Q2 2019 Earnings Call
You are currently on hold for Shake Shack second quarter 2019 earnings call at this time, whereas something today's audience tend to be underway. Shortly we appreciate your patience and please remain on the line.
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Good evening and welcome to Shake Shack second quarter 2019 earnings call.
At this time, all participants have been placed in listen only mode and the floor will be open to questions. Following management's prepared remarks.
It's now my pleasure to turn the floor over to Mr., Zhu <unk> Investor Relations you may begin.
Thank you James and good evening, everyone. Joining me for Shake Shack Corporate conference call is our CEO , Randy to Rudy and CFO Tara Komatsu 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 maybe forward looking and actual results may differ materially due to a number of risks and uncertainties, including those discussed in the risk risk factors.
Section of our annual report on Form 10-K filed February 25th.
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 second quarter 2019 earnings release, which can be found at investors that shake shack dot com in the news section. Additionally, we have posted our second quarter 2019 supplemental earnings materials, which can be found in the events and presentations section on our site or and 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.
Now more than halfway through 29 team I'm pleased to report that shake Shack enjoyed continued strong momentum into the second quarter across all areas of the business.
System wide sales increased 33% to 225.9 million and total revenue grew by 31% to 152.7 million driven by the addition of 58 shack system wide.
Since the end of the second quarter 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 the benefit from the shift in Easter timing within the second quarter.
We earned adjusted EBITDA of 25.9 million growing at a rate of 18.5% and again delivered positive traffic in the quarter with growth of 1.3% I'm. So proud of the team leading our shacks everyday 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 also expanding into new markets, Sarasota, Columbus, and Virginia Beach subsequent to the quarter, we opened in New Orleans, and Salt Lake City.
Were thrilled to see the shake shack brand continuing to resonates so well across the country.
As of today, we've opened 21 company operated shacks, so far this year and this development pace represents much more balance opening schedule and the compression we experienced late in the year in 2018.
Given where we are today in terms of openings were taking the opportunity to tighten our new shack guidance for 2019, So between 38 and 40, New company operated shacks from our previous guidance of between 36 and 40.
Moving on to licensing has 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 the third quarter.
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 create us.
Our shack in Mexico City is a true community gathering place an incredible central location in the city on Paseo del out of a former 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.
He is a key role in the shack.
We had an exclusive shack specific menu items made with ingredients from local Mexican purveyors and in this case, our delicious local for Chata shaken Mexican classic features vanilla custard blended with rice and our signature spice blood top with whipped cream and crystal blast so traditional Mexican snack.
Our shack attack concrete incorporates chocolate chunks from local chocolate maker low reefer, whose chocolate uses local Mexican cobiz.
As part of our continued growth.
We're also testing to expanding our shack formats.
In May we opened our first ever 24 hour roadside shack, the monmouth's travel Plaza and 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, signing bringing fresh quality to everyday places that generate so much daily traffic.
We continue with that approach, we believe we have significant whitespace and airports globally.
As of today, we are in 12 airports following opening 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 Las Vegas, We Armstrong in New Orleans, and Minneapolis, Saint Paul 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 first six months in Shanghai, It's reinforced our belief and the tremendous growth opportunity for the shake Shack brand in mainland China.
We've entered into a new development agreement with maxims 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 teams some of whom are now based in the region and 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 have 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 and 20 net new licensed shacks up from our prior guidance of 16 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 share with you our strategic pillars, which underpin long term growth and investment strategy across the company.
Committing the 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 and our people. We are thrilled to welcome Diane level, 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 shacks leadership team.
We are passionate and our people are truly our greatest asset we feel fortunate to have such a high caliber executive joined the shake Shack family to help continue to drive the development of an investment in our almost seven and a half thousand strong workforce in the United States alone.
And our innovation kitchen, we continue to create new LTL shows this past quarter, we tested the Alabama chicken shack are taken a southern classic as well as a crime relations served with Caramelised sugar topic.
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 strength of potential partners. We've learned a lot with each of the delivery providers with whom we piloted and we're excited to move forward on this important part of our overall digital ecosystem and gas offerings.
