Q3 2019 Earnings Call

Greetings and welcome to Shake Shack third quarter 2019 earnings conference call.

At this time all participants are in listen only mode. A question answer session will follow the formal presentation. If anyone should require operator sits in turn the conference. Please press star Zero telephone keypad. Please note. This conference is being recorded.

I'll now turn the comps over to your host Melissa.

Juice yeah.

Ms.

And Mr. Caladrius you may begin.

Thank you Omar and good evening, everyone. Joining me for Shake Shacks Conference call is our CEO Randy good Rudy as President and CFO Derrek Hallmark during today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance presentation of this additional and.

<unk> and should not be considered in isolation, whereas 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.

Today's David maybe forward looking and actual results may differ materially due to a number of risks and uncertainties, including those discussed in the rest doctors section of our annual report on Form 10-K filed February 27 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 third quarter 2019 earnings release, which can be found at investor Dot Shake Shack Dot com and the news section. Additionally, we have posted our third.

Quarter, 20, 910 supplemental earnings material, which can be found in the events and presentations section on our website or as an exhibit to our 8-K for the quarter I will now turn the call over to Randy Thanks, Melissa and good evening everyone.

We're pleased to report that total revenue grew nearly 32% to.

257.8 billion accompanied by another quarter of positive same shack sales at 2% and positive traffic of 1.2%.

We opened 66 net shack system wide since Q3 18, taking us to 254 shacks around the world at the end of third quarter.

Actually the hard work of our team and a continued trying to more brand both of which are reflected in these results. We're raising our overall revenue guidance of between 590 to one 597 million for the year.

I would agree year for shake shack.

Being opened 32 domestic company operated shacks to date, which 11 in the third quarter and expanding our footprint in South, Florida, Detroit, Kansas City, Columbus, Houston, and New Jersey.

We're also thrilled open for the first time, the new markets of Louisiana, Raleigh, Durham, and greater Salt Lake City, Utah.

Oh, well, we've been able to drive a more evenly phase development schedule. This year compared to last our fourth quarter, we'll see 11 to 13, new shack openings and we're reiterating our previous guidance of 38 to 40, New company operated shacks for the full year.

I will share a full 2020 guidance and our February call, but at this time.

And so between 40 and 42, new domestic company operated Jackson 2020.

Next year is opening schedule is currently looking more heavily back where the we'd like but despite that we remain on track to exceed our previously communicated target of at least 200 company operated shacks by the end of year.

As a business is gain a strong foothold in major cities around the U.S. over the last few years, our Ford focus is shifting to greater existing market penetration will continue to enter new markets and see much opportunity to do so we're also excited to build deeper brand awareness and fill in around those already established shacks.

As we do this we have the opportunity to further support and gradually leverage our existing infrastructure, including operations training marketing and our supply chain network. We have a number of exciting new markets on the list for next year, but in total they will likely represent a lesser percentage of the overall development plan to date at approximately 10% of our new unit openings.

In 2020.

We are increasingly bullish on a variety of forms of Jack will take in the future in 19, we've built across a mix of formats increased our evaluation of new format options. We've added a number of premium food courts over the last year and are encouraged by those results and the next few months, we'll be opening two more outlet mall locations, which have also proven strong for us have you looked at.

I had in the pipeline for 2020, and 2021, we'll execute a strategic mix of shacks, ranging and format between urban freestanding pads and shopping lifestyle centers, but we're also planning to test additional formats, including a few urban chats with a smaller footprint that increasingly integrated digital ordering and an improved pick up express.

It's in their design.

I'll expand formats and build new shacks, we remain focused on ensuring the guest experience continues to improve in our existing shacks.

Ongoing renovations, having happened or planned and some of our highest traffic and most established locations a.

Theater District in New York City, one of our busiest shacks in the country went through a significant renovation last year.

Well because kicking off a few more somewhere New York shacks, including the upper West side and Grand Central station at 2020. During these remodels will be updating and improving layout to ensure optimal flow for multiple ordering giles upgrading our kitchen equipment to maximize throughput and it's going kiosks or bring even further experience to the gas is a convenience to the guessing.

Spirits Somebody's will include temporary closures that'll be incorporated into our total revenue outlook for 2020, it'll come back to you with the specifics around that on our next call a more than ever were committed to ensuring all our shack stand as a community gathering places they have always been and will be for years to come.

Moving on our license business 2019 has been a record year I'm, so proud and thankful for our team spent a huge portion of their lives on the road building this business across the globe.

This year, we've opened shacks in the first time in mainland China, Singapore, the Philippines, and Mexico each of them. That's had an incredible stark and year to date, we opened 22 net licensed shacks, which six open during the third quarter, including our first in Mexico City, our third in Osaka, Japan, our first and boots on the second largest.

City in South Korea.

Subsequent to the core we've also been our second shack in Shanghai, Our third in Hong Kong and our first airport location in the UK in London's Gatwick Airport. We've also open another airport in the U.S. at Mccarran International in Las Vegas, and additional or international expansion strategy, we're confident in the growth opportunity in both domestic and international.

Airports with a number still to come this year.

At this stage in the year with a strong pipeline in place we expect to open between 20 428 net new licensed shacks.

An increase from our previous guidance of 18 to 20 that.

We've been fortunate this year to beat our own expectations on the timing of these shocks.

Found opportunity to pull forward a few openings that were expected for 2020 into this current year.

Given the high volatility in the timing of airport developments in certain international locations, our license openings can shift to significantly period to period. So for the remainder of this year and into 2020 that timing uncertainty remains especially with a high number of shacks potentially opening at the very tail into the core assets will be keeping a relatively wide.

Arranged for now and will firm up our 2020 guidance on February call, but our unit estimate for the year taking into consideration those shacks brought forward. The end of 19, it's open between 20 and 25 net new license you [laughter]. These estimates placed us well on track to we exceeded our previous target of at least 120 licensed shacks by the end of 22.

Morning.

Let's move on the digital evolution of our industry and our brand probably the most important strategic growth opportunity and shift in our business that we're working on today.

Expanding our digital footprint and using technology to enhance the guest experience remains a priority.

And is an important part of our ongoing investment strategy, we continue to invest and improve our mobile app web and kiosk functionality and experience as we strengthened overall digital product performance and remove friction and pain points for I guess, we still are ever have a lot of work ahead of us in order to alleviate what is often front of house.

It's congestion Ferguson and simplify the overall shack experience regardless of Orange out.

And of course, we've been testing delivery ultimately formalizing a partnership with Grubhub at this point, we have delivery available across virtually all company operated shacks.

With Grubhubs platform integrate directly into our point of sale, we can work towards the goal of having maximum 'cause it visibility and real time communication between kitchen demand driver availability and pick up.

All with the objective of minimizing the amount of time, I guess waits for their order.

Reducing time, the N. delivery process is the most effective way to protect the quality of our food something we care deeply about.

And one of the biggest challenges surrounding delivery overall <unk>.

Beginning today will be actively marketing our partnership with grub nationally across a variety of campaigns and channels together with some regionally targeting communications as consumers transact across multiple already channels were pleased to formalize our integrated delivery offering as part of our overall digital ecosystem.

