Earnings Call: Q2 2019

Aug 5, 2019

Good evening, and welcome to Shake Shack's Second Quarter 2019 Earnings Call. At this time, all participants have been placed in a listen only mode and the floor will be open to questions following management's prepared remarks. It is now my pleasure to turn the floor over to Melissa Calandruccio, Investor Relations. You may begin. Thank you, James, and good evening, everyone. Joining me for Shake Shack's conference call is our CEO, Randy Garutti and CFO, Tara Comont. 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 the Risk Factors section of our annual report on Form 10 ks filed February 25, 2019. Any forward looking statements represent our views only as of today, and we assume no obligation to update any forward looking statements if our views change. By now, you should have access to our Q2 2019 earnings release, which can be found at investors. Shakeshack.com in the News section. Additionally, we have posted our Q2 2019 supplemental 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. I will now turn the call over to Randy. Thanks, Melissa, and good evening, everyone. Now more than halfway through 2019, I'm pleased to report that Shake Shack enjoyed continued strong momentum into the Q2 across all areas of the business. System wide sales increased 33 percent to $225,900,000 and total revenue grew by 31% to $152,700,000 driven by the addition of 58 Shacks system wide since the end of the Q2 2018. Our comp base delivered positive Same Shack sales growth of 3.6%, specifically our digital channels including delivery were a key contributor to these results in conjunction with a benefit from the shift in Easter timing within the 2nd quarter. We earned adjusted EBITDA of 25 point $1,000,000 growing at a rate of 18.5 percent and again delivered positive traffic in the quarter with growth of 1.3%. I'm so proud of the team leading our Shacks every day. To achieve this level of growth, while also opening a record number of Shacks and extending the power of the Shack brand around the globe is truly a testament to their talent and hard work. During the quarter, we opened 11 domestic company operated Shacks, continuing our strategy to deepen our roots in existing markets with openings in San Diego, Los Angeles and Dallas, while also expanding into the new markets of Sarasota, Columbus and Virginia Beach. Subsequent to the quarter, we opened in New Orleans and Salt Lake City. We're thrilled to see the Shake Shack brand continuing to resonate so well across the country. As of today, we've opened 21 company operated Shacks so far this year and this development pace represents a much more balanced opening schedule than the compression we experienced late in the year in 2018. Given where we are today in terms of openings, we're taking the opportunity to tighten our new Shack guidance for 2019 to between 3840 new company operated Shacks from our previous guidance of between 3640. Moving on to licensing. It's been a tremendous year so far for our international business with a record number of new market openings and performance well above our expectations. We entered Mainland China with our opening in Shanghai in January, both the Philippines and Singapore in the second quarter and most recently Mexico earlier in Q3. Having been on the ground for our recent openings in the Philippines and in Mexico City, it was as humbling as ever to watch the thousands of fans lined up to greet us. Our Shack in Mexico City is a true community gathering place, an incredible central location in the city on Paseo de la Reforma Avenue, adjacent to the famous Angel of Independence landmark. As always, we strive to do what others are unwilling or unable to do. Ensuring the local community is well represented plays a key role in the Shack. We added exclusive Shack specific menu items made with ingredients from local Mexican purveyors, and in this case, our delicious local horchata shake, a Mexican classic, features vanilla custard blended with rice and our signature spice blend, topped with whipped cream and crushed Oblast, a traditional Mexican snack. Our Shack Attack concrete incorporates chocolate chunks from local chocolate maker La Rifa, whose chocolate uses local Mexican cocoa beans. As part of our continued growth, we're also testing and expanding our Shack formats. In May, we opened our first ever 24 hour roadside Shack at the Monmouth Travel Plaza on the Garden State Parkway in New Jersey. Whoever wrote the rule that stopping off the highway on your next road trip couldn't be a great experience? We're working to change the perceptions of captive audience dining, bringing fresh quality to everyday places that generate so much daily traffic. And continuing with that approach, we believe we have significant white space in airports globally. As of today, we're in 12 airports following openings so far this year in Dallas Fort Worth and Phoenix Sky Harbor. We recently opened a second airport location in Kuwait International Airport and later this year we'll be opening at McCarran in Las Vegas, Louis Armstrong in New Orleans and Minneapolis St. Paul in Minnesota. We're excited to continue to expand the ways in which we bring Shake Shack to hungry travelers in the U. S. And abroad. Tonight, we're pleased to announce a new strategic partnership to take Shake Shack to Beijing. We've had an incredible start in Hong Kong over the past year. Between that and our 1st 6 months in Shanghai, it's reinforced our belief in the tremendous growth opportunity for the Shake Shack brand in Mainland China. We've entered into a new development agreement with Maxime's Caterers, our partner in Hong Kong and Shanghai to open 15 Shacks in the Beijing market over the next 10 years, with the first Shack targeted for late 2020. With our global licensing team, some of whom are now based in the region, an increasingly well established supply chain and key strategic partnerships firmly in place, we're bullish on the increasing contribution and importance of our international business over the coming years. In China, we've chosen to focus on the major markets of Beijing and Shanghai at this point and not to develop further afield just yet. We really want to continue to execute well and learn in these huge markets, while keeping a keen eye on the bigger opportunity we have in the rest of China over the long term. Given the excellent progress we've made so far this year, we are raising our guidance for our license business and now expect to open between 18 20 net new license Shacks, up from our prior guidance of 16 to 18. I want to take the opportunity to acknowledge what we've achieved on the development and licensing front, both domestically and internationally. Today, we are a global company of 245 Shacks in 16 countries, in 29 states and 128 cities. And yet, we're still at the beginning of our journey with plenty of runway and work still ahead. Earlier this year, we shared with you our strategic pillars, which underpin the long term growth and investment strategy across the company, committing to excellence in our people, delivering a consistently great guest experience, cultivating a loyal and connected community and innovating our business for long term growth. And