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Edited Transcript of HABT earnings conference call or presentation 3-May-17 9:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Habit Restaurants Inc Earnings Call

Irvine May 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Habit Restaurants Inc earnings conference call or presentation Wednesday, May 3, 2017 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ira M. Fils

The Habit Restaurants, Inc. - CFO, Secretary and Director

* Matthew D. Hood

The Habit Restaurants, Inc. - CMO

* Russell W. Bendel

The Habit Restaurants, Inc. - CEO, President and Director

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Conference Call Participants

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* Andrew Michael Charles

Cowen and Company, LLC, Research Division - VP

* Brian Michael Vaccaro

Raymond James & Associates, Inc., Research Division - VP

* David E. Tarantino

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst

* Jeffrey Daniel Farmer

Wells Fargo Securities, LLC, Research Division - MD and Senior Restaurant Analyst

* Nick Setyan

Wedbush Securities Inc., Research Division - Research Analyst

* Nicole Miller Regan

Piper Jaffray Companies, Research Division - MD and Senior Research Analyst

* Will Slabaugh

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Habit Restaurants, Inc. First Quarter 2017 Earnings Conference Call. Please note that this conference is being recorded today, May 3, 2017.

On the call today, we have Russ Bendel, President and Chief Executive Officer; and Ira Fils, Chief Financial Officer. And they'll be joined by Chief Marketing Officer, Matt Hood, for the Q&A session.

By now, everyone should have access to the company's first quarter 2017 earnings release. If not, it can be found at www.habitburger.com in the Investor Relations section.

Before the company begins their formal remarks, I need to remind everyone that the discussion 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. These statements are also subject to numerous risks and uncertainties that could cause actual results to differ materially from what the company expects. The company refers you to their recent SEC filings for more detailed discussion on the risks that could impact the future operating results and financial conditions.

Lastly, during today's call, the company will discuss non-GAAP measures, which they believe can be useful in evaluating the company's performance. The presentation of these additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliations to comparable GAAP measures are available in the company's earnings release.

With that, I will now turn the call over to Russ Bendel. Please go ahead.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [2]

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Thank you, and good afternoon, everyone. Welcome to our earnings conference call. I'll start the call with an overview of the first quarter and then share our thoughts for the remainder of 2017. Ira will then review our first quarter financial results before we open up the call for your questions.

At a high level, we are again very pleased with our results for the first quarter, especially in the challenging operating environment and the extremely rainy quarter we experienced in our core California market. For the quarter, total revenue increased 17.4% year-over-year to $78.6 million.

Adjusted EBITDA for the quarter increased 9% year-over-year to $9.5 million. And the company operating comparable restaurant sales increased 0.9%, which marks our 53rd consecutive quarter of positive comparable restaurant sales. As I said earlier, we believe this is a significant accomplishment given that we had a challenging start to the quarter with unprecedented amounts of rains in both Southern and Northern California. Our ability to consistently drive positive comps is attributable to sticking to our core strategy of providing a differentiated high-quality fast casual experience at a tremendous everyday value. This strategy has continued to work for 53 consecutive quarters, and we have confidence that it can be the basis of many successful quarters to come despite the challenging macroeconomic environment.

During the quarter, we continued to build on our strategy of introducing premium-priced high-quality limited-time offerings, while also promoting everyday value. We began quarter 1, featuring 3 new menu items we added to the permanent menu at the end of December. The Portabella Charburger, the Golden Chicken Sandwich and the Super Food Salad. In February, we brought back a popular LTO from last year by reintroducing the Chicken Caprese Sandwich for $6.99. Driven in part by our enhanced point-of-purchase merchandising, the Chicken Caprese Sandwich built on its success of last year, with the menu mix of this sandwich growing by approximately 40%.

In early March, we rolled out our latest LTO, our Golden Chicken Salad, with hand-breaded golden chicken atop fresh garden greens, feta cheese, diced tomatoes, crumbled bacon, red onions, carrots and cilantro tossed in our own Southwest-inspired cilantro lime ranch dressing. The Golden Chicken Salad was extremely popular with our guests and was the best-selling on-tray salad on the menu during this promotional period, which ran until late April. The success of this salad comes on the heels of our successful Golden Chicken Sandwich launch in the fourth quarter of 2016.

As we moved into the second quarter, in late April, we began promoting our Tempura Jalapeño Charburger. Looking forward, our product pipeline remains strong, and we feel very good about what we have lined up for the rest of this year. These menu initiatives are in line with our philosophy of menu evolution, not revolution. And our ability to introduce new culinary items or LTOs that will add a tremendous everyday value even, at a slightly higher menu price, is great for our customers and great for us.

