work day as our ERP solution. We are now kicking of the implementation planning and resourcing and we will move into full deployment work in early September. We expect the overall cost of the project to increase from previous estimates to navigate between $6 million and $8 million. As we've gone through the review process, we've chosen to add to the overall scope of the project and upgrade a broader set of systems and infrastructure that we had initially planned, consolidate some of our longer term plans into this initiative now. Given the timing of our partner selection and depending on the finalization of the implementation planning, we estimate that roughly one-third of the spend will occur this year with the remaining two-thirds in 2019. We will continue to provide visibility to the overall spend and timing as we get further through the project. We do continue to expect the majority of these costs to be one time and primarily opaque in nature. Adjusted EBITDA in the second quarter grew 12.9% from the same quarter in the prior year to $21.9 million dollars and adjusted EBITDA margin as a percentage of total revenue was 18.8%. in the second quarter, on an adjusted pro forma basis, we earned $11 million or $0.29 per fully exchanged and diluted share compared to 7.3 million or $0.20 in the same quarter last year. Stock-based compensation had $0.04 benefit on the current quarter. Moving onto full-year expectations, our guidance is as follows. We continue to expect to open between 32 and 35 new domestic company operated Shacks representing a unit growth rate of between 36% and 39%. As Randy mentioned, this year's opening schedule heavily backend weighted that has increasingly been the case as the year has progressed. More than 70% of this year's new Shacks will open in the second half of the year with roughly 14 to 16 of those scheduled to open in the fourth quarter and many of those in December. A strong economy and resulting high level of construction activity of course the lengthening in the permitting and development process in certain markets resulting in a number of projects pushing later in the year. Page 6 of our supplemental earnings materials illustrates the expected timing of our opening by quarter this year compared to last. We remain confident in executing the plan we have laid out despite the timing shift. However, it will have an impact on our overall revenue for 2018 and this is reflected in our full-year revenue guidance which remains unchanged at $446 million to $450 million, an increase of approximately 24% to 25% over 2017. We remain on track to open 16 to 18 net new licensed Shacks internationally and expect $12 million to $13 million of licensing revenue including the estimated $500,000 impact of the new revenues that I mentioned earlier. We continue to expect average unit volume for company-operated Shacks for the full fiscal year to be between $4.1 million and $4.2 million, as we add a border range of AUV Shacks and systems throughout the balance of the year. We are reiterating our same-Shack sales guidance to be between 0 and 1% for 2018. Our outlook takes into account our performance to-date and increasingly tougher compares as the year progresses as we lap the launch of last year's delivery pilot which started towards the end of the third quarter 2017 with the majority running in the fourth quarter. Shack level operating profit margin guidance for the full year remains at 24.5% to 25.5% impacted by three major factors. Slight deleverage on COGS as a result of the recent trends in our beef pricing, deleverage on the labor line driven by year on year increases in hourly wages, our largest class of the opening and the introduction of lower volume Shacks into the system, continuing sequential deleverage as we move through the third and fourth quarters. Other operating expenses deleverage year on year due to the new impact of deliver commissions, an increasing facility related expenses on a broader range of sales volume. We continue to expect our poor G&A expense to be between $49 million and $51 million exclusive of Project Concrete. As I mentioned we now estimate a total Project Concrete investment of approximately $6 million to $8 million across the remainder of this year or well into 2019 based on the system selected and an expanded scope. And as I mentioned, we expect the expense related to implementation to be mostly operating in nature on one time. We expect pre-opening costs to be approximately $13 million, the higher end of previous guidance due to timing delays of some of our 2018 Shacks into Q3 and Q4 as well as additional spending of certain new market launches. Due to the later timing of our openings in the back half, we expect deprecation in 2018 to be between $31 million and $32 million compared to our prior guidance of approximately $32 million. We expect interest expense to be approximately $2.5 million for the fiscal year, higher than our previous guidance of $2 million to $2.2 million driven by an increase in the number of build-to-suit Shacks in the system combined with strong performance in a number of those with percentage rents. We continue to expect adjusted pro forma effective tax rate for 2019 of between 26% and 27%. Which excludes any potential tax effects related to the accounting treatment of the stock-based compensation. Before I conclude, I could like to remind everyone of the new leasing accounting standard that will take effect beginning January 19 on our evaluation of the potential impact as to how we will report our operating results. We had a significant number of real estate leases, which we may or may not be required to record as capital leases on the balance sheet on the go forward basis. As previously noted, we are currently assessing the potential impact and we will further visibility as we get closer the effective date of the new standard. With that I will turn it back to Randy for concluding remarks.