we've been busy executing these areas of strategic focus. We're very pleased with the continued progress across each one. Certainly a key milestone in our commitment to excellence in our people, we are thrilled to welcome Diane Neville, our new Senior Vice President of People Resources. Diane brings over 20 years of people resources experience from across the restaurant and other industries and has quickly become an influential member of Shake Shack's leadership team. We're passionate that our people are truly our greatest asset and we feel fortunate to have such a high caliber executive join the Shake Shack family to help continue to drive the development of and investment in our almost 7,500 strong workforce in the United States alone. In our Innovation Kitchen, we continue to create new LTOs. This past quarter, we tested the Alabama Chicken Shack, our take on a Southern Classic, as well as a creme brulee shake served with caramelized sugar topping. We're excited to use this space to keep dreaming, taking feedback from our loyal fans as we continue to stay loyal to our culinary roots, while experimenting with new menu items. With continued growth and importance of our digital evolution, I'm pleased to share that we've chosen to formalize and launch a partnership today with Grubhub to deliver Shake Shack to hungry fans nationwide. During the deep learning of the pilot phase, we've benefited from taking our time to understand the needs of our guests, the important and necessary operational aspects of executing delivery well and the relative strengths of potential partners. We've learned a lot with each of the delivery providers with whom we've piloted and we're excited to move forward on this important part of our overall digital ecosystem and guest offering. This partnership decision prioritized the key factors of long term revenue opportunity, technology integrations and functionality, guest services capability, geographic footprint, guest data insights, marketing capabilities and of course overall economics. As of today, a small number of our Shacks have Grubhub available to guests as we work through tech integrations and operational process on both sides. We anticipate gradual system wide rollout over the next 2 to 3 quarters. As we move through that launch program and transition to our new partnership across the system, we do expect to see some volatility in our delivery sales in the remainder of the year and in certain parts of the country. Making Shake Shack more accessible is an important growth lever for us, and this is something our digital channels allow us to do. So you'll see us continue to focus on the enhancement of those experiences, integrating the necessary technology that supports each one and adding guest facing functionality on a regular basis. We're also committed to ensuring the experience in Shack remains as frictionless as possible, albeit understanding that these are busy restaurants and the addition of multiple ordering channels can sometimes create some level of confusion in the front of house. The proliferation of these additional ordering channels is a key consideration in our thinking for design in new Shacks and how we continue to evolve in existing Shacks. All this necessary physical, technological infrastructure will require continued investment in order to drive long term sustainable growth. We'll keep you posted on our guidance as to those expectations over the long term. Before I pass you on to Tara, take you through the financials and additional updates, I do want to take a moment and thank our incredible team. It's really been a strong quarter on all fronts. None of it would happen without the hard work, passion and commitment to excellence of each and every team member. When I look at everything we've accomplished so far and all we have ahead, I'm so proud and excited to be a part of this journey with this very special group of people. Thanks, Randy. As you've just heard, we're very pleased with our continued strong sales performance across the business during the Q2. Total revenue increased 31 percent to $152,700,000 with Shack sales of 147,900,000 dollars also representing growth of 31 percent and licensed revenue of $4,800,000 growth of 43% on the same quarter last year. We delivered positive same Shack sales of 3.6%, which consisted of a 2.3% increase in price and mix, a traffic increase of 1.3% and this performance was on top of a 1.1% same Shack sales growth in the Q2 last year. This was driven by continued strength and momentum across all our digital channels, combined with a favorable impact from the timing of Easter, which fell later in the Q2 of this year. Our average unit volume remained strong at 4,300,000 on a trailing 12 month basis, with average weekly sales of $85,000 during the quarter. As a reminder, these particular average unit metrics will continue to gradually come down before leveling off as we broaden our sales volumes, open new Shacks across the country and further expand in existing markets, all while continuing to deliver significant total top and bottom line growth. At this point in the year, given our performance to date, we're expecting company operated AUV to be at the higher end of our previous guidance range of $4,000,000 $4,100,000 for the full year. As Randy mentioned, we'll be transitioning our company operated Shacks to our integrated delivery partnership with Grubhub over the next 2 to 3 quarters. And as we work through that period, we expect a degree of volatility across the system in our delivery and overall sales, which is reflected in our updated guidance for the year. Additionally, our year on year sales comparisons get tougher in the Q4 as we lap strong digital channel performance, in particular delivery and a positive impact from weather during the busy holiday period. Taken together and based on 2nd quarter results, we are however increasing our same Shack sales guidance for the year to the higher end of the previous 1% to 2% range and expect to perform at approximately the 2% level. Furthermore, as evidenced in our Q2 results, our licensed business continues to perform extremely well with some strong new market launches. And as Randy mentioned, we're raising our unit guidance at this time from between 16 and 18 to 18 20 net new licensed openings for the year. We're also raising our licensed revenue guidance to between $16,000,000 $17,000,000 for the year, an increase from our prior guidance of $15,000,000 $16,000,000 One important side note, while we're extremely pleased with performance in this part of our business, we do fully expect to see the impact of some more acute honeymoon performance levels. In particular, we expect to see an overweight performance of large new markets this year, including Shanghai, Singapore, the Philippines and Mexico that we expect to come down into next year. Taking each of these factors in totality, we are at this point raising our 2019 guidance for total revenue to between $585,000,000 $590,000,000 up from our prior guidance of $576,000,000 to $582,000,000 We've seen some really strong openings over the past year, including many of our Shacks that opened in the back half of twenty eighteen. Our Shacks often outperform pro