All that said as we mentioned on our last call. We believe the transitional grubhub caused some noise in our Q3 numbers and we'll certainly have an impact through the fourth quarter and into next year.

As we removed direct point of sale integrations with door to ask Postmates and caviar, we expect an impact to our delivery revenue, especially in those regions, where grub may not be the current market leader.

Any difference in pricing placement or regional shrank. The non grew up marketplaces will affect ourselves for a period of time.

How much volatility this will cause during this transitional period is uncertain, but the reality is this represents short to midterm revenue risk.

Lastly, I want to give you a preview of the priorities within our strategic plan for 2020.

Well come back to the next earnings call a specific guidance on numbers as we execute and capitalize on the global growth opportunity. We have ahead of us.

Our commitment for next year are focused and trade for <unk>.

Beginning with putting our people first there's never been a greater need to invest in recruitment retention and leadership development.

We'll be expanding our test of a four day work week for managers and ramping up even more towards our diversity inclusion goals and our shacks will be squarely focused on simplifying our operations deepening the support for our inject teams.

We'll be working to improve kitchen in front of house guess flow strengthening our digital infrastructure and experience and streamlining systems and processes to allow our operators to thrive.

We'll be investing our data and insights capabilities to better understand and personally connect with our guests.

Affording the incredible brand strength Shake Shack has built over the last 15 years.

Making improvements to our current menu and testing some new menu items to drive guess excitement and frequency for years ago.

Finally, we'll be designing and testing some new shack formats to ensure our evolving guest behavior is reflected in tomorrow's shacks community gathering place I'm really excited about what's ahead and with that I'll turn the call over to Tara share more details on our financial results. Thank you Randy.

Total revenue in the third quarter increased 31.9% to $157.8 million compared to the same quarter last year with shack sales of 152.4 million representing growth of 31.5% unlicensed revenue of $5.4 million gross 43 point.

3%.

Same shack sales increased 2% in the third quarter, consisting of a 1.2% increase in guest traffic and a combined increase in price mix a 0.8%.

Our digital channels continue to be key contributor to draw your and your good partially offset by lower average item, but check in the quarter caused primarily by the strength and all LTL shake offering last year and all decisions to limit certain menu items on delivery channels as we work to streamline the guest experience.

On a sequential basis the quota so some seasonality impact all digital channel.

As well as initial volatility when they come to will deliver <unk> delivery partner transition.

On that topic and if you just heard from Randy we quickly progressing I grew up integration and expect some degree of volatility to continue through the end of <unk> and into 2020 as we settle into this partnership I removed direct integrations with all the pilot <unk>.

Moving through the year going into next you'll start to see more shake shack and grew up marketing roll out now that one platform I can talk talk at a future guests in a consistent manner.

Well as they start to integrate all customer data from grew up and parents with our existing data and insights capabilities, albeit there isn't early stage of development and a key investment area for us to further build in 2020.

In addition, well gradually see some financial benefit as a new economic terms would go up start flowing through all financial.

Our results to date combined with the expected volatility from our delivery transition are reflected in our year end same shack sales guidance of approximately 1.5% for the year.

But the uncertainty around the short to mid term financial impact about delivery transition that remains more inherent risk and all fourth quarter performance than would typically be the case at this stage in the.

Well also be lapping our toughest year on year comparison, this quarter due to a ramp up of digital and delivery performance last year as well as the warmer weather we experienced during the busy 2018 holiday season.

Over the past 12 month, we've opened 44 shacks, 85% of all of our shacks <unk> outside of New York City.

As a whole for the trailing 12 months ending Q3, we've added $131 million in total sales with growth of just under 3% and same shack sales.

All regions, adding new shack sales and delivering growth and I couldn't be cells.

Well, we're pleased with those same shack sales performance remains relatively small parts of the annual revenue growth as a company with less than 7% about total shack sales growth over the last 12 months coming from a comp base shacks.

Today, a comp base represents around for 54% about total shacks decreasing 52% by the end of the yet.

Our trailing 12 month average unit volumes remained strong at 4.2 million at the end of the third quarter with average weekly sales of $80000 during the quarter.

As we brought internal sales volumes by opening new shacks across the country and expanding further in existing markets. These average unit metrics well experienced gradual decline the four leveling off.

Consistent with our updated guidance from last quarter. We continue to expect company operates a day easy to be approximately $4.1 million for the full year 2019.

We expect licensed revenue to end the year between 18 and $18.5 million.

Significant raised from our prior guidance the 16 to 17 million.

This strong performance is driven primarily by all four new markets openings earlier in the yet it maintains that performance above expectations together with an increasing the number of new units opening is now expected.

But as a reminder, with fully expecting those large 2019, new market honeymoons to normalize as well as lowering expectations for all Hong Kong shacks, given the uncertainty in the region.

We're thrilled with the performance and growth of our license business overall, this year, which will impact overall license sales projection 2020 .

As we look at our 2019 revenue expectations broadly.

There are number of factors contributing to our updated guidance.

As Randy mentioned, our domestic opening schedule has been somewhat more balance this year with a number of our shacks, having opened earlier than originally estimated date, allowing us to gain additional sales and operating weeks from the current class.

We're also pleased to be seeing a sophomore class into the second do you have with less of an initial decline than we previously forecasted during the third quarter.

We now expect total revenue of between 592 $597 million for the full year a raise from our prior guidance of between 585 590 million.

Moving on from Tennessee for the quarter Shack level operating profit for the third quarter increased 17.4% compared to the prior year to $35.1 million with shack level operating profit margin of 23.1%.

There are a number of new elements impacting on profitability. This year, some short at seven nature, and some new cost directly related to the changing dynamics within our referral business.

Nothing with food and paper costs, which were 29% of shack sales an increase of 80 basis points on the same quarter last year was flat sequentially.

Consistent with the last two quarters yoni or increase was driven primarily by chicken bites, albeit with lesson that material impact in the first off yeah.

Improvements and the cost profile of this menu I can have been coming into effect gradually over the last six months.

With further supply chain efficiencies plants to come into effect early next year.

As a reminder, chicken generally remains a high cost item and all basket specifically the premium quality no antibiotic standard that we insist upon.

Chicken by its remain an interesting menu item ceiling test with much breasts continued to the first in terms of guest feedback and operational execution well keep you up to date, because we decide how long does help here were made them.

Well generally food cost inflation about basket as a whole made modest in the quarter.

Some increases in beef and dairy we have however, since the more recent inflation and b and expect to see that potentially carry through the fourth quarter and into next year.

Could increase our overall cost of goods.

Beef continues to represent the largest item within our basket. So any significant movement does in fact, all shack level operating profit margin.

We also continue to see an increase in paper costs on a year on year basis as a direct result of on digital sales me, which comes with additional packaging.

This dynamic to remain as digital including delivery represents an increasing growth opportunity for our business going forward.

It's also worth mentioning what on this topic, but as possible commitment to look for ways to improve all sustainability hit those initiatives often come with cost implications I'll move away from plastics rule was last year being a perfect example.

