Shake Shack Inc. (SHAK) Q4 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to Shake Shack Fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being record. I will now turn the conference over to your host, Melissa Calandruccio, Investor Relations.

Thank you, Dale, and good evening, everyone. Joining me for Shake Shack's conference call is our CEO, Randy Garutti; and President and CFO, Tara Comonte. 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 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 our annual report on Form 10-K filed earlier today. 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, you should have access to our fourth quarter 2019 earnings release, which can be found at investor.shakeshack.com in the News section. Additionally, we have posted our fourth quarter 2019 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. Please note, there was an error in our guidance on page 18 as it relates to our swap outlook, which has since been corrected in our supplemental materials. I will now turn the call over to Randy.

Thanks, Melissa. Good evening, everyone. 2019 was another milestone year for growth at Shake Shack, increasing total revenue by almost 30% to $595 million, system-wide sales by 33% to nearly $900 million. Our same-Shack sales growth for the full year was 1.3%, and we delivered adjusted EBITDA growth of 11% to $82 million while continuing to strategically invest for the significant growth that lies ahead. We opened our largest class of Shacks ever, with 73 across the globe, and a total of 49 of those here in the United States. Of the 73 total, 39 were company-operated and 34 licensed, strategically expanding our footprint in current markets across New York City, California, New Jersey, Boston, Texas, the Midwest and more. We also launched in a number of new markets, including New Orleans, Salt Lake City and Columbus. In the most significant year-to-date for our license business, we grew revenue by 45% through the strength of our current regions while unlocking major new domestic and international markets, opening for the first time in Shanghai, Mexico City, Singapore and Manila, each to an incredible guest reception. It's a reminder of the global strength and potential of this brand. We also opened our Hong Kong office to support our growth in Asia, and it's been a game changer to have our team on the ground working closer with our partners to grow and manage this dynamic region. We also made the tough decision at the end of the fourth quarter to exit the Russian market due to its persistent macroeconomic and supply chain challenges we've experienced over our six years in the region. I'd like to highlight those many areas of progress across the business in 2019. This is a people-first company, and it always will be. We're committed to nurturing our culture, investing our team's development and providing opportunities for a successful career in the restaurant business. Taking care of each other is the core of enlightened hospitality for a reason and a founding principle of the company, one we proudly aspire to live every day. In the past year, we formally launched our diversity and inclusion program called All-In, which encompasses our growing mentor program, the evaluation and direction of our inclusive work practices, celebration of our diverse workforce, benefits programs, diversity training and much more. We're proud of the All-In initiatives and to be a company of leaders, training future leaders. In 2019, we promoted over 1,600 individuals around the company, of whom almost 60% were women. With All-In, we're ensuring that diversity inclusion is a strategic imperative that is an ongoing positive impact on our organization and teams as a whole. We also continue to test a four-day work week for our Shack managers. Right now, it's operational in about one-third of our Shacks, and we're encouraged by the feedback and early results. It appears to be contributing to an increase in applicants and, notably, an increase in female applicants. We'll continue to monitor the program over the coming months as we seek to create a balance and fulfilling personal and professional lifestyle for our leaders. We'll continue to monitor the program over the coming months as we seek to create a balance and fulfilling personal and professional lifestyle for our leaders. Let me turn 2019 to our menu. In 2019, we chose to limit our menu innovation in comparison to prior years as we focus on the launch of Chick'n Bites, now a core menu item in 2020. We believe Chick'n Bites have a variety of use cases and attach opportunities as an add-on for a group to share, trade up, or ordered on their own. We're seeing the transactions containing bites generally carry a higher average check. And this, along with guest feedback and overall positive sales performance, encourage us to move them to the core menu while still monitoring ongoing performance. We're excited to ramp-up menu innovation in 2020. Let's talk about our Shacks and the experiences we're building. As we grow and innovate our design and real estate process, we're exploring and testing various formats in addition to those we've already successfully built. As just a few examples. Today, we have three premier food court locations, four outlet center Shacks, and we're testing a smaller urban footprint Shack in Midtown Manhattan. This particular Shack has limited seating and is focused on convenience within Shack kiosk ordering and is geared towards reducing friction in the guest experience with a sort of digital pickup area for app, web, and delivery. We believe that a multi-format strategy will allow us to explore opportunities to, at times, deliver higher levels of profitability and investment returns, whether due to cost to build or level of operating profitability. With fewer than 200 Shacks in the U.S. today, we've got lots of testing and learning ahead. 2019 was also a year of continuing to build out our digital capabilities with ongoing improvements to our app, web ordering, our delivery offering, and the further rollout of kiosks. We're really optimistic about digital and everything it represents in terms of our ability to better understand, connect with and meet the needs of our guests. And so it will take time, investment and evolution, and we believe we're laying the fundamental groundwork to deliver sales growth over the coming years. Overall, 2019 was our biggest year ever in unit openings, total revenue, and adjusted EBITDA. That said, the fourth quarter was our toughest quarterly compare and traffic overall was below our expectations. Tara will take you through the drivers behind that in our 2020 guidance in a moment. After that, I'll share our 2020 strategic priorities, which support our long-term vision committed to delivering compelling top and bottom-line growth as we expand our footprint around the world. Now, Tara will take you through the result of the quarter.