This partnership decision prioritize the key factors of.
Long term revenue opportunity.
Technology integrations and functionality.
Guest services capability.
Geographic footprint.
Gays guest data insights marketing capabilities and of course overall economics.
As of today, a small number of our shacks have grubhub available to guess as we work through tech integration and operational process on both sides, we anticipate gradual system wide rollout over the next two to three 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 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 and existing shacks.
All this necessary physical technological infrastructure will require continued investment in order to drive long term sustainable growth.
Well keep you posted in our guidance as to those expectations over the long term.
Before I pass it on to Tara take you through the financials in 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 people.
Thanks Randy.
As he just said we're very pleased with our continued strong sales performance across the business during the second quarter.
Total revenue increased 31% to $152.7 million with shack sales of 147.9 million also representing growth of 31% and license revenue of $4.8 million 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 second quarter 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 second quarter. This year.
Oh average unit volume remained strong at 4.3 million on a trailing 12 month basis with average weekly sales of $85000 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 opened new shacks across the country and further expand in existing markets, all while continuing to deliver significant.
Okay and bottom line growth.
At this point in the year, given our performance to date.
Expecting company operated.
To be at the higher end of our previous guidance range of four and $4.1 million for the full year.
As Randy mentioned, we'll be transitioning our company operated shack store integrated delivery partnership with Grubhub over the next two to three quarters and as we work through that period, we expect a degree of volatility across the system and not delivery in overall sales, which is reflected in the updated guidance for the year.
Additionally, our year on year sales comparisons get tougher in the fourth quarter 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 second quarter results. We all have an increasing same shack sales guidance for the year to the higher end of the previous one to two percentage range and expect to perform at approximately the 2% level.
Furthermore, as evidenced in our second quarter results. Our license business continues to perform extremely well with some strong new market launches and as Randy mentioned, raising all unit guidance at this time from between 16 and 18 to 18 and 20 net new licensed openings for the year.
We're also raising our licensed revenue guidance to between 16 and $17 million for the year, an increase from our prior guidance of 15 and 16 million.
One important side note well, 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 decreases in a number of these shacks in 2020 as they settle into a more normalized level of sales from these initial year one performance levels.
In particular, we expect to see an overweight performance of large new markets this year, including Shanghai, Singapore, The Philippines, and Mexico, we expect to come into next year.
Taking each of these factors in totality. We are at this point raising our 2019 guidance total revenue to between 585 and $519 million.
Up from our prior guidance of $576 million to $582 million.
We're seeing some really strong openings over the past year, including many of our shacks that opened in the back half of 2018.
Our shacks often I perform pro forma estimates in that first year opening with very high initial sales volumes.
Depending on the class of specific shacks, we then experience a leveling off as they reach with vessels a normalized sales levels.
As we look towards the back half of this year, we'll be lapping many of our 2018 cents to marketing openings, which may have a greater impact exiting the 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 chicken bites, which had a meaningful impact on our food and paper cost as well as higher levels of staffing and shacks that opened at the end of 2018, which negatively impacted the labor line.
We're pleased to report improvements in both.
Sequential improvements in our shack level operating profit in the second quarter, which increased 13.7% on the prior year to $36.2 million with shack level operating profit margin of 24.4%.
As a reminder, particularly when comparing shack level operating margins for the same quarter last year, we're lapping two benefits in the second quarter of 2018, which we identified and cool down to the time.
Specifically, a 30 basis point benefit to food and paper costs related to sponsorship funds for our biennial company retreat.
As one of the 70 basis points non cash deferred rent adjustments to occupancy line.
Together. These represented a benefit of 100 basis points to our shack level operating margin in the second quarter last year.
In order to appropriately compare year on year performance is also important to consider the impact of the new lease accounting standards. We implemented in January which has changed the way we account for our real estate and capital leases moving cost into the occupancy line previously sense 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 two quarters supplemental decks and we've included this again this quarter for reference.
Getting back to some further detail around the underlying operational performance of our second quarter.
Food and paper costs in the quarter were 29%.