Labor and related expenses were 27.3% of shack sales and increased 30 basis points on the same quarter last year, representing a narrowing of the de leverage experienced over the last few quarters. Thanks to the continues so because of all breaches together with the fixed labor cost component benefiting from sales leverage.

While the broader market remains a challenging as ever in terms of both cost and availability of labor New shacks also continue to unpack. This line if they typically are done with highest dolphin costs.

We didn't bringing staffing into line and new shacks slightly faster as the year has progressed, although the dynamic still exists I will continue to do say for good reason.

With 11 to 13 shacks opening in the fourth quarter, we'll certainly see some of that higher opening costs continue to impact our labor line.

As we look forward to next year.

The challenges that come with is tight labor market to remain based on the cost and legislation side in fact, a number of cities in which we have a significant presence, including Chicago Philadelphia.

Well for many implement a similar labor legislation to the fact work week that we have in New York City over the last two years.

These regulations out a significant amount of inefficiency draw later model, we're moving the ability for more dynamic scheduling and adding payroll costs and administrative burdens the role of all managers.

We're working hard on a number of initiative to mitigate these headwinds by continuing to really inefficiency from elsewhere in our model taking various administrative tasks I took the shacks with project concrete and optimizing both all scheduling methodologies and improving all to support them.

Other operating expenses as a percentage of shack sales were 12.4% an increase of 80 basis points compared to the same quarter last year, driven primarily by increased shack level marketing activity in shock technology costs and repairs and maintenance expenses.

We recently made the decision to step up our investment in a in shock technology and strengthen our digital infrastructure in the quota in order to maximize the performance of all broadening array of digital products and ensure our shacks well sets up for an ever increasing digital future.

[noise], increasing volume of orders originating beyond the cashier, maintaining a strong and reliable technology Foundation is critical it's continuing to deliver an ever improving guest experience.

Okay, Patency and related expenses as a percentage of shack sales were 8.2% an increase of 80 basis points driven primarily by the adoption of a new lease accounting standards that went into effect at the beginning of this fiscal year.

Hi level summary of the impact of the newly stand it can be found as in prior quarters in a supplemental materials.

Well that topline growth remains strong our 2019 shack level operating profit margin has been impacted by the items I've mentioned.

Increasing makes a chicken with an eye basket inflation, and beef and dairy labor costs and regulation in all key markets the cost of new shack opening and based investment in cost associated with all digital growth.

In addition, this year. We also have the negative impact of an approximate 50 basis point headwind to shack level operating profit margin, resulting from the new lease accounting standard that went into effect at the beginning of this year, albeit the impact is close to neutral on a net income basis.

Taking all of these factors into consideration we are updating all shack level operating profit margin guidance for the full yet to be between 20% to 22.5%.

Total DNA for the third quarter was $17.1 million and included $1.8 million related to non cash equity compensation as was approximately $1.4 million related <unk> ERP system upgrade project concrete and other onetime costs.

The year on year increase in all geographies entirely driven by a significant business gross today.

Had with ongoing investment for growth ahead.

We're adding resources across almost all areas of the company and our operational support all technology and digital capabilities.

Founding marketing activities and of course, and I'll people resources function.

In addition, we now have additional cost related to our first international office up and running in Hong Kong critical to supporting a high grade license business in Asia.

The call finance and people resources systems within project concrete, but life at the end of June and our teams and I working through the optimization of associated business processes across the organization.

We're also now in the midst of the next phase of this initiative focused on a invoice supply and inventory management platform.

The new system and associated process redesign redesigns of family talk to the shacks intended to lessen many of the time consuming and administrative tasks currently being performed by the teams that.

Over the course of the border project called Cree implementation with capitalize a significant portion of the project cost based on spends a date. We expect the 2019 operating expense a project called agreed to be approximately $2 million and 2019 capital spend to be between 5.5 and $6 million.

We'll update you more specifically around final 2020 spends and all February cool.

However in terms of go forward impact this type of technology implementation falls under the cloud computing asset model will result in those capitalized costs being amortized in gionee over the remaining life of the associated kind software agreements, which raises ranges from three to seven years.

Our expectations for total DNA in 2019, which includes project complete and equity based compensation remain in line with prior guidance $67 million to $68 million.

Within this number we expect to end the year between 57.5 $58.5 million the core Gionee and then approximately 7.5 million for equity based comp.

Sales performance will likely result in your and your leverage in 2019 in the total Gionee line and there's not a trend that we expect to carry into 2020 as we've emphasized many times and with a strong balance sheet. We see many areas of opportunity is the continued investment to drive long term returns and plan to prioritize those into a three.

Your next year.

Depreciation increased 40.8% to $10.5 million for the quarter driven primarily by the addition of those 44, new shacks since this time last year.

Expect depreciation to be between 40 $142 million for 2019 inline with our prior guidance.

Pre opening expenses in the quarter were $4.5 million with a year on year over year increase driven by the high a number of shack openings during the quarter compared to last year and also a number of expenses related to future openings being recorded in the quarter.

Oh, yes, we expect preopening costs to be between 13 or $14 million with our biggest class of shack openings to date in 2019.

Interest expense declined $459000 compared to the prior year driven entirely by the change in accounting treatment related to build to suit leases, which had previously been accounted for in this line and I recorded within occupancy.

For the full yet we now expect interest expense to be between 450 and $500000. The slight increase from prior guidance driven by additional interest on T., our eight payments and an increasing the number and timing of equipment leases from new shack openings.

Adjusted EBITDA in the third quarter increased from the same quarter in the prior year to $23.3 million, an adjusted EBITDA margin in the quarter was 14.8 cents.

On an adjusted pro forma basis, we on $10 million or 26 cents per foot exchanged and diluted share increases within these pro forma results as a seven cents tax benefit from increased levels of stock based compensation compensation activity during the quarter.

Which is also the primary driver of our negative 3.9% pro forma effective tax rate.

Our underlying effective tax rate, which excludes the net impact of the excess tax benefits I just mentioned was 25.4%.

A reconciliation of our tax rates is included in the appendix of all supplemental materials.

Third quarter right. So a catch up benefit as we now expect a slightly lower annual effective tax rate, primarily due to higher tax credits and favorable state mix.

We continue however to expect our pro forma effective tax rate for the full year to be between 26.5% I'm, 27.5% well they likely towards the low end of this range.

We're proud of the team this year and continued performance the business. Despite the headwinds impacting our 2019 shack level profitability, well, making foundational investments across the company spoke with and strategic investments to deliver additional topline growth and bottom line cost efficiencies over time.

We're working to optimize our existing operating model and mitigate operating profitability headwind with talked isn't initiatives across the business, including supply chain labor kitchen design, a more suffice to say we have lots of work going on across the company right now no <unk> not just to expand this great brand for the domestically and globally, but to ensure.

Well, we're building a business infrastructure and the guest experience to drive continued success for many years to cap.

Ill now pass you back to Andy.

