Earnings Call: Q1 2018

May 3, 2018

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Shake Shack First Quarter 2018 Earnings Call. At this time, all participants have been placed in a listen only mode and the lines will be open for your questions following the presentation. Please note that this conference is being recorded today, May 3, 2018. On the call today, from Shake Shack, we have Randy Groody, Chief Executive Officer Tara Kamunt, Chief Financial Officer and Josh Oman, Vice President of Finance and Investor Relations. And now I'd like to turn the call over to Mr. Josh Oman. Thank you, operator, and good evening to everyone. By now, you should all have access to our Q1 2018 earnings release, which can be found at investor. Shakeshack.com in the Financial Info section. Additionally, we have posted supplemental Q1 2018 earnings materials, which can be found in the Events and Presentations section on our site or as an exhibit to our 8 ks for the quarter. Before we begin our formal remarks, I need to remind everyone that our discussions today will include forward looking statements, which are not guarantees of future performance, and therefore, you should not place undue reliance on them. Actual results may differ materially from those indicated by these forward looking statements due to a number of risks and uncertainties, including those discussed in the Risk Factors section of our Annual Report on Form 10 ks filed on February 26, 2018. Additionally, any forward looking statements represent our views only as of today, and we assume no obligation to update any forward looking statements if our views change. 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 in the appendix of the aforementioned supplemental materials. Now I'd like to turn the call over to our CEO, Randy Geruti. Thanks, Josh, and good evening to everyone on the call today. I'm pleased to report that 2018 is off to a strong start as we build upon our Q4 momentum, delivering solid top and bottom line growth. During the Q1, we opened 5 domestic company operated Shacks and 4 international licensed Shacks. We delivered year over year revenue growth of 29%, including a 1.7% increase in same Shack sales and grew adjusted EBITDA by nearly 33%. These results were supported by continued evolution of our digital initiatives and the strength of both new and existing Shacks as we execute on our strategic growth plans. Shake Shack is a growing, loyal, connected community relentlessly focused on excellence, experience and hospitality. To deliver on these guiding principles, we are committed to continuously elevating our performance and accountability, deeply understanding our guests, executing the basics with brilliance, building our business infrastructure and driving smart and profitable growth. We believe we've built a solid foundation upon which we'll continue to expand and grow, leveraging the strength of the Shake Shack brand globally to capture the significant opportunity ahead. Today, I want to provide an update on some of the key strategies we're focused on to achieve our growth plans. First, our development pipeline, which remains healthy both domestically and across our international license regions globally. We're also investing in continued digital innovation across our business to better connect with our guests and to make it easier than ever for them to experience Shake Shack whenever and wherever they wish. We're also constantly innovating our menu, focused on executing the core better than ever, while considering and testing expansions of our existing menu as well as into new categories. And we're working to ensure our foundational infrastructure, both our people and our systems, to support the significant growth that lies ahead. We're as excited as we've ever been about this year's class of Shacks. Towards the end of the Q1, we opened 5 domestic company operated Shacks and continue to expect between 32 35 new domestic company operated Shacks in 2018. As a reminder, our opening schedule is heavily back end weighted with roughly 70% of our planned openings scheduled for the second half of the year with a significant portion of those in the Q4. Consistent with our strategy, approximately 20%, 25% of our 2018 Shacks will be in new markets and the remainder across our existing markets. During this Q1, we further expanded our existing markets in Houston's Rice Village, Downtown Los Angeles, adding our 8th Total Shack to Southern California. Also opened in South Florida with a new smaller format style Shack inside the Aventura Mall, as well as Southern New Jersey. We're also thrilled to have launched in the important new market of Denver, Colorado with a Shack in the Rhino District just north of Downtown Denver. This group of Shacks from the Q1 is a great example of our multi format strategy with a mixture of urban, freestanding and premier shopping destination Shacks. Since the quarter end, we've also opened our 1st Shack in Charlotte, North Carolina. The community at our core and continuing to execute on ideas that other companies are simply unwilling or unable to do, we continue to host dynamic pop up events with local partners, breweries and chefs throughout the new markets we enter. It's just yet another way we build excitement for our loyal guests and build legions of fans around the globe. We have more exciting growth planned this year, entering the new markets of Seattle, San Francisco, Cleveland, Nashville and more, while expanding our footprint in California, New York, Florida, Texas and deeper into our current markets. Our domestic pipeline is strong as we execute toward our goal of 200 domestic company operated Shacks by 2020 and our long term target of 450. Internationally, during the Q1, we opened 4 licensed Shacks and continue to expect to open between 16 18 new international licensed Shacks in 2018. We furthered our growth in the Middle East and continued our expansion in Asia with additional Shacks opened in both South Korea and Japan. In fact, just last night, I returned from the opening of our first Shack in Hong Kong at the IFC Mall, a premier location in Hong Kong. I'm so proud of our international team and our licensed partner Maxine's. This was an incredible moment for our company. 