As we said many times, we'll continue to stay away from the discounting that has plagued the industry. We pride ourselves on blocking and tackling and out-executing the competition. For which, there is no substitute. It's all about execution. We can't be 100% better than any of our competitors, but we can be 1% better in 100 different ways. We feel incredibly good about the path that we're on.

In addition to successful product innovations, we supplemented our traditional FSI print media with some incremental digital media. We also used our expanded social media channels to engage our guests to do a big sign-up push for our CharClub e-mail database. In appreciation for being fans of The Habit, we offered our CharClub members a free Charburger with cheese, no strings attached.

In addition, any new members who signed up before March 31 also received a free burger with redemption period lasting until April 16. This promotion allowed us to able to dramatically increase the size of our e-mail database from 278,000 members before the promotion to 538,000 members after the promotion, while at the same time, driving guest traffic to our restaurants. We had an extremely high redemption rate of 49%. And even more importantly, the average guest spend while redeeming the free Charburger was approximately $3.85.

Moving on to unit growth. During the first quarter, we opened 3 new company-operated locations and franchisees opened 3 new locations. The 3 new company-operated locations were all in California. Of the 3 franchised stores, 2 were in the Seattle market and 1 in Las Vegas. We finished the quarter with a 165 company-operated locations, 13 franchise licensed locations for a total of 178 systemwide locations.

One of the new company-operated locations was our first-ever ground-up drive-through in San Diego. We're pleased with this performance so far. 8 to 10 of our new locations in 2017 will be drive-through locations. Putting more capital to work, opening drive-throughs allows us to capture more sales and generate returns that we expect on average to be at, or above, the 30% traditional new store cash-on-cash return targets. Our East Coast development continues to move forward as we anticipate opening 6 to 8 company-operated traditional locations in the East during 2017 and have begun looking for drive-through opportunities in these East Coast markets. We continue to remain confident in our ability to open between 31 and 33 new company-operated restaurants in 2017, while franchisees expect to open 5 to 7 locations during the year. 12 to 14 of those company-operated locations are expected to open by midyear. Thus far in 2Q, we have already opened 2 new company-operated restaurants, bringing the total number of company-operated restaurants opened so far in 2017 to 5, and 3 franchise openings, for a grand total of 8 new Habit Burger locations for 2017.

Finally, on the development front. A few weeks ago, we announced the appointment of Doug Branigan as Chief Development Officer. We are pleased to welcome Doug to The Habit team. Doug brings with him more than 20 years of leadership in restaurant operations and development. Prior to joining The Habit, he served in development and operational roles at restaurants including Black Bear Diner, Sprinkles Cupcakes, Smash Burger and Mimi's Café. His experience will be an invaluable asset to us, as we continue expand throughout the United States. And we're very excited to have Doug on board.

With that, I'd like to turn over the call to Ira to discuss our results more in detail.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [3]

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Thanks, Russ. Now turning to the results of our 13-week first quarter ended March 28, 2017. Total revenue increased 17.4% to $78.6 million in the first quarter of 2017 from $67 million in the comparable quarter last year. The 3 new company-operated restaurants that were opened during the quarter were opened for a combined 18 sales weeks.

The 165 company-operated locations were opened for a combined 2,124 sales weeks in the first quarter. As Russ mentioned, comparable operated restaurant sales increased 0.9% in the first quarter. In breaking down the 0.9% comp store sales increase, we saw a 1.5% increase in The Habit's transaction amount, partially offset by a 0.6 decrease in traffic. During the quarter, we're carrying a 2.2% price increase that was partially offset by a slightly negative mix impact of 70 basis points.

Excluding the impact of the free Charburger promotion, the negative mix impact would have only been about 20 basis points. Turning to expenses. As a percentage of company revenue, food and paper costs were 29.2%, which was a 90 basis point decrease compared to last year. The decrease was largely driven by leverage gained from our recent price increases combined with decreases in certain commodity costs, specifically beef and produce. We did, however, begin to see commodities start to trend up at the end of the quarter, and they have remained elevated in the second quarter.

Labor and labor-related expenses as a percentage of company revenue were 33.2%, which is a 110 basis point increase from the first quarter of 2016. Of the 110 basis point increase, 90 basis points was due to an increase in direct wages and 20 basis points was due to an increase in labor-related expenses.

