Shake Shack Q1'16 Earnings Conference Call: Full Transcript

Operator:

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Shake Shack Inc SHAK First Quarter 2016 Earnings Call. At this time all participants have been placed in a listen only mode and the lines will be opened for your questions following the presentation. Please note that this conference is being recorded today May 12, 2016.

On the call today, we have Randy Garutti, Chief Executive Officer of Shake Shack; and Jeff Uttz, Chief Financial Officer.

At this time, I’d like to turn the conference over to Mr. Jeff Uttz. Please go ahead sir.

Jeff Uttz:Chief Financial Officer:

Thank you, operator, good evening everyone. By now everyone should have access to our first quarter 2016 earnings release. If not, it can be found at shakeshack.com in the Investor Relation section.

Before we begin our formal remarks, I need to remind everyone that our discussions today will include forward-looking statements. These forward-looking statements are not guarantees of future performance, and therefore you should not put undue reliance on them.

Actual results may differ materially from those indicated by these forward-looking statements due to a number of risks and uncertainties, including those discussed in the risk factor section of our Annual Report on Form 10-K, which was filed with the SEC on March 30, 2016. Additionally, any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change.

During today’s call we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release.

And with that I would now like to turn the call over to Randy.

Randy Garutti:Chief Executive Officer:

Thank you, Jeff. Good evening everyone on the call today. I am pleased to share the extraordinary results for Q1. Kicking off a very strong start to 2016.

I want to begin today by thanking our team for their incredible work, passion and dedication. We are working harder than ever this dam something good, while delivering strong results. As we getting to the numbers I want to remind everyone that we’ll in our sixth quarter as a public company. We continue to execute on our strategy and our massage remains unchanged.

We are more dedicated than ever to building community gathering places, elevating and innovating our menu, driving engagement with our guests and investing in our team. We believe the Shake Shack brand and culture have been never been stronger and both continue to gain momentum. We have got an exciting run way for growth ahead and we wake up every day excited to take this company further.

Now a few notable highlights from the quarter. Total revenue grew 43% to $54.2 million. Same-shack sales increased 9.9% lapping an 11.7% increase in the prior year first quarter. Shack level operating profit a non-GAAP measure increased 59% to $14.7 million representing a 28.2% shack level operating profit margin.

Adjusted EBITDA a non-GAAP measure increased 54% to 10.8%. On an adjusted pro forma basis net income increased 114% to $2.8 million or $0.08 per fully exchanged diluted share for the quarter.

We believe the biggest contributor to traffic growth is quarter or the addition of the ChickenShack to our menu which launched January 14 at all domestic operator locations. In addition, we benefited from the unseasonably warm temperatures in our largest markets providing an extra tailwind to traffic. But we are still in the early stages of the Chicken Shack launch we believe this item could be a long-term game changer for Shake Shack. Now we are running more everyday about its effecting our business.

Turning to traffic the Chicken Shack is driving excitement with our current fans as well as giving guests a new reason to try Shake Shack for the first time. By expanding our menu we are able to give our guest yet another opportunity to come back for the Shack. With also better diversified our long-term exposure to commodities with the addition of this key protein and with highly excitement we are keeping a close eye on things but it still too early to comment on the long-term impact of chicken on sales mix.

The lot of chicken Shack is price higher than some of our burger options we are seeing both to trade up as well as the trade down from certain higher price outlook. The most importantly our guest love to Chicken Shack and it’s provides our team a whole new campus on which they create in the future and what makes Shake Shack so unique is our ability to innovate around that core menu and create limited one of the kind regional specialties that stamp from our heritage.

Just as one example this past April in our Russian DC market we highlighted the Chicken Shack in a collaboration with celebrated jeff to create the crispy baking chicken the crispy chicken rest with soft, pickle tamarind and scale this is a fun twist to the classic chicken Shack sandwich and ran for 10 days.

Furthering our place as a shift connected culinary destination. At our newest with Hollywood Shack we created the roadside double a double switch cheeseburger top with pizza and mustard and onion similar in bacon and available only in California. Keeping our promise to team up with the best local our seasonal producers we introduced a selection of concrete in collaboration with a lot of baking company all in LA. For the first half of this year the Chicken Shack has been acting as our current LTO.

However today our culinary team is excited to announce that we will be launching the Bacon Shatter Shack as a new burger LTO for the second half of the year. The Bacon Shatter Shack is a classic cheeseburger topped with all natural bacon, melted aged white cheddar cheese sauce and we price that $6.89 across all markets.

Moving on to development during the first quarter we opened three new domestic company operated Shacks. This includes our first two Shacks in Arizona, Scottsdale Fashion Square, followed quickly with the second in uptown Phoenix. Next which further west for our California debut in the heart of West Hollywood. While we generally don’t comment on units specific data we are really excited to share that this first California Shack has the one of the strongest openings in our 12 year history where are thrilled and hope we will have a passionate response from our guest in this new market.

