Shake Shack Inc. (SHAK) Q1 2019 Earnings Report, Transcript and Summary

Good evening and welcome to Shake Shack First Quarter 2019 Earnings Call. Today's conference is being recorded. [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, Operator, and good evening, everyone. Joining me for Shake Shack's conference call is our CEO, Randy Garutti; and our CFO, Tara Comonte. During today's call, we will discuss non-GAAP financial measures which we believe can be useful in evaluating our performance. A 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 on our earnings release and in the appendix to our supplemental materials. Some of today's statements may be forward-looking and actual results may differ materially 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 February 25, 2019. 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. By now, he should have access to our first quarter 2019 earnings release, which can be found at investor.shakeshack.com in the News section. Additionally, we have posted first quarter 2019 supplemental earnings materials which can be found in the Events and Presentation section on our site or as an exhibit to our 8-K for the quarter. I will now turn the call over to Randy.

Thanks, Leo, and good evening, everyone. We are really pleased with our first quarter results and the momentum our team carried forward from a strong 2018 into the beginning of this year. We grew total revenue by 34% to $132.6 million, earned adjusted EBITDA of $17.8 million, an increase of 10% over the same quarter last year and delivered positive same-Shack sales of 3.6%. I'm also pleased to report our strongest traffic in 11 quarters as we've returned to positive traffic growth of 1.6%. Our performance was positively impacted by strength from new openings, a favorable holiday shift and warm weather conditions across a number of key markets early in the quarter and the continued growth of our digital channels where we see significant ongoing opportunity. During the quarter, we opened 5 domestic company-operated Shacks and 7 licensed Shacks. These strong results are a testament to the hard work of our entire team and the execution of our strategic plan. With continued to focus across the organization on those key initiatives that will support this business for 2019 and into the future. So here's where we're refocused: Committing to excellence in our people; delivering a consistently great guest experience; cultivating a loyal and connected community; and innovating our business for long-term growth. Our most important and strategic pillar will always be our commitment to excellence and our people. The macroenvironment has rarely been as challenging to find and retain great talent. And it's critical for us to continue investing in our teams and ensure Shake Shack remains a great place to work and grow. Our people are our greatest asset, the champions of our culture and the most important ingredient in our guest experience and the heart and soul of our Shacks. We are committed to ongoing innovation and investment in our teams, albeit against very real cost pressures across our industry. I'm thrilled to highlight some of the initiatives that we've been working on. We recently launched All-in, our companywide diversity and inclusion initiative that seeks to create an environment that provides equal opportunities for success by removing obstacles for progression and fostering a culture of growth and empowerment across all employees at Shake Shack. We're always proud to see our leaders grow and we're particularly proud that almost 60% of promotions in 2018 were earned by women throughout the Shacks. We are piloting women's mentorship program to support health and leadership development. We plan to launch this more formally across our entire team in the future. In addition, we are honored to have been awarded a score of 100% in a human rights campaign 2019 Corporate Quality Index and designated the Best Place to Work for LGBTQ quality. We are so proud of this recognition of our commitment to be an inclusive workplace where all are welcome and treated equally. And lastly, we're also looking at how to continue to enhance the benefits across our teams including increasing equity grants with more leaders and expansion of our 401(k) eligibility earlier in the year, testing various works environments including flex working at our home office and a four-day work week that we are testing in several Shacks across the country. We care deeply about our people and we will continue to make impactful investments in their development and welfare today and going forward. Our second strategic commitment is to deliver a consistently great guest experience in each and every Shack. We are working to eliminate those frustrating aspects of yesterday's legacy restaurant model for our guests, both inside and outside of the Shacks. We've completed or in the midst of a number of Shack remodels with particular focus on front house flow and pickup experience. We also plan to test more pickup shells over the next few months where we have a higher proportion of digital sales and new Shacks are being designed with an omnichannel experience top of mind. We made big strides in the continued enhancement of our digital channels and we have committed investments across our tech [indiscernible] we're feeling really good about the growth opportunity in this part of the business. We are pleased with the positive impact digital had on the first quarter with all channels delivering growth as a percentage of sales. And the continued trend of a higher average check than in Shack. You'll see us continue to test and iterate here, particularly as it relates to making the various channels that now exist to operate in a more holistic manner in terms of both the guest experience and the tech infrastructure that supports it. We are bullish about everything digital means for Shake Shack. Although as we've mentioned before, the introduction of additional channels into an already busy Shacks can at times create operational complexity which we are still working hard to address. In addition, you'll hear this from Tara, many of these channels come with new cost to our business and you're seeing some of those in our financials in the quarter. Right now, we are focused on execution and guest experience. And as this part of our business gradually grows, we'll be working