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Edited Transcript of HABT earnings conference call or presentation 31-Jul-19 8:30pm GMT

Q2 2019 Habit Restaurants Inc Earnings Call

Irvine Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Habit Restaurants Inc earnings conference call or presentation Wednesday, July 31, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ira M. Fils

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

* Iwona Alter

The Habit Restaurants, Inc. - Chief Brand Officer

* Russell W. Bendel

The Habit Restaurants, Inc. - CEO, President & Chairman

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Conference Call Participants

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* Andrew D. North

Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst

* Brian P. Vieten

Cowen and Company, LLC, Research Division - Associate

* Matthew R. Kirschner

Guggenheim Securities, LLC, Research Division - Associate

* Nerses Setyan

Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst

* Nicole Miller Regan

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

* William Everett 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., Second Quarter 2019 Earnings Conference Call. Please note that this conference is being recorded today July 31, 2019.

On this call today, we have Russ Bendel, President and Chief Executive Officer and Ira Fils, Chief Financial Officer; Iwona Alter, Chief Brand Officer is also joining Russ and Ira for the Q&A portion of the call. By now everyone should have access to the company's second quarter 2019 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 a guarantee 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 the recent SEC filings for a more detailed discussion of the risks that could impact their 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 this additional information should not be considered in isolation or as 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 would like to turn the conference over to Russ Bendel. Please go ahead.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [2]

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Thank you, and good afternoon, everyone. I'll start the call with a brief overview of the second quarter, update you on our progress of becoming a total access brand and share some thoughts about 2019. As usual, Ira will then review our second quarter financial results in more detail as well as review our 2019 guidance before we open the call for your questions. With that out of the way, let's dive into our second quarter results.

Total revenue increased 14.7% year-over-year and our company operated comparable restaurant sales increased 3.9% in the second quarter. Adjusted EBITDA increased 13% to $11.9 million compared to $10.5 million in Q2 of 2018. Adjusted fully distributed pro forma net income was $2.4 million or $0.9 per share compared to an adjusted fully distributed pro forma net income of $2.2 million or $0.08 per share for the second quarter of 2018.

We're very pleased with our results as this quarter marked our fifth consecutive quarter of comp store sales increases and at 3.9% was our largest increase since mid-2016. In addition, we are even more pleased with how aggressively and efficiently we have moved to provide total access to our customers in this ever-changing consumer environment.

We made this pivot approximately 18 months ago and since then we've first, from the beginning of 2018 through the end of July 2019, we have opened a total of 28 drive-thru restaurants, system-wide which brings the total number of drive-thru's, in operation today, to 50 giving our customers the option to order our great tasting food without leaving their car.

While our drive-thru's provide additional convenience to our guests, they also broaden our universe for potential sites. Second, we've partnered with two different third-party delivery providers allowing our customers the ability to enjoy our great-tasting food without even leaving their house. So far, we've been getting great reviews from our guests and we've -- and we're seeing a higher check for delivery compared to our dine-in or carryout business.

As our off-premise business continues to grow, we believe offering our guests full access to our brand is simply an extension of our focus on providing great service and hospitality. Third, in -- installed self-order kiosks into 14 of our restaurants allowing our customers a different and faster way to order in-store. On average, we're finding that approximately 8% of sales comes through the kiosk at our test locations and we're also experiencing a higher check average for those orders placed through the kiosk. Although it's still early, guests and team member feedback has been very positive and we are planning on expanding this test to additional locations.

Fourth, witness sales through our current online ordering platform and or mobile optimized Website experience significant -- experienced significant growth with same-store sales through this channel up 16.8% during Q2. Our customers clearly value the convenience of being able to quickly order their favorite meal and have it waiting for them at the pickup when they arrive at the restaurant.

And finally, on July 17, we did a soft launch of our new customized mobile ordering app to all locations. We've been testing the app in three markets during the last six months and have had great feedback from our guests and look forward to the nationwide launch aided by marketing support during Q4 of this year. The mobile app will be a great addition to our growing online ordering sales channel. While we believe the best marketing is a great customer experience at a fair price that compels people to come back more often, this and all new digital channels will give us a new platform to communicate with our guests regularly. While we have made great strides to make The Habit more convenient and accessible to our guests over the last 18 months, we still have lots of upside to our business as we continue on our digital transformation.