We remain excited about the opportunity we have ahead of us in California as we continue to grow our brand and through 2017 we have a announced a premier development plan to open at least four additional Shacks in the Southern California market. Glendale, and Hollywood, Century Citi and downturn.

Subsequent to the quarter on May 4 we opened our six Shack in the DC area with our newest in the Fashion center of as we continue to grow this important and successful market. We also continue to execute on our full gross strategy for 2016 with about one third of new domestic company operated Shacks targeting new territories and the remaining two thirds focused on deepening our footprint in existing markets.

Looking ahead at the rest of 2016 we have been able to add a few more grey checks to the end of your line up and so we are now raising our guidance from 13 Shacks to at least $16 for the year. We will be opening three new Shacks on our home turf in New York City also this year. One down town at the new Fulton Transit Center, One in Helm Square and our second in Queens in Forest Hills. We remain on track to add Shacks this year also in Boston and Long Island.

In new markets we are excited to be bring our first Shack to Dallas’s thriving up town neighborhood towards the end of the year and additionally we will be extending our Mid-West market with the upcoming opening in Minneapolis at Mall of America.

As a reminder scheduled openings and new Shacks added to our guidance continue to remain weighted more towards the second half of 2016 which will limit the sales and impact of these new Shacks on total revenue for the year. Now license business, subsequent to the quarter end we opened domestic license Shack in T-Mobile Arena brand new in Las Vegas further complementing our footprint in that market. Internationally we have expanded our roots in the Middle East during the quarter with our first Shack in Oman at the City Center. Subsequent to the quarter we also opened our first Shack in Bahrain at city center.

Now while the Middle East remains a very important market and part of our international footprint, we are experiencing softness in sales area this year, particularly in our mall locations throughout energy dependent markets that are seeing a natural economic slowdown right now coupled with currency headwinds, we expect sales in our Middle East Shacks to remain under pressure through this year given the macro environment in the region.

On Asia we are following the initial success of our first Shack in Japan we opened our second location in Central Tokyo subsequent to the quarter. We remain very enthusiastic about the earlier acceptance of Shake Shack in the region and look forward to growing this market with our third Shack now in the design stage. Additionally in Asia we are aiming to open our first Shack in Seoul South Korea with our new license partner the SPC Group towards the end of 2016. As a reminder a development agreements spans 25 total Shacks in Korea over the next 10 years.

The Asian markets for us presents a tremendous opportunities and white space for the future. We are more encouraged than ever by our strategy.

Looking ahead our domestic company operate real estate opportunities have never been stronger and as a result we are confident in our ability to accelerate our growth plans to 15 new domestic Shacks in 2016. We also expect to open at least 16 domestic company operated Shacks for 2017. Already with half of our pipeline at least signed at this time for 2017. The success of our real estate model and all types of various formats such as urban high streets, neighborhoods, suburban gathering places, and shopping centers, transit centers, even outlet malls continues to validate the runway of growth that lies ahead for our brand.

With that update I will turn back over to Jeff who will take you through the numbers.

Jeff Uttz:

Thank you, Randy. Now I would like to share with all of you the results of our 13-week first quarter ended March 30, 2016.

Total revenue which includes both sales from company operated Shacks and licensing revenue, increased 43.3% to $54.2 during the first quarter from $37.8 million in the first quarter of last year. Sales from our company operated Shacks increased 44.7% to $52.2 million during the quarter versus $36 million last year. The increase was largely due to the addition of new domestic company operating Shacks over the past year as well as our strong same-Shack sales growth. Same-Shack sales increased 9.9% during the first quarter on top of an 11.7% increase in the prior year or Shack two year increase of 21.6%.

The growth in same-Shack sales for the quarter consists of a 7.3% increase in traffic combined with a 2.6% increase in pricing mix.

Our strong performance in the first quarter was positively impacted by the factors Randy noted earlier including an approximately 1.5% menu price increase taken in January of 2016 and an increase in traffic due to one weather and menu innovation which in the first quarter was primarily the launch of the Chicken Shack. The comparable Shack based in the first quarter included only 20 Shacks compared to 13 Shacks in the first quarter of last year. Of the 20 Shacks in the base only five of them are in Manhattan and we continue to see relatively consistent performance across all markets.

Additionally, our Madison Square park Shack was not included in the comp base for the quarter as it was closed during this time last year. But it will reenter the for good in the middle of the second quarter.

Average weekly sales for domestic company operated Shacks increased 1.1% to $90,000 for the first quarter of 2016 from $89,000 in the same quarter last year primarily driven by robust traffic turns menu price increases and solid performance across the existing Shack base including in new markets. As we expand further into our existing markets and open more target volume Shacks for the annual sales of approximately $3 million we naturally expect of our average weekly sales will decline over the long term. While that is long term view for 2017 and beyond we believe that first year sales for Shacks we opened in 2016 will exceed that amount. With greater visibility into 2016 and with the few openings under our belt so far this year we now expect the first year AGV for Shacks to be opened this year will be approximately $3.6 million which is an increase of $300,000 from the $3.3 million that we previously discussed.