Thank you, Randy. As you just heard, we're pleased with another year of strong growth in 2019, delivering $594.5 million in total revenue, positive same-Shack sales growth, and a 10.8% increase in adjusted EBITDA, albeit with a challenging fourth quarter to end the year. We do expect certain aspects of the business to remain under pressure throughout some of this coming year. During the fourth quarter, same-Shack sales decreased 3.6%, consisting of a 1.8% increase in price/mix, offset by a 5.4% decline in traffic. Of the many things going on in the business right now, delivery is well impacting both comp and overall sales performance. In August, we announced our decision to move ahead with Grubhub as a single partner for integrated market delivery. Our forward momentum continues in that important partnership. Although, as we've shared, it's not without as expected impact to sales, individual market challenges, and resulting volatility. With the tech integration complete in Q4, we had originally planned for a speedier move to full exclusivity. Instead, we decided to transition on a market-by-market basis, testing and assessing various marketing strategies to transition Shacks brands over from other marketplaces in the process. As of the end of Q4, just over a quarter of our Shacks were solely integrated with Grubhub, while the delivery channel experienced a significant slowdown in growth rates in the quarter compared to earlier in the year in the prior year. As of today, nearly half of our Shacks are solely integrated with Grubhub and we continue to work through transition plans on a market-by-market basis over the coming months. As a result of this phased approach, we continue to expect potentially significant volatility in the delivery channel throughout much of 2020, and we're already seeing this play out through the first quarter so far. It's hard to precisely quantify the impact of this transition. And since the announcement of our partnership, we know we have often been subject to less prominent site placements, higher pricing and, in some cases, removal from a marketplace entirely. So, I enjoy this volatility in the near-term, our goal in delivery remains unchanged, to prioritize guest experience while capturing long-term revenue growth. Through this strategy, we'll ultimately retain the data to connect with our guests directly while benefiting from a compelling and sustainable cost structure. All of this, while we invest further in our indirect channels, including delivery as a service on our app and web platforms targeted for later this year, integrating and leveraging our own guest data, whilst building loyalty to Shake Shack over the long term. Same-Shack sales performance in the fourth quarter was not as strong as prior quarters, and we believe our results were impacted by this delivery strategy and a number of additional factors. The first was directly linked to the holiday calendar. With many of our Shacks and busy travel, shopping and community gathering locations, one less shopping week during the high-traffic holiday season compared to the prior year, clearly, had an impact. In addition, our fourth quarter 2018 holiday season compare was a challenging one, lapping warm, favorable weather conditions in New York, the Northeast and the Mid-Atlantic, where we still have the majority of our comp base sales. We believe the combination of these two factors represented a headwind of approximately a-third of our comp decline in the quarter. We also believe our decisions to reduce overall menu innovation and promotional activity versus last year may have contributed to weaker traffic as we chose to focus on Chick'n Bites, as well as our digital delivery channels. Likely adding a bit of additional pressure in the comp base was a record development year, where we opened a total of 39 new company-operated Shacks with over 80% in existing markets, a number that has been gradually increasing as we shift to further penetrating current markets. After that, the additional 10 licensed Shacks that we opened in the U.S. last year, and this contributed to negative traffic trends in the comp base. At only 167 company-operated Shacks today, having added $129 million in Shack sales in the year and with significant growth planned for many years to come, we remain confident in our strategy. While we don't believe our aggressive market expansion to be the sole reason for negative traffic in the quarter, it can at times have a short-term impact on existing Shacks. We remain focused on growing overall sales and gaining market Shack, one Shack at a time and towards a much bigger footprint in the U.S. Licensing revenue increased 59% to $5.6 million driven by a net increase of 28 Shacks and strong performance continuing through the fourth quarter, with exceptional strength in new markets and all regions showing growth and strong levels of performance. We also saw a benefit from timing of openings during the quarter and ended the year with license revenue growing 45% to $19.9 million, exceeding our previous guidance. Shack level operating profit margin in the fourth quarter was 20.4% pressured across a couple of areas, including sales performance. And yet, for the full year 2019, Shack level operating profit grew to $128 million with Shack level operating margin of 22.3%, just above the midpoint of our prior guidance. One of the most significant headwinds in the quarter was mid-single-digit beef inflation, which have been gradually increasing throughout the year, but stepped up meaningfully in November and reached the highest levels we've been since late 2015. We also experienced inflation in dairy, impacting the cost profile of our concretes and shake’s throughout the quarter. Beef has leveled off somewhat in Q1 2020, but this inflation, together with the high cost profile of Chick'n Bites in the first half of the year, represented the majority of the year-on-year deleverage in the COGS line in 2019. Consistent with the last few quarters, we continue to see paper costs increasing with digital sales mix. Labor continues to face pressure in this strong employment environment. It's competitive and expensive to recruit and retain great talent. And you heard from Randy some of the ways, we continue to invest in and differentiate ourselves as an employer of choice. We increased our average starting wage by mid-single digits in 2019, and it remains a headwind moving forward. As well as these industry-wide factors, our labor line in the fourth quarter was impacted from less sales leverage on fixed management costs than we had benefited from earlier in the year. Finally, new Shacks do continue to typically open with a higher labor cost, which then normalizes over time. Our occupancy came in at 9% in Q4 impacted by the loss of sales leverage. Also, as a reminder, the adoption of the new lease accounting standard impacted our 2019 Shack level operating margin by approximately 50 basis points as certain lease costs moved out of depreciation and interest and into occupancy. Total G&A for the fourth quarter was $19.2 million, and included $1.9 million related to non-cash equity compensation and non-cash technology amortization. The year-on-year increase in our G&A was driven by investments across the company to support our growth. For the full year, we spent $65.6 million in total G&A, below our prior guidance of $67 million to $68 million due to the timing of various initiatives. Operating expenses associated with Project Concrete were $2.1 million for the full year, with a greater proportion of spend capitalized as the project progressed. Project Concrete is now in its later stage, focusing on procure-to-pay inventory and supplier management tools and processes with rollout ongoing through the middle of this year. As a percentage of full year 2019 revenue, G&A ultimately provided leverage, mostly due to the timing of spend that I mentioned, combined with strong full year 2019 sales performance and should not be expected for 2020 as we continue to invest across a variety of long-term growth initiatives. Pre-opening expenses in the quarter