Now moving on to one of my favorite topics, our food. In the second quarter of 2019 we continued to showcase our ability and value of our menu offerings. Our customers trust that we will provide a broad menu and are looking for more differentiated bolder flavors and items that they may not find in a traditional limited-service restaurant.

Early in the second quarter, we featured our Guacamole Crunch Char Burger. This limited-time offer featured a char-grilled beef patty, crispy tostada shell, guacamole, pico de gallo, melted cheese, zesty ancho chili lime sauce, lettuce, tomato, pickles on a toasted sesame seed bun. More recently, we featured a Fresh Berry and Chargrilled Chicken Salad which is a perfectly seasoned chargrilled chicken breast, fresh strawberries and blueberries atop of garden greens. This light summer salad is topped with toasted almonds, feta cheese and tossed in our house-made strawberry balsamic dressing.

In addition, we brought back our Spicy Green Beans which are golden crisp tempura-battered green beans drizzled with house-made creamy sriracha lime aioli then seasoned with a touch of seven-spice pepper blend. We've also featured a delicious Oreo Cookie Shake and a Blueberry Citrus Mint Agua Fresca as new -- as a new crafted beverage for the summer. We believe we have a great opportunity to further innovate our drink menu and look forward to launch more seasonal drinks and shakes in the months to come.

These various LTO's showcase the variety of our menu, diverse menu strategy and the broad opportunities for food innovation. We have a robust lineup of LTO's for the remainder of this year and we believe that our innovation truly drives differentiation being from The Habit and our peers. We have seen these items keep our menu fresh and continue to gain traction with our guests. Speaking of our menu; two of the restaurants we opened this quarter have our new digital menus. These new digital boards are a great way to highlight our seasonal LTO's as well as work on optimizing menu board communication through design, product positioning or menu mix to drive profitability.

Moving on to marketing. Last week we announced that we selected Innocean USA as our first agency of record to handle creative and media. We're excited to work closely with the Innocean team and we believe that together we can connect the brand with our guests in new and meaningful ways. We invested in marketing talent by creating a new position, that of vice president of digital marketing, announced -- and announced the addition of Brandon LaChance for that role. Brandon has deep restaurant industry and digital marketing experience and will lead our digital marketing communications strategy including media and creative as well as oversee the digital guest experience.

We have been implementing our digital-first strategy and we'll continue to focus on creating brand awareness. We certainly have a lot to share when it comes to our product innovation and brand [of compliments], such as being recognized as the best regional fast-food chain in USA Today's 2019 Readers' Choice Awards. As we're evolving our brand tone in social and digital, we're also working on targeting strategies. We just completed a segmentation study defining our core customer segment. Next we're about to dive into more qualitative research which will allow us to sharpen the brand positioning and brand story we want to communicate to our guests.

Switching now to development. During the second quarter, we opened four new company-operated restaurants. One of the four restaurants we -- one of the four restaurants we opened, two were -- of the four restaurants we opened, two were drive-thru's of which one was on the East Coast and the other in California. Of the two traditional stores we opened during the quarter, one was on the East Coast and the other was on -- it was in California. Our franchisees also opened three franchised licensed restaurants during the second quarter of 2019 including two in China and one in the Seattle market. The Seattle opening was the first drive-thru location in that area.

Speaking of franchise development, we're pleased to announce that we've signed two new franchise agreements; one agreement calls for 25 units in Cambodia to be developed over the next five years. The second agreement includes seven units in New Hampshire and Massachusetts over the next five years. We expect both of these partners to open their first locations in 2020.

Currently, approximately 10% of our stores are franchised or licensed and we could see that number increase over the next couple of years to approximately 20% of our store base if we find the right partners. We continue to receive significant interest in the brand but we'll continue to be selective and strategic in our future partner selection. While we are excited about the long-term opportunity to franchise, we are lowering our 2019 expectations for franchise development to seven to nine locations; down from 10 to 12 which we originally outlined late last year. This is due to delays in the Chicago market as very sadly the CEO of this franchise group passed away. In addition, to our small franchisee in the Spokane, Idaho market terminated their agreement.

For 2019, we continue to expect to open 21 to 23 company-operated locations; approximately 30% of those locations will be on the East Coast and about two-thirds of those stores will be drive-thru's. In the third quarter, we've already opened five stores which brings our total to 16 locations so far this year. With that, I'd like to turn the call over to Ira to discuss our financial results in more detail.