This increase is driven by strong real estate selection and better than expected openings primarily our new West Hollywood location which has been posting strong sales with lines well over an hour since its opening in early March.

Licensing revenue increased 14.3% to $2 million during the first quarter from $1.8 million a year ago driven by the opening of nine international internationally licensed Shack since the first quarter of last year. Total licensing revenue was affected by lower revenue from Shacks primarily in the Middle East and the unfavorable impact of foreign exchange rate fluctuations.

Now I would like to give you some detail on our expenses for the quarter. Food and paper cost as a percentage of Shack sales, food and paper cost decreased 170 basis points in the first quarter to 28.8% compared to the prior year quarter. This improvement was primarily driven by the previously mentioned menu price increase, total supply chain enhancements, as well as lower commodity costs primarily in beef and dairy.

Our beef cost decreased approximately 11% since last year and our outlook for the remainder of the year is that beef will continue to remain lower than last year and dairy will also continue to come down. However as we get further into the year, our beef comparison year-over-year will get more difficult and while we do expect it to be down for the remainder of the year, we do not expect it to be down as much as it was in the first quarter. So overall we are now expecting total food and paper cost to leverage just slightly for the full year 2016.

Labor and related expenses as a percentage of Shack sales were flat on a year-over-year basis at 25.2%. As we mentioned on our last call we implemented a companywide increase to the starting wage for all hourly team members. Team members now start at between $10.50 and $12 an hour and our team leaders and our trainers now make between $12 and $15 an hour. This undoubtedly resulted in higher labor cost during the quarter these increases were offset by strong sales growth and gains in other areas.

For 2016 we still expect labor pressure year-over-year however given our strong performance in the first quarter we now expect labor and related expenses to deleverage by approximately 75 basis points to 100 basis points for the full year fiscal 2016 versus the 100 basis points to 150 basis points that we previously discussed. Occupancy and related expenses, as a percentage of Shack sales decreased 50 basis points to 8.3% versus prior year, driven by benefits from tenant improvement announces as well as higher Shack sales.

Shack level operating profit, a non-GAAP measure grew 58.6% to $14.7 million from $9.3 million last year mostly due to the flow through captured on the strong Shack sales. As a percentage of Shack sales, Shack-level operating margins increased roughly 250 basis points to 28.3%, as we leveraged food and paper cost as well as other operating expenses. We continue to reiterate our long-term outlook and I believe the target volume Shack AUVs will be approximately $3 million and Shack level operating profit margins will be approximately 20%. With further insight into the 2016 pipeline now we do expect the average sales, volumes and Shack level operating margins to be higher than our long term forecast.

General and administrative expenses decreased $11.5 million to $6.9 million during the first quarter from $18.4 million in the same quarter of 2015. As a percentage of revenue, general and administrative expenses decreased to 12.7% for the first quarter of 2016 from 48.6% in the first quarter last which include an higher cost related to our IPO including $12.8 million of non-recurring compensation expenses and $600,000 of IPO-related expenses. Excluding the impact of these non-recurring expense of the last year, G&A expenses decreased 30 basis points down form 13% last year to 12.7% in the current year.

Adjusted EBITDA, a non-GAAP measure grew 54.4% to $10.8 million in the first quarter compared to $7 million in the prior year period and as a percentage of total revenues adjusted EBITDA margin increased roughly 140 basis points to 19.9% for the first quarter.

We recorded net income of $1.5 million or $0.07 per diluted share for the first quarter of 2016 compared to a net loss of $12.7 million $1.06 per diluted unit for the same period last year. On an adjusted pro forma basis, which excludes the non-recurring items and also assumes that all of the outstanding LLC interest were changed for Class A common stock whereby we have been no longer -- a non controlling interest, we earned$2.8 million or $0.08 per fully exchanged and diluted share compared to $1.3 million or $0.04 per fully exchanged and diluted shares in the first quarter of last year.

Given our strong results in the first quarter we are updating our outlook for the remainder of fiscal 2016. We now expect to open at least 16 domestic company operated Shacks in fiscal ‘16 in each year for the foreseeable future. This is an increase of three openings per year from our previous guidance. We continue to expect to open seven licensed Shacks in fiscal 2016.

Total revenue for fiscal 2016 is now expected to be between $245 million and $249 million compared to $237 million to $242 million we previously discussed. Because of the number flagship 2016 openings in new markets, we expect the average sales volumes for the 2016 units to be at least $3.6 million and Shack level operating profit margins to be at least 23%. Remember how with our long term guidance past 2016 still remains of approximately $3 million and 20%.