The increase in direct labor was largely due to the wage rate increases for hourly employees. For the quarter, our average hourly rate increased a little over 6%. The increase of labor-related expenses was primarily due to higher associated payroll taxes for the increased wages and slightly higher medical insurance costs. Occupancy and other related expenses as a percentage of company revenue increased approximately 100 basis points to 16.7% of company revenue. The increase was primarily due to higher rent and cam costs, primarily associated with new unit development. In addition, we experienced higher repair and maintenance costs of about 20 basis points. Our general and administrative expenses increased approximately $1.2 million to $7.8 million during the first quarter, primarily due to costs associated with supporting an increased number of restaurants in a larger geographic area.

As a percentage of total revenue, general and administrative expenses remained flat at 9.9%. Depreciation and amortization expense increased to $4.2 million from $3.4 million last year. As a percentage of restaurant revenue, depreciation and amortization increased to 5.4% in the first quarter of 2017 compared to 5.1% in the first quarter of 2016. Preopening costs were $395,000 for the first quarter of 2017 compared to $260,000 in the prior-year quarter. We continue to expect preopening costs to range between $85,000 and $90,000 per new restaurant in 2017.

GAAP net income for the first quarter of 2017 is $1.8 million or $0.09 per diluted share compared to $1.4 million or $0.10 cents per diluted share in the prior year . On an adjusted fully distributed pro forma basis, net income for the first quarter was $2.5 million or $0.09 per fully distributed weighted average share compared to $2.6 million or $0.10 per fully distributed weighted average share in the first quarter of 2016.

In terms of our liquidity and balance sheet. As of March 28, 2017, we had cash and cash equivalents of approximately $49.5 million and outstanding debt of $9.8 million, which consists solely of our deemed landlord financing. We expect capital expenditures to be between $44 million and $47 million for the fiscal year 2017. Based on our growth plans, we believe our expected cash flows from operations and current cash on hand will be sufficient to fund our capital needs for the next several years.

With regard to fiscal year 2017, we are reiterating our full year guidance as follows: we expect total revenue will be between $338 million and $342 million; comparable restaurant sales are expected to increase approximately 2% for the year; we expect our restaurant contribution margin to be approximately 20% of sales for the full year 2017; it is also our expectation that commodities will be up 1% to 2% for the year, primarily driven by short-term pressure during Q2 in produce, combined with escalating ground beef and chicken prices. Our prior expectation on commodities was flat for 2017.

In regard to labor, we continue to expect our average wage rates will increase 6% to 8% in 2017. On a positive note, we have been working on labor productivity initiatives that we believe will help to offset some of the short-term commodity inflation.

General and administrative expenses are expected to be between $33.5 million and $34 million. And as Russ said earlier, we continue to expect to open between 31 and 33 company-operated locations with 9 to 11 openings in the second quarter.

We expect our franchisees to open between 5 and 7 locations for the full year. We expect our depreciation and amortization expense to be a little under $19 million for the full year. And finally, we expect a pro forma effective tax rate of approximately 41.5%.

With that, I'd like to turn the call back over to Russ for final remarks.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [4]

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Thank you, Ira. And as usual, I'd like to wrap up our comments by saying a big thank you to all the men and women in our restaurants. They certainly do an outstanding job of taking such great care of our guests each and every day.

With that operator, I'd like to turn the call over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Nicole Miller of Piper Jaffray.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [2]

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One housekeeping question and then a bigger picture question. I'm sorry, I missed the 2 separate operating weeks, if you could repeat those? And then, talking -- could you talk a little bit about the overall limited service environments, specifically around QSR discounting? Are you seeing more or less quick service restaurant discounting? Is there anything regional versus national in nature? And are you seeing anything to do with certain day parts or item patterns?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [3]

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All right. Hey, I'll do the first easy one. The sales weeks for the company-operated stores that were opened in Q1, the 3 new ones, was 18 sales weeks and all sales weeks for the quarter were 2,124.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [4]

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Okay. And Nicole, thanks for your question. And in regard to discounting, I'll take that first stab at it, then I'll let Matt give any color that he may have. But I don't think we've seen a drastic difference in it through the first quarter on the QSR side. I think what we have noticed more probably in the latter part of 2016 rolling into the first quarter is an increased amount of strong promotional discounting electronic media by the Bar & Grill category in the full-service category. I think, we just feel like and especially in the West, we are certainly seeing more of that. As we talked about a little bit of commodity pressure here, maybe long term that will have some effect on the ability of traditional burger QSR players, maybe not to be able to do as much deep discounting. Matt?

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Matthew D. Hood, The Habit Restaurants, Inc. - CMO [5]

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Just following up of what Russ had in the opening remarks also. While we continue to see QSR discount and maybe add new items to their bundles, 4-for-4 packages and casual dining doing more discounting. When you look at our results over the last 53 quarters and just continue to gain confidence in the fact that we don't need to go there. And we've had continued success with being able to just continue to drive folks into the restaurant, where our operators do a great job of taking care of our guests. So -- and we feel really good about our strategy. And we know that the macro environment is going to ebb and flow, but we feel really good about the results we've posted in Q1 and really the outlook for the remainder of the year.