to ensure efficiency and cost optimization for the longer term. 2019 is a year of innovation, testing, listening and learning from our guests to ensure we are continually improving the end-to-end Shack experience, regardless of the channel in which they choose to engage with us. On the development front, this year's class of Shacks is going to be another great one. During the first quarter, we opened five new domestic company-operated Shacks, executing our strategy of further penetrating existing markets. This time in the Northeast to the West Coast. We're also expanding the Shack brand and connect with new guests in markets like Providence, Rhode Island. We've got solid lineup of Shacks for the rest of the year as we gear up to enter Salt Lake City, New Orleans and Columbus, as well as the recent successful opening of our second Shack in the Bay Area in Marine County. In our rapidly growing license business, 2019 will be our biggest push into new markets today. With the Philippines and Mexico coming soon and our first mainland China Shack in Shanghai having opened in January. We opened four international Shacks in the first quarter, including our second Shack in Osaka, Japan, and are launching in Gotemba, new market outside of Tokyo. We continue to grow deeper in South Korea. And of course, I just mentioned, our first Shack in Shanghai. Subsequent to the quarter, we just opened for the first time in Singapore in the incredible new Jewel Changi Airport, reaching the city and airport with lines of exciting guests to greet us. This is without a doubt one of the most spectacular Shack locations we've ever opened, nestled next to a stunning botanical garden and the world's largest indoor waterfall. To further support our growth in Asia, we'll also be opening our first international office in Hong Kong later this year and we'll have permanent resources off the ground there for the first time. We also bought three domestic airport Shacks at VFW, Phoenix and Cleveland as we continue our airport expansion strategy here in the U.S. Last month, we're also excited to bring Shake Shack to more baseball fans on opening day to the Philadelphia Phillies with our new Shack in Citizens Bank. Our staying business continues to be a great brand builder and we are always thrilled to have Shack be a memorable part of our guest game day experience. So we remain on track to open between 36 and 40 new company-operated Shacks, between 16 and 18 net new license Shacks in 2018, our largest class yet. As a reminder, our domestic company-operated opening schedule remains back weighted to roughly 60% of our planned openings scheduled for the second of the year. Approximately 80% of those openings in existing markets. There's still so much whitespace for us this country and abroad to continue to grow Shake Shack one market at a time. Our third strategic commitment is to cultivate a loyal and connected community. As we near our 15th birthday later this summer, our community is strengthening throughout the world. The Shake Shack brand continues to resonate with our guests and we are focused on building on an already strong foundation in a broad variety of creative ways. So far this year, we popped up at South Lake, South West, served thousands and hundreds of music lovers at Coachella. And in April, we have teamed up with HBO for an epic collaboration around the final season of Game of Thrones. Just a few weeks ago, fans lined up at our Westville at Shack to have a shot at sitting on the actual throne. And as part of this partnership, we launched unique limited time menu items around the country, the Dracarys Burger and the Dragon Glass Shake. We have always had a strong community focus, actively partnering with local businesses, engaging with local charities and taking part in key events around our Shacks. Shake Shack is your community gathering place. The expansion of our business in new digital channels presents a real opportunity for us to expand that concept of community and to engage with our guests and fans in a much broader and more personalized basis. Despite more relevant and targeted communications, by rewarding our most loyal guests with offers for reasons to engage. With many buzzworthy moments we activate around, or by fun brand partnerships. Our growing digital footprint is a significant one and we are just getting started. Finally, we're always looking towards a much bigger future and we are committed to innovating our business for long-term growth. We are investing meaningfully across all areas of business as we look towards the many years of significant expansion ahead of us. One of the most meaningful investments this year is in our back office systems and infrastructure upgrade, Project Concrete, Tara will provide more detailed update. But I would like to take a moment just to underscore how important this is for our company as a whole. It's a significant undertaking and it is touching every team member in every Shack. I'd like to acknowledge and say thank you for the hard work, long hours and many teams who are in this project right now which is a sizable list and critical to our future growth plan. With our Colorado team, new Innovation Kitchen [indiscernible], we are experimenting and testing both potential LTOs as well as longer-term menu items with a focus on improving our Shack classics as well as the opportunity to drive guest excitement and engagement. Our first quarter special shakes which are now part of the monthly program included tiramisu, salt and vanilla toffee and a seasonal cherry blossom. And we've got some fun ones planned for the rest of the year. The biggest news out of the Innovation Kitchen so far has been the launch of Chick'n Bites as a nationwide LTO in the quarter. It's still really early but we've been pleased with the guest response thus far. With guests ordering Bites in both entrée as well as item [ph] and the launch of this item did come with a cost impact and Tara will touch on this in a moment as it presents a significant near term impact to the COGS line in Q1 and Q2. We are pleased with the guest adoption feedback to date and we will keep you posted as this LTO continues. 2019 is off to a strong start as we remain focused on the execution of our key strategic commitments that will continue to drive growth. And with that, I'll turn it over to Tara who will walk you through the numbers.