form a estimates in their 1st year, opening with very high initial sales volumes. Depending on the class of specific Shacks, we then experience a leveling off as they reach more settled and normalized sales levels. As we look towards the back half of this year, we'll be lapping many of our 2018 first to market openings, which may have a greater impact exiting their honeymoon periods than is typically experienced. Moving to Shack level profitability. We saw some significant headwinds in the first quarter from both the launch of Chick'n Bites, which had a meaningful impact on our food and paper costs, as well as higher levels of staffing in Shacks that opened at the end of 2018, which negatively impacted the labor line. We're pleased to report improvements in both and sequential improvement in our Shack level operating profit in the 2nd quarter, which increased 13.7% on the prior year to $36,200,000 with Shack level operating profit margin of 24 point 4%. As a reminder, particularly when comparing Shack level operating margin to the same quarter last year, we're lapping 2 benefits in the Q2 of 2018, which we identified and called out at the time. Specifically, a 30 basis point benefit to food and paper costs related to sponsorship funds for our biennial company retreat, as well as a 70 basis point non cash deferred rent adjustment to our occupancy line. Together, these represented a benefit of 100 basis points to our Shack level operating margin in the Q2 last year. In order to appropriately compare year on year performance, it's also important to consider the impact of the new lease accounting standard we implemented in January, which has changed the way we account for our real estate and capital leases, moving cost into the occupancy line that previously sat within the depreciation and interest lines primarily. A further explanation of the impact of the new lease accounting standard has been included in our last 2 quarter supplemental decks, and we've included this again this quarter for reference. Getting back to some further details around the underlying operational performance of our 2nd quarter. Food and paper costs in the quarter were 29% as a percentage of Shack sales, an increase of 90 basis points on prior year or an adjusted 60 basis points when taking into consideration the benefits I just mentioned in 2018. This represents a 50 basis point sequential improvement from Q1. During the quarter, we continued to experience an increase in food costs, driven primarily by Chick'n Bites, albeit less of a material impact than the prior quarter with increased pricing as well as improved supply chain initiatives, which came into effect gradually throughout the quarter. We remain pleased with the guest uptake and feedback on Chick'n Bites since our nationwide rollout at the beginning of the year, although like all LTOs, we'll listen, learn and assess how long it stays on the menu as time goes on. Although we've seen margin improvement from last quarter, chicken is a high cost item in our basket, particularly the premium quality fresh antibiotic free whole breast meat that we source. In addition to the impact of Chick'n Bites, our overall basket saw slight inflation across both beef and dairy during the quarter. The second half of this year should see continued improvement in the overall cost profile of Chick'n Bites as the supply chain improvements take effect across the entire system. And as always, our overall COGS line will continue to be affected to the extent beef prices move, albeit we're not expecting material changes there for the remainder of the year. We also saw a continuation of recent trends in the quarter with increases in paper costs as a direct result of our off premise digital growth, which requires more packaging than in Shack orders. Packaging is an area we've been testing and updating as our digital channels continue to grow and is something we believe remains an opportunity for continued improvement in the future. Labor and related expenses increased 90 basis points to 27.2 percent of Shack sales as we continue to experience significant labor inflation across the country, especially in our hometown of New York City, where 2019 has seen double digit increases in both hourly and salaried wages, combined with the administrative burden and cost of legislation, such as the Fair Work Week. Additionally, we continue to experience higher staffing levels in our newer Shacks as they transition through their initial opening, training and settling in phases. This improved sequentially from the Q1, particularly in those Shacks which opened at the end of 2018. And we expect to see this trend continue over the course of the year, albeit likely offset by those new Shack openings still to come. Other operating expenses increased 40 basis points to 11.3% of Shack sales, driven predominantly by delivery commissions and increased levels of marketing activity both local and nationwide. We're pleased with the performance and results of our ongoing marketing activities. As our new CMO and CIO continue to really get into the business, we're looking forward to continuing to invest in sales driving and positive ROI initiatives into next year. Occupancy and related expenses increased 140 basis points to 8% of Shack sales or approximately 70 basis points when adjusting for the 70 basis point non cash deferred rent adjustment I mentioned earlier. Beyond this, the increase on prior year in occupancy was driven primarily by the adoption of the new lease accounting standard that went into effect at the beginning of the fiscal year. These increases were then in part offset by sales leverage in the quarter. Consistent with guidance from last quarter, given these results from the first half of the year and our outlook for the remainder, we continue to expect Shack level operating profit margin for the full year to be at the lower end of our previously guided range at approximately 23%. Moving on to G and A. G and A for the 2nd quarter was $15,400,000 and included $2,100,000 related to non cash equity compensation as well as approximately $500,000 related to our ERP system upgrade, Project Concrete and some other one time costs. Project Concrete also represented an additional $2,300,000 in capital spend in the quarter. This project has been progressing well with core finance and people resource systems now live across the company as of the end of June. Work continues on this important company wide project over the remainder of the year and into next, with the most significant next phase being centered around our invoice supplier and inventory management platforms, particularly within the Shacks. Based on our most recent timeline for the various components of this broad implementation, we expect operating expense hitting G and A for Project Concrete to be between $3,000,000 $3,500,000 and capital spend to be between $4,500,000 to $5,000,000 for the full year with continued investment into 2020 as we add modules and broaden the scope of this important infrastructure upgrade. This project is critical to our continued and future scale, building our business efficiently and for the long term. And I want to thank all of our team involved in this transformational