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

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Thanks, Russ. Now turning to the results of our 13-week second quarter ended June 25, 2019. Total revenue increased 14.7% to $117.9 million for the second quarter of 2019 compared to $102.9 million in the comparable quarter last year. Our four new company-operated restaurants were open in the qua -- we opened in the quarter, were opened for a combined 28 sales weeks. Our other 230 company-operated locations were opened for a combined 2990 weeks for the quarter. In total, the 234 company-operated locations were open a combined 3018 weeks in the quarter.

As Russ mentioned, we are pleased with our sales trends during the quarter as comparable company-operated restaurant sales increased 3.9%. In breaking down the comp store sales increase, traffic decreased 2.5% offset by a 6.4% increase in the average transaction amount. As was the case in Q1, transactions in Q2 were negatively impacted by not repeating the free char burger promotion we ran in 2018. We estimate that transactions were negatively impacted by about 50 basis points and excluding the impact of the prior year free char burger promo, we estimate transactions would have been down about 2%.

During the quarter we were carrying accumulative pricing of approximately 4.3%, as planned, at the end of May we took an average 5.3% price increase to help offset the minimum wage increase introduced on July 1 in the City of Los Angeles as well as to combat the continued wage pressure we are seeing as a result of a tight labor market across the country. The price increase was higher in our California markets which has been impacted the most by wage pressure and is less aggressive in our non-California markets.

Now turning to expenses. As a percentage of company revenue, food and paper costs were 29.9%, essentially flat compared to last year. As we move towards the end of Q2, as we moved toward the end of Q2 and so far into Q3, we have experienced some significant pressure as we believe to be relatively short-term in nature related to produce. In addition, beef costs have been slightly higher than we had anticipated for this time of the year.

Labor-related expenses, as a percentage of company revenue, were 33.2%, a 20-basis point decrease from the second quarter of 2018. The decrease was mostly driven by lower payroll taxes resulting from the California food attacks -- tax -- tax elimination at the end of 2019, 2018. For the second quarter, our average hourly rate increased approximately 5%. The increase in average wage was offset by price increases and good labor productivity. The tight labor market combined with government-mandated wage increases for hourly employees continues to put upward pressure on our labor costs.

Occupancy and other related expenses, as a parentage of company revenue, increased approximately 160 basis points to 19.1%, about 140 basis of this increase was due to higher third-party delivery costs as well as online and call center costs. We also experienced higher rent expense resulting from the lease accounting standard ASC 842 which we adopted at the beginning of 2018.

As a reminder, we began lapping the introduction of third-party delivery to our locations at the end of the second quarter in 2018. Additionally, we plan to increase marketing expense by approximately 25 basis points in 2019 compared to last year. Our general and administrative expenses increased approximately 775,000 or 7.9% to $10.6 million during the second quarter as a percentage of total revenue G&A expense decreased 60 basis points to 9% as we were able to leverage our 14.7% sales increase.

Preopening costs were approximately 670,000 in the second quarter of 2019 compared to 646,000 in the prior year quarter. As Russ mentioned, we opened four company-operated restaurants in the second quarter of 2019 compared to seven openings in the second quarter of 2018. We continue to expect pre-opening costs to range between $100,000 and $105,000 per restaurant for 2019.

Net income for the second quarter of 2019 was $2 million or $0.09 per diluted share compared to net income of $2.1 million or $0.10 per diluted share in the prior year. On an adjusted fully distributed pro forma basis, net income for the second quarter was $2.4 million or $0.09 per diluted fully distributed weighted average share compared to net income of $2.2 million or $0.08 per fully distributed weighted average share in the second quarter of 2018.

In terms of our liquidity and balance sheet as of June 25, 2019, we had cash and cash equivalence of approximately $40 million and no debt. We expect capital expenditures to be between $35 million and $38 million before the landlord contributions for the fiscal year 2018. Based on or growth plans, we believe cash flow from operations and current cash on hand will be sufficient to fund our capital needs for the next couple of years.

With regards to fiscal 2019, we are updating our full-year guidance as follows. We expect total revenue to now be between $462 million and $465 million which is an increase from our prior guidance of $460.5 million to $464.5 million. We continue to expect comparable restaurant growth of approximately 2.5% to 3.5% for the full year of 2019.