were $4.2 million, bringing the full year to $14.8 million, above our prior guidance due to certain first quarter 2020 opening costs falling into the fourth quarter, as well as some delays to certain Shacks versus their originally forecasted opening date. Adjusted EBITDA for the fourth quarter was $14.8 million and grew 2.3% compared to last year and was $81.8 million for the full year, growing 10.8%. Long term, we expect to continue to deliver double-digit adjusted EBITDA growth as we continue to grow top line sales and ultimately deliver leverage across various cost line items. Our underlying effective tax rate, excluding the net impact of excess tax benefits related to stock-based compensation activity, was 16.2% for the quarter and 26.2% for the year, slightly below our guided range for the full year due to higher levels of tax credit. A reconciliation of our tax rate is included in the appendix of our supplemental material. Looking to this current year, we expect total revenue in 2020 to be between $712 million and $720 million, growth of approximately 20% to 21%, including the impact from the 53rd week of approximately $15 million. Within these numbers, licensing revenue is expected to be between $21 million and $22 million. We remain on track in 2020 to exceed our three-year sales target of $700 million that we shared in 2017 as well as to surpass $1 billion in system-wide sales. Our license business has been performing extremely well, and we've been bullish entering 2020. However, due to the recent and potentially significant headwinds caused by the coronavirus outbreak, we've updated our initial plan and believe it appropriate to be more conservative in our 2020 expectations and guidance at this time. Our Shacks in China, Hong Kong and throughout Asia are facing significant uncertainty and already experiencing acute sales impact over the last five weeks. We expect delayed openings in the region for the remainder of the year. And for context, Asia represents approximately one third of our annualized license revenue, so a very small percentage of our overall total company revenue, it does have an impact on our bottom line. Our total revenue guidance also incorporates the impact from the temporary closure of two New York City Shacks undergoing extensive renovations, the Upper West Side and Grand Central Station. These are two of our highest volume Shacks expected to be closed for a combined 14 to 18 weeks of lost sales in the first quarter. Both of these Shacks have been removed from our same-Shack sales guidance for the estimated periods of their respective closures and will be adjusted for in our reporting. Getting into our same-Shack sales guidance. Given continuing volatility as we work through our delivery transition, combined with trends-to-date, we expect same-Shack sales for the full year 2020 to be down low single=-digits. Within this, we expect more acute pressure in the comp base during the first half of the year as we lap our toughest compares with gradual improvement throughout the course of the year. We expect to open between 40 and 42 company-operated Shacks in 2020 with approximately 90% of this year's openings planned within our existing markets. Our opening schedule is currently projected to be back-end weighted with 60% to 70% of our openings happening in the back half of the year and the majority of those in the fourth quarter. As Randy mentioned, our Shack formats continue to expand. And as a result, our 2020 class will likely see a broadening range of expected sales volumes. We expect the average unit volume for all company-operated Shacks to be between $3.7 million and $3.8 million by the end of 2020. Our sales forecast include the 1.5% to 2% price increase we took mid-December. We've remained conservative with pricing over the last decade, generally taking less than 2% per year. However, we're in the midst of some extensive pricing research across the country. Learnings from this may present opportunities for us to adjust pricing in certain markets, on specific menu items or in certain channels, although we don't have any further increases planned at this time. Moving on to Shack level operating profit. We expect margins to begin to stabilize in 2020 compared to the contraction seen over the past few years as the size and profile of our unit base continue to broaden and a certain cost line items start to potentially level off. At this time, we expect Shack level operating margin to be between 22% and 22.5%, and included within this guidance is an approximate 20 to 25 basis points favorable impact from the 53rd week. As I mentioned, we've seen some of the recent beef inflation easing so far in 2020. In total, based on this and the improved cost profile of Chick'n Bites compared to last year, we do expect slight leverage in the food and paper cost line in 2020. Labor has both puts and takes. The challenging market continues, yet annual mandatory wage increases less than somewhat when compared to those in 2019. We've been very focused on how to optimize our labor model, continuing to drive more efficient operations through increased use of technology so that precious labor hours are well spent. These initiatives range from the impact of kiosks on our ability to reduce or redeploy labor, minimizing administrative tasks for our teams through Project Concrete, updating and optimizing our scheduling rules and the tools that support them, and a host of other process improvement initiatives being worked on across the company. While we anticipate continued deleveraging of labor in 2020, we do expect an easing of the pressure compared to recent years. We plan to continue to invest in building the business in 2020, and as such, do not expect to deliver G&A leverage this year. 2019 was a year focused on back of house and operational infrastructure investment. This is the year for digital and guest experience. We've recently grown our tech and marketing teams with a much deeper and broader set of skills as we continue to expand the ways a guest and engage with us, and we're excited to invest in front of that opportunity. We've also created a new op support team as we remain committed to driving excellence across the company. We're investing for growth, and we feel confident in the returns these investments will deliver over time. 2020 will see the expansion of our home office in New York where we'll take on additional space within our current building above the West Village Shack in our innovation kitchen. It's also the year of our biannual leadership retreat, currently planned for the fourth quarter, a core part of how we nurture and enrich our culture and develop our leaders. In total, for 2020, we expect G&A to be between $80 million and $82 million with approximately $9.1 million of non-cash items related to equity compensation and technology amortization as well as license fees following the implementation of Project Concrete. Included within our total G&A is an additional expense impact primarily related to salaries and benefits of $1 million to $1.2 million from a 53rd week. We expect depreciation to be between $52.5 million and $53.5 million, another sizable step-up. The majority of this driven by the increasing number of Shacks we continue to add to the portfolio. This year-on-year increase in depreciation continues to have a large impact on EPS growth, and we'll continue to do so while we remain in such a significant build phase. Our pro forma tax rate is estimated to be between 26% and 27%. And as a reminder, we guide to this number, excluding any beneficial tax impact from stock-based compensation activity. Our 2019 tax rate was significantly lower due to stock-related activity, which had a $0.15 impact on 2019 full year EPS. We're at an important stage in our journey right now, approaching a size where we can start to think about gradual economies of scale. Yet still so early in our overall growth, we remain committed to investing in what we believe is a sizable opportunity ahead. And with that, I'll pass you back to Randy to give some more color on how we're thinking about 2020.