Thanks Tara, I want to end today with a note of thanks to our team and update you on how we think about leadership here at Shake Shack. in May, we gathered over 650 Shack leaders and welcomed many of our dedicated suppliers and key business partners from around the globe to our Shack leadership retreat. This year's message centered around connected community and the belief that as we grow, we must act smaller and be more connected than ever before. There is no question that our industry faces a challenging environment in relation to staffing and rising wages, none of this will be easy but we're committed to paying the right wage offering compelling benefits and providing a great work environment build upon the hospitality our Shacks have become known for. Our leaders are working harder than ever to build community gathering place that become a key part of our guest everyday lives and to the lives of our team members. We're proud to be growing, we're proud to be building a company where leaders are training future leaders and we look forward to our welcoming back to Shake Shack soon. And with that, we'd like to thank you all for joining today's call and operator you can go ahead and open the line for questions.

[Operator Instructions] our first question will come from Sharon Zackfia with William Blair.

I guess a question on the cadence both innings for this year. Is it fair to say that you had some that for opening later in the fourth quarter that's kind of what it sounds like in the commentary and through the first half of the year if you are kind of above your expectations that the revenue reiteration was just really because of those new unit timings. And then secondarily how should we think about pre-opening particularly in the fourth quarter [indiscernible] you guys ever opened that many locations before in one quarter.

Yeah, thanks Sharon. You got it right, we've really been thrilled with the performance of a few things. The end of 2017 Shacks that performed strong, the beginning of 2018 Shacks and specifically we've called out a couple of those new market launches, Charlotte, Cleveland, Staten Island, New York, some really good starts. So that part of the solid beat for the first half of the year. The unfortunate reality for timing just really is that way more than we expected of our Shacks are going to open in the third and fourth quarter with the vast majority of those in the fourth quarter with the majority of those in December. So it'll be a big push for us at the end of the year. We're really expecting a busy holiday season for our team. Look, we are in good shape to do it, as Tara mentioned this, just been some questions - some issues on permitting is taking longer, contraction on both landlords work to deliver to us. And then sometimes our own permits getting ready, it's just been delayed from what we expected. So that's the unfortunate reality. But this is not one quarter of a company here, we are really excited that all these Shacks as we said in the 32 to 35 we'll be getting in this year. And they're going to make a great contribution for a long term. As it pertains to startup cost, you should kind of read into the same guidance I just gave, most of those are going to happen really towards the end, the fourth quarter and towards the end of the fourth quarter which is part of why we raised stronghold, we have that app and we have some non-cash deferred rent that builds up a little more than we expected. So that's part of why startup costs ends up being a little higher than that. It will hit you more at the end of the year.

We'll continue onto Joshua Long with Piper Jaffray.

Great, thank you taking the question. Obviously, the brand has a very strong following and really speaks to both New York heritage but then also as you go across the nation. I was curious in just how you think about that now that you have a growing base outside of New York, California you mentioned having strong unit volume. What you've learned there in terms of really taking Shack into new market and then maybe preparing new markets for 2019, 2020, and beyond pipeline just in terms of staffing or getting the brand ramped up and ready to go.

Not just in the United States, but also globally. We have this opportunity, being the strength of the brand, our history, it really gives us a chance to do something special, when we open new markets. And just a couple of examples, this last quarter, we did a pop-up in Seattle. We opened one of the finest restaurants in Seattle. We did a pop-up for one day in their parking lot. Nearly 3000 people showed up just for a four hour pop-up. It's extraordinary what can happen for Shake Shack and some of the openings that we've had, if you follow along and you look at what's happened, some of those mentioned in Charlotte, Denver this year, two shacks in Denver, both of them really, really strong starts. It's part of why we invest a lot in the startup costs line that you see so we can capture that opportunity out of the gate. It's also part of how we've, keep the strong AUVs, continuing to go for the company over the long term. And, meanwhile, our business strategy means about 80% of those shacks that we opened will be in existing markets. We love that too, we love going deeper into existing market, it helps our teams, it helps our supply chain and we've barely scratched the surface, you look at us having 102 restaurants in this country. We've barely scratched the surface on those economies of scale. So we really have so much opportunity on the road there. But we love new markets. This coming month, next couple of months, we're going to open in Nashville, Tennessee; Birmingham, Alabama in the fourth quarter and Seattle and the Bay area of Palo Alto. So like that balance, we really think it's a good thing to the brand and for our national expansion. To your question about the learning, as we've noted in previous quarters, our numbers are strong everywhere we've gone. We've shared that information and especially in California, as I noted, we're really excited to continue so much of the strength. So we're excited about the future of where we're headed in development.