Turning to our performance in the first quarter, same-Shack sales growth is now expected to between 4% and 5% for the full year 2016 and as a percentage of Shack sales, we expect deleverage and labor related expenses of approximately 75 basis points to 100 basis points on year-over-year basis compared 100 basis points to 150 basis points previously discussed .

And lastly, we expect our adjusted pro forma effective tax rate to be between 40% and 41% compared to 43% to 44% previously discussed. We are extremely proud of our start for the year and I hope this is given you a clear picture of where we are and where we hitting.

With that I would like to turn it back over to Randy to make some final points.

Randy Garutti:

Thanks, Jeff. We believe Shake Shack is well positioned to deliver platform -- growth into the future. Our recent new market success is in LA, Arizona and Japan far away from our home market in New York City. Remind us the lengths to which our fans will go to be part of what we do.

We continue to see record engagement with our fans both in line and online. We believe our massages resonating more deeply than ever. Before we end I do want to highlight what’s happening at all Shake Shack country right now during the month of May. Our fifth annual Great American Shake Sale is in full swing.

Although last four years are guests that helps to raise over a $1 million for Share Our Strength’s No Kid Hungry campaign to help battle childhood hunger.

Now during the entire month of May guess you don’t just $2 of Shake Shack receive a coupon for free shake value at over $5 for a return bill and do this great program we helped to raise crucial funds for No Kid Hungry. As well as creating another reason for our guests to visit us again soon. It’s our most important charitable effort of the year and we will hope you come out and support our teams during the busy moment. Jeff and I want to sincerely thank our team for making Shake Shack the branded it today and bringing to life the boundless hospitality that differentiates the Shake Shack experience.

Our team is executing the plan, our future is bright, our opportunities are vast and we will continue to make a strategic investments and decisions for the long term that are building our company for decades to comp. With that I want to thank all of you for taking the time to follow our story by joining today’s call. Operator you can go ahead and open a line for questions.

Question & Answer

Operator:

Thank you sir and ladies and gentlemen if you would like to ask a question at this time it is star one on your touched tone telephone. Please make sure your mute function is turned off to allow your signal to reach our equipment. Again that’s star one at this time if you would like to ask a question. We will take our first question from Sharon Zackfia with William Blair.

Sharon Zackfia:William Blair:

Hi. Good afternoon. So a couple of questions I know you don’t want to talk too much about the long term impact of chicken but then you just called it a game changer. So I guess how are you measuring whether it’s increasing frequency or bringing in new customers and can you talk about whether it’s kind of above what you saw on Brooklyn or similar in terms of mix?

Randy Garutti:

Thanks Sharon. Yes we did say it could be a game changer and we certainly hope it will be I think what we believe so far the data we have in Q1 is that it really did drive traffic. Hard to measure exactly who is doing what. We had a little bit of everything as we mentioned.

So you’ve got a lot of first timers you got a lot of people who are just really excited about it. What different from the initial hit in Brooklyn which was a lot of Euphoria but then it has settled into a very similar pattern across no Shack. So the behavior has been consistent with some of your said in the past of the top five seller. But really is the traffic generator.

Again the biggest point we’re making on this call is we’re still not sure just think it’s premature to say just with one quarter’s data. How it really will effect mix long term because we are seeing a little bit of everything. People are trading up, people are trading down, people are trading sideways, people are adding on a little bit of everything and it is such a new thing to us that it’s hard to know exactly where it goes.

So the best and the most exciting news is when you look at our comp and you look at the overall traffic in Q1 we believe chicken was likely the largest contributor to that and our price was relatively consistent with roughly 1.5 that we took so it was just above that is about 2.6 so that tells you its hard to measure early on what mix shift has been.

Sharon Zackfia:

And then I guess just my second question would be as you think about menu evolution of your time I mean is there a process that chicken could be a platform similar that the burger platform and the hot dog platform that you have?

Randy Garutti:

Here is its pretty exciting. It’s a category. We have not chosen the use it that way yet. It’s really early but our team is really excited about what other kinds of things we can do with chicken.

Our test kitchen is constantly kicking out fun ideas for us like the one we did with that chef collaboration. We have never done a collaboration with chicken and we chose to do that and in the first day in Washington DC we sold almost a thousand of that Peking Chicken just in the small market four Shacks at the time. So we take it as vast opportunities for Shake Shack but as know we are going to take our time and make sure we fully understand its impact before we see whole lot of addition and change that category.

Sharon Zackfia:

Great. Thank you.

Operator:

And we will take next question from Alton Stump with Longbow Research.

Brittany Whitman: Longbow Research:

Hi guys. This is actually Brittany Whitman on for Alton this afternoon. Congrats on the quarter. Just one quick thing first of all.

Can you just repeat the pricing component that was in the ticket number for the quarter.

Jeff Uttz:

Yes so we had 7.3% increase on traffic and 2.6% increase in pricing mix which about a point and half of that is price.

Brittany Whitman:

Okay and then just on chicken pipeline, do you have any maybe color that you could add as far as timing on some of these new chicken items are if we are going to see anything going to testing soon or anything like that just a follow up.