Thanks, Tara. So let's be clear. We're still in an aggressive growth phase. Our 2020 growth plan is centered around five key pillars. Our people: attracting, retaining and developing the best people as we scale. Our menu: maintaining excellence around our core menu, innovating classics and an eye on potential category expansion to drive growth. Evolving our guest experience, we're designing Shacks and experiences that manage digital convenience with our signature community gathering spaces. Continued use of technology to better support and grow all aspects of our business. And finally, our license business, leveraging our high-margin cash accretive model through expansion of our brand across the globe, particularly with those sizable new markets we just entered in 2019. Let's dig into some of this a bit. Our investment and focus on our people only strengthens in 2020 as hospitality remains at our core. Tara mentioned our leadership treat, which will come together later this year. And we'll be investing in additional programs throughout the year, aimed at leadership development, professional growth for all levels within our teams. We'll also be continuing to ensure we provide a compelling compensation package, particularly for our general managers to whom we plan to issue equity awards again later this year. Nothing is more important than our people. We'll be doing more than ever to attract and develop the talent we need and celebrate everything they do. Moving on to our menu. Shake Shack was born by recreating the classics better than the traditional fast food chains. In 2020, we'll be ramping up menu innovation with a variety of buzz worthy LTOs, innovating around our core menu and expanding into new categories. So far this quarter, we've brought back the ShackMeister Burger LTO, our Shack Burger topped with shallots, marinated and ShackMeister Ale beer and crisp-fried. Beginning in Q2, we're bringing back our hot chicken, a perennial favorite, while also expanding our chicken category with the addition of hot Chick'n Bites for the first time. This year, we'll feature various heat levels to customize to your taste, including the fire level, which will be available only on digital channels. And finally, we'll couple that with a newly available ranch stressing. This year, we plan to rotate even more flavors throughout our future chicks, including some of our current flavors, such as cookie butter and return to cherry blossom this spring. We're also testing a smaller shake size option in certain markets. We're early in that test and understanding guest preference and sales impact. And our goal overall, of course, is to satisfy guest desire for a smaller portion and sell more shakes over time. This year, we'll also be looking further into cold beverage innovation as we believe there is opportunity for us to offer greater choice and add to our check through this category over the long-term. Lastly, we're also looking at new menu categories. Plant based food is obviously a hot topic these days, and we've been offering a beloved vegetarian option, our Shroom Burger since 2004. It's been a fantastic menu item for vegetarians and mediators alike. And currently, we're testing a new innovation in how we approach vegetarian and vegan options, a veggie Shack Burger, incorporating 13 real vegetables, herbs and grains currently being served only at our West Village Shack. We're certain this category will evolve as we listen to guest feedback, and we may create other products to expand vegetable based menu options while staying true to our core and delivering craveable menu items for Shack fans. Moving to the overall Shack experience. We know the pickup area at certain Shacks during peak time remains a challenge. And while we've made improvements this year in our current Shacks with new shelving, we're focused on new Shack designs and layouts that create distinct areas, separating digital and delivery from the in-Shack pickup experience. In a few weeks, we'll reopen our Upper West Side location after an extensive renovation with dedicated delivery entrants and pickup area and an improved flow and seating layout. We're also testing new kitchen flows and layouts in certain new Shacks with the goal of labor efficiency, improved accuracy and greater throughput. As for the 2020 class, we expected to perform on average at around $3 million AUV profile we previously shared with Shacks across a varied range of sales volumes. Our development team has done a fantastic job over recent years, holding our average build cost relatively flat despite a prolonged inflationary environment in the construction sector. In 2019, our average cost to build was approximately $2.2 million gross, that works out to about $1.9 million net of tenant improvement contributions, which was overall roughly flat with 2018. We're targeting to continue to stay in a similar range for 2020. Certain formats and smaller footprints will be at the lower end of our cost range with premium freestanding pads and larger urban locations generally being at the higher end. When we think about guest experience, we're dialing up our investments in building towards improved digital experiences for the future. Our goal is to better engage with our guests across their preferred channel and add reasons to come to the Shack for the first time or to return more frequently. We're building more sophisticated front and back ends across our digital ecosystem. We're working to tie all our guest data together so we get a better cross-channel view and deliver insights and opportunities to reengage with our guests more frequently. Our biggest goal is to continue to grow traffic to our own channels over time. Lastly, we have a long-term focused opportunity in our license business. We have the flexibility to be a company-operated model here in the U.S., and at the same time, benefit from approximately 40% of our Shacks today being licensed through an asset light, cash flow accretive operating model. It allows the Shake Shack brand to thrive in so many places around the world. Now looking at 2020, we're planning on opening about 20 to 25 new license units with our focus geared towards Asia, in particular China where our entrance into the Beijing market later this year represents another tremendous opportunity. Of course, the ongoing and significant challenges with the coronavirus outbreak could impact the timing and performance across our Asian markets in this year. Our primary concern will always remain the well-being of our teams, our guests and our communities. And over the long-term, we remain big believers in the China market for us as well as Asia overall. But this year may not capture fully the growth or unit expansion that we had planned. Outside of China, we see solid growth ahead in new and established markets, and we continue to go deeper in our established markets. Additionally, we're really excited to continue to expand our domestic license business across multiple formats, including the expansion of our newest category of roadside freeway Shack with a new Shack on the New Jersey Turnpike by coming up in 2020. To sum up, there are many reasons we're excited about our future as we fast approach $1 billion in total system-wide sales in 2020. Last year, we delivered our biggest year ever to almost 30% revenue growth, and this year targeted again exceed more than 20%, all while growing EBITDA significantly. While we expect 2020 to have its challenges, there's a lot going on in the business going through this much growth. We're thankful for the incredible teams and leaders fueling this company's growth and the tremendous runway we have ahead. And with that, operator, you can go ahead and open up the call for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Joshua Long of Piper Sandler. Please proceed with your question