Great. Thanks for that. And particularly exciting to hear about the increasing scope and opportunity for projects, obviously, still early on in that, just curious on how you would characterize some of those additions and the shacks that you had in there in terms of just really supporting that long-term pipeline and targets that you had, I mean, does that allow you to do things quicker or just maybe do things more the right way as you go through and really building the brand for the long term.

It's Tara. We're really excited to really get into this project properly. And as you right pointed out, as we went through very detailed indigenous process, we decided to expand the scope to get more done at one point in time for a whole host of reasons, mostly to do with sort of distractions, disruptions of business and to bring - as well as to get the benefit sooner. So one of the examples where we expanded scope is in our HR systems, which we're not originally in scope, but we told about potentially being and so it's a very broad upgrade in this financial systems, touch both back office and shacks, operational systems in relation to some of the procurement processes that touched the back office on the Shack and the same with HR. And obviously a number of add-on areas. And the objective is those multi-faceted, one of the things we're focused on doing is making sure that we're not putting any administrative burden on our shacks that we would have to, because we want our operators focused on delivering a great guest experience. And so, we would use technology where we can to lessen that burden. Will they want to be adding cost in an efficient and effective manner for the long term and again obviously technology will help us leverage our cost basis, where we're adding - we are using take rather than continuing to add same solution of hedge. And finally, I think - I feel I think it's an enabler to top line growth, I think, having efficient, scalable, flexible systems allow you to get far greater insight into the business, allow you to out-speed up, get the rate of decision making. So we are excited to get going. I mean, it will take us into next year now, but we feel very god about it.

You reiterated the way we've run this company from day one. We're thinking about everything from a very long term. We are adding systems that will support a much, much bigger company. We've talked to you about doubling our sales and our units in less than three years in this current timeframe that we're look at. We have just over 180 shacks worldwide and that is a small number compared to where we're headed, and now we want to get some foundational solid infrastructure that we can really grow with and ramp up our opportunities as we go down the road.

Operator, I was just going to take the opportunity to just correct something in my prepared remarks. I believe I said 2019 when I should have said 2018, as it relates to our adjusted pro forma tax rate gains of 26% to 27%. So, that was a 2018 guidance, as reflected in our earnings release that we posted earlier.

And we'll go to Jake Bartlett with SunTrust.

The first is just a clarity on the revenue guidance. It sounds like the development is significantly more back end weighted than you thought, but you kept the all the other metrics, how should we think about that in terms of the average unit volume target that you have?

Yeah. We don't know that yet. I mean, we've had shown performance. We'll see if we can get to the high end of that range. It's still - we're holding it right now on an AUVs, JP costs, we literally have 20, 22 restaurants though yet. So there is a lot that's going to go into an AUV calculation when you add all those restaurants. So if you look the opportunity to raise from what we beat in this last quarter, it's just really completely impacted by development schedule and all that timing. So that's really how we're thinking about it. These restaurants will open, they will open well. There will be great checks, but we just wanted to get the full benefit, the full year that we had hoped for. All that said, when we target everything, we shared this before, we've got that target of about, we're about $4.5 million currently on our AUV. We think that will be in the 4.1 to 4.2 range by the end of this year. And we'll see, we'll keep you focused if we can beat that.

And then as you look at your pipeline for '19, should we expect a similar level of back-end loading or do you feel more comfortable that it's a little more evenly weighted throughout the quarters.