Jeff Uttz:

Yes. No plans at all that we would announced today it’s really don’t just a few months old it’s widely launched now across all Shacks in the US. So no new plans just here. We think we have a good runway of the current, but we are focused on our new announcement that we didn’t talk about for the next burger LTO which we will add since we have not had a burger out this quarter the baking shutter Shack at 689 which we are pretty excited about. That should be a fun item to run for the second half of the year.

Brittany Whitman:

Absolutely. Okay. Thanks you so much.

Jeff Uttz:

Thank you.

Operator:

We will take our next question from Andy Barish with Jeffery.

Andy Barish:Jefferies:

Hey guy’s wondering if the entry into four new markets is a shown up in all and in your thoughts on margins this year and it’s so were or does the big volumes you are kind of expecting out of this class kind of offsets some of those new market inefficiencies.

Jeff Uttz:

Well they were really four great markets when you look at it right so obviously we are performing well above our expectations early on we are just beyond excited about the acceptance of Shake Shack out in the West Coast. So that’s super exciting. It does appear obviously in the G&A line when we have any new market. You have got one restaurant out there we have got a great operator and our area director out there.

So some of the G&A, some of the startup costs are affected generally one of the reasons even though we’ve benefited in the COGS line quite a bit this quarter one of the reason we will continue to see just a little -- predict just a little bit of leverages this year is dozen markets at times have a higher cost force they are little bit more inefficient we have one two restaurants and they take some time growing as we cluster restaurants. Which was exactly did a point of our long terms strategy of continuing to do new markets and clustering there. So I think the big answer little bit in COGS little bit in G&A and we’re happy that even with that we able be leverage G&A little bit this quarter.

Andy Barish:

And I think Jeff you mentioned some supply chain wins in your discussion on food cost. Can you give us little more color on what happened there?

Jeff Uttz:

Yes. So beef came down its beef came down 11% this year compared to last year. Dairy also came down near the wins which is why kind of updated our guidance that we expect the little bit of leverage on the COGS line as we move forward. -- little bit of leverage is because we have those wins in the commodity market but we have like we just start Andy just talked about the new markets that we’re going into some of the inefficiencies that we have there will also offset some of that as well.

So I think in last call we talked about flat I think year-over-year now I am expecting to see a little bit of leverage there on the COGS line because beef is reacting more favorably really than we thought it would as we get into this year.

Andy Barish:

Okay thanks.

Operator:

We’ll take our next question from John Ivankoe with JPMorgan.

John Ivankoe:JPMorgan:

Hi. Thank you. First little bit of housekeeping question. Obviously the 20 units in the comp basis it still a very comp base the majority of those and I guess the sale at core door selected better word.

How much did weather benefit that traffic number in the first quarter ‘16 if you’re able to force that out and as we think about kind of setting traffic expectations for the remainder of 2016. Do you think that two your traffic relationship between the first quarter o ‘16 and first quarter of ‘15 will hold us traffic was obviously pretty volatile in ‘15.

Jeff Uttz:

On the word John you know we want talk whole lot about weather is pretty balanced right and it was certainly warmer on flat quarters you would say in the North East. We did have -- we certainly have some closes during that time that balancing a little bit, but generally it was a warm weather winter record warm weather winter in the North East.

So hard to say we don’t really know and we also had a Chicken as a big driver there. So hard to separate how that work. But we do believe the work certainly help to side in that first quarter. And your second question certainly our guidance we have to our guidance to the 4% to 5% for the year John.

We are coming up on some tough comparisons as you know the 12% to 9% in Q2 and 17% in Q3 and we are hopefully the traffic will continue to be positive for us and we believe it will, but will those comparisons coming up and with the 9.9% that we posted in Q1 again this would little bit of conservative eyes we are looking at it that way and which is why we can out with the 4% to 5% and not something higher than that at this point and as you know as we get further through the year you will have much more visibility to that but there though comps coming up really tough job....

John Ivankoe:

But it’s interesting I mean it’s actually, it’s the check that’s really tough and certainly be the traffic does tough and as we go from the first quarter to the third which is why asked whether that two year relationship would hold to ‘16 but certainly I hear the overall consolidated guidance. And the secondly, if I may regarding the uptake and development in ‘16 you’ve already given a preliminary ‘17 I think for basically every year you’ve kind of increase the number of units that you opened versus the previous year in 2016 as another example of that. As you gave the initial ‘17 guidance and as half of those units I guess are already in contract or have been identified why wouldn’t there be an increase in ‘17 over ‘16 in terms of the absolute number of units.

Jeff Uttz:

Yes there is certainly could be job as long as we find the great sight so today we feel really good about half of that cost with -- signed those are going to be some great Shacks in ‘17. But there is still a lot of work to be done. If may and we don’t have the all class down for ‘17. So as soon as we have any more than we feel real good about the sites we have set for ‘16 that’s 16 sites for ‘17 and if we can ramp that up we feel good about that that’s an increase from our last call as it is so we will keep it closer if that goes up.