Thanks, before we move to Q when I asked want to take a moment to acknowledge and congratulate her on the recent expansion of her role to president and CFO . She's got such a positive in fact, our company over the past few years, both in terms of for partnership with all of our key leaders, but also on a broader strategic development in execution as we build our company for the growth ahead.

As we grow it's more important than ever that I'm focused on what's ahead for shake shack.

I remain really close to our global and domestic development strategies, our site selection, our guest experience our menu strategy our ongoing innovation.

Cars brought enroll enhances my ability do these things even better as we prioritize and execute our strategic priorities so critical to our growth.

While building a strong long lasting and scalable business built for generations to come.

With that we'll open the call for questions.

At this time, we'll be conducting a question answer session. If you would like to ask your question Press Star one under telephone keypad a confirmation total indicate your line is into question Q you May Press Star too. If you would like to remember question from the Q4 participants using speaker equipment. It maybe not sort of pick up your handset before pressing the star Keith one moment, please while we pull for questions.

Our first question is from Nicole Miller Piper Jaffray. Please proceed with your question.

Thank you and good afternoon on two quick questions. The first one is very big picture long time, you had some fantastic accelerated development this quarter and taking that into consideration in booking a couple of years out press modeling that far it's very to winning relatively soon that we see you closing in on 400.

50 stores, which was a call you set a while ago. So how do you feel about that what does that look like going forward.

And then just a second final question, which is a pair of it.

It's really hard to tell from your tone at the same store sales guidance since its cost Marion and very well documented understood or but trying to crank current trend to date. Thank you.

Thanks, Nicole so on the long term, we still have never changed our initial guidance of 450 domestic company operated shacks right as of today. We've got a 156. So just about a third of the way there because there's so much screw up still to come we haven't changed but how do we look at it.

Part of it I mentioned in my earlier comments, when we're thinking about the number format. So we can do which are increasingly interesting to us whether its food courts outlets.

And some smaller formats, you know, we're actually going to open a restaurant here Manhattan at the end of the year, maybe early next year, depending to one of those that's right on the on the cost that will be a little bit smaller and with very few seats inside and built for really the digital and delivery experience. So that'll be interesting test for us and we've got a few more of those.

Noxious urban but some some throughout the country that we're going to tests that are different formats that'll teacher. Some things so but we continue to be encouraged we continue to believe there was a huge opportunity out there.

Both domestically and as you saw internationally with so much of the good start we've had this has been a you know well over 40% growth in sales. This year, it's been a tremendous your international so we're really bullish on not where we're headed for same store sales you know, we never give me a quarter guidance, but based on the trends we've seen in the fourth quarter to date.

Well as the volatility we absolutely expect and and as we've noted have seen are already a with a broad transition. So much of the shifting of all these third party marketplaces, we do expect lavelle volatility in this year.

Turning to here and that's all part of our guidance look it and when you look at the beginning the year. We had initially guided to zero to 1% same store sales. We believe we'll be right around 1.5 right now we've had a solid year and that compares are tougher this quarter and we'll keep you posted on what looks like for next year, but there's going to be noise in the numbers for wall through this transition we ultimately bill.

Leave it's an important strategy, we're on a and the right. One for this next step in our digital experience, but it's going to it's not going to come without its challenges in the near term.

Thank you for the thought.

Our next question is from Sharon Zackfia William Blair. Please proceed with your question.

Hi, Good afternoon, I guess, that's a question its kind of a related question on the margin guidance of being refined for this year as that.

So direct reflection of the comp guidance change and then secondarily is there anyway to help quantify or what you're seeing what the delivery disruption maybe you know in a market like New York, where seamless is so strong or work Rob.

What things look like there versus somewhere where postmates or or door dash might be stronger.

Hello, <unk> churn, thanks, I'll start with the second question.

Look we're not going to quantify you just yet it's pretty noisy even if you follow our our day to day today was the actual launch day of grew up you know we were actually trending on Twitter and the top 10 trending things for the last few hours, it's been kind of a huge day for us with grub and he's going to be a region by region.

Conversation that said, we have two years of people, who have built up habits, whether it's on postmates or door to ask for caviar.

Very little of arc tests were with Grub. During this time and we're gonna have to move those people over so when those third part other third parties are eventually not integrated into our system in the near term, which will happen in this probably in this next quarter.

If not sooner.

We will see what happens.

And we're gonna have to do a lot of marketing a lot of work to move people over the broad platform, which we think we'll do that said in New York you know, it's a strong grub nor could place, but we have done a lot with those other other marketplaces. In this last couple of years in places like L.A., where I'm, probably not the market leader, that's going to be even harder work. So we just have seen.

We're not going to break out what that is we'll talk about that.

Last weekend in the next quarter, but we expected to be pretty noisy.

But you know we feel really good about the path that were on its just going to its going to have some some turns into us as we go here I'll, let Tom to speak to the op profit sharing yeah, and I mean, I think needed to the 20 to 22 and a half is is our best estimate of what we're going to end the year right now I think some of the new things that was thing.

Since we last talked you and you see some of them in our numbers would definitely beginning to see some more inflation come through in beef.

Which is you know some new news since we last spoke to you and we expect when it continues through the fourth quarter and potentially into next year and in addition, and you saw this in the Q3 numbers a little bit and our other opex just being a bit higher that than it had been trending earlier in the year and we've got some marketing going on in a wheel if they still have delivery Commission.

Isn't that when we have our NIM, which has always been in that but all say that decision to really strengthened some of our technology in shack say the all shacks are really very well set up for not just the digital business. They have today and the multiple digital channels that they've got coming in today, but also if increasing growth and digital as time goes on so.

There's a lot of headwinds in shack level operating margin I, you know I listed many of them and what we're really busy and you know across the company doing as many things as we possibly can to mitigate the weather within our control.

No I listed a number of they oversee pieces fee for the challenging one but you know supply chain has a good example, where around the alluded to the fact that will be more focused on.

Existing markets next year that will that helps us start to leverage some of our existing coal spaces of existing infrastructure supply chain being one of them.

That's really helpful I [laughter] <unk>.

I think one other thing you mentioned on the comparable was on the they average ticket side that you streamlined.

Somebody offerings for delivery could you expand upon that and if that is oh, just kind of order of magnitude. What you did how that might impact your fourth quarter as well.

Yeah. So one of things that has been a part of these pilots for last two years, it's been testing what things travel well would switch things down and and which acts. So there's been on an off over the course of this year as it compares to last year, we've had various items, whether it's been juices soda sometimes shakes sometime.

Zeltiq goes.

Bonds regional specialties.

Not included in the offering.

That's been something we'd need to learn as we've tried to figure out to make these degree guest experience and when you have multiple partners. As we did you have so much happening in the kitchen that you really want to streamline this now as we move forward with Grub and part of again part of our strategy doing. This is we can we just remind that alone, but we can begin to bring back some of those things because we can count a little bit better on.

Driver availability.

And the ability to execute on those things. So we believe that had an impact on some of the items for Jack.

And some of the some of the impact on the numbers for this quarter.

Okay. Thank you.

Our next question is from Katherine So Ritchie Goldman Sachs. Please proceed with your question.