100 of fans lined up prior to the opening and a tremendous amount of media captured the excitement and spread the word of Shake Shack throughout Asia. The energy that we opened with earlier this week continues to demonstrate the power of our brand across the great cities in the world. Over the next 3 years, you're going to see a meaningful part of our international development focused in Asia, with planned growth in Japan, South Korea, Hong Kong and Shanghai next year. We are confident there's significant white space in these regions as well as new markets internationally. Now let's move on to the continued evolution and innovation of the Shake Shack digital experience. In today's rapidly shifting consumer environment, we're focusing and investing in strategies to make the Shack experience more convenient and personal than ever. Over the past year, we've grown our digital fan base, increasing our ability to engage with and better understand our current guests, while expanding our opportunity to acquire new fans, all so that we can continue to deliver on and further enhance the Shack experience. Our mobile app has become a key channel for our loyal guests, and we continue to test and learn how best to connect with and reward these guests, whether through visit based offers like the recent Shake It campaign or launch of the Veggie Shack, which started exclusively on the app a couple of weeks ago. We're looking at the entire ecosystem within which our guests can experience Shake Shack. And on that basis, continue to expand our digital ordering capabilities with planned browser based ordering for mobile and desktop later this year. This will further expand our availability to guests who may prefer not to download the app. We're also testing self order kiosks and plan to retrofit a number of Shacks throughout this quarter, which will be a combination of both kiosks and cashiers. We'll continue to gather learnings around kiosk based ordering with the goals of enhancing our guest experience, improving speed of service and providing an opportunity to offset some degree of the increasing labor costs we have. In additional ways in which our guests can order and engage, we continue to test and learn through integrated pilots with key delivery service partners. Throughout the 1st 4 months of 2018, we conducted integrated tests with Postmates, DoorDash, Caviar and Grubhub. We're seeing continued demand from our guests for Shake Shack to be delivered, gaining valuable feedback across multiple areas, including the new packaging we've been testing. We're encouraged by the results and we do believe we saw a positive uplift in sales during the Q1. For now, our strategy as it relates to delivery remains unchanged. We will continue to thoughtfully test and learn and if or when the time comes for us to enter into a formal partnership, we'll do so on the basis that it will deliver a strong and economically healthy business for us for the long term. By this time of night, we're all getting a little hungry, so I want to move on to innovation across our menu. We've got a lot happening right now. We're testing and learning which LTOs drive the most excitement and which new categories are worth exploring. So during Q1, we created Griddle Chicken Club as an LTO, giving our guests a different type of chicken option to our Crispy Chicken Shack, which has been a staple on our core menu since 20 16. Also based on years of feedback from our guests, we've just begun testing our first ever Veggie Shack in various locations in New York, California and Texas. Our own innovation made from brown rice, black beans and beets, which can also be served vegan. We're excited for this initial limited test and to learn from the feedback that will come in from our guests. Just this week, we also introduced a new LTO, a barbecue lineup featuring a new Smokey Cheddar Cheese on both our barbecue cheddar and bacon cheeseburger and the barbecue cheddar and bacon griddle chicken. We also did some more fun chef collaborations during the quarter and even ran a pop up at Coachella, serving thousands of music and burger fans out in the desert with a streamlined test of our new kiosks. We're going to continue to test and innovate test new and innovative offerings that drive excitement, frequency and overall guest satisfaction, all while staying true to our core and operationally effective in the Shacks. With our first dedicated test kitchen opening this summer at our new home office, we're really excited about the creations we'll be cooking up for our menu for years to come. Lastly, we are committed to strengthening our systems and teams this year. As we've shared previously, we're making key investments in our core financial and operational systems through Project Concrete. Tara will give you a brief update on that a little bit later. Furthermore, to support our plans, we're going to continue to invest in our people who are and always will be our most important asset. Our success today and going forward is a result of our guiding principle that we are leaders training future leaders, the amazing team members who are the driving force behind our operations. In less than 2 weeks, we're excited to bring nearly 700 of our Shack leaders together to celebrate their hard work at our upcoming biannual leadership retreat. It's such an important event and one that everyone looks forward to as it's a time for us to celebrate, build and build on the strength and power of the very special Shake Shack culture. Finally, I'm happy to report that we've officially moved into our new home office on Barrack Street in New York City. We're so excited about this new era for our team and we're looking forward to the enhanced opportunities our new space will provide, including our dedicated center to focus on menu innovation, kitchen design and leadership development. Overall, 2018 is off to a solid start. We're laser focused on continuing to execute our key strategic initiatives that will continue to drive this great company forward. With that, I'll turn it over to Tara, who will take you through the numbers. Thanks, Randy. Total revenue for the Q1 2018, which includes sales from both company operated Shacks as well as licensing revenue, increased 29.1 percent to $99,100,000 