We now expect our restaurant contribution margin to be between 16.25% and 16.75%, a slight decrease from our prior guidance of 16.25% and 17% due to an increase in commodity inflation pressure which we expect to be up 3% to 3.5% for the full year. We continue to expect our average wage rate increase will be approximately 5.5% for the year.

General and administrative expenses are now expected to be between $44 million and $45 million which is down from our prior guidance of $44.5 million to $45.5 million. And as Russ mentioned earlier, we remain on track to open between 21 and 23 company-operated locations for the full year and the franchisees are now expected to open between 7 and 9 locations for the full year.

We continue to expect our depreciation and amortization expense to be approximately $28.5 million for the year and we expect interest income to be approximately $175,000 in 2019 as opposed to the $1 million of expense we saw in 2018. The difference reflects the change in lease accounting which previously resulted in $1.1 million of interest expense related to financing in 2019 which is now recorded in occupancy in 20 -- sorry, in 2018, which is now recorded in occupancy in 2019. And finally our pro forma tax rate we now expect to be between 28.5% and 29.5%. Additionally, I would like to remind everyone that 2019 will contain 53 weeks with the extra week in Q4 of 2019.

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

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [4]

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Thanks, Ira. In conclusion, we believe that the initiatives that we put in place over the last 18 months are beginning to have real traction and we expect to carry this momentum forward throughout this year and beyond. We feel good about where we stand and are excited about the opportunities in front of us. Finally, I would like to have a few shout-outs; first to our internal I team -- IT team and the developers that have worked so hard in this transition to being a much more total access brand and thank the 6000 amazing teammates who worked extremely hard each and every day.

I would also like a special thank you to the team members in Southern California that -- that were using our fleet of ten Habit catering trucks and served over 23,000 Disney cast members a delicious meal at the Disneyland Resort in the Anaheim a few weeks ago. It was a very proud moment for us.

With that, operator, we'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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We will now begin the question and answer session. (Operator Instructions) The first question comes from Will Slabaugh of Stephens Inc.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [2]

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Yes. Wanted to ask first about digital and then increased digital presence that you've made an effort to establish in the past three quarters. What have you seen there in terms of customer behavior as they responded to your digital marketing, whether it be through ticket or transaction or just general behavior inside the restaurant, if there's anything to really speak to there?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [3]

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Yes, I'll let Iwona take that one.

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Iwona Alter, The Habit Restaurants, Inc. - Chief Brand Officer [4]

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Yes, so 2 parts to the answer. When we look at the behavior in our restaurants, especially those that have the self-order kiosks, we definitely see that as a way that the guests avoid standing in line and welcome that additional convenience and their average check, their purchasing behavior points to them adding more items to their orders, sometimes upgrading the size, so we are definitely seeing a positive in terms of the average check.

As far as our mobile app is concerned, somewhat of a similar dynamic. We feel that as much as the guests have that time to look at the menu, to explore it, they add things that they normally would not think of as they just look at the menu board. So in both of those platforms, we are seeing higher average checks as well as additional items being added that normally are not as frequent with over-the-counter orders.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [5]

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We also think, Will, while it's early stage with these new convenient tools for guests, we think it long-term certainly helps with line [abandment], line abandonment, potential.

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William Everett Slabaugh, Stephens Inc., Research Division - MD [6]

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Makes sense. And I had a question on trends as well. Obviously, you had a nice number for the quarter in term of same-store sales growth. I was curious if you could talk just a little bit more about trends you saw throughout the quarter, if there were things that caused things that -- caused your trends to jump up or back down or if it was fairly steady at that relatively high level throughout?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary & Director [7]

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Yes. No. So for us, we had a very good quarter. The first 2 months were definitely, April and May, were a little stronger than June, but I think that's really more a function of last year June was our best month of the year. And so just the 2-year stack on that was obviously a little tougher so we did see -- we did see relative to April and May, June did soften a little bit. We did see some volatility around the fourth of July week which the timing of the holiday did not help us and, we're happy -- if you exclude that week, we're happy with what we're seeing as we move into Q2.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [8]

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Yes, we really feel, Will, that these initiatives that the team has worked tirelessly on over the last 12 to 18 months are really starting to show results.