Great. Thank you I'm I invite your questions here. So first of all can you expand a little bit more I know, what you mean with that increased marketing cadence you're gonna be doing around crowd I'm now that youre kind of nationally in line here well. This include you know free promos and the Lakeside TV anything on that.

And and then the second question I have as you know with we're seeing higher beef inflation in dairy inflation here. I mean is that you know impacting or changing the way that you're thinking about I'm, taking price is it possible that you take more price if we see I'm higher inflation I'm on these.

Thank you.

No on on the go up rollout as we've been pretty quiet about it it's been happening over this last few months.

We've just gotten to kind of nearly all shacks rolled out now and today was really the beginning of marketing and for the most part we've actually never really marketed.

Delivery ourselves, it's been mostly partner base a marketplace driven so we know our marketing deprogram going with grab if you look at our Twitter for the most were one of our most engaged we to ever.

Today, our shack up.

Tweet, where we were doing these encrypt really cool neon jackup signs that people could win and we had a ton of people come on and hit it back.

We've also been doing some free delivery promos those things will come in and out you'll see a lot of it it'll be national in certain areas and it'll be regional for certain other things, where we determine there's some interest we may do some more regional promo so you're going to just kind of see that our channels on grubs channels and threw out and inactive way over this.

Next period time, and part of our partnership will be that there's a significant contribution that grub will make in marketing dollars to to fund a lot of conversation about this over the next month.

Okay, and then you know in relation to price and I mean, we have typically always been quite conservative in terms of how we think about price typically taking one and a half she spends every day.

I think you will see as do the same next month, we expect to take within that range.

As we did this time last year at the end of December . So I think at this point, we are planning to take more price to offset those headwinds having said that having you know it's definitely available to us and it's something that we're keeping a close eye on pricing strategy methodology. It continues to become.

More sophisticated as we expand across the country into different markets and I think because we still want to really build out these digital channels, particularly now with delivery being a formal parts of the offering. We also have the ability to potentially different price by channel something that we have never done. So I think it's a you know I think it so.

Watch and see will we will see how high some of these headwinds play into next year and have some of these channels performance and definitely reserved the right to use price should we ever should we have a feel the need I do think you will see as overall remain relatively conservative, though just because the brand is still so.

Early in terms of it experiments and quite frankly across the country and it's still very young company and certainly very young in certain markets across the U.S. So it's an area that I do expect us to move suddenly to be super aggressive in but it's definitely a lever that we have available to us that we continue to continue to look at that.

That's very helpful and you know going back to the guidance and the fact that where you're starting I got pretty heavy marketing calendar on their promotions around crowd with your guidance for one and half percent comp for the year do you contemplate a lift from advertising around delivery.

Well, it's all built into the guidance, which you know at the other day I think it's going to be a still a lot of shifting a lot of change a lot of it though it's hard for us to predict.

Which is why we've given the range that we've given right now in this approximately one and a half I think the fourth quarters, you me really interesting quarter for us to watch and as a as I said earlier, we've got a lot of people who built up behaviors on other marketplaces, where they you know we were I need to move over to grow up that's a lot of work lot of time and it's going to be.

I mean real project here for for a while the Lake stop I can get occasionally where do you have to see how this channel plays I don't have that delivery line plays out over the next few quarters as we integrate those other partners. So I think you know we alluded to it and all in our prepared remarks that that Q4, calling on budget. It has a higher.

A level of of risk associated with it but I think would be typical for us at this time in the year. There's just the you know there's a lot of change going on in an increasingly important piece about business.

Thank you.

Our next question is from Lauren Silberman.

Credit Suisse. Please proceed with your question.

Thanks, I just wanted to clarify on delivery seems like your available on grab across the system are you also off of the other deliver delivery platforms and then on your decision to the exclusive with the garage, we've seen many restaurant companies moving away from exclusivity.

Partnerships. So can you speak to the strategic decision to partner just one at the risk of losing south.

Yeah look at the moment, we are available pretty on grub add olmos or less than a handful fall shacks are not available so pretty much everyone across the country. We are still available on certain marketplaces for the time being on Postmates jordache and caviar, although probably in the very near future certainly.

In this fourth quarter.

They will become on integrated so whether they choose to keep us on their platforms are not that that will be up to them.

But our agree with Rob is to only integrate directly and market with them. So why do we do that for the same reasons, we've been talking about setting aside any other companies decisions. Our decision has been consistent as we've talked about in the last few quarters and when we announced this in the last quarter.

We're going after the greatest guest experience, we possibly can making sure that food gets there in the best way can.

And what we've seen with so many different platforms is that.

It's been more challenging for operators more challenging for our guests. So we want to give a clear channel where that can happen in the best way Weve possible. We also are going to benefit from the data that we learn about our gas about grub people and how we can harness that.

We were going the other directly market with them and that'll be exciting for US. We also believe over the long term and this is we're a long term thinking company, we're not just going to jump onto the next quarter.

That this has the best potential to be the best revenue, we can get and in and lastly, the overall improved economics.

We expect to our grub deal they will be better.

And the Opex line than the economics, we've had in various pilots or last years. So all those things together. This is the next step it may not be the forever. So that we may we may at some point of future reconsider that as we learn but today. It's the next step we're making its an important one and we leave it to rise that for shake shack today.

Thanks, and then just on the delivery next are you seeing a relatively similar mix across markets are pretty wide dispersion across shacks.

Very wide dispersion always has been do these pilots and that's been partner, but it did for the certain ones that are shack related right.

And then there most of it is partner shrank. So you have certain regions, where various partners are stronger than others and you know interestingly in our pilots we've had certain shacks within a region be very different between partners.

Overall, we think grubs going to do the best job move all the potential partners, we had of bridging that gap across the company, but that's certainly going to impact sort of jacks at times Grubs got to got to continue to win market share in markets, where they're not winning.

That's their job to do that and you know we hope our presence on their can help and do that in the markets. They want to continue to improve on and the markets whether already strong we hope to capitalize so.

We'll be watching all of the regional data really closely as it goes.

Great. Thank you so much.

Our next question from Jake Bartlett Suntrust. Please proceed with your question.

Great. Thanks for taking the questions Randy I'm I'm sure, we'll confuses chooses to what has been disruptive so far it sounds like you've been rolling out to Grubhub, but you're still integrated with the other partners.

Sounds good go from your comments that you're already seeing disruption.

From the transition to grow up so help me understand what has gone on kind of to date.

In two <unk> in patch.

Your same store sales and then.

Really the Passporting I guess you talked about.

Disintegrating with those partners really fairly shortly but.

The next step is that and then we just kind of rebuild with grub.

Yeah, I Jake I think when you are we've been piloting in these last couple of years with all these different marketplaces.

What.

What creates noise is when pricing whether it be.

Delivery fees service towards other things placement on their third party marketplace side various promotions that those companies may have done.

When those things change it makes a lot of noise and as you might imagine those things have changed from time time, especially since our announcement with growth. So that's been really part of it and again for all the reasons I just mentioned with the previous questions. A again, we believe this is the right next.