Thanks, Randy, and good evening to everyone on the call today. As you've heard we had a strong start to the year and we are very pleased to have fulfilled performance across the business, albeit we encountered a number of short-term headwinds that Shack level profitability in the quarter. Total revenue increased approximately 34% in the first quarter to $132.6 million as we delivered positive same-Shack sales growth of 3.6% and added 34 new domestic company-operated Shacks since the same period last year. In addition, our licensed business continues to deliver strong results with revenue growth of 34% in the first quarter and an increase of 16 net licensed Shacks over the same period last year. Given our performance in the first quarter, we are raising our 2019 guidance of total revenue to between $576 million and $582 million. And within this, maintaining our licensing revenue guidance of $15 million to $16 million. With respect to our development schedule, we remain on track with prior guidance to open between 36 and 40 new company-operated Shacks and 16 to 18 net new licensed Shacks in 2019. Our same-Shack sales growth of 3.6% consisted of a 2% increase of price and mix, a traffic increase of 1.6% and was on top of 1.7% same-Shack sales growth in the same quarter last year. This was driven primarily by performance early in the quarter during which we experienced warmer weather in the Northeast and New York City, combined with a favorable holiday shift. In addition to the continued growth of momentum across our digital channel, particularly delivery. Taking into account these first quarter results, at this time, we are increasing our same-Shack sales guidance for the year from 0% to 1% to 1% to 2%. Our average unit volume remains strong at 4.3 million on a trailing 12-month basis with first quarter average weekly sales of $79,000. These metrics will continue to gradually reduce as we expand and broaden the sales volumes in the system opening new Shacks across the country and going deeper in existing markets. Also while delivering significant top and bottom line growth. We are maintaining our expectations for company-operated AUV to be between $4 million and $4.1 million for the full year. As Randy touched on, some of this strong revenue growth came with short-term increases in costs and this is reflected in our Shack level operating profit, a non-GAAP measure which increased 12.5% to $27 million in the first quarter with Shack level operating margin at 21%. There were a number of specific items impacting these numbers, some temporary and some result to the changing dynamics within our business. And I'll take you through them now. Food and paper costs in the first quarter increased 140 basis points to 29.5%. We are committed to menu innovation and see significant opportunities in continued category expansion. As part of this innovation and with a focus on chicken category following our successful launch of ChickenShack three years ago we launched Chick'n Bites as an LTO in the quarter. This is a menu item much asked for by our guests. And with broad potential guest acquisition and frequency opportunities. We made the decision to test this item with reduced promotional pricing focusing primarily on guest uptake and feedback. We have been pleased with the reaction. And as a result, saw the opportunity to increase pricing at the end of March. Chicken is a high cost item in our basket, particularly in the high-quality fresh, hormone and anti-biotic free supply that we insist upon. In the first quarter, the combination of adding a high-class item to our basket and the corresponding promotional pricing caused an increase in our food costs and was the most significant contributor to our overall cost deleverage. As we continue to test Chick'n Bites, we will see this pressure lesson with the new pricing expected to rollout combined with supply chain improvements we are making during this current quarter which will result in cost efficiencies going forward while maintaining all our stringent quality requirements. On that basis, we expect Chick'n Bites contribute less of a material impact to food costs during the second half of the year. In addition to specific impact of the testing around this LTO, we also experienced some commodity inflation in the quarter primarily within beef, as well as an increase in packaging costs associated with our digital channel growth. While commodity costs can and will continue to fluctuate, the trends of higher packaging costs with higher levels of delivery revenue is something we expect to continue. Labor and related expenses increased 110 basis points to 28.9% as a result of 2 primary factors, namely continued significant inflation in the labor market across the country, especially in our home market of New York City where we continue to see double-digit increases in hourly and salary team member compensation combined with the administrative burden of legislation just as the Fair Workweek. And the impact of higher labor costs in the majority of our new Shacks that opened at the end of 2018 and through the first quarter that has been normalizing operations and optimizing executional process. The impact of this is more acute than in the past, primarily as a result of back-to-back opening schedule in the last few weeks of year, causing a longer than typical periods of normalization of those Shacks starting levels. Over the long-term, as we continue with an aggressive development schedule, new Shack label will at times have a material impact on profitability. Our opening schedule for this year remains