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Operator [6]

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The next question is from Andrew Charles of Cowen and Company.

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - VP [7]

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As you guys probably know, last week, McDonald's launched a line of premium hamburgers. And just wondering, is this something that -- when QSR kind of steps up a little bit and gets a little bit more premium-ized, is it is something competitively that you view as more challenging for you guys? Or is it something that we should be thinking about as an easier offering for you to compete against then, if they intensify the focus on value?

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Matthew D. Hood, The Habit Restaurants, Inc. - CMO [8]

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Yes, I would agree with that second statement. I think they have always really come --- their position of strength really on the QSR side has really always been value and convenience. And when they start to step out of that and start to go to premium items, that's really our point of strength. So they're trying to come up against us and our point of strength, but we feel pretty good about where we are positioned in that regard.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [9]

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And when traditional QSR historically has gone toward those premium-type products, you could argue how premium they are. But their value proposition for them gets a little distorted and, I think, really plays into our everyday value strategy with everyday premium products.

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - VP [10]

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Got it. And then the labor enhancements you mentioned to help offset the incremental commodity pressures, can you guys give a few examples of some of the tactics you're putting in place?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [11]

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Yes, we are working through a number of them. The tactics that we're putting in place really are not meant to affect the customer experience at all. That's first and foremost where -- of how we think. But what we're looking at -- our operating team is looking at a way to save an hour or so a day during the times when there are not customers in the restaurant. These would be the times before we open at 10:30 at night or when we close the doors and are in closedown mode. So that's where we're looking at it. We continue to make significant strides with technology and systems that are -- have always been designed to provide the management people in our stores the ability to spend more time with employees and customers and less time on administrative tasks. So some of it will fall into that purview as well.

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - VP [12]

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Great. Just my last question. You guys reiterated the target for the 12 to 14 openings in the first half of the year, and points to about 7 to 9 over the next 2 months relative to the 5 over the first 4 months of the year. So can you talk about the line of sight you guys have into the openings, just in the near term?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [13]

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Yes. Obviously, we have pretty good visibility into the first half of the year. And to back up a little more, all of our deals for this year we have signed leases for and are in various stages of development, entitlement, construction on. And in fact, we feel better about the pipeline that we have in a long time and are working more than the 31 to 33 so that we anticipate having a -- even, hopefully, a better start to 2018 in the first quarter, especially the first half of the year. But we said from the beginning, we were going to try to balance this schedule out. Our entire real estate development construction team has done, what I believe, is an amazing job thus far in putting more deals in the pipeline, working very diligently to bring as many forward as possible. And our target of 12 to 14, we feel good about. There's always the possibility one or so could slip a week or 2, but we feel we are, without question, on track to balancing out the pipeline, which was one of our major internal initiatives for 2017 and beyond.

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Operator [14]

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The next question is from Will Slabaugh of Stephens Inc.

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Will Slabaugh, Stephens Inc., Research Division - MD [15]

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And I wonder if you can talk a little more about the sales trajectory through the quarter and then, if you're willing, into the quarter-to-date period? And I'm more curious because you mentioned the rains and the weather that you had in California, I'm sure that caused a good deal of volatility. So I wasn't sure if there is any quantification around what that was? And just in general, if things did sort of pick up for the end of the quarter, as things normalize from a weather perspective?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [16]

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I'll let Ira give maybe a little more color because we analyzed and looked at it. And we have always chosen not to talk too much about the weather. Because there's always weather. Sometimes it helps you, sometimes it hurts you. This year, it has probably been, without question, a drag on sales, especially for early in the quarter.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [17]

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Yes, as Russ talked about and we talked about in our last call, we had a lot of rain in January and February. And then as moved into March, we did a couple of things. We took our CharClub, our free Charburger promotion and we pushed it up a week. So we have one incremental week. We coupled that with an FSI and some incremental digital media. And it really helped to reignite kind of our sales for the quarter. That, with the combination of a better weather and a little favorable timing from Easter which moved into Q -- we moved out of Q1 from last year, enabled us to do the 90 basis point favorable number for the quarter. When we did our analysis in weather, and it's hard because of when it falls and where, but we were able to do a pretty detailed analysis. We think it kind of had a 100 basis point impact on us for the quarter. So when you really break it down, when you look at the quarter in its entirety and think about the damage that the 100 basis points did, but the 30 basis point plus side, 30 or 40 basis point plus side without an Easter, that puts us into a same-store sales number that's pretty comparable to Q4 of last year. So for us, we feel like our same-store sales trajectory remains good. And as we moved into the first quarter, there was nothing that made us think otherwise, in regard to that.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [18]

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And we feel good about our guidance for the balance of the year.