Next term were not as good term all on just for the sake of sales here, we want to make sure that we're building somebody asked last thing that I guess has a good experience. Most importantly, and you know the number one contributor for us to delivery being good. His time is making sure there is a driver available.

Person is sink dump the timing in our kitchen.

And that doesn't get their food as well as quickly as possible. If we can do that long term success.

It's going to be the most important factor we're looking for so again, we've said this consistently and we'll say it again you know we expect some volatility in this piece of the business for sometime.

Okay and in it but it just to clarify it volatility that you've already seen kind of quarter to date or internal towards that since you made that announcement that you.

That that there you've been impacted by it so far.

We've begun to see it in the third quarter numbers, and we expect to see a lot of it, especially when we do not when we no longer integrate those other partners in the fourth quarter.

Got it and can you just talked about some other drivers to the same store sales I believe you in 2020, you were going to potentially get.

More active with menu innovation efforts focusing in on on digital integration and simplifying operations in chicken bites on his menu innovation. The significant driver in 2020, and then also asked if you can just touch on cannibalization new it's it's.

You're talking about kind of in Philly markets and it seems like that's going to be even bigger part 2020 than it has been in a long time, how much should that be a potential dragged into same store sales.

So most of.

There's potential contributors to same store sales growth that we're looking at in the future. We always talking about menu innovation. This year has been a lot about chicken bites, mostly entirely about it right. We've had some wins in some losses on some of our shakes that were better than others. So some of the innovation will be doing is will be we'll be doing a trio of premium shape.

Jason this in this upcoming.

Couple of quarters, which were excited about little bit more offering.

Thanks Todd.

We'll be where we haven't announced the yet but we'll be doing some LTL work next year with some of our classic items.

All towards the goal, though of continuing to drive this digital piece of our business and simplifying our operations, we want really want to make sure with so much of the business changing and so much of the flow in the shacks.

Food moving in and out of shacks had been the biggest concern for us and something we still need to work a lot on so we're going be working on on on those things that that's really going to be the biggest part.

Of our goals for menu innovation.

Got it thank you very much.

Our next question is from Andy Barish Jefferies. Please proceed with your question.

Yeah, Hey, guys I'm, just a follow up.

On that last question from Jay kind of couple of things as we look out you've talked about some some honeymoon.

Impact coming off is that starting to show up and an overall average unit volumes and then you know the point of development in more existing markets.

Do you think you think that's a little bit of a headwind in 2020 to same store sales as we look forward.

Well.

We're learning a lot here, obviously still such a new thing remember we opened about a third of our restaurant in the last last year and we're going to do.

Not quite but roughly the same in next year with the with the early guidance, we've given right. So so many new shacks coming in so much to learn generally the sophomore classes. We mentioned here has done a little bit better than we expected it's kind of hit around its historical average of about that generally we model our sophomore class down around 5% summer down.

More not if it really big launches summer up.

But generally we feel pretty good about it there's been a few big shacks that'll that'll be entering in Q4.

Data that will be soft moring in Q4.

Seattle.

Palo Alto some of our big ones.

But but I think as we think about going to less new markets. It's hard to say will happen, but my expectation is that.

My hope is that we'll have less of these huge bangs in the first year and a little bit more of an even performance. It allows us to grow over the long term. This is a long term comment on making but I think it's something we've got to.

We've got to continue studying continue to see.

It's been fun for us whenever we've not had a huge start we've often seen those restaurants continue to grow and a nice pays so our hope is that that that's where we go with all of US as we go deeper in new more a new markets human deeper in our current markets.

Yeah, we've got more of that dynamic. So we'll see we'll see we'll keep the positive but as of now that business is performing similarly to how it how it has and when it comes to sophomore and potential cannibalization.

Long term Andy there, obviously benefit for us as we mentioned as we you know.

Focusing more on existing markets just leveraging the infrastructure in the system. That's already that I'm, you know whether it comes to whether it relates to brand marketing in market or even centralized marketing, whether it's just operational support training and recruiting we supply chain for sure I'm you know across the board Nissan light switch.

Right and they didn't change overnight with one additional shocking to market. The over time as we do continue to build a around our existing footprint. It just allows us to so think about.

That's a use of those existing resources and leverage over over the long term.

Thank you.

Our next question is probably not Chris Ocull Stifel. Please proceed with your question.

Yeah. Thanks, Tara you mentioned the company doesn't expect gene a leveraged next year, but can you help frame up what type of growth rate. We should expect in terms of Gionee, maybe next year at least over the next few years.

Oh, Yeah, Chris how are you we haven't we haven't given these numbers at this point, we'll give you our 2020 guidance. Obviously in February as we mentioned I think it's just you know at this point just more headline commentary around that line item and just again around where we are in the in the big long term growth.

Journey, if that this business and we still feel really early in terms of that expense and whether it be domestically or globally. So there's just there's I think as Randy said. It you know we were not managing this business the quarter, we're managing the business for the long term.

And we still see plenty of opportunity for continued investments the gross the topline growth of the bottom line leverage on the bottom line efficiency and so I think you should just you know the comment was to make sure that you expect that's continue it than we've been very consistent in level, yes. They will give you more details in February but right now.

Best thing across the board and you'll expect feel a lot in guest experience and Randy talked about you know shock innovation design and we're investing in training and people in recruitment and development get an old technology infrastructure. It really isn't it on across people and say that that's that's not going to stop anytime soon and we feel really good about.

Page it with a weighted good about those areas that we're investing in and but this year and and to the you know a period of time to come.

No I appreciate that and then some modeling question. The licensing revenue guidance you guys gave implies about 4 million in revenue in the fourth quarter and I may have missed this but was there any reason, but you don't expect the current run rate to continue, especially given going to have more license openings. This year than you expected.

You are you asking about the run rate for the fourth quarter into 2020.

Fourth quarter.

Yeah, I don't have a broken out I think well look we've been part of why we were able to raise that guidance is we've done so well this year with so many of those big hitting shacks right Shanghai, Singapore, Mexico in Philippines are.

Just just an outstanding start we'll see how that goes you know, it's hard to say where that goes in the fourth quarter part of the the potential limitation there, though Chris is Hong Kong, we have definitely been impacted there.

Talked about in my notes, mostly related to 2020, but we've definitely been impacted there yeah. We've got a lot of closures. We have our three shocks that are open there and some of them that's locations.

I can imagine a Hong Kong and that that city has changed right now so.

And this is concerned that's part of the balancing of all the fourth quarter potential.

Okay. Thanks very helpful.

Our next question is from John Glass Morgan Stanley . Please proceed with your question.

Thanks very much first.

No you're not going to talk about 2020, now, but maybe at a high level, how we should think about shack level margin.

Particularly the pressure given the pressured had this year.

Is it for a foregone conclusion, it's likely down just given where do you talked about for for a day work week for some managers and fair work we could all these these other pressures.

You know conversation Kimberly about pricing is there a margin level, which are if you're willing to fight forward to say no 22% as a good shack level margin for business and we were able to control factors such that we can achieve that and 2020 beyond how do you think about 20, just well high level.