back half weighted and any expected impact from that is incorporated in our Shack level operating profit going for the year. Other operating expenses increased 90 basis points to 12.1% driven predominantly by delivery commissions as a result of our digital growth together with an increased overall marketing spend targeted primarily at LTOs. Occupancy and related expenses increased 50 basis points to 8.5% driven by the adoption of the new lease accounting standard that went into effect at the beginning of this fiscal year. This impact on our occupancy line will continue throughout the year. And additionally in this current second quarter, will lap a noncash deferred rent adjustment that have a favorable 70 basis point impact in the second quarter 2018 and a favorable 20 basis point impact on the full year 2018 results that will not recur in 2019. There are moving parts within our Shack level operating profit margins both in the first quarter results and our full year outlook. However, taken within total, we expect -- we continue to expect to deliver between 23% and 24% Shack level operating margin for the full year consistent with our prior guidance although likely towards the lower end of that range. Total G&A for the first quarter was $13.9 million, and included approximately $500,000 relating to Project Concrete and $1.6 million relating to noncash equity compensation. Our G&A expense will continue to increase as the year progresses as a result of continued investments across the business to support our strong growth and the ongoing implementation of Project Concrete, our back office or ERP upgrade. We continue to expect our full year G&A expense to be between $66.4 million and $68.2 million inclusive of Project Concrete and equity based comp. Within this amount, our prior guidance breakout still stands. Core G&A spend of between $56 million and $57 million. Equity based compensation between $7.4 million and $7.7 million. And Project Concrete G&A spend at between $3 million and $3.5 million, with approximately $4 million of additional capital costs. This very significant enterprisewide project is progressing well with key modules in both financial operations and people resources schedules the go live during the second half of the year. As a result of our ongoing expansion and increasing pace of new Shack openings, we continue to record significant increases in our depreciation expense, a major impact to EPS. Depreciation increased 38% in the quarter to $9 million driven primarily by the addition of those 34 new Shacks, together with existing Shacks remodels and ongoing enterprisewide capital investment primarily in digital tools and technology. We continue to expect depreciation of $41 million to $42 million for the year, consistent with prior guidance. Pre-opening expenses in the quarter were $2.6 million. For the full year, we continue to expect preopening costs to be between $13 million and $14 million with our biggest class of Shack openings to date occurring in 2019. Interest expense declined by approximately $500,000 year-on-year to $72,000 driven by the change in accounting treatment related to build-to-suit leases which have previously been accounted for in this slide and are now being recorded within occupancy. For the full year, we continue to expect interest expense of between $300,000 and $400,000, in line with prior guidance. Adjusted EBITDA in the first quarter increased 10% from the same quarter last year to $17.8 million and adjusted EBITDA margin in the quarter was 13.5%. On an adjusted pro forma basis, we earned $4.9 million or $0.13 for a fully exchanged diluted share compared to $5.7 million or $0.15 in the same quarter last year. Our pro forma effective tax rate was 19.5% from an adjusted pro forma basis. Our underlying effective rate was 27%, which excludes the effect of excess tax benefits from stock-based compensation. Page 20 in our supplemental materials shows the impact of these excess tax benefits on our effective rate. As a reminder, our tax guidance excludes any potential impact from such excess benefits, given the unpredictability of the timing of exercise activities. On that basis, we continue to expect a range of 26.5% to 27.5% for pro forma effective tax rate for the full year. Overall, we are extremely pleased with the momentum we have across the business and particularly the strong topline performance we delivered in the first quarter. We continue to execute against those strategic growth initiatives, centered on domestic and international expansion, testing and learning of our core menu and expanding digital innovation. All while investing in our teams and ensuring they have strong foundational infrastructures to support them as well as to further enable scale for the long-term. We certainly saw cost pressures impact the business in the first quarter as we accelerated openings and tested new menu items. And have taken steps to address many of those going forward. In addition, as we expanded to new channels and carry different cost structure have also resulted in operational complexity which we're very focused on and working through. But ultimately, with the strong balance sheet, you should expect to see us continue to test and learn as we grow as well as continue to invest where we see compelling long-term returns for the company. We do intend to deliver cost leverage in the future with a long-term plans and ensuring we pursue critical initiatives that we believe will continue to build this company for generations to come. And with that I'll pass it back to Randy who will open the call.