As a percentage of shack sales, an increase of 90 basis points from prior year or an adjusted 60 basis points and 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 chicken bites, albeit less immaterial impact than the prior quarter with increased pricing as well as improved supply chain initiatives first came into effect gradually throughout the quarter.
We remain pleased with the guest uptake and feedback on chicken bites since our nation wide rollout to the beginning of the year, although like old Altos will listen and 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 chicken bites are overall basket, so 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 and chicken bites of 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 news, albeit were not expecting material changes that 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 off premise digital grace, which requires more packaging than in shock orders.
Packaging is an area we've been testing in updating us on digital channels continued to grow and is something we believe remains an opportunity for continued improvements in the future.
Labor and related expenses increased 90 basis points to 27.2% of shack sales as we continue to experience significant labor inflation across the country, especially in our hometown of New York City. What 2019 is seeing double digit increases in both hourly and salaried wages combined with the administrative burden and cost of legislation such as the 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 first quarter, particularly in those shacks, which opened at the end of 2019.
We expect to see this trend continue over the course of the year, albeit likely offset by those new shop openings still to come.
Other operating expenses increased 40 basis points to 11.3% of shack sales.
Driven predominantly by delivering commissions and increased levels of marketing activity, both local and nationwide.
We're pleased with the performance and results of 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 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 noncash deferred rent adjustments I mentioned earlier.
Beyond this the increase from prior year and 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 would 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 of all right that 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 DNA DNA for the second quarter was $15.4 million and included $2.1 million related to non cash equity compensation as well as approximately $500000 related to our ERP system upgrade project. Congrats on some other one time costs.
Project concrete also represented an additional $2.3 million in capital spend in the quarter.
This project has been progressing well with core finance and people resources systems and I 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 sensitive Randall 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 DNA for project concrete to be between three and $3.5 million and capital spend to be between $4.5 million to $5 million 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.
I want to thank all of our team and both in this transformational project going above and beyond over many months and you set those up such a successful implementation and rollout.
Hi side project concrete, we're tracking to our previous expectations and guidance and coordinate with expenses gradually increasing as the year progresses to support our strong growth.
At this point, we expect our core DNA spend for the full year to be between 56 and $57 million and equity based compensation of between 7.4, and 7.7 million 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 Gionee 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 progressive but generally plans to reinvest beatson performance back into the business, where we see compelling long term returns.
I'm, particularly in those areas, we believe will have a direct and positive impact the shack level profitability.
Suffice to say this strong sales delivering DNA leverage in 2019 is not a trend we necessarily expected Marin 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 no depreciation expense as a result of our ongoing expansion, an increasing pace of new shack openings.
Depreciation increased 41% in the quarter to $9.8 million driven primarily by the addition of those 40 new shacks.
We continue to expect depreciation to be between 40 $142 million for the full year.
Pre opening expenses in the quarter was $3.5 million the year on year the year over year increase was driven by 11, new shack openings during the second quarter compared to only five in the same period last year.
For the full year, we continue to expect pre opening costs to be between 13 and $14 million was our biggest class of shack openings to date.
2019.
Interest expense declined by approximately $500000 year on year to 97 size and its driven entirely by the change in accounting treatment related to build to suit leases, which had previously been accounted for in this line of the night being recorded with an occupancy.
For the full year, we continue to expect interest expense to be between 300 and $400000.
Adjusted EBITDA in the second quarter increased 18.5% from the same quarter in the prior year to $25.9 million and adjusted EBITDA margin in the quarter was 17%.
On an adjusted pro forma basis, we owns $10.2 million or 27 cents per fully exchanged and diluted share.
Our pro forma effective tax rate was 19.3% on an adjusted pro forma basis.
No 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 benefit 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% from pro forma 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.
Well, 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 seats. The company at this stage in our overall growth journey.
The facilities for a term of five years for up to $50 million available immediately and an incremental commitment of up to $100 million available upon 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 were 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 environments in which we operate.
All while investing in critical initiative, where we see compelling long term returns for the company and all our stakeholders.
I'll close the call today with the celebratory note. This summer we reached a milestone our fiftyth birthday at Shake Shack in Madison Square Park, the little Hot Dog Cart that began at all.