Sales from our company operated Shacks increased 29.6 percent to $96,100,000 primarily due to the addition of 24 new domestic company operated Shacks since the Q1 of 2017. Licensing revenue increased 16.7 percent to €3,000,000 dollars driven by a net increase of 17 Shacks since the same quarter last year. Within our license business, we remain thrilled with the ongoing strong performance of some of our newer Shacks in South Korea and Japan, balanced by the continued pressure on some of our Middle East operations. You may remember that the implementation of the new revenue accounting standard has an impact on the timing of recognition of revenue in some of our licensing agreements. We'll include a comparison in our 10 Q footnote to show our revenue as reported under each of the new and old methodology, the impact of which was a reduction of approximately $120,000 in revenue for the Q1. We expect the impact over the full year be approximately $500,000 less revenue recognized, which is incorporated into our 2018 guidance. Same Shack sales increased 1.7% during the Q1. This increase consisted of a 5.9% increase in price and mix, including the 1.5% to 2% price that we took in December, partially offset by a 4.2% decrease in traffic. As a reminder, we lapped the free burger promotion we ran in the Q1 last year in connection with the launch of our mobile app. Excluding all transactions associated with the free burger promotion, our same Shack sales would have been positive 2.1% in the 1st quarter, with traffic declining 2.2%. While we're pleased to report another sequential quarter of positive same Shack sales, it's important to continue to highlight that our comparable Shack base in the Q1 included only 44 Shacks, less than half the total number of company operated Shacks in the system. In addition, and as we've shared again in our supplemental materials, the majority of our comp based Shacks are in the Northeast of the country, and therefore, this relatively small and geographically concentrated base can be swayed by micro or regional trends both positively and negatively. In the Q1, our comp base was impacted by multiple winter storms in the North Sea, balanced by the strength of our delivery pilots as well as an uplift in the last few days of the quarter from the Easter holiday shift. Average weekly sales for domestic company operated Shacks were $81,000 for the Q1 of 2018, a decrease of 6% compared to the prior year. This decline was due to the addition of newer Shacks at lower volumes to the system. As for average unit volumes across the system, trailing 12 month AUV at the end of the Q1 2018 for company operated Shacks was $4,500,000 This represents a decrease of $100,000 compared to the prior quarter and is on pace for our full year AUV guidance of $4,100,000 to 4 point $2,000,000 as we continue to add a broader range of AUV Shacks to the system throughout the remainder of the year. Shack level operating profit, a non GAAP measure, grew 28.5% in the Q1 to $24,000,000 As expected, Shack level operating margins declined slightly year on year with the expansion of our Shack base, remaining healthy at 25% and in line with our full year guidance of between 24.5% 25.5%. Food and paper costs as a percentage of Shack sales decreased 50 basis points from the prior year quarter to 28.1%. This improvement was primarily driven by menu price increases I mentioned earlier as well as approximately 20 basis points of cost in the prior year quarter associated with last year's free burger promotion. We did experience higher beef costs during the Q1. These were offset by favorability in a number of our other ingredients. Labor and related expenses as a percentage of Shack sales increased 20 basis points to 27.8 percent driven by ongoing increases in minimum wages and increasing regulatory environment and the introduction of lower volume Shacks to the system, offset by the strength of our top line performance in the Q1 and the impact of timing and total number of openings of new Shacks in the Q1 versus last year. Other operating expenses as a percentage of Shack sales increased 90 basis points to 11.2%, driven mainly by certain fixed expenses as we add lower volume Shacks, increasing facility costs as our Shacks mature and delivery commissions paid as part of the integrated pilots that we ran during the quarter. Occupancy and related expenses as a percentage of Shack sales decreased 30 basis points to 8% due to an increase in the number of leases that fall under build to suit attempting. G and A increased by $3,300,000 during the Q1 compared to the prior year quarter, primarily due to the addition of headcount to support our ongoing growth, technology development costs related to our digital product agenda and non cash deferred rent for our new office. Although we didn't have material spend in the Q1, we did also make significant progress in relation to Project Concrete, our financial and operational systems upgrade and we are now in the final stages of making our vendor selection. Costs related to this project will ramp up throughout the remainder of the year as we move through design and implementation phases, and we do expect that the majority of these costs will be deemed operating expenses in light of our intended selection of a client based platform. Adjusted EBITDA in the first quarter grew 32.8% from the same quarter in the prior year to $16,200,000 and adjusted EBITDA margin as a percentage of total revenue was 16.3%. In the Q1, on an adjusted pro form a basis, we earned $5,700,000 or $0.15 per fully exchanged and diluted share compared to $3,700,000 or $0.10 in the same quarter last year. Stock based compensation had a minimum impact on the current quarter, while there was a $0.01 benefit in the prior year. Included within these results is a $0.02 benefit from the lower corporate tax rate effective in 2018 under the Tax Cuts and Jobs Act. Moving on to full year expectations. We're revising our guidance for the full fiscal year 2018 as follows: raising our previous total revenue guidance by $2,000,000 to between $446,000,000 $415,000,000 an increase of approximately 24% to 25% over 2017. Within this total revenue, we continue to expect $12,000,000 to $13,000,000 of licensing revenue, including the impact of the new revenue standard mentioned earlier. We continue to expect to open between 32 35 new domestic company operated Shacks, representing a unit growth rate of between 36% 39%. I want to reiterate that our 2018 development schedule is heavily weighted with approximately 70% of our planned openings in the second half of the year and the majority of those in the Q4. 