Well look I think where we're at today down from our expectation this year, but still pretty fantastic business.

20% to 22.5% I think well always fight for margin in every way as we look at next year, John It's not a foregone conclusion that it should go down okay. We're not saying that we've not given that its explicit guidance and we will do that I'm coming up here, but the major factors a few things happening. Okay beef is all the sudden.

Quite a bit up we need to watch very closely that'll be our number one in back to Cogs and what happens there.

Labor you know, we will see similar to kind of middle mid single digits increases, but less so than this year. So.

We do have a law the fair work week stuff, which is really an unknown in so many new markets as to how that's going to work and its cost we've certainly seen it impact our New York shacks quite a bit.

And that's and that's been hard thing on our margins here in New York with her work week. So.

As we look at Opex as a lot we're attacking there, including the delivery costs, which hopefully will go down but a lot of things. So will you know there's a there comes a point in this business, where I know people would mean yourself says what's gonna look like for long term, that's not a number we've given but it is something we're very confident in leveling off overtime we.

God, we still are continuing to add at various volumes of away from where we used to be at these super high movies that starting a level.

And as it does we expect to that.

Profitable level within and something that overtime, we can get back to growing for the moment, we're still under pressure there and you know we'll see how next year goes it's the best we can really say this time, but we'll keep we'll do do that explicitly in the next fall.

If I could just like one quick follow up on chicken bites, which you mentioned is one of the major initiatives. This year. We saw we've talked about it every quarter, but you still referred to it as an LTL why is that I mean, our isn't big enough now that you're kind of stuck with it in the sense that there's a big sales mix there were a large enough that you'd notice. It. So is it more like just modifying the product or might bring pricing or whoever else you want to maybe.

Modify it.

Or is it really an opportunity or.

Possibility I should say that you actually just don't continue with it for some reason.

Yeah, No we're definitely stuck with anything I'm certainly not that I. That's why we say that is we're still.

Looking now understand number one guest satisfaction, which we think it's pretty good but also our own ability to make these as consistently excellent as we want you know so their supply chain initiatives that we've been through to to get our costs in line with human grade. There's also supply chain issues for the just improvement of consistency in the product so much as a young company here.

We've got a lot of work to do and how we roll things out and how we listen and learn more gas and the way that we understand their shift so.

The reason, we haven't said that is even though you know you will see at an all shocks not all nearly all shaft. It's something we still are not sure we want to keep forever and we'll see people like I know my kids on room and you know we're still we're still learning so.

That doesn't mean, we couldn't removes something that's been on the menu this year. So.

Well keep an eye on it.

Thank you.

Our next question is from Jeffrey Bernstein Barclays. Please proceed with your question.

Great. Thank you very much.

Two questions as well the first one just on the.

Topic already discussed in terms of pricing power.

And seemingly you're not in a rush to take the incremental pricing, although it seemed like structurally speaking.

I'm now would be good time in terms of justification, but I'm just wondering how you measure.

Sunpower, whether there's any concern that maybe.

You don't have as much in if you want to wait or how you go about testing or arriving at what kind of pricing power you actually have and I had one follow up.

Where you were spending more time and efforts right now both internally and externally answering that question. Yes. We we've always felt like we have great pricing power, we've always been very conservative with a very long term view on our pricing.

You know again, there was only one other time in our history that we went kind of above to 2%. That's when we've really skyrocketed number of years ago. So something we're keeping an eye on we were not opposed to.

Lots of different pricing opportunities next year in variations I think as we look at December .

We've modeled this out in the prices, we kind of want to be out in the regions. We want to be at in that kind of one NAFTA, 2% range is probably where we'll landed this next one that doesn't mean, we couldn't take more next year doesn't mean, we're not a rural and also on willing to consider pricing in various channels, which has opportunity whether its delivery or otherwise to protect our margins and.

Those are all things were really deeply considering right now doing quite a bit of researcher and hallmark honor to try to find something so you'll probably see us test. Some things next year, you probably see submission new regional things that we're looking at.

And and you know continue to get a little bit more aggressive there, but for the meantime, we're going to stick with our with our conservative approach for the next the next near term.

Gotcha, and Randy you mentioned before.

So many new shack, so much to learn which is obviously a great thing I'm just wondering how you think about the the recent investments you've made in the people and infrastructure and supply chain. Do you think you guys are ready to handle the further outsized growth just wondering how you assess the corporate where it stands at this point.

I think we there's been a lot this year with project concrete with the next phase as far as mentioned of project concrete coming which deeply impacts the shacks. The most all of our ordering invoicing procurement and inventory that's a big one and and so much of this growth you know we're looking we're targeting a similar number of shares.

Next next years, we did this year.

That's that's a that's the right number probably for us for this year, but all of that is to make sure that we're building great shacks for the long term that give us the opportunity to do what we want to do you look at our focus is for next year people.

Simplification of option and really winning the guest experience those are things we want to make sure we're doing well no matter how many shacks we open.

And we don't open to many that that allows us to not do that well. So our focus will be on continuing to execute execute at a high level as we have and have great community gathering places for the long term.

Thank you.

Our next question is from Andrew Charles Cowen and company. Please proceed with your question.

Great. Thank you Randy drug delivery no active to shake shack happened website and as we sit here in the first data. The platform is live nation wide well to be a conscious effort on your end to try and channel delivery through the happened website. After six years happened website to help maximize data collection.

Eventually, but not today data collection is one of the most important parts of why we chose grub, we're going to have an active opportunity to understand truly our guests who come through their marketplace.

And that can be huge for us. So we can also directly market there when we choose to today you cannot do it.

Delivery to the App or the web, but it's something that we've targeted it is actually a goal for us, but we don't have a date on when that will happen there we want to focus on our own a.

The digital offerings that we're doing right now as well as getting delivery going on drugs, but huge opportunity down the road for us.

If we can continue to give people regency use our app in new and exciting ways.

Sure and then try I want to come back to the margins you know in the context. The updated 2019 restaurant margin guidance, that's brushing up against the high end of long term guidance V 22%.

Long term margin guidance issued at the time of the January 2015, IPO before you joined the company, obviously and give it since that time, we've seen persistent mid single digit labor inflation.

The issue before third party to live it's worth factor and the adoption affair work week acts that were not contemplated in the original guidance. So can you talk about the confidence you have as we think about the long term margin guidance and what would you need to see that would lead to Rick Legion reconsider the long term margin range.

Yeah, Hi, Andrew.

Yeah, I mean, we still feel really good that you know when we look at Oh, the shacks that we are signing off and on real estate reviews, our real estate committees that you know on average going forward, we still feel good about the 3 million dollar and the 20% shack level operating margins. So you're right the business has changed.

Just I think a lot in the last few years and I'm sure. We'll continue to get too. There's if if if more change, but those numbers still they sit number still still hold for us to the extent that we we feel we the they they differ them, we'll update you, but I think we still have a long way to go after you know again.

156 domestic company operated shacks as of today, there's still a long runway before we get the Olympic Dam, we're adding shack civil volumes still across the board. So but you know it's it's the right question does this certainly.