project who've gone above and beyond over many months and who set us up for such a successful implementation and rollout. Outside of Project Concrete, we're tracking to our previous expectations and guidance in core G and A, with expenses gradually increasing as the year progresses to support our strong growth. At this point, we expect our core G and A spend for the full year to be between $56,000,000 $57,000,000 and equity based compensation of between $7,400,000 $7,700,000 both consistent with prior guidance. Taken together with our latest expectation of Project Concrete spend, this may potentially result in year on year leverage in our total G and A line. However, it's important to note that we are still very much in the investment stage of our long term growth journey. We'll assess opportunities for accelerated investment spend as the remainder of the year progresses, but generally plan to reinvest beats in performance back into the business where we see compelling long term returns and particularly in those areas we believe will have a direct and positive impact to Shack level profitability. Suffice to say that strong sales delivering G and A leverage in 2019 is not a trend we necessarily expect to mirror in 2020, particularly while we're so early in our expansion plans and see so many opportunities for strategic reinvestments ahead. We continue to record significant increases in our depreciation expense as a result of our ongoing expansion and increasing pace of new Shack openings. Depreciation increased 41% in the quarter to $9,800,000 driven primarily by the addition of those 40 new Shacks. We continue to expect depreciation to be between $41,000,000 $42,000,000 for the full year. Pre opening expenses in the quarter were $3,500,000 The year over year increase was driven by 11 new Shack openings during the Q2 compared to only 5 in the same period last year. For the full year, we continue to expect pre opening costs to be between $13,000,000 $14,000,000 with our biggest class of Shack openings to date in 2019. Interest expense declined by approximately $500,000 year on year to 97,000 dollars driven entirely by the change in accounting treatment related to build to suit leases, which had previously been accounted for in this line and are now being recorded within occupancy. For the full year, we continue to expect interest expense to be between $300,000 $400,000 Adjusted EBITDA in the 2nd quarter increased 18.5 percent from the same quarter in the prior year to $25,900,000 and adjusted EBITDA margin in the quarter was 17%. On an adjusted pro form a basis, we earned $10,200,000 or $0.27 per fully exchanged and diluted share. Our pro form a effective tax rate was 19 point 3% on an adjusted pro form a basis. And our underlying effective rate was 26.8%, which excludes the net effect of excess tax benefits from stock based compensation. A reconciliation of these tax rates can be found in the appendix of the supplemental materials. And as a reminder, our tax guidance excludes any potential impact from such excess benefits given the unpredictability of the timing of exercise activity. And on that basis, we continue to expect a range of 26.5% to 27.5% for our pro form a effective tax rate for the full year. As a rapidly scaling company with significant runway of continued growth ahead, we took the opportunity to further strengthen our balance sheet in the quarter with the completion of a new revolving credit facility agreement. We increased both the size of the facility and the level of flexibility throughout the agreement, including the ability to raise additional debt capital and make strategic investments or acquisitions should we decide to in the future. While we have no plans to draw on the facility in the near term, this expanded credit line gives us additional financial flexibility should we wish to use it and better suits the company at this stage in our overall growth journey. The facilities for a term of 5 years for up to $50,000,000 available immediately and an incremental commitment of up to $100,000,000 available upon our request and subject to certain conditions. We're pleased to have significantly improved the terms within this facility in order to ensure we have the flexibility and optionality for crucial investments should they be compelling in the future. Overall, we have very solid momentum across the business heading into the second half of the year as we continue to execute against our key strategic initiatives. Our focus is anchored on domestic and international expansion, while investing in our teams and infrastructure to enable us to grow and scale for the long term. We'll continue to test, learn and evolve our business to adapt to the changing environment in which we operate, all while investing in critical initiatives where we see compelling long term returns for the company and all our stakeholders. I'll close the call today with a celebratory note. This summer we reached a milestone, our 15th birthday at Shake Shack in Madison Square Park, the little hot dog cart that began it all. And today, we are as focused on the opportunity ahead as we have ever been on building a truly great company to last. Once again, a sincere thanks to our hardworking and dedicated leaders and team members who make it all possible day in and day out. With that, we'll go ahead and open the call for questions. Thank And our first question is coming from Katy Fogarty with Goldman Sachs. Great. Thank you. So you guys last provided us with some more granular color on store margins by region at ICR. And I think that was mark to market for 3Q 2018. There's been some volatility in the margin line since then, delivery in chicken. It was really nice to see those margins rebound this quarter. But it would be really helpful for us if you could either quantify or give us a way to contextualize how this improvement is playing out by region. In particular, we're really focused on non New York stores rolling into the comp base. So it'd be helpful to see or understand what the incremental traffic you're seeing from delivery looks like by region, how operating margin trends have been by region? Any color there would be helpful. Thank you. Thanks, Katie, and congrats on launching your recent coverage for the industry. Those are numbers we're not going to break out today. Appreciate the ask. I think we'll look at that possibly in the Q3. We've done that the last 2 years. We'll take a look at that information to the extent it's helpful to you and our shareholders will certainly consider that. Look, I think it's important that everyone know we continue to grow across the country. I noted that in the development remarks. If you really look at it, we've seen broad based success in so many markets and that continues today. If you really look at it, we only have 22 Shacks in New York City. So I think now with 140 Shacks company operated in this country, only 22 of those are New York City. I think the question of how this restaurant company does outside of New York has been answered and will continue to be answered as we go. So bear with us when we can give you data, especially as it pertains to the digital ecosystem that you asked a lot about. That will be an evolving thing