Thanks, Tara. As we near our 15th birthday this summer, we believe that Shake Shack has an opportunity to become one of America's and the world's most iconic and beloved restaurant brands. We never take for granted what we've created. And I want to say another thank you to our dedicated teams who wake up excited to serve you, understanding that every day we must earn and re-earn that privilege. We're looking forward to a strong 2019. And with that, I would like to thank all of you for joining today's call. And operator, please go ahead and open the line for questions.

[Operator Instructions]. And we will take our first question from Nicole Miller from Piper Jaffray.

I'll stick to just one question with two parts admittedly if it's okay. I want to understand new unit performance in new markets. And just kind of guide us back to how you're identifying those locations? And then the second part is how are you transferring the Shack culture into those new territories? How are you identifying staff and employees? Thanks.

Thanks, Nicole. It's crucial to what we do. Let's start with the team because that's where everything begins. We have done a lot of growth over this last few years. As you see in my strategic commentary, we want to do less new markets in this coming year or two. We have definitely learned that we should continue to do a lot of new markets but going deeper has helped us quite a bit. It's helped us see that culture. And when we do go to new markets or even go deeper in other markets, we try to make sure that we have some of our leaders from other Shacks to help us open those. Sometimes, that's the General Manager, sometimes it's other leadership. All the time, it is leaders from around the Shack world who go there and help us open and stay somewhere between 2 to 4 to 6 weeks, at least. So we really see that culture. While I give my comment, I made very clear it's never been harder for us to find and retain great talent. It is true to everyone in our industry and I also think it's our sweet spot. And it's the thing we do best and we're going to continue to work on it really hard. When it comes to how we choose those, we have an incredible development team who is out there all the time with a very long-term lens, market by market, with a 3 to 5 year plan, making sure we are going after the opportunities that we want. Always making sure that when we launch we do it in a way that builds a community gathering place for that place. I think the Shacks you will see this year in markets like Columbus, Salt Lake City, New Orleans and others to find that for us. Just last week in San Francisco, where we have our Palo Alto Shack which is just rocking and our newest one in Marin County, which already feels like it's a part of the community. So we want to bring real estate that can do all the things that are great community gathering place can do. And we build for the digital future where we can find and take care of our guests anywhere and anytime. When we talk about the performance of those units, we have continued to outperform our expectations over the years in AUVs and the strength of those openings. And that cost money. To Tara's point in her commentary, when we really want to set these new Shacks up to achieve those sales and achieve great guest satisfaction out of the gate, that causes money. We spend a lot of money on the initial setup of those restaurants and the ongoing certainly first few months and really into that first year. It takes time to level out that business plan and make sure that our number one priority is always take care of our guests and grabbing those sales. So the impact of that, we noted in the fourth quarter, we noted it again, when we have large classes of Shacks which we continue to have in the record-setting numbers this year, when they open, they impact our Shack level op profit in the near term and then that generally levels off.

Thanks for the update.

We will take our next question from Sharon Zackfia from William Blair.

So a couple of questions on the Chick'n Bites. First, I guess is from the customer outreach. I'm assuming that that's bringing in more families and children. But if you could talk about what kinds of new customers you're seeing with Bites? And then secondarily, could you quantify some of the specific cost impact from the Chick'n Bites in the first quarter and then how that should lessen in the second quarter and then it sounds like it neutralized by the back half of the year if I'm understanding correctly?

Yes, almost. I'll start with the Chick'n Bites. We are really excited about this. As we know, for a long time we wanted to test, we are excited to be testing it right now. I don't know if that is changing the makeup of our guests. I think what's interesting and I take my own kids as an example, right. They might have gotten a hotdog in the past. While they might sometimes get Chick'n Bites now. Sometimes they do that. Sometimes they might trade it with a cheeseburger or sometimes they might get it in addition as a snack or a side. So it's really too early to say what its impact is going to be on our guest makeup, certainly on frequency or any of the impact over time on the menu mix. Those things are too early. What I will say, obviously we made a lot of notes about the cost. We throughout the process of launch, made these products better and better and better. And over time, we ended up with a higher cost product than anticipated through the first quarter. And now in the second quarter. What's been great is now we've got our arms around this item a little bit. We've also felt really comfortable about some of the promotional pricing that we started with. We've been able to raise that and such recently in the last month, while getting our supply chain in a stronger place and getting the food product better and better and better. So with all of that, it will, it had a significant impact to COGS in Q1. We called that up. It will have a significant impact to COGS in Q2. We do believe over time that is lessening. And by the end of Q2, we should be exiting some of the initial higher COGS stuff on that. So the whole idea is no one is making them like these, right? These are hormone antibiotic-free, hand battered, hand -- brought to order, one by one. This is not a frozen product. This is not a product that come in ready. This is something that we do on the line and we've got a lot of learning in how to do that on the labor line and the COGS line. We are getting better and we will see. We are still treating this as a test. There's still so much we want to know. And -- but we are excited about it. We like what we are seeing so far.

We will take our next question from Jake Bartlett from SunTrust.

I had a question about the mix, Randy. At roughly 0.5 was the lowest mix in about 1.5 years. Yet it sounds like you're getting a boost from digital sales, which is -- which should be boosting mix. So trying to understand that, whether due to the Chick'n Bites or if there's any other factors to consider?

Well, remember, it's still a growing number and it's definitely impacted, as you said, by the digital channels. The items for check, the things within that. But again, we only have launched chicken in February. That was a rollout through the company. So there's a lot of noise in there in this quarter that I'm not sure we are ready to point to an exact reason there. But I think in general, what's encouraging news there, we were pretty gentle on price especially compared to the industry right now at or about 1.5% and traffic was really positive. So we will take a smaller win in mix than some of the bigger ones that we've had in the past. But I think lots of options to see how that shakes out. That's a long-term metric we will keep an eye on, not just for one quarter.

Got it. And I know you're kind -- don't love focusing on the near term same-store sales trends. Just so we can understand and really get engaged as to how conservative or not your guidance is, could you help us understand how much the weather impacted the quarter? And I'm also -- just I guess wanted to better understand how the calendar shift is impacting, I assume that's April weather. How much that will be a hurt or was a hit in the Easter shift?

Thanks. All of that is baked into our increased guidance again from 1% to 2%. Let's start where we would start no matter what the comp number was. Still a small base, still not a vast majority of our company, still highly impacted regionally from time to time on certain things. Like weather in the first 2 weeks, really with the holiday shift on the end of the year going into New Year's, we had really favorable weather, much warmer, much nicer weather in the Northeast and New York City area which is the majority of our comp base, which is not the majority of our company. That has impact. And that was a noticeable part of Q1. So as we look at -- there's other things, there's Easter shift noise, too early to talk about that, we don't give any quarterly guidance. But we expect to be around 1% to 2% for the year, which is an increase in how we are thinking about it earlier. So great first quarter, great to see traffic continue to grow.