We talk about the changing dynamic of operating model and we're working hard to make sure the as that changes a new costs come into the business with digital wealth wheels that belief that within that deliver incremental top line growth that we're working hard to mitigate other costs, whether within our control project called wasn't perfect example of that making sure that we streamlined.

That operational process within the shack sneaking should we take out administrative tasks and just continue to become more and more efficient and not cool operating model. So that we can continue to invest in in the future.

Yeah.

Our next question is from John I Vanco JP Morgan. Please proceed with your question.

Hi, Thank you I have a couple of development questions. If I may it first.

Randy as you guys were talking about smaller format urban stores that you know, what's really going to be digitally focused how would that different differ from Astra place. If at all or is aster place basically kind of the precursor of what you may roll out and her for any further way.

That's great for those who don't know ask place was our first kiosk shack ever in New York City, I'm pretty prime location I think the difference there John .

That we're going to try next year is mostly about.

Footprint, that's why it's still a pretty big Jack I think it's probably around 3500 square feet on has quite a bit of seats. Some of these there we're going to try are going to have less seats. They may not always.

So that's one piece of it just doing a little bit smaller format see when and again, we're not going to be are certainly not be our whole development schedule, but we'll probably going to try a few shacks in that 2000 to 2500 square foot range and then also really the design rule will do it's best to separate in a more.

In a better guest experience fashion regular inject guest experience from the digital pick up experience one of things we founded with so many careers drivers people picking up on the App.

And web channels.

Throw that in with kiosks in a shock theres just a its busy at the pickup it's really busy something we are committed to making better and it's it's not everywhere and it's not all the time, but it's not as good as academy and we need to make a great. All the time at every shacks order ties and try some of these and see if somebody's formats can work towards.

You know with a higher increase.

You know every year recently of the percentage of sales going towards digital those are those orders that are originating outside of shake shack. So the way in the space that we give towards orders origination check me to evolve. So this is one way this test and learn and we're pretty excited about we'll see we'll see we'll we'll keep both of which acts keep an eye on for.

Those.

Okay, perfect and they these are related questions I'm going to go opposite ways with them. So talk about your experience in the higher end food courts, which I would imagine probably wouldn't have as much digital it would be more about you you're kind of happening to pop and then you choose shake shack because it might be the best alternative there so you're talking about your experience and the high into courts.

What's that what that has taught you if the average unit volumes are close to the system average and I don't what they are they arent on and what kind of a margin that you got and obviously, what's a very different type of location than many of your others.

Yeah sure. We we've seen some recent good success in some of the food court. So we're certainly not going to be a food core brand necessarily but when there are food courts that can be distinctive were shake shack can have a distinct position and feel really great for our brand we want to do up we're where it won't break out.

Average unit volumes, but they're pretty solid now granted in some of those depending on the mall itself. There's there's usually a limited hours. So generally they're probably not going to be of the highest volume shacks, but they're very efficient they have a different opex line are they have different labor line. You know you. We generally don't have bathrooms, we generally don't have h. we exceeded.

Same extend right the buildouts can often be less.

But we can still producing pretty solid sales, so we really like them.

In each well we also like about John is the opportunity often to do too in a place that we might have previously peg for one for example, King of Prussia Mall, we have one outside the flagship and then we have one inside and food court in in Somerset in the suburb of Detroit and Troy, We have a show.

Jack on the road on the road right there and we have a shack just about a mile away in the summer small.

When we see those opportunities, we really like that because we think its two different audiences that we can capture simultaneously and when we can hit that allows us lots is really good opportunity to maximize market.

Whenever we have there.

Perfect. Thank you and then finally, you know you, but one of your fast casual you kind of peers AAA as you know obviously, you're going down the road you know what at a fairly it celebrate a pace in terms of their digitally optimized Ah you pick up lanes, you know what do you Drive-thrus Sofia, maybe I'm using some different language, but.

Have you guys begun to pencil out something like that you think the brand is ready.

Especially as you know your second third fourth unit in certain metropolitan areas and have some more suburban locations to where that may make may make something for the brand as the consumer get strain.

Yeah in my its not something we have on the books right now in design, but something we talked quite a bit about a lot and whether that you know whether that becomes truly drive through or and I was what you said I'm not sure. That's that's what we're looking for I think what we want to figure out is whereas the digital future of pre ordering and how can you most easily.

That food and stay well get that food and go wherever you choose together with your community.

So we've got our eyes on those talking about his job will give you pose a nothing to analysis yet.

Thank you.

Our next question is from Brett Levy MKM partners. Please proceed with your question.

Great. Thank you for taking my call.

Oh, we seem to the news interesting news that a Microsoft today, where they talked about the productivity of the for the four day work week.

Can you give a little bit more segmentation on how many units you're doing a four day work week and really what you're seeing in terms of either sales productivity profitability or or even the internal metrics.

And then just do you could yeah, the number of units with a.

Really kiosk footprints. Thank you.

Sure. So we probably don't have the artificial intelligence capabilities of Microsoft does to examine this so what I can tell you. Though is we've got about a third of our shacks, who are doing four day workweek okay.

About a quarter of our shacks are doing kiosk, so lets separate those issues for a second.

40 work week is a big deal.

It's something that.

Yeah, we have dreamed of doing this for so long and it's something that we're still in test saw this is not something you take lightly or rollout.

To quickly so at about a third of those shacks were really listening to our matters understanding what their lifestyles or like what are the things that they want we're hearing things like Wow. This is so powerful I don't need to get child care for 50 day Wow. This is amazing we're hearing things like yeah, I saw that and that caused me to apply to shake shack.

It's pretty cool or you know what it's hard for me to imagine going to work for another company, where I've worked a 50 day. So the recruiting possibilities are huge as you know we have deep goals for diversity inclusion that helps this issue in a big way. So these are all the positive goals. Some of things we still have to work through is making sure that people can.

Get all the impact to training and desire that they want that you get an that extra hey, you know so different is different and then we have to make sure. We can cover our restaurants and still protect our margins in a way that makes a lot of sense. So.

We are cautious about it we're excited about it and it's something we're continuing to invest in it is not something that's locked in forever.

Well go we're looking to learn on kiosk me about again about 40, plus shacks, there's some more that we'll be rolling out with kiosk still a lot to learn there in terms of its guest experience number one we still have to invest more to make the guest experience even better than it is we're finding in a lot of shacks people really love them.

And they sometimes refer them and there's still going to be a good people, who would rather talk to cashier and we're going to have that human element there with hospitality every time whenever we even when we have kiosk so.

A lot of learning there still before we go see any kind of deeper roll out we're going to kind of keep going with what we've got and see some of the new shacks dues kiosk and we'll see how we go a lot of data there that we like.

And we'll keep an eye.

This concludes the question answer session and I will now turn the floor back over to Randy go Rudy for closing remarks.

Okay. Thanks, I appreciate everyone for me on the call Tonight and always appreciate your support. Thanks. So much we'll look forward to being a touch having tonight.

This concludes todays conference you may disconnect your lines at this time. Thank you for your participation.