in the next 2. We've just been piloting for a couple of years here. Delivery with Grub, we expect to be everywhere nationally. And we will keep a close eye on that and share those trends when we think it's helpful to you. Okay, great. Thank you. Next we'll hear from Lauren Silverman with Credit Suisse. Hi, thanks for the question. How are you thinking about modifying the layouts of both new and existing Shacks as digital becomes a bigger part of the business? I think you've mentioned in the past the testing of pickup shelves. Are there any changes being implemented or necessary in the back of the house? Thanks. Yes. Thanks, Lauren. We've been doing a lot. Well, it's a kind of a constant iteration if you look at Shack designs over this last few years. Let's start in the back house. I think in the back of house, we've built what we call split kitchens, which continue to evolve, really giving us the horsepower to compete anywhere at maximum throughput. We still have a lot of technology that we need to evolve on that. Part of our decision to go with Grub is the way that we're going to integrate that technology and make sure that we can really start to have a more dynamic ordering capability for the percentage of our sales that is delivery. So we believe for the most part, we've made some better designs than others, but for the most part, the back house kitchen can handle a lot. However, it gets more complicated now as the delivery, digital app, web ordering, large orders come in. So a couple of things we're doing in the front of house to help that, which is challenging by the way. We've noted this on a few calls. It remains challenging. If you go to a Shack in the busy times, that pickup area is busy. It is really busy. There are couriers, there are app pickup. There are folks who just want to stay and get their Shack Brothers. There's families. There's everybody competing for a limited space. So we're working to make sure we have some really good pickup areas for some good shelving that will help make the couriers job a little easier and make our app pickups a little bit easier. We're designing some restaurants that will really truly separate those areas. So next year, you'll see some Shack designs that will really have a completely separate section for the digital pickup from the in house pickup because we really want to honor our guests who continue to come to Shake Shack. Obviously, the overwhelming majority of our guests remain people who are looking for that great Shack community gathering experience and we want them to have a great experience. So stay tuned, lots of different iterations. We're going to be testing a number of different ways to do it, all towards really making sure that a digitally native restaurant can be successful, while providing great guest experience across any channel you choose. Great. Thank you. Next, we'll hear from Sharon Zackfia with William Blair. Hey, it's Matt on for Sharon. Could you talk a little bit more about the integrated marketing plans for Grubhub? I mean, how much customer data is Shake Shack going to get? And then secondarily, can loyalty be used in conjunction with the Grubhub partnership? Okay. So starting off, we will not have any Shake Shack loyalty program. And we won't be connected to anything that Grub does other than people who have they've just launched their new loyalty plan. So we've got a lot to learn about how that will work for their marketplace. But in terms of data and the tech integrations, there's a few important things. We've been able to work with Grub in a significant design that will have optionality for us for kind of just in time delivery as well as really try to pair up that real delivery courier with real time how busy we are at Shake Shack in the moment. That tech integration is going to be crucial for us, right? We have really busy restaurants. We need to be able to have the ability to throttle that in real time and make sure that that works across their drivers and our team. When it comes to data, we're really excited about the data that we intend to retain and access throughout their marketplace for our guests. That was one of the most important considerations of this decision was for us to be able to have that data and be able to connect with our guests regardless if they choose to order on a third party platform. That's one of the things we're really excited about. So over time, we expect to do some really great marketing, both Shake Shack Direct and together with our partnership with Grub. Okay. Thank you. Our next question comes from Jake Bartlett with SunTrust. Great. Thanks for taking the question. Randy, I want to start with just understanding better the transition period as you shift over to Grubhub and from the kind of the handful of stores now to the system over the next couple of quarters. Were you saying that you mentioned that could cause volatility? Does that mean, I mean, what are the what kind of delivery you're going to be doing with the other partners that you had been testing with? Trying to understand how big maybe a headwind this could be in the near term. Yes, Jake, it's a great question. So thank you for asking. It's built into our guidance on revenue, comp and everything. So here's the reality. We've spent 2 years building up relationships on other marketplaces, one of which was Grubhub, but we have great relationships on Caviar and Postmates and DoorDash. Those relationships continue in the near term, exactly as they've been and where they've been. However, as we roll this out and we reach mass scale with Grubhub, we will eventually unintegrate and not market. We haven't done a lot of marketing with those in the past anyway, but really it's about on integrating the tech. So there could be some volatility there, right? If you are on another third party marketplace and you're used to looking at that and deciding, hey, maybe I'll get Shake Shack tonight, which has been a part of our sales. It's something we're going to have a big marketing job to move those guests over to our partnership with Grub, which we're excited to do. But it's going to take some time, right? You've got 2 years of behavior in various marketplaces. And they all have slightly different regional strengths, right? There are players. And by the way, this was one of the biggest decisions we had to make in this. Each one of them are they're great companies. Every one of them are great companies. And each one of them has a certain region, sometimes a certain shack within that region that has strength or weakness. And they have varying success rates when it comes to the guest experience. For us, we put all that together, we believe over the next series of time that we will be able to do the best job at guest experience possible by working with Grub in all that way. But we very well may be that some of those marketplaces continue to sell Shake Shack on an integrated basis. Got it. Got it. And when I think about your same store sales guidance, it implies a pretty sharp deceleration from what you did in the 1st and second quarter. And as I look at just from the surface, it doesn't look it looks like your compares actually get easier just on a half year basis. So would you point to this