Great. Thanks so much. Appreciate the time. Wanted to see if you can dig into the op support team investments that you talked about and what's been done to-date? Where you see that going and how you think that's going to help continue the long-term development profile? Where you guys focused not just on the quantity, but the quality of the store openings and really transferring that culture into new and existing markets? Thank you.

Yeah. Thanks a lot, Josh. Look, it's been -- we've run this company pretty lean for so many years, right? And as we continue to grow our -- the amount of regions and the amount of complexity that we've built into the Shack, it's been so important for us to grow that ops support team. What's so fun about it is, it's gone from zero people to four already, plus in addition to all of our training teams that open and continue ongoing training. And that team is made up of veterans who have been with Shake Shack some for nearly a decade, and others from some of our earliest Shacks. That team today is really focused on mostly the digital opportunity that we have, both in delivery and our own channels, making sure that the Shack operators can do that really well. It's focused quite a bit on the rollout of Project Concrete and the way that we're trying to take admin out of the Shacks. It’s focused quite a bit on our labor effectiveness so that we can make sure that we're scheduling better, we're using those important labor hours, especially as so many new regulations have come up in various markets, including New York, California and some of the biggest -- and this team is really -- their job is to make sure that we open Shacks well. We continue to train them and develop our leaders and just really support what's out there in restaurants right now. And look, I said it earlier, it is -- it's a complicated business to run a Shake Shack, especially the volumes that we do. So the more we can build this team, the better we think we're going to do. Really excited about the initiatives that you'll see coming down the pike from that team.

Our next question comes from the line of Katherine Fogertey of Goldman Sachs. Please proceed with your question.

Great. Thank you. I was wondering, one of the points that you had made about price for 2020. When we compare the price that you're taking versus kind of your peers, it looks like maybe there's a little bit more opportunity for you to push there. At what time in the year would you make that decision if it does make sense to actually pass on a little bit more price here? And then I had another question on your guidance. We heard about all the menu innovation that to come this year. How much are you factoring in improving traffic around menu innovation versus just waiting to see what comes? Thank you.

Thanks Katherine. On the pricing, look, we've -- you know we've been conservative for more than a decade, taking generally less than 2% price every year. We have kept a lot in the tank for the future. We believe we have a great price value opportunity. As we noted, we're doing more extensive research than we've ever done, both regionally, channel-by-channel, trying to understand what our opportunities might be beyond the strategy that we've employed for so many years. So, we don't have a date where we would expect to change anything, and we certainly may not. We may continue to keep with that strategy. But I think what we wanted to call out is for the first time really investing in the research and understanding of guest preference value across so many places and across so many menu items and channels. So, we will definitely keep you posted on that. If we find that there's opportunity, we may choose to take that later this year. That is definitely something we feel like we may be able to do. And as you noted, the industry is probably taking a lot more than we have. We like being in that position for all these years. We're in a long-term game here, not just for the next quarter. So, we're taking that one quarter at a time. We'll keep you posted. And the second question was menu innovation and traffic. So, I think -- look, we're doing quite a bit more than we did last year. I think the pressures in the business that Tara spoke to in the fourth quarter and continuing, obviously, our delivery transition, some of the other things that we've noted that have pressured us and one of the tactics we're going to be using is menu innovation to attempt to turn that back around. We've got some favorites coming up here with our hot chicken and we've got some new categories. I'm really excited as we've talked about vegetables quite a bit and the obvious plant-based excitement going on in the country right now. We're testing that in the innovation kitchen as we do so many things that allow us to test, learn and decide whether it's got legs beyond that. So, that's what we're working on. We're excited to do the kind of innovation that we believe will not complicate operations and that we can pull off with some solid throughput and keep things simplifying and moving forward, but it's still adding guests a reason to come by.

Our next question comes from the line of Lauren Silberman of Credit Suisse. Please proceed with your question.

Hi thanks. I have a clarification on the question. On the Shack level operating margin guidance in the script in initial release, I think you mentioned that you expect Shack level operating margins to stabilize into 2020 at 22% to 22.5%. The updated slide deck is 20% to 22.5%. If you could just clarify what the guide is? And then related to that, my question is, what gives you confidence to be able to manage to that 20% long-term operating margin given fiscal year 2020 is expected to end with AUV to 3.8 to 3.9? Thank you.

Yes. Thanks. You're absolutely right on the error on the supplementals. So, I apologize, everyone, for that confusion. On slide 18, it's a supplemental deck, there is an error in the Shack level operating profit margin guidance and the numbers we referred to in the prepared remarks and the earnings release are correct. Our Shack level margin guidance for 2020 is 22% to 22.5%, representing a stabilization of that margin compared to this year. So, we'll be updating our filings if it hasn't already happened imminently. Thank you for putting that out. And then in terms of -- yes, holding to those original target margins. I mean we're seeing our existing classes of new Shacks at a bank that $3 million AUV on average and that 20% shack level margin on average. You've heard about all these initiatives that we've got going on in the business right now, and we feel pretty confident about some of the returns and results that they're going to continue to deliver. We're really embracing use of technology. Randy used the op support team is a good example of how we're really rolling out new initiatives across the company, both to always be striving for excellence in operations, but also efficiency in operations. Whether that be ERPs like Project Concrete or things like scheduling, rules and tools that we put in the Shacks, new formats is another one. I think when we -- certainly, we first IPO-ed and -- this company first started, I think we ever envisaged that there could be so many different formats that a Shack could take, and we're feeling really encouraged be that with every year that goes by, and Randy touched on some of those. So, we still feel really good about those numbers.

Our next question comes from the line of Andy Barish of Jefferies. Please proceed with your question.

Thanks. Just on the infill strategy. I understand the market share opportunity. This is, I think, the first time you guys have talked about maybe a same-store sales impact. Can you just give us a little bit more color in terms of what you're thinking? Is that in certain markets or big markets versus small markets? I guess any additional color would be helpful there.

Thanks, Andy. We've noted it from time to time. You look back, I mean, obviously, we've had a strong couple of years here, but we've had moments in this company's history as a public company where traffic has been negative for a significant period of time. And we've come upon the question of – in past years of, hey, these Shacks cannibalize or the impact of other Shacks? And the answer is sometimes they do. We talked about this in the past. It's hard exactly to quantify how much, but we do think that was part of the end of last year. We think it will be part of this year. And it's a strategy as we want to capture total market share and total revenue and opportunity of the strategy, we're excited to move forward with, even though it'll have short term and certain impact on Shacks that are nearby. Look at certain regions, just like California and Texas alone, we've more than doubled the size of those regions in the last couple of years. That's significant, and that's on such a small base, right? We had – we've opened 10 restaurants in the last couple of years in California on a base of eight. We've opened nine in Texas on a base of eight. These are big places, but we're still focused on the overall sales add. We're adding nearly $130 million in sales in 2019 overall. That's what we're after. Will it impact same-Shack sales at time from time to time? Yes, it will. We've had that, and we just experienced that, and we're going to expect to experience some of that this year, but we're going after a much bigger opportunity here in the growth rates that we have.