And today, we are as focused on the opportunity ahead as we have ever been 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 you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to Arsenal tree Cherry equipment.
Again press star one to ask the question.
Our first question is coming from Katy Huberty with Goldman Sachs.
Great. Thank you.
So you guys last provided us with some more granular color on store margins by region at IC or anything that was mark to market for Threeq you 18.
There's been some volatility on the margin line since then delivery and ticket and 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, you know, we're really focused on non New York stores rolling into the comp base.
So it would be helpful to see or understand what the incremental traffic you are seeing from delivery looks like by region. How operating margin trends had been by region anything any color there would be helpful. Thank you.
Thanks, Katie and congrats on.
Launching your recent coverage for the industry.
You know that those numbers were not going to break out today. Appreciate the ask I think we'll look at that possibly in the third quarter. We have done that the last two years.
We'll take a look at that information to extend its helpful to you in our shareholders, we'll we'll 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 weve seen broad based success in so many markets and that continues today. If you really look at it we will have 22 shacks in New York City, So I think.
Now with 140 Shacks company operated in this in this country will be 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 we will continue to be answered as we go so.
Bear with us when we can go we can give you data, especially as it pertains to the digital ecosystem that you asked.
A lot about that will.
Valving thing in the next two we've just been piloting for a couple of years here delivery with Grubb, we expect to be everywhere nationally.
And we will we will we will keep a close eye on that and share those trends what we think it's it's helpful too.
Okay, great. Thank you.
Next we'll hear from Lawrence Silberman with credit Suisse.
Hi, Thanks for the question how are you thinking about modifying the layouts of both new and existing sacks, as digital becomes a bigger part of the business I think you've mentioned in the past that testing of pickup shelves are there any changes being implemented are necessary in the back of the house. Thanks.
Yes, Thanks, a lot and we've been doing a lot.
The kind of constant iteration, if you look at shaq designs over this last few years.
Let's start on the back of House I think in the back of House, we Bill what we call split kitchens.
Which continue to evolve really giving us the horsepower to compete anywhere at maximum throughput we solve 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 and others, but for the most part of the backhouse kitchen can handle a lot.
However, it gets more complicated now as the delivery digital Pap web ordering large orders come in.
So a couple of things we're doing 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 there are carriers there are.
At pick up there are folks, who just want to stay and get their Shakira this families as everybody.
Most 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 lot easier and make our app pick ups a little bit easier.
We are designing some restaurants that were 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. The obviously the overwhelming majority of our gas remain people, who are looking for that great Shack community gathering experience and we want them to have a great experience. So stay to 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 how much customer data is shake shack and again.
And then secondarily can loyalty be used in conjunction with the part with the Grubhub partnership.
Okay. So starting off we will not have any shake shack loyalty program.
And we won't be the connected to anything that grub does I other than people who have they have 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 integration, there's a few important thanks, we've been able to work with grub.
And 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 are 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 were really excited about the data that we intend to retain an access.
Throughout their marketplace for our guests we that was one of the most important consideration to 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 things, we're really excited about so over time, we expect to some really great marketing, both shake shack direct and together with our partnership with growth.
Good thank you.
Our next question comes from Jake Bartlett with Suntrust.
Great. Thanks for taking the question I wanted to start with just understanding better the transition period as you shift over to Grubhub and.
From from the time that the handful of stores now to the system over the next.
Couple of quarters, reaching that you mentioned that could cause volatility does that mean.
I mean, what are the what kind of delivery to be doing with other partners that you would you would been testing with trying to understand.
How big maybe a headwind this could be in the near term.
Yeah. Jake is a great question. So thank you for asking it its built into our guidance on revenue.
Topping and everything so here's the reality, we've spent two years building up relationships on other marketplaces, one of which was grubhub, but we have great relationships on caviar, postmates and door to ash those relationships continue in the near term.
Exactly as they have been and where they've been however, as we roll. This out do we reach mass scale with Grubhub, we will eventually on integrate and not market.
We haven't done a lot of marketing with those in the past anyway, but really it's about on a on integrating the tech. So there could be some volatility there right. If you 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 crop, which we're excited to do but it could take some time right you've got two 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 or 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 what next next series of time that we will we will be able to.