kind of potential volatility around delivery as the main reason why you'd be more a little more conservative in the back half of the year? Well, hey, Jake. How are you? Hi. I mean, we called this out in the prepared remarks, and you may remember this in Q1 too, but we did have we benefited within that comp base from some warmer weather, particularly in the Northeast in the beginning of the year, which went into that Q1 comp. We benefited and Randy mentioned in his prepared remarks just now from that shift in Easter with more of those Easter holiday weeks really falling into the quarter this year than last. So those are whilst we're really happy with the COGS in the first half, those two things were contributors. We're coming into some pretty active delivery and some digital activation in the back half of last year, particularly Q4. So we're comping over that. And then as Randy just explained, the majority of our Shacks have had delivery turned on for many quarters now across many marketplaces. So as Grub gets rolled out and all these marketplaces look slightly different in many different ways, whether it's regional footprints or various other factors, there just potentially will be some noise as we go through that transition, particularly as we start un integrating those others who we've been in pilot with. So I think we'll see how it shakes out over the next couple of quarters. This isn't an overnight rollout. So we'll have the benefit of being able to keep you guys up to date as we get further into it. Great. Makes sense. Thanks a lot. You're welcome. Chris O'Cull with Stifel has our next question. Thanks. Good afternoon, guys. Randy, could you tell us what kind of information you're looking or you're needing to determine whether the Chick'n Bites could be a permanent menu item? And then maybe just how much should we expect the product cost for that item to improve if you guys were able to commit to a supplier that could become a permanent menu item? Yes. So what are we looking for? This has gone for basically half the year. With any LTO, we're looking for a few things. How does it perform sales wise, of course? It's very hard always to understand incrementality, true incrementality, which is one of the things that just takes time, especially in a totally new category like this, and impact for trades up, trade down, and in this case, maybe an add on. We're also looking to continue to improve the way that we operate it. The way we do these, every single Chick'n Bites is done by hand to order, right? This takes time. It's operationally challenging. It takes labor and these are things that we want to continue to improve upon and the way we do it. And we really just want to listen and learn. We have been really encouraged by what we've seen, which is why it's continued to stay on and why we're going to continue to give it more time. When it comes to the supply chain and the cost, we've done a lot of work in the first half of the year, still impacted us in Q2. It's still, as Tara mentioned, a high cost menu item. Chicken that is all antibiotic free and all natural and fresh in the way that we do it is not cheap. It's not a commodity product and it's something that we spend a lot of money on. So it's still got a higher food cost. There's some work we want to do And kind of exactly how you just said, we're connecting with our chicken suppliers and saying, hey, can we do a little bit better here if we're going to continue to run this? Chicken as a category, go back just a few short years, we never had chicken before. Now with the Chicken Shack, with Chicken Bites, chicken is a category at Shade Shack. That's a real thing. We're going to compete in the chicken business and we feel really good about that. But again, super early, it's something we've got to see people continue to come back for and again encouraged by the early signs. Mr. Ochols, do you have anything further? No, thanks. Thank you. We'll hear from John Glass with Morgan Stanley. Thanks very much. A couple of first on the Grub announcement. Did you actually see higher sales volumes from delivery on Grub versus other platforms? Or was this decision made on the other factors primarily that you mentioned? Secondly, are you going to launch in app delivery with this? Is that part of this integrated approach? Or does that come later? And do you have information about the customers? Do you know who they are, who are using other platforms? Did you communicate with them directly and say, come and get us on Grub now or is that not possible? That really wasn't part of the deal. I mean, in fairness to the marketplaces that did the work with us the last couple of years, it's really their customer. John, it was a combination of factors. And Grub had tremendous performance in our pilots. They had a shorter pilot timeframe than the others. But in that, we were really encouraged by what we saw and we looked at it by a few things. Big picture nationwide, who's got the best long term revenue opportunity, that was number 1. Preceding even that, I guess, is who's got the opportunity to do the best job at the guest experience. Delivery is a hard business. Shake Shack's food is hard to deliver and we need to do it really, really well. So we even had just a limited amount of markets during the Grub test. So it gave us a lot of encouragement for what they can possibly do. The guest data and insights is a huge thing moving forward. So that's going to be new opportunity for us. And then really the overall economics of the deal will lead to better economics for us over the long term, which as everyone is battling right now in this part of the business. You need to have something that works for everybody. And we believe we've got that. It's something we're going to do well. As far as delivery through our app, we absolutely want to do that over the long term. It's not our first focus right now. We're doing some other great things with our app that continues to drive engagement and our new web platform. So we're doing a lot on our own channels. But over time, we do expect over the long term to be able to deliver through our app with Grub. That's going to take some time. All right. Thank you. And then, Tara, you mentioned that you might spend some of the overage in G and A and particularly in projects that might assist store level margins, if that's correct or make sure that is correct? And then what do you have in mind specifically? Are there technology investments that you think you can make near term over the next 6 months that improve things? Or are you just saying that hypothetically, you don't want to leverage G and A because there's so many opportunities longer term? Or was there something specific in mind? I think it's a bit of a, John. I mean, I think that the third of the way through our 450, we continue to be very committed to reinvesting back in the business as a philosophy, just being as young as we are with the growth that we have ahead. So I think there is a general appetite to do that, and we continue to gain conviction and confidence in that with some of the returns that we're seeing in the projects that we have invested in to date. And I think there are always a multitude of areas that you can invest