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Will Slabaugh, Stephens Inc., Research Division - MD [19]

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Great. I want to follow up on your comments on drive-throughs. It seems like that's more and more a focus and you mentioned you opened up your first ground-up recently. I'm curious if you had any more commentary around those that you've converted in the past and then, any metrics in terms of either throughput or customer response to being -- to willing to wait for that cooked to order higher quality product versus some of the other drive-throughs that are obviously a little bit more kind of speed-focused?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [20]

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Yes, I'll take the first part of that question and let Ira or Matt jump in, whenever they feel appropriate. But first of all, we have not converted any. I think you may have said converted. So we've -- and converting them is probably not an option just because of permitting and sites and layouts, et cetera, et cetera. But we had -- we opened our first drive-through in 2011 or '12 and only had 4 through 2015 -- into 2015, but today we've only opened one so far this year. We started the year with 12. I think today we have 13-plus. Our franchisee in Nevada has 1, as well. And we like their performance. We have not broken out specifically what they do in regard to revenue. We've talked a little bit about the investments. But we feel very good about them. And as we, and I, have talked specifically over the last couple of calls, we want to do more of them. And in fact, as we said we're going to do 8 to 10 of them this year. And you would expect to see more next year. It falls into where the consumer is. They just continue to want more convenience. We're still committed to cook to order. We don't precook anything. It still our same 6 to 8-minute cook times. But people want convenience. And I think you've seen that Panera Bread is doing a significant amount of drive-throughs. And it's just ties into the overall consumer and what their lifestyle and what their demands are. So we continue to be very bullish on them. We're trying to do as many drive-through deals as possible. They certainly generate higher sales. They require more capital. But their all-in returns are in line with our targets. And as we said in -- at the beginning of the call, it's a way for us to put more capital to work, generate higher sales and return the same kind of returns that you're accustomed to seeing.

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Matthew D. Hood, The Habit Restaurants, Inc. - CMO [21]

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Well, just to add on to that. One of the things that we've tried to do as well is leverage some of the technology that we've been developing in-house to allow the guests to place their order earlier in line, so that the wait time and the ability to get throughput with the drive-throughs also meets the consumer expectation.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [22]

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Cook time is the same.

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Matthew D. Hood, The Habit Restaurants, Inc. - CMO [23]

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Cook time is the same and so it allows us to get the order in earlier, and allows us to process as many orders for the drive-through and also, have busy restaurants in the inside as well.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [24]

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So we like them. And we're actually getting pretty gosh darn good at running them.

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Operator [25]

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The next question is from David Tarantino of Baird.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [26]

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I guess, first a quick clarification question, I guess, on the trends exiting the quarter and entering this quarter. I think, Ira, you might have misspoke and said early or entering Q1, you're feeling good about business. But, I guess, any comment you would have on what you're seeing so far in Q2 if you exclude the impact, of course, from the Easter shift?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [27]

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Yes, well, sounds like I did misspoke and I did mean Q2. As we entered into Q2, without being specific, when you exclude -- excluding the Easter flip-flop between quarters and what happened in the rain, our sales trajectory is pretty much in line with what it's has been in the last couple of quarters. So we feel pretty good about where we're going. In Q2, we are running up against a little bit with our strongest quarter last year. And so far, we feel good and we're on track to hit our guidance for the year of 2%.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [28]

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Great. That's helpful. And then Matt, a question for you on the Charburger giveaway and the membership increase you saw, which was very impressive. I guess, as you think about that bigger database you have now, are you planning to maybe more aggressively attack that database as you think about the balance of the year, given that there is a much bigger number of people in there and can move the dial a little bit on the comps that way?

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Matthew D. Hood, The Habit Restaurants, Inc. - CMO [29]

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Yes. Thanks, David. Good question. And we -- it's a real fine balance. And then we're going to be very careful about overcommunicating to that database. Right now, if you look at one of the metrics that we measure is our open rates for when we send a message to our guests. And right now, our open rates sit at a premium above the industry average of about 50%. So we have -- we still have very high engagements with our guests that are in the e-mail database who want to hear from us. And so we're going to leverage that and for example, when we just introduced the new Tempura Jalapeño Charburger, we had some of our highest open rates against the largest our database had ever been. So in essence, we'd reached more people more efficiently. I think what I've seen in my past and what you see other brands have done that may have loyalty databases or e-mail databases, if you start going too often to that database with uninteresting or un-relevant communications, your un-subscriberings go up and your open rates go down. And right now, we sit in the top decile compared to the industry's benchmarks. And we're going to keep that really the way we think about it. But we feel very good about the fact that we've got a larger audience, an engaged audience, an audience that opens more of what we send and unsubscribes at a rate that's well below 0.5%, which we see as an industry -- one of the industry leaders. So that's how we're thinking about using it going forward. We feel really good about the way that we were able to build it, and the size that it exists, going forward.