Our next question comes from the line of John Glass of Morgan Stanley. Please proceed with your question.

Hi, thanks very much. Two questions. First, can you just elaborate on your decision to extend the period of transition in the aggregators? How long do you now expect that to go on for? And if you can provide any color as to what you think that impacted your fourth quarter. And then, Randy, as you think about your – picking up the pace of product innovation in 2020, have you changed your thought about changing how you think about testing protocols? Chick'n Bites, for example, I know, while successful, created some noise in the first half of the year just on pricing and product cost, for example. Do you think you've worked those things out? So as you innovate this year, you're less likely to see that kind of disruption?

Yes. So let's start with menu. Thanks, John. Yes, indeed, on the volatility of new menu items, right? I think, look, we're still a young company. We're still learning how to roll out things. We've got only 167 restaurants that we, company, operate today. And there's no doubt, we will own the fact when we need to continue to learn. That's what our innovation kitchen has been about. It's been what broader testing has been about. It's what op support is about. So we don't expect the kind of impact that we had on Chick'n Bites. And if we do, we'll certainly let you know about, right? The items that we're returning with this year are generally things that are time tested, and we certainly understand what their impact is going to be. Now you never know exactly what their sales impact could be, but we hope it'll be positive in the year. So I think we're getting better. We've got a lot of work to do. We're still a young company, and we're going to always push quality in the culinary aspect of what we do. When it comes to delivery and the timing of that. Obviously, we did not participate in the growth we expected in the fourth quarter, and the challenge of that transition remains. There's no doubt, it has an impact, and it's going to be over for a while. We're not quite halfway done with the move to exclusivity with Grub, and we're learning a lot. I think the answer to why has it taken so long or what period of time will it take, why is it in a market-by-market learning? There are some markets that have been easier than others. There are some where some of the tactics we've had haven't been the most successful right out of the gate. So we're thinking about things with Grub, like what kind of marketing works best, what placement, what kind of offer like a free delivery offer for an initial period, what other type of things happen. And through all of the Grub transition, we're going to continue to prioritize the guest experience. That's what matters most to us, especially in delivery. We're – delivering burgers and fries is a tough thing to do. So look, there's a lot of good things happening in our partnership. We've got a lot to continue to learn, and we're watching it very closely as we look at the future of this. And it'll take time to transition guests over from current marketplaces over to Grub, and we'll keep you posted on that. But we're moving ahead. And as we said, it will have some impact.

Our next question comes from the line of Jeffrey Bernstein of Barclays. Please proceed with your question.

Great. Thank you very much. Two questions. Just one on the restaurant margin outlook for 2020, presumably, most of the cost pressures are still outsized, and you are projecting negative comps with sub-2% price. I'm just trying to connect the dots there when you compare to 2019, for example, where you had pretty significant deleverage with positive comps. So I was wondering, if you can maybe walk through some of the puts and takes that would give you confidence that at the end of 2020, a flat restaurant margin is reasonable. And then the second question was just a comment you made about EBITDA growth, up double digits. Just wondering what year might you think that's a reasonable expectation or – I know you mentioned certain line items you'd be able to lever. I'm just wondering, how you think about that double-digit growth, over what time frame? Thank you.

Hey, Jeff, it's Tara. Yeah, I mean, starting with the last one, as you know, we haven't issued updated – we haven't issued long-term guidance at this point. So that's really more commentary just around how bullish we continue to feel about our ability to grow top and bottom line and just a reflection of the extent to which we are in, as Randy mentioned, major builds and investment mode right now. So no specific time horizon on that one, although delivered double-digit adjusted EBITDA growth this year. And in terms of going into next year, yeah, I mean, there's a few moving parts in that Shack level profit line. As you know, within COGS in 2019, we had a couple of pretty major headwinds. The first being the cost profile of Chick'n Bites, which we call out regularly throughout the year, and was really a significant headwind in the first half, in particular, eased over the back half. So we're not only comping on that, but also haven't improved cost profile around that menu item just as we've continued to refine it. Also, as I mentioned in the prepared remarks, we are seeing beef beginning to level off, which is the biggest driver to that line. And so we're expecting to have some potential improvement and some potential leverage in the COGS line in 2020. Labor a bunch of puts and takes, we touched on those. So, one of the labor headwinds is obviously around new Shack openings. We've talked about that quite explicitly as time goes on, and it maybe a benefit as we do more of an infill strategy and less focus on new markets with that labor line and new Shacks leveling off a bit quicker than otherwise would. Benefit of the 53rd week, obviously, we touched on. And we also have inflation in that labor line, but just – we've had some serious double-digit inflation in certain markets around the country in the last year or a couple of years that – New York being no exception. So we're seeing some of that ease a bit, which helps, plus all the labor optimization initiatives that we've listed and have talked about at length. And then OpEx, again, we are – one of the benefits of our delivery partnership is a sustainable cost economic model, which will start to flow through that line as the year goes on and as we move to full exclusivity. So there's a lot going on that gives us confidence that we can start to stabilize that margin, which is great.

Our next question comes from the line of Chris O'Cull with Stifel. Please proceed with your question.

Thanks. Good afternoon, guys. My question relates to the comp guidance. I know you're expecting it to improve over the course of the year, but it sounds like conversions to the one delivery partner is going to remain a pretty heavy drag on the comps for a little while. And so maybe can you help us understand which particular initiatives you're most excited for in terms of either offsetting that drag or helping to improve the comp over the course of the year? And maybe, when you expect some of those things to start to roll out?