16 to 18 net new licensed Shacks with our international growth focused on Japan, South Korea and our recent launch in Hong Kong. We continue to expect the average unit volume for all company operated Shacks for the full fiscal year to be between $4,100,000 $4,200,000 Taking into account our Q1 results, we're increasing our same Shack sales guidance to between 0% and 1% for 2018 from approximately flat previously. We're reiterating Shack level operating profit margin for the full year to between 24.5% 25.5%, impacted by the same three major factors I mentioned on our last call, namely flat COGS expectations with slight deleveraging possible depending on beef market volatility deleverage on the labor line driven by the introduction of lower volume Shacks to the system increased starting hourly wages and continued investment in our teams. Strong sales in the first quarter had a positive impact on the labor line and we did not experience significant deleverage. However, given the opening of 32 to 35 new Shacks this year, which will carry a broader range of sales volumes, our expectation remains that the labor line will be significantly pressured on a full year basis. We experienced 120 basis points deleverage on the labor line in 2017, and we expect 2018 full year deleverage to be at a similar level. Other operating expenses deleverage on a year on year basis due to certain expenses on a broader range of sales volumes, increasing facility costs as our Shacks mature and potential delivery commissions. Moving on to G and A. We continue to expect our core G and A expense to be between $49,000,000 $51,000,000 exclusive of project concrete costs. Spend will increase during the year in line with our growth and investment plans. As I mentioned earlier, we've made good progress on Project Concrete and we're close to making a final platform selection. At this point, we continue to estimate an investment of $4,000,000 to $6,000,000 for this project depending on the ultimate scope of systems capabilities selected and the level of required configuration and implementation work. As noted earlier, we expect these costs to be mostly operating in nature and in addition the majority to be one time. We'll identify spend as the project progresses, a portion of which may fall into 2019. We continue to expect preopening costs of between $12,000,000 $13,000,000 and we continue to expect depreciation of approximately 30 $2,000,000 and interest expense of between $2,000,000 $2,200,000 and an adjusted pro form a effective tax rate for 2018 to be between 26% 27%, which excludes any potential tax effects related to the accounting treatment for stock based compensation. Before we finish, I want to provide some initial comments on the impact of the new lease accounting standard that will take effect from January 2019. We have a significant number of real estate leases and under the new standard the full obligation of these leases will likely our real estate leases are considered operating leases for accounting purposes. Assuming that they continue to be classified as such, our general understanding at this time is that in terms of P and L impact, we will incur operating lease payments over the term of the lease recorded within our occupancy cost line. We are, however, still evaluating the full impact of the standard, including the treatment of both existing and future build to suit leases, and we'll share more specific impacts as we have them. So with that, I'll pass you back to Randy for closing remarks. Thanks, Dora. I do want to close today sharing just some of the incredible atmosphere I experienced at our Hong Kong opening this week. Our international and domestic teams worked for nearly 4 years on this launch and their hard work was executed beautifully. As I spoke with our partners and team members just before we opened the doors, I reminded them the message I share at nearly every opening. On this day, we may or may not see a line of people greet us at the door. And regardless, we don't deserve that line. Every day, we must earn it, one guest at a time in every Shack around the world. Now luckily, yet again, on that opening day in Hong Kong, 100 strong lined up for the 12 hours we remained open without a moment of letting up. And on that day and every day forward, I remind our team we're going to work hard to earn it. Beyond these gratifying results, what remains our greatest point of pride is that the hospitality culture of our team is stronger than ever. That is what will always guide and drive our continuing growth. This is a special company with a special opportunity ahead and we're thankful you're on the ride with us. With that, I want to thank you for joining today's call. And operator, you may go ahead and open the line for questions. Thank And we'll take our first question from Nicole Miller from Piper Jaffray. Thank you so much and congratulations on another great quarter. I had two questions this afternoon, please. First, how are your guest satisfaction scores looking? And do you get any different kind of feedback from a CS or a delivery user, albeit early on? So I'll take a little bit. We haven't really had anything in particular in guest satisfaction that we have shared. Nicole, we do a lot of different surveying both internally, a little bit externally and obviously through social channels that we follow. I would say without any particular data based backup on this, we're pretty happy about it. I think it's similar to how it's always been. It ranges. We always have different openings and there's excitement and then there's mistakes that we make and we hear about those. And I guess the best way to just say it is that we continue to listen and learn quite a bit. As it pertains to the kiosks, it's too early to keep sharing just yet. It's really a young project for us. I stood there myself often. We talk to our operators all