Do the best job.
Guest experience possible by working with grabbing all that all that way.
But you know that we very well may be that some of those marketplaces continue to sell shake shack on on an integrated basis.
Got it got it and what has been getting better.
Got it and when I think about your same store sales guidance.
Implies a pretty.
Pretty sharp deceleration from what you did in the first and second quarter and as I look at just from the surface. It doesn't look like it looks like your compares actually get easier just on a half year basis. So what would you point to this kind of potential volatility around deliveries as the main reason why you'd be more little more conservative in the in the back half of the year.
Well, Hey, Jay how are you.
I mean, we call we called this out in the prepared remarks on you May remember this from Q1 to but we did have we benefited within that comp base from some warmer weather.
Particularly in the northeast and the beginning of the year, which went into the Q1 call.
We benefited from 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 of this year than last.
So those that whilst we're really happy with the Cogs in the first off those two things were contributors.
We were coming into some pretty active delivery.
And some digital activation in the back half of last year, particularly in Q4. So we're comping over that and then you know is roundly just explained that the majority of our shanks have had delivery turned on for many quarters now across many marketplaces. So as club gets rolled out and all these marketplaces look slightly different in many different ways, whether it's regional footprint or.
Various other factors that just does it potentially will be some noise as we go through that transition.
Particularly as we as we still on integrating those others, who have been in pilot with so I think we'll see how it shakes out over the next couple of quarters. The this isn't an overnight Roland So we'll have the benefit of being able to keep you talked you guys up to date.
As we get further into it.
Great makes sense makes sense, thanks a lot.
Welcome.
Chris Ocull with Stifel has our next question.
Thanks, Good afternoon guys.
Randy could you tell us what kind of information you're looking or are you needing to determine whether the chicken 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 it could become a permanent menu item.
Yes. So what are we looking for this has gone on 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.
An 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 chicken bite 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 given more time when it comes to the supply chain and the cost we got a lot of work in the first half of the year still impacted us in Q2, it's still as Tom mentioned, a high cost menu item.
Chicken that is.
Or antibiotic free.
And all natural and fresh and the way that we do it is not cheap it's not a commodity product and it's something that we we spent a lot of money on so it's still got a higher food cost. There is some work we want to do and kind of exactly how you just said, we're we're connecting with our chicken suppliers and saying Hey.
Can we do a little bit better here, if we were going to continue to run this.
Chicken as a category go back just a few short years never had chicken before now with the chicken shack with chicken bites.
James category I think Chuck 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., Michael do you have anything further.
No. Thanks.
Thank you well hear from John Glass with Morgan Stanley .
Thanks, Thanks, very much a couple of <unk> first on Oh 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 factor is primarily the two you mentioned secondly are you going to launch INAP delivery with this is that part of this integrated approach or does that come later.
And do you have information about the customers you know who they are who are you using other platforms that you could communicate with them directly and say you know come and get us on grab now or is that not was that not possible.
That really wasn't part of the deal I mean in fairness to the marketplaces that did to work with US last couple of years really there their customer.
Hi, John It was a combination of factors and.
Grub had tremendous performance in our pilots.
They had a shorter pilot timeframe then.
The others, but in that we are 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 one.
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 shacks food is hard to deliver and we need to do it really really well.
So even if we even had just a limited amount of markets. During the drug test. So gave us a lot of encouragement for what they can possibly do.
The guest data and insights is a huge thing moving forward, so thats 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 is something we're going to we're going to do 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.
Web platform. So we're doing a lot on our own channels.
But overtime, we do expect.
Over the long term to be able to deliver through our app with growth Thats going take some time.
All right. Thank you and then Terry you mentioned that you might spend some of the overage in DNA in 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 or their technology investments that you think you can make near term over the next six months that improve things are you just saying that hypothetically you don't want to leverage DNA, because there's so many opportunities longer term or was there something specific in mind.
I think.
John .
I mean I think that.
Okay.
The third of the way through a full 50, we continue to be very committed to reinvesting back in the business as a final state just being as young as we all with declines that we have ahead. So I think that 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 today.