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David E. Tarantino, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research and Senior Research Analyst [30]

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Great. That helpful. And then last question, on the new unit performance, it's getting, I guess, the way we calculated it, increasingly better. And I assume drive-throughs are having an impact on that. So I guess, could you talk about the unit performance of the traditional units ex the drive-throughs? And whether you are also seeing improvement there in the volumes? Or how those are comparing to your targets? And then specifically, perhaps, if you could give an update on how volumes are trending in the East Coast markets?

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Matthew D. Hood, The Habit Restaurants, Inc. - CMO [31]

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Yes, so for the traditional stores, the new traditional stores, our target on average is $1.4 million. And for the last 3 years of openings, we've been above that on average for those locations. So we -- exclusive of the drive-throughs. So the drive-throughs are definitely helping, but even when you step back from the drive-throughs, take them out, we feel very good about the volumes from our traditional locations. And what was the second part of your question, I'm sorry?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [32]

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A little color on the East Coast.

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Matthew D. Hood, The Habit Restaurants, Inc. - CMO [33]

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First time we've ever heard that question, Ira. I mean, it's really kind of -- I mean, just like our overall sales, it feels like it's steady as you go. We have been -- we feel good about where we're at. They're in line with our targets. We're continuing to look for more stores in the market. We're looking for drive-through locations. We feel good about where we sit today.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [34]

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And I will say the same thing I've said previously, but I'll say it with as much confidence as ever. The few stores that are in the comp base and the ones that aren't in the comp base, but are opened more than 12 months, are performing at a number that's significantly higher than the comp totals we reported. We feel we're on track with where we want to be. We would always like to do more. No question about it. But we talk about what their volumes are going to be. And I'll remind you that we are entering the East Coast with some of our largest most direct competitors Smash Burger, Five Guys where they are well entrenched. And we're opening at volumes that are at or above their system average. So we feel pretty good. We feel very good about the people we have back East, the level of execution, how we're being received. And I'll remind you that in 2009, our system was totally comprised of California, primarily all Heartland, Southern California locations, and the system average was $25,000 per week or $1.2 million.

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Operator [35]

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The next question is from Jeff Farmer of Wells Fargo.

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Jeffrey Daniel Farmer, Wells Fargo Securities, LLC, Research Division - MD and Senior Restaurant Analyst [36]

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Just following up on David's question on the -- improving the unit productivity, excuse me. I think you said that the drive-throughs are a relatively small influence. So if that is the case, what is driving that improvement, Ira, in terms of those better numbers we're seeing with AWS versus same-store sales?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [37]

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I don't know but small might be too large of a word, too small of a word, large of a word, however you think about it. We're really not that far. We've really been doing very similar volumes in the new restaurants for the last few years now. So I know a couple of stores, the way it can be looked at a couple of stores here, a couple of stores there depending on when they open in the quarter can move things a little bit. But when you really take a big step back, the new store productivity...

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [38]

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Pretty consistent.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [39]

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It's pretty consistent.

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Jeffrey Daniel Farmer, Wells Fargo Securities, LLC, Research Division - MD and Senior Restaurant Analyst [40]

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Okay. And then you did touch on it, but in the first quarter, roughly 100 basis points of unfavorability on that occupancy and other line, occupancy and other line. Should we expect that level of pressure moving forward over the balance of the year? Is there any reason to believe that number will get higher or lower?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [41]

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It will get lower. We've had a couple of things that hit us. One of the bigger ones was R&M, but there was a couple other little things here and there in our P&L. It won't abate, but it won't be 100 basis points either. It will be south of that.