John Ivankoe:

And is that the constraint is solely real estate at this point I mean it’s not a its human resource or G&A management structure issue when it’s just solely a side issue?

Jeff Uttz:

There are always being a human resource question John there will always be supply chain question and really humans will human resources will lead our decisions on real estate. That said every time we’ve bump this up we have got more and more comfortable with our ability to develop the leaders for the next generation Shacks. We feel great about doing that for much increase number from last year and if we can do it again in ‘17 we will do we still in this company. These are big percentage increases over the current total units in this country both from last year and even in the ‘17 those are some high percentage of increases.

So I just want to make we are ready for it.

John Ivankoe:

Thank you.

Operator:

We will take our next question from Andrew Charles with Cowen and Company.

Andrew Charles:Cowen and Company:

Great, thank you. It’s obviously encouraging that you are aging first year sales volumes for 2016 but I want to checking on how the Phoenix Scott sales are behaving that open two weeks apart from each other. Last time you did two of things on top of each other was in Boston last year so presumably this is strategy that works while for you?

Jeff Uttz:

Yes. It’s hard to say that’s really based on developer timing right that’s not a strategy where we go ahead and say we want to open to a once generally we would for -- amount actually. But we headed at a great time for the end of the busy season and it sort of season in Scottsdale that seasons comes through quite a time now but we have had a great start with both of those.

But without getting any unit specific data we are really happy with it we have a really and we have a great third Shack plan that should open at the end of this year out in that can be a free standing model and a fantastic development of -- and I am sure you know and that really hit the market with a great real estate strategy for those three very significantly different but strong areas. So we are hopeful for a lot of opportunities in the future in Arizona market.

Randy Garutti:

And Andrew what Randy said I don’t not necessarily a strategy to open back to back like have in future cities that was a timing issue with the developer with that we had a fall through.

Andrew Charles:

Got you. Okay and then did you see the mix of chicken Shacks increase in a three broken Shacks or is once tested once the store base rolled it out.

Randy Garutti:

No it’s been pretty straight forward across Shack that doesn’t change much in Brooklyn again when we first launched in as you might imagine when we make news people come from foreign -- at times for something like this so that very beginning of that launch last year July August were the huge tick up in percentage for those restaurants. That level towards the end of the year and that leveling office remained pretty consistent.

I think as we got into the end of last year it became more than normal item in Brooklyn and not something with people are traveling for. They did in a very beginning of that launch.

Andrew Charles:

Great. Thank you.

Operator:

And we will take our next question from Jeffrey Bernstein with Barclays.

Jeffrey Bernstein:Barclays:

Great. Thank you very much. Couple of questions just one on the comp with the traffic -- is strong as it was north of 70% I am just wondering just. How you think they are actually achieving that usually with the volumes that you’re running at the traffic you’re already running unless you have some sort of fee of service initiatives or new technology initiatives just hard to figure out exactly where that traffic is going.

So I am just wondering if you think maybe and broadening out your key periods or from extended hours or how is that do you think you getting that terrific through when you’re already up at the volume.

SHAK:

Yes, that’s an interesting question. No real expansion of hours or anything like that sort I think we just made an investment in our team this year if you recall at the same time we did this we have also given people raises across the company significant raisers that we talk quite a bit about and we believe our team is more excited, more motivated than ever they are going to paid well they are being taken care of and they are doing a better job again every year we get a little bit the little tick here and there better at operating a throughput some small changes that we make in how we move through but it was really about chicken, you know as the chicken expanded the shoulder periods people are coming for it they were adding things to their orders so it really was the driver for the first quarter with the lot of initial excitement.

Jeffrey Bernstein:

Got it and then in terms of kind of other potential drivers I know in the past years dabbled with they talked about delivery for a while seems like a lot of people trying to the trend for the two more like recently maybe you welcoming. So I am just wondering with the season terms of potential signing with partners delivery which could which could be a new driver for you.

SHAK:

Yes, we have got our up and down emotions about it mostly just about the guest experiences and making sure that the guest is paying the right price that we said not someone else and that they get agreed Shake Shack experience if they choose to work that way there is no question we are seeing a lot of delivery to the major view players throughout the country. specially in Urban markets and it’s certainly been an impact for us I think in 2015 and ramping up we have a lot of good relationships to those companies we have no firm partnership, no intension to this time to do so. Other than continuing to improved that experience so every time if you choose to experience Shake Shack in your own home through a third-party delivery we’re going to make that as good as we possibly can that experience.

And that’s where we sit today but so many got their eyes on that opportunity and what could it mean for how people how use the Shack in the future.