And I think there are always a multitude of areas that you can invest in so when we're looking at all sorts of things I would say that.
It's hard to as you find in investment stay that isn't underpinned with technology. So you should assume that the majority of them willing we'll have some sort of technological component and pretty much everything weve done. So far this year does whether it's the back of house concrete type work or some more guest facing in our digital channels and so yeah I wouldn't call out 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 shuttling. We've mentioned in the past you know looking at optimizing our scheduling processes, putting better tools and highs to help operators schedule.
On a more precise basis, so I think there's a lot in the pipeline and.
We're pleased that will have the opportunity to continue to just redeploy resources back into the business, where it makes sense right now that's obviously not really contemplated in the guidance that we gave you. So as we have firm plans to do say, we'll obviously update that guidance and keep you guys updated.
Thank you.
Our next question will come from Jeffrey Bernstein with Barclays.
Great. Thank you very much.
Two questions one just on the.
The restaurant margin tower, I think you mentioned ex unusuals headwind was maybe 280 basis points.
But at the same time in the qualitative commentary it does sound like maybe there's some signs of even 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 seen a significant deleverage despite that outsize comp Im 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.
Yeah, there was a low in that and say that the Cogs and lay our Cogs and labor assumptions for the back half included within our guidance that we gave you so reinforcing that lower end of the 20, 324% 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.
We continue to see chicken bites impact that Cogs line, but also as these digital channels continue to grow and we really like that growth and take paper and packaging and we'll continue to go up in that line and beef and dairy commodities moved a little bit.
As we said in the prepared remarks, it any expect anything material in the back half, but we might continue to see a little bit of inflation that continue labor. We just you know it is still really.
Meaningful inflation across the country in the world in the Labor line double digits in New York City, when a mid to high single digit inflation across the country in the in the Labor line and that's why that's why didn't you know we also committed to reinvesting back in the business that we're not just the recipient of these things and that we're constantly looking at ways in which we can tackle it while not damaging the wonderful experience the is shake shack.
So yes. This is them there's less pressure on the line that will continue to be pressure on the line. Just this week as we opened lower volume shacks.
Yes, I think from the time of the IPO, We talked about you said, a three 3 million dollar future state or current stage in certain Jack's M. A HCV with with more of a kind of 18 to 22 around a 20% slot. So as we continue to add more of those the system, we're adding a lot of those the system that that line will come down prices, obviously and opportunity for us we tend to be very conservative on price and were asked about this a lot and we took about a point and a half in December and we took a similar maybe slightly higher than the year before but still stuff to yeah, we'll probably do the same thing this year and 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 you know we didn't we obviously have the opportunity to price differently across channels. We don't currently do that today and that may be one way to help us mitigate the cost of delivery and so we you know it's something we'll look at very seriously, but it's also something that I think you should expect to see us be cautious on but it is certainly is a lever.
But if we if we have to use it will 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 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 kiosk pickup and delivery I guess, the big ones like what you see as the prioritizing the strongest of the biggest of the smallest.
Well, we haven't broken it out yet Jeff.
And don't intend to today just to separate a couple of things kiosks, you got to separate that we talk about additional sales of course, it is digital but we got to treat that gas like an in house guest.
They just happen to order definitely not out of cash here on the other ones. They're all growing you know your 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 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.
Thank you.
As a reminder press star one if you have a question. Our next question will come from Andrew Charles with Cowen and company.
Great. Thank you and congrats on well defined the Grubhub partnership.
On a two year basis, it looks like the traffic accelerated 130 basis points in the quarter, while checked maturity about a 190 basis points you guys spoke about the excess digital during the quarter, but you previously called out that digital is a higher check sales channel can you talk through the dynamics behind the check traffic changes if you look from one could accuse you.
Yeah, I mean, we had positive traffic in the quarter of 1.3 and price mix of 2.3 schedule three six comp. So both both positive and we're very pleased with the continued positive traffic and price mix is we don't split it out any further you know directionally, what we've taken on price and that's not a lapping on itself when it comes to depending on which period, you're comparing it to and so particularly with that the impact of digital and we do we continue to see higher a higher average check in the digital channels. So with the growth of digital that will continue to impact that but I would say we are now you know, we're now lapping growth of digital and delivery on growth of digital delivery, which is which is posted what you what you're looking at.