in. So we're looking at all sorts of things. I would say that it's hard to actually find an investment today that isn't underpinned with technology. So you should assume that the majority of them will have some sort of technological component. Pretty much everything we've done so far this year does, whether it's the back of house concrete type work or it's more guest facing in our digital channels. So I wouldn't call it anything specific right now, but expect to see us continue to try to take administrative burden out of the Shack, so that we can, in a high cost labor environment, have that labor really focused on guest experience. Concrete was a piece of that, but there are various other labor initiatives that we're beginning to look at. Scheduling, we've mentioned in the past, looking at optimizing our scheduling processes, putting better tools in house to help our operators schedule on a more precise basis. So I think there's a lot in the pipeline and we're pleased to be able to have the opportunity to continue to just redeploy resources back into business where it makes sense. Right now, that's obviously not really contemplated in the guidance that we gave you. So as we have firmer plans to do so, we'll obviously update that guidance and keep you guys updated. Okay. Thank you. Welcome. Our next question will come from Jeffrey Bernstein with Barclays. Great. Thank you very much. Two questions. One just on the restaurant margin. Tara, I think you mentioned ex unusuals, the headwind was maybe 2 80 basis points. But at the same time, in the qualitative commentary, it does sound like maybe there's some signs of easing pressure, whether it's on food or elsewhere. And obviously, your comps have been stronger than you might have expected. So I'm just wondering, still seeing the significant deleverage despite that outsized comp. I'm wondering maybe how you think about potential for where that would stabilize over the next number of quarters, whether there's any option for incremental pricing to help on that front and if you could at least quantify what the COGS and labor basket is for the year or for the back half, however you think about it? And then I had one follow-up. Yes. There was a lot in that. So the COGS and our COGS and labor assumptions for the back half are included within our guidance that we gave you. So reinforcing that lower end of the 23% to 24% range that we gave you last quarter at about the 23%. I mean, big picture in COGS and we touched on some of this, we will continue to see Chick'n Bites impact that COGS line. But also as these digital channels continue to grow, and we really like their growth, paper and packaging will continue to go up in that line. Beef and dairy, our commodities have moved a little bit. As we said in the prepared remarks, we don't expect anything material in the back half, but we might continue to see a little bit of inflation there continue. Labor, we just it is still really meaningful inflation across the country in the labor line, double digits in New York City, really mid- to high single digit inflation across the country in the labor line. And that's why I think we are also committed to reinvesting back in the business so that we're not just the recipient of these things and that we're constantly looking at ways in which we can tackle it whilst not damaging the wonderful experience that is Shake Shack. So yes, there's pressure on the line. There will continue to be pressure on the line just as we open lower volume Shacks. I think from the time of the IPO, we talked about your sort of $3,000,000 future state or current state in certain Shacks AUV with more of a kind of 18% to 22% around a 20% slop. So as we continue to add more of those to the system, we're adding a lot of those to the system, that line will come down. Price is obviously an opportunity for us. We tend to be very conservative on price, and we're asked about this a lot. We took about 1.5 in December, and we took a similar amount, maybe slightly higher the year before, but still sub-two. We'll probably do the same thing this year. We're working through all of that right now. And it certainly is something that as we continue to expand our digital channels, we will consider more seriously. I think we obviously have the opportunity to price differently across channels. We don't currently do that today. That may be one way to help us mitigate the cost of delivery. So it's something we look at very seriously, but it's also something that I think you should expect to see us be cautious on. But it certainly is a lever that if we have to use it, we will do so extremely thoughtfully. We prefer to stay cautious on that line. Got you. And then Randy, I think in your prepared remarks, you talked about the just digital channels broadly being a key contributor to the comps. I know you don't necessarily want to break out all the components of that. But can you maybe directionally prioritize between the app, the kiosk, pickup and delivery, I guess the big ones, like which you see as the prioritizing the strongest to the biggest to the smallest? Well, we haven't broken it out yet, Jeff, and don't intend to today. Just to separate a couple of things. Kiosk, we kind of separate that when we talk about our digital sales. Of course, it is digital, but we kind of treat that guest like an in house guest. They just happen to order differently, not out of cashier. On the other ones, they're all growing. The app, web and delivery are significant. So we're not going to break it out just yet. There's a lot of movement in there. It's got to settle and it's something that we're just going to take some time and continue to learn about. But we're excited about all those channels and investing in all of them. Thank you. Our next question will come from Andrew Charles with Cowen and Company. Great. Thank you and congrats on solidifying the Grubhub partnership. On a 2 year basis, it looks like the traffic accelerated 130 basis points in the quarter, while check deteriorated about 190 basis points. You guys spoke about the success of digital during the quarter, but you previously called out that digital is a higher check sales channel. Can you talk to the dynamics behind the check traffic changes as we look from 1Q to QQ? Yes. I mean, we had positive traffic in the quarter of 1.3 and price mix of 2.3 to get to our 3.6 comp. So both positive and we're very pleased with the continued positive traffic. Yes, pricemix is we don't split it out any further, but you know directionally what we've taken on price. That's now lapping on itself when it comes to depending on which period you're comparing it to. So particularly with that the impact of digital. And we do, we continue to see a higher average check-in those digital channels. So with the growth of digital, that will continue to impact that. But as I say, we're now lapping growth of digital delivery on growth of digital delivery, which is positive what you're looking at. And Tanya, just a longer term question. At the time of the IPO, you referenced that long term restaurant margin guidance was set at 18% to 22%, which 4.5 years ago was obviously before third party delivery was a factor. Before targeted $15 minimum wages throughout