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Jeffrey Daniel Farmer, Wells Fargo Securities, LLC, Research Division - MD and Senior Restaurant Analyst [42]

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Okay. And then just one more, just to harp on the P&L here. It's a clarification. I think that you said -- did you say commodity inflation of 1% to 2% for the full year and then with the menu pricing, you thought that you might be at a flat cost of goods sold number for the full year? Is that how you described that?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [43]

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No. I didn't really bring in the menu pricing.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [44]

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We're working through that.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [45]

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So we're working through that still. We do expect to take some menu [pricing review areas]. So and the inflation -- the menu -- the commodity inflation is actually pretty recent. So we've had a lot -- all the rains drove a lot of produce costs, in fact, for the quarter. In the second quarter, it's really impacting us now. It looks like produce is going to be up over 27% during the quarter. Now the good news about produce is that tends to be a little more short term in nature because the growth cycles are much shorter. So we've seen a lot of pressure on produce in the -- really more in Q2 than Q1. And we've also seen, I think, as other people have talked about already, we've seen chicken pressure, as well also at the end of Q1 and pushing through Q2 for sure. And then thirdly, we've seen burger start to creep up as well. And we're hoping that's more transitory, but we don't know for sure yet. It's definitely -- it's kind of the signs that we've seen -- haven't seen it in a long time. We didn't just have -- beef prices were deflationary in Q1, and they very much reversed in Q2 and then, headed the other direction. So that 1% to 2% is for the year and it's really most of that's being driven by Q2. So we are going to see a little bit of a spike in food cost in Q2. Now the good news is, what I did talk about is the things that were going to be offsetting it, is we're doing some things in labor that we believe, over the full year, can help offset some of the pressures we're seeing mostly in Q2 in food cost. And hopefully, the inflation will mitigate itself. But all in all, for the year, we feel like we can achieve our targeted 20%...

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Matthew D. Hood, The Habit Restaurants, Inc. - CMO [46]

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20% store margins.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [47]

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Store margins. It's just going to change a little bit throughout the year, with a little bit lower margin than we maybe initially thought in Q2 and a little better in Q3 and Q4.

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Operator [48]

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The next question is from Brian Vaccaro of Raymond James.

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Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [49]

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I just wanted to follow-up on your comments regarding increased value competition from Bar & Grill that emerged late last year and, Russ, I'm just curious, is that causing a change in your lunch versus dinner trends?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [50]

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If it is, it's not very material. Our lunch-dinner traffic continues to be about 50-50.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [51]

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And yes, yes, dinner continues to perform well. Yes.

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Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [52]

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Okay. All right. And I also want to just circle back on the mix component of your comps, specifically. And with the Charburger redemption period, I think, you said extending into the first part of Q2, do you expect a similar drag on mix sort of in the second quarter and then followed by stabilization in the second half? Is that how we should be thinking about that component?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [53]

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Yes. A little less. So a bigger part of it was remember, we had one incremental week of the Charburger promotion in Q1. We are seeing -- there is more out there in higher redemptions. So that's part of it. So it's a combination of both. I think the bigger piece of that is the back in Q1 . . .

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [54]

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More of it's behind us.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [55]

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We had a full extra week of the promotion out there.

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Matthew D. Hood, The Habit Restaurants, Inc. - CMO [56]

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And the promotion ended April 16. So it really only came into the second quarter for the first couple of weeks.

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Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [57]

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Okay. All right. That's helpful. And shifting gears to the margins, if I could. I wanted to just ask about the labor costs. And looking at, again, on per operating week basis, it was pretty encouraging to see that mellow out a bit. You mentioned the -- some labor productivity initiatives. Were those in place and do they have some benefit to the first quarter? And if not, was there anything unusual year-on-year that we should consider as we think about the rest of the year?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [58]

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No, nothing unusual. There were a few things that we had started and we started to see a little bit of an impact in Q1, I think that helped. I think operations have been very much focused on labor given the fact we've known about the wage increases for a while. So they continue to focus kind of day-in and day-out on labor. We had the things Russ talked about. The other thing that our team has been working on too really been the new unit -- the new store productivity, in regards to labor and kind of ramping them down to efficiency a little faster. So it's really a combination of a few things that's really helped there.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [59]

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I think, a lot of this falls into really some of our real core competencies. As we pride ourselves on being operators, we're not afraid to tweak, adjust. We talk about it internally all the time. It's evolution, not revolutions. But we're always looking at opportunities. And first of all, how do we drive more sales? How do we drive more throughput? But then, how can we be more efficient? And as Ira said, I think of our operators have done really a nice job, especially with new restaurants using the tools that we have developed internally, proprietary tools, on ramping efficiency in new restaurants. Because we believe if new restaurants don't get to the appropriate level of efficiency over the appropriate amount of time, they struggle for a significantly longer period of time. And we are always looking at that and noodling and tweaking and that's kind of who we are.

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Brian Michael Vaccaro, Raymond James & Associates, Inc., Research Division - VP [60]

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Okay. And then last one from me, on the food cost side. Ira, I just want to make sure we're all on the same page, sort of thinking about the next few quarters. Do you expect -- as you look at Q2, Q3, Q4, do you expect year-on-year inflation in each of those periods and Q2 is just going to be, sounds like maybe somewhere in the low- to mid-single digit type of inflation range potentially? Is it -- did I interpret that correctly?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [61]

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Yes. We're going to see it more in Q2, and we think it'll abate a little bit in Q3. It'll come back a little maybe in Q4. But the biggest impact we're going to see is in Q2.