Yeah. Thanks, Chris. I think, first of all, the compares get easier as the year goes, right? We had our toughest – our strongest quarters in the first half of the year, and then that obviously got to the weakest quarter in the fourth. So, generally, that trend compares will get easier. They're tougher over this next couple of quarters. The stuff that we're most excited about, I would say, initially, will be, hopefully, some of the menu and, over time, adding new – our digital opportunities. Tara mentioned delivery as a service through our own channels. We're hoping for that towards the end of this year, and then all the initiatives really that I mentioned within the business that we hope we'll continue to turn things on. And they're the strategies that we've employed in years past and we believe are the core of the brand today. So those things are -- we're really excited about. So I think it will be higher pressure in the first half of the year, and we're hopeful that, that intends to ease throughout the end.

Our next question comes from the line of David Tarantino with Baird. Please proceed with your question.

Hi, good afternoon. A couple of questions on the comp trends you've seen over the last four quarters. It's been a pretty meaningful swing in the comp, I think, by 700-plus basis points from the start of the year to the end of the year. And I was wondering, one, you've called out delivery across the year as being one of the issues. I was wondering if you'd be willing to quantify how much impact you're seeing on that now versus maybe what you experienced in the beginning of the year we needed to have this issue. And then secondly, one of the things you haven't talked about is whether you're seeing any operational impact on the comps, whether it's through throughput or any other metrics you're looking at underneath the surface as to sort of gauge what's happening. So any perspective on all of that would be helpful. Thank you.

Well, we're just starting with the comps and the trends of the year and we're also going to look at it versus 2018 and how those compares set up. The other thing, I think, we're not going to break out the -- we're not going to quantify digital delivery of those percentages today. But what Tara said is the growth rate declined, right, of delivery where we had a couple of years of that continuing to grow at a pretty rapid rate, which obviously contributed, as we talked about, to the first half of 2019. As that growth rate declined and significant with our transition over to a single partner that we announced in August, that was a real part of it, and that is expected a part of what we're expecting for this year. In terms of the operational impact to comps, we're continuing to just improve the way that we operate. I'm not sure that comps really impacted, whether they're up or down generally. I'm not sure if there's a specific question you want me to think on. But as I think about that, we're -- I don't think comps are necessary. Obviously, we love busy restaurants. And when we're busy, that's a lot more fun. We got to staff up for when we miss, it impacts us. When we're overstaffed, we've got to react to making sure we run better restaurants. But just as a reminder, look, there's still just about half the Shacks in this company and the comp base. Another reminder, talked about this earlier in the year, 60% of all the restaurant that we, company, operate have opened in the last three years and nearly half of last two, and we're going to open another 25% new Shacks this year. So we're growing rapidly. There's a lot for us to shake out on that and continue to learn and do better. And that'll impact comps positively and negatively over time. We're building this for more than just the next few quarters.

Our next question comes from the line of Andrew Charles with Cowen. Please proceed with your question.

Hey, Randy, can you dive a little bit more to the behavior of stores that are exclusively running on Grub? Clearly, I'm getting at, are you seeing similar sales performance across markets once the Grubhub exclusivities turned on? And if not, can you provide some guardrails around what you are seeing in the early days here? Then my separate question is just you talked a little bit about -- touching this a little bit before, but just wanted to know if you spend on around, what do you just believe that would lead you to accelerate transition to Grubhub or conversely slow it down -- exploit on the transition? I know, I know you're not giving updates, but just things that you're thinking about as you go through it.

Yes. So Andrew, it's a really good question. I think it really is a -- as we've talked about during pilots for the last more than two years, the regional strength of various marketplaces is a powerful thing. It definitely is. And that's mostly what we're working with Grub on as we partner towards better marketing efforts and launching different markets as we have. Certain ones, it's a little bit easier to move people over. There's -- it's a little bit harder, and everything in between. So really, what we're talking about here is extending the amount of time so that we work together with our partner in figuring out what does that really look like? What are the best tactics in each market? And by the way, different tactics works differently in each market. So this is a hard part. I think you know this. You're studying this deeply. One of the other things happening in this industry, we know, is the massive changes in who's gaining and losing share throughout the delivery business and where there may or not be consolidation changes. And we all know that within this year, we're obviously going to see continued changes through the major strength of all those partners, all of which we have some relationship with, and we appreciate all those relationships. It's been a fun launch with Grub. We've done a lot of things right, and we've learned a lot. And there's a lot for us to go. So we're not giving out of time frame yet. It's going to be a market-by-market decision. And it's really still just so early in the process that we want to make sure we take our time. And we're cautious, and we understand the drivers between our guest behavior market-by-market.

Our next question comes from the line of Nick Setyan of Wedbush Securities. Please proceed with your question.

Just to follow up on the last question. Any chance you could update us on sort of which markets have been transitioned and which markets we're still kind of testing? And then just to confirm, we don't really have a set date in terms of when the transition may be complete.

Yes. So no set date. Generally, we've transitioned the DC area, the Boston area, the Chicago area, some of Texas and some smaller markets as we've gone. And then there's – when we open new Shacks, we're generally opening them with only Grub. So you may see a new shack in New Jersey, for instance, where New Jersey has not transitioned yet fully, but we have a lot of Shacks in New Jersey who are exclusive on Grub. So it's kind of a rolling process there. But those are the main kind of three or four big ones that have transitioned while the others are continuing to be multi-partner at this time. And ultimately, Nick, I think the big important thing is we're also still building our own channels here. I want to make sure that you got that. And our goal is to continue to build our own channels to strengthen our guest relationship with Shake Shack directly and continue to benefit from the strength of marketplaces, but also continuing over this coming years to build reasons to go the Shack channels. We'll be investing deeply in that in this coming year.

Our next question comes from the line of Jake Bartlett of SunTrust. Please proceed with your question.

Jake, are you there?

Can you hear me?

Yes. Okay.

Good, good. So this is maybe a little bit redundant, but I think I'm hoping for still a little more clarification. But it would seem to me that as you've gone from, say, 25% integrated to Grub to now 50% a month or two later, the -- probably the impact is getting worse. And so I'm just – I'm wondering whether it gets worse before it gets better. And just my thought was that as other partners pull away from the system, that's going to be kind of the lowest point as – during the transition. Is that the right way to think about it? Or am I missing kind of maybe any offsets?