the time about it. We think people really like it. But what we have learned and why we're doing the next rollout, we'll probably do about 4 or 5 Shacks in this next coming quarter. What we want to do now is some of the things we've clearly seen is that our guests do often want to pay with cash. In the 1st rollout at Aster Place, we did not accept cash at all. And there are people who have told us very clearly, we want to pay with cash. So in this next phase, we're going to go ahead and have cashiers as well as kiosks. And there's going to be a lot of learning for us too there. It will be interesting when you're not forced to use a kiosk like Yard Aster, how that works. So we'll keep Aster as it is. We'll have a number of Shacks testing otherwise. We'll keep listening and learning. But I think the whole point of the digital evolution of the company is that we want to put the power in your hands. If you want to be a person who orders on the app, we got you. If you want to have it delivered, we got you. If you want to talk to a human being, we can't wait to greet you with a smile. But it's your call and we want to make sure that we're doing that in so many different ways. So that is the best way I can answer it without any particular data backup. And just, that's understanding the guests, which is helpful. So thank you. I want to understand the employee satisfaction. So growing 40% or nearly 40% unit growth is a big task. And you could talk about real estate barriers, but the real hurdle is the people. So in this kind of labor market, what kind of things are you doing to be uniquely positioned for hiring, training or retention? Yes. I think, it's so important. You know us very well and our culture precedes everything. As I said in multiple times in my remarks, we got a few things. Starting with our leaders, that's part of why we're doing our retreat this month. It's one of the best ways we all come together. We reinvigorate our team. We constantly look at our pay and our turnover versus the industry. We're real proud of where we sit in that. This year, we even added some enhanced benefits to our program to make sure that we're offering the best package we can. All of that said, this is a tough industry and it will always have high turnover. And we think we're pretty good at it. But my sense is 10 years from now when you ask me that question, I'll have the same answer. It's the toughest thing we'll ever have to deal with, especially during such big growth. But it's also our sweet spot as Shake Shack's culture and it's the thing that we focus on the most. We've got incredible training teams led by Peggy Rubenzer and her team. I was just in Hong Kong with about a dozen of our U. S. Trainers who move over there for a month and instill the culture of Shake Shack in Hong Kong culture. It's an amazing thing to watch and I'm so proud of how our team does it. But it will always be a battle. It will always be a challenge, no matter what. Thank you. And we'll take our next question from Sharon Zackfia from William Blair. Hi, good afternoon. A question on delivery and then a clarification on Project Concrete. On delivery, could you talk about the benefits or advantages of potentially doing kind of a single provider versus doing kind of a multi pronged approach, which is what you're testing right now? And then secondarily, on Project Concrete, I'm a little confused. Are there going to be ongoing operating costs that are excluded from adjusted EPS this year? Or are you going to exclude the one time elements and Do you want to take Project Concrete first? Sure. Hey, I'll take Project Concrete first. So yes, to the extent that we incur costs this year and they're one time, then we will adjust for them in our adjusted EBITDA numbers and therefore in our EPS numbers. And we'll obviously identify those as we report. Sharon, just moving on, on the delivery thing, we can jump back if you have questions on that. On delivery, we're this is why we're testing. We've done tests for the last really 6 months, some being exclusive, some being non exclusive, and we're in those conversations now. We're learning the regional differences between partners, their willingness to make this a good long term relationship. And everybody I think what everybody has shown is that there's great demand out there. But that's still wide open for debate whether we would go exclusive or non exclusive. So from delivery standpoint, we're going to keep testing, learning and keep going there based on what we learn. I mean, Randy, how wide are the economics that are offered to you depending on the provider? Well, I think that's a competitive thing that we wouldn't share. I think Shake Shack has a great brand calling and has an opportunity to build this the right way for the long term. And every company has got their metrics that make it work. Ultimately, it needs to work for everyone. Like any relationship, it's got to be a good cost for the couriers, for the company, and for our team. So we'll land on that once we choose. But, again, we're in no rush to do so. Okay. Thank you. Thanks. And we'll take our next question from Jake Bartlett from SunTrust. I had a question about the comps and kind of suffering through 4 nor'easters this March and recognizing that the 1 nor'easter last March drove comps up negative 8% in that month. How did weather impact you? I would have thought it would be a pretty large impact, but if you can help quantify that. And then at the same time, if you can talk about how much the Easter shift impacted you in the Q1? And I guess so we can kind of anticipate the negative effect in the Q2. And then then as well on this comp question, if there's any way to quantify what kind of lift you're getting from these delivery pilots, that would be helpful. Yes. Jake, all good questions. Without breaking out each piece, which I don't think we're going to do, I could say, if you look at the supplemental materials we gave on Page 5, the continued story of our comp base, which we will say whether it's up, down, sideways or anything, don't get me wrong, we're happy when it's positive as it was this quarter, But more than 70% of our comp base is on the Amtrak corridor from Boston to D. C. With a huge portion of that in New York City. So