And Todd just a longer term question you know at the time of the IPO you referenced that long term restaurant margin guidance was set at 18% to 22%, which you know four and half years ago is obviously before third party delivery was a factor as before targeted $15 minimum wages throughout most throughout much of the country.
With 2019 margin guidance for approximately 23% getting close to the high and the 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 cover.
Theoretically is enough to help lever the margins.
Andrew its great point to talk turn I made both answer this I'll just give you. The the historical perspective is obviously are the IPO and long before.
That's that's definitely a number that we target 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 that we've seen in many places, but there are new pressures right labor continues to be a pressure and no sign of that lighting up.
But we do believe obviously delivery and some of the 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.
When you use a couple of things you got to remember about shake shack, it's really important to say since we have a 140 restaurants. We are in 28 states. Okay. When we opened one restaurant on Saturday, we opened in Utah, Okay that that shake shack is out there by itself.
That's really hard to run that restaurant now it's going to be crazy sales in.
There was about 1000 people online on Saturday and a whole heck of a lot of excitement that's great.
But someday, 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 cost.
You know we have 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 issues or get fuller and for 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 are deepening that learning. So look it's kind of I think it's a it's a tick on each part of the PML overtime.
Near term pressure, but eventually that levels off and it levels off in a pretty darn good company.
Thank you Mr. Charles.
Okay.
<unk>.
Thank you, we'll now hear from Alton Stump with Longbow Research.
Great. Thank you and.
Congrats on a quarter or you know it's all around so congrats on that just wanted to ask you know this has been a fair amount of conversation in the industry about you know whether its door dash or other third party guys. On you know how the margin profile looks when it goes through them versus you know you're on your own sand or inside your store you know nothing like it any specifics, but just any color on you know.
If it is at all to do from a margin perspective, if a customer you know does go to door dash as opposed to a figure side directly.
So.
Yeah, you came in and out their bid on just wanted to make sure I got the question right really it's a question of is delivery of more expensive channel then somebody walking in the shake shack or going onto our site is that kind of the the question.
Yes. Thank you Randy yes, that's it yeah. So yes. So so the answer is yes deliveries more expensive right. We have a commission in those 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 costs to that so yeah. We've added a channel that is a more expensive channel over time.
But.
You know.
Well you know eventually hopefully we can deliver on our own 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 deliveries one of them, sometimes those come at a cost part of why we chose Grubb 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 Ivan coal with JP Morgan.
Hi, Thank you.
I was looking for a little bit of.
It maybe color on the composition of the confidence and specifically traffic in assets.
Just because your comp based is still still so small and it's getting increasingly diverse.
If there is any characteristics by store year by geography by time, it today and by timely that they I mean, whether off peak or peak, where you're specifically seeing strength and if you see any areas that you could see you for particular improvement over time.
Yes, no honestly John there are it's there's this 74 shacks in the base today would be 84 by the end of the year.
A significant portion that remains in the northeast right as we've talked about both in New York in the northeast in general.
So it's still a small base is still fairly volatile.
It happens to be up right now a lot of that has been digital as we said a lot has been strength to summarize some of the call outs entire made earlier.
So we haven't broken it out or share 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 to 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.
Paul a lot of what we have is very mixed you know 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 but just just to say it all there is a lot of strong momentum.
And the company right now in the comp base in our sophomore shacks in our freshman first 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 Austin's question.
Assuming the current helps to continue to grow the Nixon delivery what gets rolled out nationally can we expect the headwinds and delivery commissions to alleviate a margin.
Given the structure.
Please.
Yes, good bye.
Given the long term agreement, we have with them. That's the structure. We do believe that will be helpful to our Opex line over the long term now it remains a question mark to how much that that continues to grow.
And that will play into the factor of how much of the total sales become 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 on the CEO for any additional closing remarks.
I just want to thank everybody for coming on the call Tonight, It's 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.