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

First, can you just talk may be about your use of both more promotional activity and promotional pricing? I don't think in the past I've heard you talk about that. In particular, why did you use promotional pricing for Chick'n Bites? I know you wanted to get trial but may be you hadn't used that in the past. Did it result, net of the cost, did it result in the benefit that you thought it was going to? And just how do you think more about promotional pricing or promotional activity now may be versus a few years ago when I didn't -- I don't think you had as much of it?

Yes. Thanks, John. And may be that’s even -- as I hear you say, maybe it's even too strong a word to consider what we're talking about. I think to put that in a category of what fastfood promotion might be doing, let's be real clear, that's not what we've ever done and that's not what we've done here. So when we talk about promotional pricing, the Chick'n Bites started around $4.39 in our Tier A markets. And that is a price that we looked at and said, what we want to learn is do people want to eat Chick'n Bites, period, at Shake Shack? And at what price does that do not confuse the issue for trying to figure out do they want to eat it? And we really like that low $4 price. It turns out, the answer is people want to eat Chick'n Bites at Shake Shack. And we feel so good about the value that we are giving there that we felt comfortable taking it off a little bit to try the next tier of pricing, which so far, we feel pretty good about what we're seeing there as well. But it's not giveaways. This is not discounting. This is not promos in the sense that you might be thinking about for other brands. This is still a premium product at a premium price that we feel we can charge it even more premium price for in the near term.

Yes, sorry. I didn't mean to scare you about promotional pricing. The digital is a really important part of your business. And yet I still feel like at least I don't understand what the real contribution here is. And in the past you have been reticent to provide specific metrics. But is there any way we can help understand what the role of digital played this quarter or what's it played in the last couple of quarters, percentage of sales, type of check, can you give any sort of further quantification of what you think digital is really doing to your business right now?

John, how are you? Yes. No, I mean, you're right. We are not at the stage yet where we are sort of breaking out the importance of the big digital metrics. I mean, it's at some point in the future, we will. And the only reason we are not right now is we're just so early in that process and in that part of our business is being built out. I mean, the app, obviously, is the most mature of our digital channels and it's barely two years old. Our most recent channel, web ordering, we just launched in December. So I think it's not that -- it's really not intended to be a lack of transparency. It's just that it's early. And there's a lot of testing and a lot of learning going on and that's awfully where a lot of our investment is going this year. It's a critical part of our business. As we continue to talk to you, we are very bullish about it. We really want to provide a holistic experience when it comes to Shake Shack. The ability to provide convenience as well as experience to interact with guests on a variety of formats. But we feel good about it. In general terms, it's a growth of our business. It's a critical part of our future growth. It's a key part of our investment strategy. We see a growth across all channels and it continues to deliver a higher average check than in Shack. But we will see what we gather reporting metrics and I'm sure at some point, we will start reporting them when all these things begin to be somewhat mature -- more mature parts of our business.

We will take our next question from Andy Barish from Jefferies.

I know it's obviously early in the year but are you willing to kind of quantify what you think the '19 opening volumes will be kind of within the long-term context that you've laid out?

Well, they're all -- that's all baked into the 4%, 4.1% AUV that we've given guidance for that's unchanged for the end of the year. As we exit the year, that's our expectation. I think obviously, you can look at that and say, the outperformance in Q1 will likely be at the higher end of that range as we look at those expectations today. So we don't breakout class by class. It's all varied. And I think that's what we want you to understand. We are going to have some of these premier big Shacks. We are going to have smaller market Shacks. It's so varied for us across what we do. And I think the strength of Shake Shack, I think one thing people should understand is not just getting sucked into the AUV as a greater number as it is the only thing to look at. We are doing all kinds of AUVs and we are making really good money at all those levels. I think that's the power of this business over the long-term. So that's where we are focused on.

And can you just give us a sense, obviously the background of where the business came from is a little bit different than a lot of other players out there. But how are you managing sort of menu complexity and new challenges and may be some of the key things you're doing to help the team be able to handle a lot of the new things that are getting thrown at them whether it shakes or chicken or delivery, what have you?

It's an important question. And we were born from a fine dining company. Many of the people who are a leader of this company today have that background. Our new chef, John Karangis, is both a fine dining person and someone who understands execution and volume. So I think the process now is about using our new Innovation Kitchen, testing, learning, listening. I think we are new at learning, how to learn, honestly. It's something we've got to take our time with. Chick'n Bites was a great first example of that. And it's not easy to do Chick'n Bites the way we like to do them. And that caused us some challenges in our restaurants. No question about it. And we noted those today on this call. And so I think we are going to always good to lead with quality, we're going to lead what guests are really are asking for and will come back for and we want to be the next generations burger joint. We going to look at those classic menu items and say, how can that simple classic thing be done better? Whoever wrote the rule that needs to be done the way we've accepted and we're going to go ahead and just do a little bit better. We want to do the things that other people aren't willing or aren't able to do. And that starts right here in our Innovation Kitchen and then it spreads to Shacks around the country. And everything we do may not be perfect. But we're going to have fun testing and trying and then trying to roll those things out so that we can execute them better and better every day.