Well, I don't think you're missing it. I think the reality is we're not quite 50%, and I don't think we'd use the words it's getting worse. I think we've said since the beginning of this, there will be significant impacts. So the more that we do, the impact can grow. So – and it also is going to depend on the market, right? As we said in the previous answers here, the markets certainly it will be easier than others where there's relative strength depending on the partner. So we're going to keep watching very slowly, Jake, and take our time. And there's – obviously, as we're taking off certain marketplaces in certain markets completely, that has impact. So that contributes to a more challenging environment. That's all built into the guidance that we have for this year. It's part of why we're being conservative about the guidance that we've given today.

Our next question comes from the line of John Ivankoe with JPMorgan. Please proceed with your question.

Hi, thank you. You called out, I guess, warm and favorable weather in the fourth quarter of 2018 as a part of your difficult comparison. I mean, are we seeing a similar benefit in the first quarter of 2020 in various markets just because you did call out that 2018 comparison? And I have a separate question as well.

Sure. John, just on that, we're not going to give mid-quarter guidance, as you know. We never do that. But it is built into our total guidance for the year, the expectations there. It's been up and down, obviously, in various regions in the first quarter. So that we're not going to comment further on that, but go ahead with your second question.

Okay. Understood. The decline in average unit volumes across the entire system, I think it was $4.4 million in fiscal 2018, and it's currently guided to a range of $3.7 million to $3.8 million in fiscal 2020. And obviously, I understand the new units and new units, which were guided to be lower than average unit volumes. But I was hoping just to get a little bit of help in terms of, like, where you see the fiscal 2019 class year as a class year to call it in those terms settling in average unit volumes? Where you think 2020 will settle in? Just looking optically from the outside of the company, maybe if I didn't know the company was named Shake Shack, I would say, this company might kind of, I guess, benefit from opening fewer and better units given that average unit volume decline, which, on a 24-month basis, is actually fairly steep on a relative basis. So firstly, if we can talk about the 2019 and 2020 store classes where you think they're going to settle? And then secondly, and I think the more important question for me, I mean, are we at the point where the number of company-operated Shake Shacks in the United States should begin to stabilize in absolute terms in 2021? And would you even consider a potentially lower number kind of looking at 2020 as a relative near-term peak in terms of the number of units that you're opening?

So yeah, John, look, I think the AUV decline is consistent with how we've guided since the beginning of time here, right? We know we've outperformed for many years. And -- but the AUV guide is consistent with how we think about generally the average of classes being around that $3 million AUV over the long-term. Obviously, we've outperformed that. Obviously, we've outperformed that on average in 2018, 2019, and we expect to be right around there for 2020, which leads you to where it is. I don't think I would at all look at this and say, well, maybe we should slow down and just do some of the bigger ones. I mean, look at the opportunity we have, adding nearly $130 million in sales last year. Look at what we're expecting to add this year, another well over, not 100 -- roughly $120 million in total revenue again this year. Just because it's lower than it has been, it doesn't mean it's not a great investment. It doesn't mean it's not a great return on capital. And we're going to continue to deploy capital where we think we can grow restaurants. We only have 167 restaurants that we own in this country. There's less than 200 total in this country. We have a massive opportunity here, abroad, and we're going to continue to grow restaurants. Hard to say when that levels off. Of course, there's going to be a year where the number, whether it's 40 to 42 this year. As we look to the future, what the right number per year will be, and we'll keep you posted on that. But we don't expect that to decline anytime soon. We've got a huge opportunity, great real estate opportunities continue to be there for us, and they're going to be in varied shapes and sizes. Listen to my comments from earlier. We've done a few more food courts last year. We'll do some more this year. Those can sometimes be lower volume and sometimes be higher profitability depending on the restaurants. As we open up more formats, we're going to see a varied range of volumes across the Shacks across the country. And it's something; we're going to keep building. We are geared towards growth. We think we haven't even really scratched the surface of this company's opportunity in this country and globally, and we're certainly going to keep going, and we're not going to let a metric of a declining AUV be something to stop us when those AUVs continue to be really impressive.

Our final question comes from the line of Brett Levy of MKM Partners. Please proceed with your question.

Great. Thank you. If you could share a little bit more on how you're thinking about G&A, not just this year, but also in the years out. You talked about the headquarters, ongoing investments in ops, the tech moves. How should we think about it from a pipeline? And when you think either modest or meaningful leverage does become possible and without, obviously, given the keys of the castle, can you talk about some of the potential ideas that we could see in late 2020 into 2021 beyond? Thank you.

Hey, Brett. Yeah. I mean, we've talked pretty consistently about G&A for a while now, and I'm not sure that, I'm a bank give you any new news on this one, which is the way we think about G&A right now with where we are at our stage of growth, because we think about G&A is a very focused important investment line for us right now. There are a whole host of areas that we're focused on, whether it be from people to op, to technology, to marketing, to data and insights, to development and training and hiring and all these really, really important parts of the company that are fundamental to our success to-date and our continued growth. So, we're bullish on our opportunity to continue to invest with compelling returns. We're investing ahead of sales in many cases. And I think we'll do our best to continue to try and explain those to you and highlight those, too. I mean, pricing is a perfect example. We're investing right now in a pricing study, pretty extensive pricing study across the country, right? That's an investment that isn't tied to revenue today. We may choose to use it to inform our growth strategy and our pricing strategy in the future. So I think you'll continue to see us make decisions like that whilst committing to delivering leverage in that line over the long-term. But again, 167 Shacks that could be a way off, and I think we feel really good about that. We feel – we're excited about the multiple opportunities that we have to continue to invest and would far rather be in that position than struggling to try and figure out where to put our money. That is not our challenge right now. So – but absolutely, over the long term, that line item will leverage as the business becomes more mature, but that's just not a today or a short-term thing.

We have reached the end of the question-and-answer session. I will now turn the call back over to management for any closing remarks.

I just want to thank everybody for being on the call today. I appreciate the time, and we'll keep you posted as we head into another year of exciting growth for Shake Shack. Thanks so much.

This concludes today's conference. You may disconnect your lines at this time. Thanks for your participation.