Jeffrey Bernstein:

Got it and then just lastly Jeff on the basket for commodities I think in the past -- down that you had the best it was expected for be flat year-over-year year and now I think it was saying -year and now I think you was saying with our leverage to line a little bit just want to make sure I mean apple to apples to perspective are you not seeing the best could done a little bit or you’re going to see a little bit of leverages as a percentage of sales.

SHAK:

As a percentage of sales I expect got to be behind just slightly year-over-year.

Jeffrey Bernstein:

While that’s a basket how is that looking in terms of relative to percentage as you’re talking about the first quarter?

SHAK:

Beef that deep and dairy which are to the things that we buy are down -- beef was down 11% then quarter number on dairy but it’s down as well so commodity also is down favorably for us and then I as I mentioned earlier it’s going to be offset by new market inefficiencies and couple other things that we just expected to be down a little bit. So when I -- completely get the benefit of the commodity basket being down year-over-year because of some of the inefficiencies but overall do you think -- leverage on that line.

Jeffrey Bernstein:

Understood. Thank you.

Operator:

And we will take our next question from Paul Westra with Stifel.

Paul Westra:Stifel:

Great. Thanks. Good afternoon. Just to follow up on your sort of your full comp guidance looks to be relatively unchanged in that 2% to 3% range than you had before your increases the first quarter just want to make sure or maybe framework around it are you seeing a comp slowdown into that quarter or maybe the start year or obviously you mentioned the tougher labs so just maybe give us an idea how we should think about whether you just seeing a slowdown or not.

SHAK:

Paul what you mentioned about the tough comparisons coming is really why we kept our guidance for the remainder of the year, after the 2.3% , 3% and we also in the quarter numbers or the information on how the last month went subsequent to the quarter and we are going to continue to do that but its the comparisons coming up and how we look at it and we are up into 17% number we can continue we can put three have 20% stack pretty good number and we are going to be pretty with that as far the outlook is for the remainder of the year.

Paul Westra:

Okay great then maybe follow up to Jeff’s question on the sold guidance it sounds like the same thing your forward sold out looks to be flat on a year-over-year basis despite what you mentioned on the more favorable peace and look should you expect more sort of incremental inefficiencies to that weeks outlook should we expect more sort of the incremental inefficiency historic in grow inter quarter and is there was some of the offsets that you had mentioned yet.

SHAK:

Its the same that I mentioned the commodity wins that we are having combined with inefficiencies and also the fact Paul I am does not convince the beef is down just day quite yet and it’s volatile still and that’s great that came beyond and it surprised me and I told you on the last call we thought it will be flat, now I am saying I expected to be down on the cost to good sold lines.

So that’s really what it is its all those factors and combined with uncertainties of the commodity market at this point and just one of the things as we get further into the year and if it stays at a reasonable level where it is than perhaps that guidance will change but right now I think its prudent to leave that as a slight leverage.

Paul Westra:

Great and then may be another quarter into your higher wage rollout, any positives negatives anything unexpected as far as turnovers, productivity, any qualitative changes there?

Randy Garutti:

Little bit always there we might have few months of data here and general obviously our workforce is certainly happier. We are able to continue to get the kind of great hospitality that we strive for in our restaurants. But its really the comment on really any kind of real turnover trends just yet. The team did a great job in the first quarter.

Obviously the high comp in the uptick in sales helped offset the higher costs that keep our percentages relatively flat which was pretty amazing work on part of our operators.

So they did a hell of a job and we’ll continue to get more effective in the way that we schedule and the way we think about how we operator Shake Shack day-to-day. But that said, we do continue to expect 75 basis points to 100 basis points of pressure on that line versus last year through the rest of the year that is a significant increase we gave our team and we still think it’s going to be an impact on the line.

Paul Westra:

Okay and my last question going overseas mentioned the Middle East always be understandable is there any kind of potentially be a impact to development how that could development change if obviously the economics little slowdown any dynamics there.

SHAK:

Bob really I mean if you look at our guidance of seven more Shakes seven Shakes all year here for that. We Middle East is that quite few restaurants there. Our region there is maturing for Shake Shack quite a bit there is some great opportunity just helping to re-add doing what really well there that saving and borrowing and -- so we fully expected that region to mature a little bit and the majority of our growth that we’re focused on through the rest of this year in the next couple of years as the Japan and South Korea markets. So just going for we’re incredibly encouraged.

If you had been there the day we opened the second Shack in Tokyo and seeing the excitement in lines at both of the second Shack and the first Shack. Its just continuing to get more exciting for us over there and we got -- on little will open at the end of the year in South Korea. So we are very excited about the international opportunities but its important note -- has slow to bit obviously it’s a dynamic market day by day right now for staffing etc.

Paul Westra:

Okay. Thank you.

Operator:

We’ll take our next question from John Glass with Morgan Stanley.