We will take our next question from Chris O'Cull from Stifel.

Rum [ph] declined about 400 basis points in the first quarter and it sounds like you're seeing similar performer you're expecting similar performance in the second. And you've got more openings in the back half. So can you give us a little bit more color on what's going to change in the back half of the year to cause the margin to show better performance to hit your guidance?

Chris, yes. I mean, I think a lot of what you're seeing also for the year which as I mentioned in my remarks, we are holding our Shack level guidance for the year. As it relates to restaurant [ph] level, margins at 23% to 24% albeit likely at the lower, towards the lower end of that range. So -- and really, when you look at that first quarter margin and Randy touched on it again in the last question, but Chick'n Bites and that launch had a sizable impact on COGS. We are making some changes not least the pricing rolling through but supply chain changes during this quarter. So that the lessen quite meaningfully in the back half of the year. There's also the way to the seasonality in our business with summer tending to be the summer months -- summer quarters tending to be our higher-margin quarters. And so those are sort of the main drivers.

And Chris, I'll jump in. And we have a lot of work to do to make that happen. And we acknowledge, there's a lot of work to do and everything Tara mentioned and our labor and all the work that we are doing. This is -- it's not an easy thing when we have pressure like we did in the first quarter. But we are committed to doing that work and we will do better.

Thank you. And then just it sounded like the other operating costs or other operating expenses was up primarily because of delivery commissions. But that -- that I hear that correctly? And then should we see a similar year-over-year impact the remaining quarters?

Yes. You heard it correctly. And yes, that is a new cost in our business. Unfortunately, delivery comes with a cost.

So that rate of increase is reasonable for the balance of the year?

Yes. I mean, our OpEx for the back of this year almost [indiscernible] all incorporated within our guidance.

We will take our next question from Andrew Charles from Cowen and Company.

Randy, I know you're reluctant to discuss when you're looking to formalize the delivery partnership. But can you speak to what the benefit of formal deliver partnership will allow you that you currently don't have today?

Well, really, Andrew, no new news since the last call, right? We are continuing to pilot. I think there's benefits on all sides of how we consider the ultimate answer to that and how we will ultimately finalize any of that. So honestly, I think what we know today is people -- our guests are telling us they like delivery. We are doing more of it quarter-over-quarter and year-over-year and it's something we are spending a lot of time thinking about. And again, no new updates different from what we said the past quarters on that.

I want to ask you, are the intended benefits from exclusive agreement with the deliver provider worth it? Or can you achieve long-term vision for delivery within the brand with three sets of partners?

We will let you know when we may have news to report.

Okay. Last quarter, you warned about the sophomore Shacks in 2018 that opened at high volumes. We are getting pretty close to the end of their honeymoon period. Did 1Q's strong topline results just perhaps these stores didn't fall harder than the 5% decline you typically see in year two?

Yes, I think, we continue to be pleased with the results of the Shacks across the board. I mean, sophomore decline is still a reality and in the business and they certainly will be this year and we got, as we mentioned in the last call and is incorporated within our guidance for the year. We continue to expect that. We've got some Shacks in the sophomore this year that started really high, really, really incredible sales. It's absolutely still dynamic but I think it's best to say that we continue to outperform our expectations across the board, including sophomore.

We will take our next question from Alton Stump from Longbow Research.

Just have a quick question and I'll hop back in queue. But of course you mentioned beef cost being a pressure point, Tara. Is that also going to wean as you get into that part of the year or what's your expectations for a quarter to quarter basis as far as the cost pressures this year?

Yes. No. I mean, I think we're coming off years of beef coming down. We've seen it start to creep back up and I think we will probably see that continue to some degree in the back half of this year. It's obviously relatively challenging to forecast commodities. But we are expecting it to potentially continue to increase throughout the year.

We will take our next question from Jeffrey Bernstein from Barclays.

Two questions. Just first kind of piggybacking off of all the cost questions. I'm wondering how you think about the menu pricing. I mean, we are still in the 1% to 2% range as what you think is reasonable for '19. But with the labor inflation you're talking about and now the, what sounds like rising food inflation, just wondering whether you contemplated an outsized or a slightly greater increase? Seems like you have the pricing power, sounds like you may be took it on the chicken after your initial promotional activity. I'm just wondering how you think about when will be the time to push it above that 1% to 2% whilst still keeping an affordable option for the consumer? And then I have one follow-up.