yes, when we have 4 New O'Reasters, we're certainly impacted by that. But look, those things balance out over time. I think as we've said, delivery was actually was of course a positive. We're excited about that. We had some of the strength of some of the new Shacks was good. And just continued regional performance balances these things out, which we're hopeful over time as this comp base gets less than 70% over there, that that will balance out more. In terms of the Easter question, it's really just a few days. It's a little bit hard to quantify because what Easter means really depends on school schedules for us, right? And particularly in New York and the Northeast, those things shift sometimes related to Easter, sometimes not. So we're not really sure. We do believe that last few days of the period saw some positive uptick because of that shift, because of some schools out and some travel, which we usually benefit from, but it's hard to say. And then you had the corresponding shifts happening in April. So lots to watch there as we come into the Q2, but we're not going to get into guidance on the Q2 right now. Got it. Got it. And then for the just a composition of the comp, the check growth and the negative traffic, what was driving the check growth? And I guess even kind of backing out the impact of the free burger giveaway last year, it looks like about a 4% check with 1.5% to 2% of price. Yes. You have a few things going there. Yes, as you talked about last year, but you have price, because you've got about a 0.5% to 2%. Then you've got all the digital initiatives. We've been clear, Jake, and this is an important thing to note. On all our digital channels, we have generally seen a higher average check. So that contributes through the app, through delivery channels. We're still working on what the kiosk will mean long term there when we look at more tests. So all those things continue to drive it as well as some good menu innovation. We always try to engineer our menu to innovation to be accretive and we've seen a good increase in the price and mix because of that. Got it. So it wasn't an LTO that wasn't the griddled chicken or something like that that might Mostly the digital. It is mostly the digital. But again, all those factors play into it. Okay. Thank you very much. And we'll take our next question from John Ivankoe from JPMorgan. Hi. Thank you. Actually just a follow-up on that and then a separate question. If digital is already driving check, did you say what percentage of your orders or your total sales currently is digital? I apologize if I missed that. We have not, John. We're not breaking that out just yet. Again, we continue to be encouraged by it, but not a number we're ready to break out just yet. Obviously, growing as we add delivery to that category that we didn't really have last year outside of delivery services coming in that weren't integrated. So with a combo of app and delivery, kiosk, that's an opportunity that we think has a lot of chance to grow over the future and we're heavily investing in that. But can you at least say how much higher the digital check is than, guess, a walk in check or walk in ticket? Is that Yes. It's been about 15%. That we've talked about, sometimes more, but roughly 15 plus depending on the channel. All right. That's helpful. And then from a modeling perspective, but I think it's actually a more important question than just plugging a number in. You kind of talked about 20% to 25% of your new units are in new markets, but the rest are in fill in. So you're now having some experience in terms of that average unit volume between new and fill in. And I was just hoping as you think about 2018 as opposed to just giving us kind of a total average unit volume number and some implicit comp guidance and allow us to kind of solve for new unit volume. If there's any kind of guardrails, if you will, that you can put around your expectations for average unit volumes in a new market versus average unit volumes for a fill in market as we look at our fiscal 2018 and going forward? John, I think the reality is it's really hard to do that. I'll give you an example why. A new market doesn't always necessarily mean a high volume restaurant and a fill in doesn't always necessarily mean a lower volume restaurant. Restaurant. A couple of examples, we continue to grow, as I said, our 8th restaurant in Southern California. That, as we've shown in the past, is a high AUV region for Shake Shack, but that would be considered a fill in, right? And then we might add something in a smaller town. This year we're going to go to Nashville, we're going to go to Birmingham. I don't know what those will be, but I don't think they're going to equal when we go to San Francisco, right, probably. Denver, interesting question. So it's just so hard to do that. As we've said, we think that low $3,000,000 average will be our average as we go. And at the end of this year, we expect that full AUV to be just over $4,000,000 which we're really excited about and proud of. But again, really balanced all through the spectrum. We generally have these kind of big starts. We've had that in a number of places, which we're encouraged by both in Q4 and the early openings in Q1, but we expect those to balance out. But we're Q1, but we expect those to balance out. But with so many openings towards the end of this year, hopefully, we continue to show strong openings there too. So I know it's hard to give you that for your model, but again, those low $3,000,000 over the long term is probably the right bet. Okay. Understood. And I'm sure your natural unit, I mean, that sounds like a market that would be perfect for you guys. So certainly, we look forward to seeing that. And then finally, are you guys beginning to think about kind of longer term G and A leverage? I mean, I know you know and we've talked about this that your G and A is very high as a percentage of revenue and there's a lot of reasons for that. But I mean, again, you guys have been nice enough to kind of lay out some 2020 objectives. When does that begin to leverage? And how much maybe on average per year in basis points of an opportunity do you think G and A can be as a contributor to your overall margins? Hey, John. Yes, I mean, as