I've been doing this long enough to say that I've never had that expectation and somehow almost every year, most companies like ours end up with a back weighted schedule. I'm not sure even though we do everything in our power to change that reality, that that changes. Right now, we're going to come towards a very balanced 2019 in a similar number of shacks that we've built this year but we'll get back to you on that as we - as we that class firms up. What we do know is that it's really looking like a solid class. We think it will be roughly again in 2019, this is a similar strategy of about one fifth of those in new markets, a lot of our new markets will be adding next year hopefully and going deep in the markets that we're excited about here. So we're devoted, got to have a solid fourth quarter here and get these shacks open and run it.

Into the technology and your initiatives, maybe delivery, you talked about how really in the late - fourth quarter last year, the biggest impact, but you started to have so many pilots it was having a major impact, were there less stores impacted by your pilots, pilot - your testing in the second quarter here, was it the same - has it been pretty consistent and kind of speaking of that 50% number and maybe if you can confirm that or just let us know whether that's been fluctuating as you've been testing.

It's a fluctuated. It's a bit on the partner, it's been on the pilot. Today, the majority of our shacks are doing delivery pilots with a few partners and these quarters, these past couple of quarters, we've done old different partner tests, some on, some off, currently, we are running with three and that is in the majority of shacks. So I think particular delivery, we're really excited about the delivery and our strategy has not changed here. We believe that there is an increasing guest demand for it. We believe we have a lot of work to make it an excellent hospitality experience for our guests who choose to order that way and for our guests who are in the shack. It's a growing and exciting opportunity for us, but one that we are being patient with. We want to make sure we have the right partner or partners depending on how we do it and we're going to keep discussing that to make sure it's a really good long term business. We are patient, we're not just jumping at sales that might be there for us. We don't think we can do it the right way and we still want to learn. We want to do it well, and we want to do it well for a really long time.

Our next question comes from John Ivankoe with JP Morgan.

The first one, the labor market and the labor outlook. I guess I'm looking over the next 18 months, is there anything that you're doing to enhance some of your current HR practices to attract and retain the labor force that you need both for your new stores over that timeframe, you're obviously going to need a lot of revenue, need a lot of people. And then secondly and related to that, you did mention that overtime, the software kiosk may help reduce labor cost. I mean, is that or at least you implied that in your prepared. I mean, is that what you're seeing in some of your early tests and I guess at this point, what are you looking for to see in terms of making software kiosks in most if not all of your installed base in the U?

Thanks, John. On the labor, look, there is no surprise. We are living in good economic times, low unemployment and that means it's harder than ever for us, clients. Let me give you an example of how we're doing this and how we're thinking about it. We're going to open at Nashville, Tennessee, minimum wage is 725. We're going to start people start at $13 hour. That's what it takes to get a great team member that can build and bring the hospitality and that Shake Shack will bring to that market and we're super excited to pay that. Potentially high rates, right, it impacts our labor line over time. We have a number of our markets in the most expensive wage rates in America with New York City, California, DC, Chicago, the Northeast, I mean, all of our major markets are increasing - going to continue to increase. So what are we doing about it. You know what, we're continuing to be a great employment brand, we're continuing to offer solid benefits, solid starting rates. Most importantly, opportunity to develop. [indiscernible] and you see the impact of the leaders of our company where they came from, so many of them have been people who started in our jobs have now grown changed their lives through Shake Shack and learning to be leaders. So as we grow, we're going to be a lot leaner, we're going to have a lot of people and we're going to pay for it. There's also just fun things we're experimenting with, right. We're thinking about how to schedule, we're thinking about how to work with today's workforce of a gig economy and people who need more flexibility, because frankly there's a lot of opportunities of jobs where they can get it. And we've got to be more flexible to meet their needs. We've got to make sure our shacks can provide that and that is what we're working on for the long-term. When it comes to kiosks, it's absolutely one of our goals to decrease the payroll over time. The number of people that we need, we have not stressed that in these early days. Of course, that's a long term goal. What really we're trying to do with the kiosks is make sure our guests love it. We'll say we've gotten some of our highest marks from our guest surveys on the experience of the kiosks, even versus our other channels with which you can order. So that's encouraging, people like it, but we only have again today five shacks that offer it and four of those really just came out a few weeks exactly, five of those just were added and we have a lot to learn before we do any further rollout. So we have no plans for any further rollout rest assured, what you will see is some of our newer shacks open with them, not all, but some. So for instance, our West Village [indiscernible] we're going to do some in some of our new markets that have high labor costs such as the Bay Area and Seattle and we'll test it in some of those new markets with a ultimate goal of guest experience, guest experience, guest experience. Secondarily, once we know we got that right, we'll work on making sure the efficiency of our team is built towards driving revenue in a way that people really want us to do. So we're excited about it, lot to learn, lot to do and we're going to take our time on that one.