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Operator [9]

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The next question comes from Nicole Miller of Piper Jaffray.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [10]

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You talked about your digital efforts and the consumer now being able to go direct to you, or more easily going direct to you. So what do you think you might do a little differently to a customer that comes direct to you versus a digital or delivery customer that goes indirectly through the marketplace to get to you?

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Iwona Alter, The Habit Restaurants, Inc. - Chief Brand Officer [11]

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Well, one of the major benefits that we are getting through having those digital platforms within our brand is that of communicating directly with the consumers and being able to start getting customized offers, messaging, being sent to them. So so there's definitely the value of leveraging the existing consumer behaviors and getting them to come more often and keep them engaged with the brand messaging.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [12]

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Do you think that will be more of -- clearly, the most loyal guests I'd imagine, but do you think that might be a consumer that's more value oriented?

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Iwona Alter, The Habit Restaurants, Inc. - Chief Brand Officer [13]

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I actually believe that it -- from what we see in our initial findings from the app engagement, these are our more loyal consumers and we have not seen that value behavior. So at this point, it's really about the more loyal ones that want to engage with us in more ways than just coming to the restaurants.

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Nicole Miller Regan, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [14]

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That's very helpful. The last question. We're still fairly early but getting into earnings season here and we've had a few of peers, and I would say both in limited service and full service talk about volatility if not flat out weakness in California and that would be kind of periods through Q2 but also quarter-to-date. What could you share with us either historically or currently, please, in terms of California?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary & Director [15]

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I think California for us is holding up relatively well consistently with -- actually a little better than we were in June. Remember, June was softer than the entire -- than the quarter. So it did come down a little bit in June, and we definitely have volatility around the fourth of July holiday but we're pleased with where we're at. I mean -- and when you take a larger step back, Q3 we were rolling over our toughest comp quarter of last year and we're pleased with our start so far in Q3.

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Operator [16]

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Our next question comes from Matthew DiFrisco of Guggenheim.

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Matthew R. Kirschner, Guggenheim Securities, LLC, Research Division - Associate [17]

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Hey guys, this is Matt Kirschner on for Matt. I was just going to dig into the comp a bit further. Can you talk about any variants between the company and franchise same-store sales during the quarter?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary & Director [18]

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We -- so far the franchise group is pretty small and in select markets and we really haven't commented a lot about the sales trajectory in the franchise markets other than they keep building restaurants, and so it's been pretty good.

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Matthew R. Kirschner, Guggenheim Securities, LLC, Research Division - Associate [19]

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Okay. Would you be willing to give some color on like the East Coast stores versus the California or West Coast-based locations?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary & Director [20]

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From a comp perspective, I think we definitely continue to see a good comp momentum in New Jersey. Florida has -- the comp momentum in Florida has softened a little bit. It's still -- now it's still, relative to California, a little bit better, but it had softened from where it was. And in the D.C. markets, a little tough, we only had really 2 stores in the comp base there in one of those stores has -- a competitor opened, and so we're seeing a little drag there. So that's a little tougher to measure, but I think when you take a larger step back, the overall trajectory that the new stores...

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [21]

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Not dissimilar than it's been.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary & Director [22]

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Yes.

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Matthew R. Kirschner, Guggenheim Securities, LLC, Research Division - Associate [23]

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And then as far the same-store sales guidance and it was held at 2.5% to 3.5% for the full year, which does imply a slowdown in the second half, is that really relating to tougher compares or are you seeing anything different from competition?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary & Director [24]

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No, I think it's really -- I mean, it's being mindful that we really hit tougher compares in the back half of the year.

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Matthew R. Kirschner, Guggenheim Securities, LLC, Research Division - Associate [25]

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Okay. And then have you noticed any change in the inflection of traffic since the price increase in May or any change with competitors discounting?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [26]

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Well, I -- we always need to be mindful of price increases, and we were -- we obviously took higher prices in California, specifically in Los Angeles and the San Francisco area where we have the most regulatory and -- and supply/demand challenges. But I don't think you have really seen any -- any traffic decline that we could attribute to those price -- our price increases. And again, we monitor our direct and indirect competitors pricing very closely and we are not an outlier in any means in regards to pricing.

In regards to discounting and the promotional environment, I would say more recently probably more Q3 than Q2, in California we're seeing the traditional QSR players certainly returning to a stronger value message with their electronic media then they previously did maybe in the latter half of Q1 and into Q2. So I think that is certainly currently more -- more the environment especially in the West.