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Operator [62]

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(Operator Instructions) The next question is from Nick Setyan of Wedbush Securities.

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Nick Setyan, Wedbush Securities Inc., Research Division - Research Analyst [63]

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Just kind of looking at labor, the 110 bps of deleverage on a lower comp was actually a pretty good improvement over what we saw last year. And as the year progresses, obviously, the comp trajectory should look even better, potentially another little bit more price in the second half as well. But then you're also going to have a lot of new units that are opening up and so you should have a little bit more pressure from those new units. So in terms of just how we should think about the deleverage on the labor line as the year progresses, is this 100 basis points or so about the right level to think about? Or can it potentially go up or down?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary and Director [64]

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I think it's a great level to think about. There's a lot of things that we're working on that are going to . . .

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [65]

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(inaudible) I believe, which will help to lessen the deleverage, number 1. Number 2, I think, you're right on when you talk about sales get better, then leverage will be better as well. So it does help us think a little bit optimistically about where we're headed from a labor standpoint, which is great given that we're starting to see a shift a little bit in the other direction on the food cost line.

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Nick Setyan, Wedbush Securities Inc., Research Division - Research Analyst [66]

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Got it. Got it. And the 8 to 10 stores in terms of the drive-throughs, what's the geographic composition of those locations?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [67]

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All in the West. We will open 1 in Utah, which will be our first one in Utah and that will open hopefully in the first half of this year, and then the rest of them are in California.

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Nick Setyan, Wedbush Securities Inc., Research Division - Research Analyst [68]

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Got it. Got it. I'm just kind of taking a step back, bigger picture to delivery or third-party delivery is very topical today with a lot of chains starting to test or rolling out fully. I guess, what's your approach to, or what's your thought process, regarding third-party delivery?

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Matthew D. Hood, The Habit Restaurants, Inc. - CMO [69]

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Yes, this is Matt. Just to sort of set the backdrop, a large portion of our food already is taken to go either for take-out or drive-through or online orders. So our food travels well. Our guests like taking the affordability of it. We continue to look at ways to use technology to accelerate that. While we don't have any specific delivery partnerships that we've endorsed or that we've announced, we know that the consumers continue to look for convenience. And so we've looked at, not only our drive-throughs, some of our -- some of the business that we see coming through our catering trucks, our take-out and online order business continues to grow. And we'll continue to look at how we leverage mobile technology to enhance that from a pickup and delivery standpoint. And we'll continue to look at how we can do it in the most profitable way, not only for our guests, but for our stores as well and let the delivery player shake out a little bit, while we continue to deliver what our guests want, which is that convenience for pickup, the drive-through and the ability to order through the channels that they really want.

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Nick Setyan, Wedbush Securities Inc., Research Division - Research Analyst [70]

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Okay. And again kind of just final question around kind of how you're thinking, how do you evolve around franchising? I mean backing into some pretty impressive numbers on the stores that exist today. And I know there is a lot of white space in the middle of the country. Could we potentially see maybe an uptick in franchise development, or new franchise agreements, in the middle of the country?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [71]

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We really haven't taken many strides in that area. As we've always said, I don't know we've said it on these calls, but when we talk to investors and each of you, if there is something a specific group brings to the table that we don't have that particularly skill set or competency, we would evaluate it. For example, someone in, I'm just saying this is an example, New York City, we're probably not ready internally to enter the New York City Metropolitan 5 boroughs area. But if there was someone that was well-capitalized, had infrastructure in place, et cetera, et cetera, we would consider that. And you're right, we're not in the middle of the country currently. But we feel pretty good about our growth rate. We don't think this is a first-to-market kind of strategy that we have to get there first and it's a land rush. Our intention has always been to keep most of the country for ourselves. And when we get there, we'll get there. And we're growing at a pretty healthy rate. And we overall feel pretty good about our strategy. Now could we add a franchisee also occasionally? We would consider that. But we're not -- we are not shifting our strategy to asset-light and flipping this to a franchise business. We're a company of operators, pride ourselves on that, and are going to keep most of it for ourselves.

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Operator [72]

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This concludes the question-and-answer session. I would like to turn the conference back over to Russ Bendel for any closing remarks.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President and Director [73]

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As always, we appreciate your interest, your confidence in the company. And we continue to look forward to speaking with you going forward. Thanks, again.

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Operator [74]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.