most of the country. With 2019 margin guidance for approximately 23% getting close to the high end of long term margin. Can you talk about the offsets to help preserve and grow margins over time as long term guidance for low single digit same store sales growth isn't enough to help theoretically isn't enough to help lever the margins? Andrew, it's a great point. And Chuck Tarr and I may both answer this. I'll just give you the historical perspective as I was here at the IPO and long before. That's definitely a number that we targeted at that time. It remains a number we believe we can hit over the course of new Shacks as they come into the system. We absolutely believe it. We've seen it in many places. But there are new pressures, right? Labor continues to be a pressure and no sign of that letting up. But we do believe obviously delivery and some of the digital world will be a pressure. But I think we've got some really good things in place for the long term. We've got work to do to make sure that our labor over the long term can settle, our COGS over the long term can settle and we do believe we also have strong price power over the very long term, which will factor into both of those. But when you there's a couple of things you got to remember about Shake Shack. It's really important to say these things. We have 140 restaurants. We are in 28 states, okay. When we opened one restaurant on Saturday, we opened in Utah, okay, that Shake Shack is out there by itself. That's really hard to run that restaurant. Now it's going to be crazy sales and there was about 1,000 people online on Saturday and a whole heck of a lot of excitement. And that's great. But someday when we have lots of restaurants in Salt Lake City, a lot of things get better. And that's part of what we need to look at. There's distribution that over the long term will help food costs. We have more than 20 different distribution centers around this country. Next year, we intend to open up no new ones. So what does that mean? It means that the trucks that we have in those distributors get fuller and fuller as we go deeper. And that's why we've talked about this strategy of going deeper in current markets. So we've got some of that just scale in general, learning. We've got to learn how to run Shacks in all these different parts of the country. We've gone pretty far, pretty fast, and now we're deepening that learning. So look, it's kind of I think it's a tick on each part of the P and L over time, near term pressure, but eventually that levels off and that levels off in a pretty darn good company. Thanks. Mr. Charles? Thank you. We'll now hear from Alston Stone with Longbow Research. Great. Thank you. And congrats on the quarter, so congrats on that. Just wanted to ask, there certainly has been a fair amount of conversation in industry about whether it's DoorDash or other third party guys on how the margin profile looks when it goes through them versus on your own site and or inside your store. Not that I want to give any specifics, but is there any color on if it's at all dilutive from a margin perspective, if that customer does go to DoorDash as opposed to your site directly? So, yes, you came in and out there a bit on. So I just wanted to make sure I got the question right. Really, it's a question of is delivery a more expensive channel than somebody walking into Shake Shack or going on to our site. Is that kind of the question? Yes. Thank you, Randy. Yes, that's it. Yes. So the answer is yes, delivery is more expensive, right? We have a commission in those businesses that we do not have on our own site. If you come into a Shack, we also have less paper, right? So there's significant cost to that. So yes, we've added a channel that is a more expensive channel over time. But eventually, hopefully, we can deliver on our own app, as I mentioned a little bit earlier. But in general, look, we just want to find a balance of all the things that will drive long term sales growth for this company. Delivery is one of them. Sometimes those come at a cost. Part of why we chose Grub and this new partnership will be to lessen that cost over the long term. And we feel like we're in a good place on that to help out as we look to the future. Great. Thank you. That's all I have. Our final question will come from John Ivankoe with JPMorgan. Hi, thank you. I was looking for a little bit of maybe color on the composition of the comp and specifically traffic. And I asked just because your comp base is still so small and it's getting increasingly diverse, if there's any characteristics by store year, by geography, by time of the day and by time of the day, I mean whether off peak or peak, where you're specifically seeing strength and if you see any areas that you could see for improvement over time? No, honestly, John, there are there's 74 Shacks in the base today, there's going to be 84 by the end of the year. A significant portion of that remains in the Northeast, right, as we've talked about both in New York and the Northeast digital. We've said, a lot of that has been strength to some of the call outs that Tara made earlier. So we haven't broken it out or shared why. I think when you look at what's the upside, I think it's just maturing in certain markets. There's we've talked over time at what happens to a Shack when we open a number of Shacks around it. You have your ups and downs there, but over time, we really feel like those things settle out and continue to grow again. A lot of what we have is very mixed. There are some Shacks that are up, some that are down when they enter the base. All told, it's making for a really great story right now and some strong traffic. So, not ready to break any of that out just yet, but just to say, at all, there's a lot of strong momentum in the company right now and the comp base in our sophomore Shacks and in our freshman and 1st year Shacks too. Thank you. And we do have a question from Andy Barish with Jefferies. Hi, this is Alex on for Andy. Just wanted to follow-up on Alton's question. Assuming that Grub helps to continue to grow the mix of delivery once it's rolled out nationally, can we expect the headwinds then from delivery commissions to alleviate on margins, just given the structure that you put in place with them? Yes, it's a good question. Given the long term agreement we have with them, that's a structure we do believe that will be helpful to our OpEx line over the long term. Now it remains a question mark of how much that continues to grow and that will play into the factor of how much of total sales becomes delivery. But in general, we expect to do better on that line once fully rolled out than we have over this last couple of years. Great. Thanks, Randy. That will conclude today's question and answer session. I will now turn the conference over to Randy Clougherty, CEO for any additional or closing remarks. I just want to thank everybody for coming on the call tonight. Been a busy day, I'm sure, for all of you in the market. So we appreciate you taking some time to be with us at Shake Shack. Thanks again, and we'll talk to you soon. Take care. This does conclude today's conference call. Thank you for your participation. You may now disconnect.