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Matthew R. Kirschner, Guggenheim Securities, LLC, Research Division - Associate [27]

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And as far as the nationwide launch of the app, I think you said 4Q 2019, can you kind of discuss some of the plan there just as far as how you will roll that out and maybe some marketing or -- will it initially go to your existing Char Member guests?

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Iwona Alter, The Habit Restaurants, Inc. - Chief Brand Officer [28]

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Yes, so all of the above. So as Russ mentioned, we have already expanded the app to be available nationwide, however, it was just opening the gates pretty much without any communication. In Q4, we will utilize both social and digital in terms of announcing the app to our guests; some in-store merchandising as far as the messaging of point-of-purchase materials. We are also looking at different types of incentives as to how to encourage our guests to download the app and use it and definitely CharClub will be one of our audiences but clearly the intention here is to have broad communication to announce the mobile app.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [29]

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Hey, Matt, we would encourage you to download the app and we can make -- we can follow-up to see if you did to help drive comps.

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Matthew R. Kirschner, Guggenheim Securities, LLC, Research Division - Associate [30]

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I plan to, especially with some new locations in Massachusetts and New Hampshire. Congrats on the quarter.

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Operator [31]

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Our next question comes from Nick Setyan of Wedbush Securities.

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Nerses Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [32]

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Great comp. Just kind of looking a little bit out, beyond 2019, the statutory labor headwinds, Ira, seem to be -- they come to a peak just given the city-by-city breakdown and your exporter to LA, et cetera. I mean is 2020 going to be the largest headwind, or the statewide headwind through 2022 is going to continue?

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary & Director [33]

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I think 2020 will be a challenge from...

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [34]

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The trajectory to -- up to 2020 is pretty brutal.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary & Director [35]

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But as I said before, there's a lot of cases where we're paying already...

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [36]

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Above.

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

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Especially, like in Northern California, well above kind of the mandated $15.00 benchmark, and I believe that we continue to do things internally to continue to manage that as well. So yes, we got headwinds, but I like to believe that we're doing some things to manage both the rate and the hours.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [38]

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Productivity.

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

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Yes.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [40]

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Hey, I can sit here and tell you the team, the operators in the field have done a darn good job of how we deploy labor in a very challenging environment, not only for us, but our competitors. And we have always had the eye of the tiger on how we deploy labor, not just from a cost side but how we're able to maximize sales because building sales is the best tool to manage labor there is and we continue to put equal emphasis on productivity and maximizing throughput and sales and a lot of these convenience initiatives are becoming total access, really allow us to put more into the top of the funnel.

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Nerses Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [41]

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And then just on unit growth, I apologize if it's too early to ask beyond 2019, but just bigger picture, is the absolute number of openings about right? Or could we potentially see another slight step down in terms of the absolute number of openings?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [42]

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We haven't landed on a number yet to your opening comment. But based on where we're at today, we could adjust that down slightly on the company side, slightly, but we would expect an increase on the international license and domestic franchise side so the total development number may not go down at all but the company side may go down slightly, again, we haven't landed on that number yet. But -- and we will provide more guidance at the end of the year.

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Nerses Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [43]

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And the last question on the other OpEx, Ira. That projected to come down to maybe closer to 100 bps or so in terms of the year-over-year headwinds in the back half because we're anniversarying the rollout of DoorDash.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary & Director [44]

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I mean the good news is we're anniversarying it. The other good news is we continue to build the business on the delivery side so I don't know if I would project that to come down quite that much because the good news is we're continuing to see, especially with the addition of Postmates, we're continuing to see the delivery trajectory be pretty good.

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Nerses Setyan, Wedbush Securities Inc., Research Division - Senior VP of Equity Research & Senior Equity Analyst [45]

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The assumption that an in-app order is -- costs a little bit less to you guys, a correct assumption as opposed to...

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary & Director [46]

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Well, absolutely, just to clarify, today...

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [47]

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Good question, Nick.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary & Director [48]

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The app is not going to be used to start with for delivery, it's just going to used for pickup. And as we -- that's something that we're going to broach maybe a little further down the road once we take advantage of capturing everybody doing the pickup and do our marketing and our initial push of that, that is definitely something we're going to explore of doing delivery through our app, but it's not going to happen in the initial launch.