We'll continue on to John Glass with Morgan Stanley.

Randy, if I think I heard you correctly on delivery, you said the majority of shacks you actually offered delivery, so what is the difference, I guess, between a test and a rollout, is it just you're not, so - you're letting demand of crude naturally in other words, if you say we're now rolling it out, is maybe don't get as much sales of, because you're already doing it effectively.

Yeah. That may be the case. It depends on the ultimate partner or partners that we choose, John. So you're right in saying that what we have done only a couple of times are in these islands over the last year is a couple of promotions. Those have generally lasted a week or two. For the most part, we're just running as a normal restaurant on their platform. So we do think, as we think about the potential, we're not giving a timeframe for that, because we still are being patient about it and discussing this with potential partners, but we do think that there is opportunity for increase in that over time once we clarity with our guests, with people, which channel or channels they can count on. The good side of our testing is we're learning a lot, the challenge to it is it's a little bit of up and down for our guests who have seen us come in and out of the various platforms. So, as I said, it's about getting the ops right, getting the experience right. We've got new packaging happening, we've got new packaging coming, there's a lot of different ways we're thinking about how to get a French Fry to your home as well as we possibly can, how to get a frozen shake to your home in a way that you're excited about it. So we want to work out all those basics first to make sure the foundation of it is there. I'm very confident that the level of delivery we're doing today over the long term can and should increase in the future, but that's a little bit further out from near term expectation.

And then just two financial questions. You didn't raise restaurant level margin guidance. I assume that though [indiscernible] and the fact that you're opening stores later this year, I would think would benefit margins, is there some offset to that perhaps labor or do you just maybe feel more comfortable at the high end based on that.

John, you cut off a little bit in that question, but we're sticking with our 24.5% to 25.5% operating margin guidance and I don't think was any real news that to say. We have some moving parts and together, they result and is holding that guidance flat. So as we mentioned, we had some increasing beef prices towards the end of Q2 and we think that may continue. So we think that perhaps from flat, we may have some slight de-leverage now on cost and we'll continue as we talk to, the sequential de-leverage in labor. Same with other OpEx, for the reasons we mentioned, not least delivery and commissions which Randy just talked to. And so - but we've got leverage for various reason within occupancy. And so all of those sort of netting out, we still stand by the 24.5% to 25.5%. And to your point, we've got a lot of shacks.

Right. And just on G&A, were there any material concrete costs this quarter or are they really all coming in the fourth quarter?

Nothing material. You'll see in some of our adjustments in earnings release and then in the Q, we identified those, there was nothing of huge this quarter. So I think that, we're really starting to the majority of them, starting to kick in to implementation, which as I mentioned, we expect to start in early September.

Our next question will come from Andrew Charles with Cowen.

When you look at the LTOs you've run so far this year on griddle chicken and piloting the veggie burger, is there a wellness bent and the brand is starting to embark upon.

You know what, I think it's balanced. Most of it's listening to our guests. So veggie is really a new thing for us. It's a test, it's an LTO. It's nothing we really want to learn. We, number one, want something to be young, we want to taste good, we want to become essential to your life that when you go there, you can be excited. So I think when you think about veggie or other new categories that we might think about down the line, we want to be impactful, we want them to drive traffic over the long term. So veggie is a kind of thing that, depending on how it goes, we want to hear from our guests that they may not have come otherwise. Right. With certain things, we wanted to be - maybe I shifted or maybe I come a little more often because today I'm not eating meat and I love Shake Shack, so I want to try veggie burger. So it's only in 18 locations right now, so it's really a minimal test. It's some of California, New York and Texas really is where it's centered, but people are liking it. I really like it. It's a great item and that's kind of what we're excited about here is seeing the test kitchen, the innovation kitchen come alive, because it's really there starting in the fourth quarter here that we'll start to see the opportunity to really some things, to have some fun downstairs right here to do a lot more of the local items, maybe even some of the things that we might choose to do internationally. We've got a lot of different ideas, so we're excited about innovation, we're not short of ideas around here, but we're very balanced about how many things we want going at once.