you know, we haven't given that level of forward looking guidance as it relates to G and A. And we're not about to join the call today. But I would say that, of course, we're looking at G and A guidance. And of course, we expect G and A guidance for the long term. And I think that that's very much top of mind as you see us invest in the shorter term. So I think while we're in such an early stage of our growth journey, the right thing for us to do right now is to be focused on continuing to get to that 3 year and then longer term target with strong returns on cash, healthy operating margins and investing across the business to make sure we've got a strong foundation to execute against those plans. Longer term, sure, within that further down that growth journey, we would expect to be delivering some G and A leverage. Project Concrete is a really good example. Project Concrete will help us will enable growth and will also enable cost leverage both over the long term. So I would say it's very much top of mind, but it goes with short term investment. And so you'll see us continue to spend where we believe it makes sense. And in fact, as we quantify returns, as we continue to test and experiment with our digital agenda and various personalized marketing initiatives, for example, you might see us spend more where we're really happy with the returns. And again, it will do one of 2 things. It will drive long term sustainable growth or long term G and A leverage. And I guess I apologize for pushing such a big issue on the call. But I mean, do you think 2019 can show leverage versus 2018? Or do you just want us to continue to assume that you're going to remain a high investment company based on what you think is a very long term kind of tailed opportunity? You said it. I think we expect it's hard to say, John, what 2019 looks like today. We've got to get through Project Concrete. As Tara said, some of that may end up hitting 'nineteen as well. We've just moved into our new office and our test kitchen. Those are new costs for us. But I think we sit around and we say, are we spending enough? And we know we have a high G and A, but I believe if you're in this for the long term and you're looking at what we've given guidance on last quarter of doubling our sales, more than doubling our units in 3 year time, I believe our shareholders want us to spend that money. We're doing it prudently, we're doing it responsibly, and we're investing in the people and the things that we need to get there for the long term. So this is a great company. If you just take a look at how we've performed in 3 years since our IPO, we're really proud of the work of the team. And that's what we want to do for the next 3 years and that cost some money to do so. Absolutely. Thank you so much. And we'll take our next question from John Glass from Morgan Stanley. Hey, thanks very much. I wanted to come back to the average unit volume question and make sure I understand the numbers you're talking about. For the year, you're saying $4,100,000 I think to $4,200,000 I heard a $4,500,000 number as well. But if you take your average weekly sales this quarter, you're already at $4,200,000 So what was the $4,500,000 relative to those numbers that if I heard that correctly? So John, we're trying to give you more of a kind of rolling 12 months update to try and give you better visibility as we go as we move towards that long term target $3,000,000 ish. So I think I don't know if it was the first time we gave the number, but certainly the first time in my Shack time that we gave the number, we gave 4.7 system wide trailing 12 months AUV for Q3 in that first set of supplemental materials. Our trailing 12 months are our full fiscal at the end of 'seventeen and one of the same thing was 4,600,000 dollars And the 4,500,000 number you heard was our trailing 12 month AUV system wide at the end of Q1. Okay. And then how does that relate to the 81,000 average weekly, which would come out to 4.2? What is the difference between that 4.5 and the 4.1 or 4.2 that, that will come out to be? That's just in this current quarter, not a trailing number, is that what it is? John, this is Josh. The 81,000 is just for the 13 week Q1 versus the trailing 12, which is the 4,500,000. So it's quarter 2 2017 through quarter 1 of 2018. Again, by the end of the fiscal year of 2018, we expect that trailing 12 or the full fiscal year by that point to be between $4,100,000 and 4 point $2,000,000 So the $81,000 by the way for the quarter, remember that historically from a seasonal perspective, quarter 1 is generally a little bit of a slower quarter. We tend to see a ramp up in quarter 2, 3 and then kind of back down in quarter 4, just from a historical seasonality perspective. No, that totally makes sense. I just want to put those three numbers. And on the traffic question, I understand you don't want to talk about maybe weather, but is there another way to look at traffic excluding weather? For example, if you were to look at the 3rd of stores roughly they're not in the Northeast, was that traffic positive or is there a way to look at traffic in the non comp stores in some way that have been open more than a year or less than 2 years and talk about that pattern in some way to give a broader measure of how footfall is on a normalized basis? Again, John, we really have never broken that out and we don't intend to at this moment. Trying to give as much a clear guidance as we can on the overall here. But again, similar stories to what we've always talked about. There's regional variations that have differing impacts based on other Shacks, based on weather, based on price and all the other things that we continue to talk about over time. So apologies, but not something we're going to break out on a regional or Shack by Shack basis just yet. Could you at least maybe just say whether cannibalization played any role in the traffic this quarter? I know in 1 quarter or 2 quarters that you mentioned it. Was there any call out there? I think it's similar to what we've mentioned in the past. There's always going to be some group of Shacks that are impacted by others. That is often by design when we really want to capture a total market share is what we're after. As we've said many