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Operator [49]

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Our next question comes from Andrew Charles of Cowen and Company.

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Brian P. Vieten, Cowen and Company, LLC, Research Division - Associate [50]

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Hey, guys. It's Brian for Andrew. Hey, Russ and Iwona, first, what are sort of the near-term priorities with Innocean and maybe what were some of the considerations that made you guys select them over others, maybe proximity for one and then, Ira, thanks for the feedback on delivery sales, that sounds like continue to build. Just wondering if you're still seeing that sort of incrementality from adding Postmates as a second provider in the first quarter if that incrementality is still high? Thanks guys.

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [51]

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Well, I'll go first and then I'll hand it over to Iwona. But from a -- from a delivery standpoint, we did see, when we added Postmates, we set -- we saw DoorDash plateau but not go down and then we've seen some, obviously, incremental business there from Postmates. So again, we feel good about the trajectory of our delivery business.

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Iwona Alter, The Habit Restaurants, Inc. - Chief Brand Officer [52]

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And going onto your first question in terms of Innocean and -- and our priorities. So I'm going to step back to probably a couple of conversations back, in January, when we talked about the overall goal for marketing for The Habit and that is to create brand awareness. We have an awesome brand, we deliver an awesome experience and it's really talking about it more; that is the goal for the next few years for sure. So as I looked at the different advertising agency, different partners, what I appreciated in terms of the Innocean's capabilities is their track record and how they built the brands that they have been working with; that includes not only smart creative but their strategy and how they approach the marketing -- different marketing aspects and their impressive data capabilities.

So going onto -- connecting those two dots as far as building the brand awareness as -- and working with Innocean, considering our footprint, considering our penetration both in our mature markets and the new markets, it's all about how we can target the consumer. So the -- the targeting capabilities when it comes to different dayparts or having the -- more of the psychographics or attitude information that we can reach our guests to basically get them to come to our restaurants. And as Russ mentioned, the efforts that go along with it are the brand efforts as far as clarifying our core consumer and working on that brand story.

So all of it is coming together and to -- just having a strong voice and a very efficient targeted communication with the help of Innocean.

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Operator [53]

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Our last question comes from Drew North of Baird.

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Andrew D. North, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [54]

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Great. First, sticking on delivery, could you just provide an update on what percent of your off-premise sales come from the digital channels including delivery? And then I just have a quick follow-up on the digital menu boards, if I could.

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Ira M. Fils, The Habit Restaurants, Inc. - CFO, Secretary & Director [55]

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Yes. We're still not ready to break that delivery percentage out just yet, and I will, but I will say we're very pleased with it. And it continues to grow, and so we're -- with that, we'll continue to give updates on that as we go forward but for right now, we'd just like to keep it that it's growing and we're happy with it.

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Andrew D. North, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [56]

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Okay. Fair enough. And then I believe you mentioned 2 restaurants today have the new digital menu boards. First, do I have that right? And then second, could you elaborate on how quickly you could roll this out to more locations because it seems pretty interesting in terms of highlighting limited time offers and driving higher ticket while also prioritizing profitable items?

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Russell W. Bendel, The Habit Restaurants, Inc. - CEO, President & Chairman [57]

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Yes, I'll let -- I'll start and Iwona can add on if she cares to, of course. We opened 2 local Southern California restaurants with digital boards, both of which have been opened about 3 or 4 weeks each. All of our, not all, 90%-plus percent of our restaurants all have a digital preview board somewhere that's visible in the queue line that we utilize for electronic messages, videos, limited time offers, et cetera, et cetera. So we're not without that vehicle in some format in most all of our restaurants. A large percentage of -- now we're going to give this ample time to look at, test in different variations, formats, positioning, et cetera, et cetera. But if we came to the decision that we wanted to convert, we would probably first start building new locations with electronic boards but probably at least 50% of the base we could go backwards with obviously some capital costs but could come up with a digital menu board solution. When I say relatively easy, I don't mean simple, but we could do that fairly efficiently in a reasonable amount of time.

But again, we're not -- we're not ready to do that today. We're in the exploration stage to play with it, see what it does to -- how consumers react to it, what it does to LTO sales, what it does to total check, et cetera, et cetera.

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Operator [58]

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This concludes the question and answer session and today's call. You may disconnect your lines. Thank you for participating and have a pleasant day.