Sure, Jeff. That's a great question. Something we talk about a lot. We are starting to thinking a lot about it. As you know for 15 years of this company's history, we have been very cautious and very much in the 1% to 2% range for the most part of every year. That's -- we are not stuck with that for any good reason other than making sure we continue to keep the exceptional pricing power we believe Shake Shack has at our quality, what we provide, and the overall experience we feel really strong about making sure our guests get a great value. We are giving that today and we want to be able to give that for the long-term. There's a lot of companies out there that have taken a lot of price right now. We obviously have had an impact to our margins with some of the creeping costs that we've had. But we are in this for the long haul. We are on this for the next quarter. We are on this for the next year. Were just going to have the long-term business that's offering a fantastic product at a great price for many years to come we're not going to rush to that. We are going to guide you to where we think it will land and we will keep you posted. So at this time, we don't have any expectation of an increased price in the near term.

Got it. But do you think you have the pricing power if you were so inclined at certain point later this year into next year or do you get a feeling that may be very some pushback that you kind of want to be more careful?

Yes, we actually do. And we have over for a very long time. I think we've got, we retain a lot of great pricing power when you really look at us versus options and that are out there we feel good about it. So we do and we are cautious and we are patient.

Got it. My other question was just on G&A. Just wondering how you think about spend through 2019. Whether it's steady relative to levels we are seeing now or may be it might be weighted to particular quarters and whether future years might also be outsized? Just wondering, kind of figure what the underlying run rate is, I think, you said $56 million to $57 million. But I wasn't sure if that was intended to be what we should think about as kind of a core underlying run rate or how we should think about it over the next year or two?

Hey, I would not call it a run rate in a business that's growing as firm as this one. So yes, the $56 million, $57 million is our core guidance for this year within a $66 million sort of, milestone, $68.2 million. We've obviously got maybe equity based comp within that and Project Concrete spend. So I think what you should expect to see is G&A increase from Q1 as we continue to spend to that $56 million, $57 million throughout the year and I think you will continue to see a spend more as time goes on, one as a result of just the significant size of growth that the business has for the foreseeable future on top of the fact that we will continue to invest where we see -- we will continue to invest outside of just current state growth. We will be investing in long-term growth as we see those opportunities continue to arise. So I would not call $56 million, $57 million a run rate. But I do think you'll start to see that -- you will start to see leverage in that basis at some point but in the long-term, I mean, come back to the fact that we are 132 company-operated Shacks today in a number of 450 that we gave at the time of the IPO. So we've done a lot of growth ahead about and we are really excited about it. We are continue to spend and deliver the returns that we like.

[Operator Instructions]. And we'll take John Ivankoe from J.P. Morgan.

Hopefully you can hear me. The Game of Thrones promotion that you guys are running is, you have premium price sits at the top at the rest of your menu. So I wonder kind of what that's telling you in terms of the pricing power that you have on the very, very premium end of the menu? And I'll also ask that in the question as your menu prices over time as kind of drive higher, whether it make sense to kind of think about entry-level meal of some type that can drive frequency for your lower and middle income customers as well? And I have a follow-up.

Yes. The Game of Thrones has been a lot of fun. We definitely tested at the Shake and tested kind of the higher end of what we have done in for shakes in the past. I think is such a one-off special thing. So hopefully we do things like that in the future as well. Because such a strong fan base, the Game of thrones and people want to try this and the fun creation of the Dragon Glass, it's really a tasty and cool invention and innovation that our team made. A lot of us do feel really good about charging that. The visuals are beautiful, the cup is the really cool thing. And it's just a fun way to have people be thinking about Shake Shack, have new audiences, be thinking about Shake Shack. So on the lower end of the pricing, I think Chick'n Bites is actually a good example of that, John. Even at a newer price, it's still below $5. So as an interesting entry-level point and we've got our eyes on that very closely. I like us to be considering around the core menu how we can tinker at both ends of high and low pricing over time. Generally, I think you'll probably see us go higher as you have. Not sure how many low-priced things we are looking for. We want to compete on quality and experience and not just on price. So we will keep our eyes on it though. But we've got something some both categories that I think are leading your question.

Helpful. Thank you. And then secondly, there have been so many questions about delivery incrementality and the cost of delivery. Have you thought about changing the price of Shake Shack on the delivery asset basically cover your cost and packaging and delivery fees? I mean, are you allowed to do it? Do you think it's in the spirit of the brand? Do you think the customer would accept that to the extent that if there were different prices for delivery versus in-store?

Yes, I think it's all wrapped up in the total delivery cost, right? And each part of it models as you look at that right now as we are piloting. But I absolutely think there's options there. Today, our menu pricing does not change on any channel. That said, we are wide open to considering those things. I think there seems to be a great willingness to pay on digital channels, that is a little bit different. So I think we've got that upside as a potential. It's not something we are going to jump on today. We are mostly concerned of continuing to grow traffic, grow the channels, the successfully make sure they go well. And then may be something you look at.

I think, operator, that's all of the question I just want to say thank you to everyone for being on the call today. We really appreciate your time. Have a great net. We will see you at a Shack soon.

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