John Glass:Morgan Stanley:

Thanks very much. I wanted to ask about the average weekly sales versus the comp and so the average weekly sales growth is 1% and it’s been lower than the comp for a number of quarters for the reasons, new store development but since some of these stores are in the comp base may be you could give in and your bullish on the stores you are opening this year average units one, just may be a little color on those sophomore stores and how they have performed and if there has been a change in the performance in those second year stores versus prior years may be?

Randy Garutti:

On in the last call or call before this John we had mentioned that the 2015 opens exceeded the $2.8 million and $3.2 million range that had always talked about. I haven’t doing a number out there so what the AUBs were of those Shacks but it was above the range of the $2.8 million to $3.2 million because we have some heavy hitters that opened up in 2015 and when you look at those sophomore Shacks combined with the comp base and then the pretty nice increase in the 2016 opens from 3.3 to 3.6 is really where you are going to be able to close the gap between the average we could sale in all those three years.

Jeff Uttz:

for a long time. We are full respect to that number come down over time we have been able to perform in a great way this last year in a half on that particular metric of average income sales. But as we had even this year that we project the 3.6 and in the coming years in the $3 million average that model down so overtime and we fully expect that and those are great restaurants that can make a lot of money for us. So its an important metric for us but we are well aware of where its headed.

We got a material gone that if Shacks come in out the 3.5 or 3.6 range that is below our AUV at this point too. Our AUV for 2015 is $5 million. So it’s a decrease from our AUV so the story we’ve been telling for the last year and a half we expect that coming down we expect average weakly sales decline over the long term.

John Glass:

Yes, the question just had to do with rate of change to grew 1% this quarter and is being growing 7% or 8% in prior quarters understand the comp as a component of that in the -- but I just wanted to -- the other piece that was helpful. The preopening was higher this quarter at least -- model as pre opening changed or are you pulling forward in that pre opening number this quarter future openings how do we think of pre opening per store has that changed at all?

Jeff Uttz:

Not really. The dynamics of this quarter that maybe high a little bleed over from Q4. If you remember we opened in Queens on the very last day of the year so from that but the most significant one was we had a quite a bit of charge pre opening to LA. We did some amazing press events that obviously kicked off a year we spend a lot of money preopening marketing we even paid some pre opening rent which we almost never do.

So then that we really want to do to launch that important market the right way. So the majority that up take really is that and you should see as we do more Shacks as we have got it that will be decreasing per Shack overtime .

John Glass:

Okay great. Thank you.

Operator:

Once again ladies and gentlemen if you do have a question at this time it is star one on your touch tone telephone. Star one to ask a question. We will go next to Karen Holthouse with Goldman Sachs.

Karen Holthouse: Goldman Sachs:

Hi. Actually wanted to follow up a little bit on a question from earlier about the change in the unit growth guidance. So looking at the original guidance was to open 24 units between 2016 and 2017 and now that’s gone up to at least 32. On a basis of 40 so adding 8 on a basis of a 40 and I guess I just like a little bit more color on how you are ramping that you in capital pipeline behind that and what gives you confidence that you are not putting too much stress on the pipeline for a General Managers is that the opening teams the training teams just given the percentage increase you’re talking about? Thanks.

Randy Garutti:

Yes, that is absolutely so much of our focus and that will be one of the hardest things we ever do at these levels or whatever levels we get to in the future. Its also a suite spot, it’s also the thing we have been doing in our parent company for 30 years and at Shake Shack for the dozen years over here what really good at creating leaders that train future leaders and we have more than ever scaled our training systems we have more than ever, we have in this recent pay increase, we continue to pay our top trainers even more than ever and there are our entry level team members are more inspired than ever to grow like money and be part of this we are developing more people from within than we ever had I think we had something on the over 400 internal promotions last year and this Company. I think number for company or size.

So we are so focused on just growing and growing our people to meet that need and we got great people at Shacks come on in any Shack and say hey you are our team I think you will be proud to see what you are doing which gives us all the confidence to ramp that up to those 32 Shacks in those two years and if we can do more and we saw colors in place as we said in the last question we’ll certainly get there but today 16 feels like a great number to us.

Karen Holthouse:

And then one real quick one just point the field leadership organization so whoever is sitting right above the general manager what percentage of that on internal promotions versus external hires just roughly.

Randy Garutti:

Yes the area director group which are about 10 people who will oversee 4 to 8 Shacks there almost is entirely from within. We got few examples of people who come from the outside but generally they start as general managers and grow from within. They are some of strongest operators you ever going to meet in the industry. We just had a area director meeting here in the office last week and that group of people is just doing extraordinary work, now led by two regional directors as well as our Senior VP Zack who is doing a hell of a job running operations clearly the results of the last six quarters have shown that kind of incredible operating excellence that we guys are working on.

So we are so proud of our team and we feel like we got great pipeline of people here who will be ready to meet that growth as we do 16 plus 16. So we feel really good about that leadership group being in place and developing the people.

Karen Holthouse:

Great thank you.

Operator:

And ladies and gentlemen, that is our last question. It does conclude our conference call. We appreciate your participation.