times, we're less concerned about percentages and we're much more concerned about dollars. And when we go after larger regions and we add Shacks, they sometimes have an impact on other Shacks. But that's a Shack by Shack question. It's not a hard and fast rule and it differs. There are many that grow when other Shacks enter the market and there are some that are impacted. So, yes, we're going to continue to make those decisions that give us ultimate market share for the long term. Okay. Thank you. And we'll take our next question from Owen Stump from Longbow Research. Yes. Hi. Good afternoon. Just quick note to hop on comps, but is there any kind of breakout or estimation that you can give us as far as impact both from Easter and also weather on comps during the Q1? We're not really breaking it out. As I said a little bit earlier, we had a few days at the end of the quarter that were impacted probably by the Easter shift. It's always hard to say. I talked about that a little bit earlier. But in terms of breakdown of the comp, not something we're going to do as we've reported that we're excited to be positive at 1.7% and all the factors we talked about, whether it's weather delivery, new Shacks, recent openings impacting that are all part of what blended into a 1.7. But again, we'll say forever. You got to be careful with the comp base of Shake Shack. We got to continue to grow into a much broader base. That is a lot more indicative of trends over time of which this continued base is not. That's helpful. Thanks, Randy. And then could you remind me how many of our stores that are intercom based are actually in Manhattan, if you have that number handy? How many of the existing comp base stores are in Manheim? Yes. 11. So much. It was we had 44 stores in the base in the quarter, 11 of which were in Manhattan. Okay. You can see this in the supplemental deck. We do a buildup both New York City and then the Northeast and Mid Atlantic and all other. So again, Manhattan represented 25% of the units and about 36% of the actual sales. And on what you're seeing also highlighted in the supplementary materials, but of the 18 Shacks that get added to the comp base in 2018, only 4 of them are in New York City. So although it's still heavily dominated by that Mid Atlantic corridor that Randy mentioned, it is gradually diversifying. So we have, for example, we have California with Arizona among others entering the comp base for the first time this year. Great. Thanks, Tara. And we'll take our next question from Karen Holthouse from Goldman Sachs. Hi. I want to dig back into the sort of traffic versus check dynamics. So looking at the mix growth that you saw this quarter, is that something you had been anticipating? And it sounds like if that's really driven by digital and some things like that, there's no real reason we should think about check growth coming in or falling as we move through the year, right? I think every quarter is different, every initiative is different. Karen, as we said, part of that was a number of things. There was some price, it was comping against the free burger promotion of last year. The digital initiatives that we talked about earlier were all built into that as well as a little bit of menu innovation. So that changes with each LTO, change with each menu innovation in each quarter. So that's what it was for the Q1 and there was other reasons. Well, I guess I'm trying to understand if the comp guidance for the year embed positive check growth or that was it was that in the plan at the beginning of the year or sort of as you pointed out these things can be different quarter to quarter. Was this quarter sort of an upside surprise? Yes. Based on our as we said, we had flat comp guidance at the beginning of the year. We're going to guide now sort of 0 to 1 after the 1.7 quarter. And better than that, that we know is the price of 1.5 to 2 that we took at the end of December. But it's hard to say. Everything we believe is embedded in our guidance that we gave you on the 0 to 1 in the comp base for the rest of the year. All right. Thank you. And we'll take our next question from Jeffrey Bernstein from Barclays. Hey, guys. This is actually Jeff Priester on for Jeff Bernstein. I have one clarification question and a follow-up. The raise in the comp guide from 0 to 1, that is just purely a flow through of the 1.7% in the Q1 and there's no change in your view for the 2nd, 3rd and Q4, correct? Correct. Yes. I mean at this point, we're obviously pleased with the positive Q1 performance. But as we've laid out many times and have again on this call, this is one of the most volatile metrics in our business. It's impacted by a number of factors, and it's still a very small base representing less than half of total Shacks. And indeed, on top of that, the compares throughout the year get harder. So yes, your summary is correct. Got it. And then to ask the traffic question a little bit of a different way, what do you guys kind of view as the hindering factor to positive traffic? And more specifically, is the kitchen size or kitchen layout of your current comp base hindering that? Well, I think there's nothing that hinders it. As we've said many times, the comp base is a small group of restaurants, regionally connected, that are incredibly high volume restaurants. So when you add in some of the digital initiatives with larger average checks, those have an impact on that base. And it's something we're constantly looking at. We're constantly looking at kitchen design. We're testing new kitchen designs at some of our new Shacks, and we'll continue to test that. But the mature Shacks are built and they make up the majority of the base. So, all of that is what gets into the traffic here. But it's obviously something we're looking hard at and always want to continue to improve on whenever we can. Got it. Great. Thanks. Thanks. And there are no further questions. I'll turn it back over to Randy. Again, thanks everyone. We really appreciate all of your support. Thanks to our team for another strong quarter. We're looking forward to a good year. Well, thanks for taking the time with us on tonight's call. Take care. That concludes today's conference. Thank you for your participation. You may now disconnect.