And then can you walk us through the monthly cadence of sales. Is it wrong to think that April was softer than the overall quarter due to an earlier Easter this year that presumably pulled forward some of the high volume spring break season business in to March?

Andrew, we don't break down the quarter. We did - on your Easter point, I think we talked at the end of the last call, potentially impacting a couple of days, but nothing material.

We will now go to Jeffrey Bernstein, Barclays.

Just following up on the cost pressures, just looking at the labor line more specifically, it seemed like in the first quarter, you did a great job with only modest de-leverage and then this quarter, it was much more meaningfully. So I'm just wondering, was there a change in the basket of inflation from a labor standpoint in the quarter, maybe what's your outlook for that basket? And as you think about that, I mean, do you want to be kind of employer of choice, how much of the wage inflation do you think is your own choice to pay well above the wage versus how much is driven by the regulation. And then I had one follow-up.

I think there is a lot in there. But a lot of it is driven by wage inflation mandate effects. Also, different kinds of regulations like we've talked about, New York and other things that have happened. So there are many markets where we pay above minimum wage, there are some that we pay at minimum wage. These are generally the higher increasing ones like New York, but again our goal always with our team is to get you out of that wage, get you to a shift manage wage that is materially higher, get into promotion, get into manager. And that's been the method that we really used here. So, but it's really work. Look, it's a changing economy. It's hard and it's always been hard. We've been [indiscernible]. This is 17 years in the making this story and this question has never been an easy one. And I'm pretty certain that 10 years from now, when we're talking, it will still be a hard one. It just got different flavors right now. So, we're doing our best to react market by market and the best way we can do that is hiring great leaders that provide a great work environment and the one that we work on. But there is exterior pressures that continue to grow.

And then I just think about the pricing, when you're sitting in that type of, I think you mentioned that you took sub-2% pricing back in December of '17. I am just wondering what's your outlook as you look to the back half of '18, maybe if you can frame it as how much pricing you would think you'd need to hold the margin flat or do you even think you have pricing power here to take if you want to offset some of the labor.

Couple of things in there. We have no intention at this stage of taking any price for the rest of this year. We generally take price around the 1% to 2% range annually. That's been the case for the most part over this last decade for Shake Shack, even longer. So it's hard to say what we'll do this year just yet, we're not - we haven't given that guidance yet, we'll keep an eye on it. I believe as a brand, we continue to have a lot of pricing power. But there's a difference between what we could take and what we should take. I have said that for many years, we do not intend to take enough leverage, enough to offset labor entirely. Labor is probably a mid to high single digits increase year-over-year and that continues. That expectation continues for a number of years. So we probably - we do not expect to take enough price. So we'll have to work on other things as we have and as we've guide you over the long term for this brand. We've got a number of tiers of pricing now, so we use that strategically region by region and we think we will take price overtime as we grow.

Thank you. We will now hear from Andy Barish with Jefferies.

I think historically, menu innovation has been a traffic driver, I'm sorry a check driver for you and now it kind of feels like scheduled delivery is driving some of the step up in mix that we've seen. Is there any reason to think that these levels aren't going to continue for any foreseeable future as you can grow those channels?

If you look at the past few years, you're absolutely right well, not just menu innovation, menu mix, menu shift, the way that we've sold things, we've been able to successfully continue to grow our check beyond our menu price increases and some smart decision making by the team on that and some of the things we offer. Yes. Digital is an increasing part of that because as we've said, the digital channels generally so far have had a higher average check. I don't see any near term end to that phenomenon, because we do believe over time digital as a percent will continue to increase and we continue to believe that we're going to offer compelling menu innovations that will drive that. You may have some quarters that menu innovation is up as a accretive to that and some quarters, down. But overall, we're always going to be thinking about menu innovation to drive frequency to drive overall sales, but we do think that digital has a big opportunity to go up from here.

Thank you. We have no additional questions in the queue. I'd like to turn the floor back over to our speakers for any additional or closing remarks.

Just want to say, thank you to everyone, appreciate your support for Shake Shack and we look forward to seeing you at Shake Shack soon. Thanks, everyone. Have a great night.

Thank you. Ladies and gentlemen, again, that does not conclude today's conference. Thank you again for your participation. You may now disconnect.