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Edited Transcript of SHAK earnings conference call or presentation 4-Nov-19 10:00pm GMT

Q3 2019 Shake Shack Inc Earnings Call

Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Shake Shack Inc earnings conference call or presentation Monday, November 4, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Randall J. Garutti

Shake Shack Inc. - CEO & Director

* Tara M. Comonte

Shake Shack Inc. - President & CFO

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Conference Call Participants

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* Andrew Marc Barish

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Andrew Michael Charles

Cowen and Company, LLC, Research Division - Director

* Brett Saul Levy

MKM Partners LLC, Research Division - Executive Director

* Christopher Thomas O'Cull

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Jake Rowland Bartlett

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

* Jeffrey Andrew Bernstein

Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst

* John Stephenson Glass

Morgan Stanley, Research Division - MD

* John William Ivankoe

JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst

* Katherine Irene Fogertey

Goldman Sachs Group Inc., Research Division - VP & Derivatives Research Strategist

* Lauren Danielle Silberman

Crédit Suisse AG, Research Division - Senior Analyst

* Nicole Miller Regan

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

* Sharon Zackfia

William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer

* Melissa Eve Calandruccio

ICR, LLC - SVP

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Presentation

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Operator [1]

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Greetings. Welcome to Shake Shack's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to your host, Melissa Calandruccio, Investor Relations. Ms. Calandruccio, you may begin.

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Melissa Eve Calandruccio, ICR, LLC - SVP [2]

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Thank you, Omar, and good evening, everyone. Joining me for Shake Shack's conference call is our CEO, Randy Garutti; and President and CFO, Tara Comonte.

During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance. A presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release and appendix to our supplemental materials. Some of today's statements may be forward-looking, and actual results may differ materially due to a number of risks and uncertainties, including those discussed in the Risk Factors section of our annual report on Form 10-K filed February 25, 2019.

Any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change. By now, you should have access to our third quarter 2019 earnings release, which can be found at investor.shakeshack.com in the News section. Additionally, we have posted our third quarter 2019 supplemental earnings material, which can be found in the Events & Presentation section on our website, or as an exhibit to our 8-K for the quarter.

I will now turn the call over to Randy.

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [3]

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Thanks, Melissa, and good evening, everyone. We are pleased to report that total revenue grew nearly 32% to $157.8 million, accompanied by another quarter of positive same-Shack sales at 2% and positive traffic of 1.2%. We opened 66 net Shacks system-wide since Q3 '18, taking us to 254 Shacks around the world at the end of the third quarter. Thanks to the hard work of our team and the continued strength of our brand, both of which are reflected in these results, we are raising our overall revenue guidance of between $592 million and $597 million for the year.

It's been a great year for Shake Shack. Having opened 32 domestic company-operated Shacks to-date, of which 11 in the third quarter, and expanding our footprint in South Florida, Detroit, Kansas City, Columbus, Houston and New Jersey. We're also thrilled to open for the first time in the new markets of Louisiana, Raleigh-Durham and greater Salt Lake City, Utah. While we've been able to drive a more evenly phased development schedule this year compared to last, our fourth quarter will see 11 to 13 new Shack openings, and we're reiterating our previous guidance of 38 to 40 new company-operated Shacks for the full year. We'll share our full 2020 guidance on our February call, but at this time, our plan is to open between 40 and 42 new domestic company-operated Shacks in 2020. Next year's opening schedule is currently looking more heavily back-weighted than we'd like, but despite that, we remain on track to exceed our previously communicated target of at least 200 company-operated Shacks by the end of the year.

As the business has gained a strong foothold in major cities around the U.S. over the last few years, our forward focus is shifting to greater existing market penetration. We'll continue to enter new markets and see much opportunity to do so. But we're also excited to build deeper brand awareness and fill in around those already established Shacks. As we do this, we have the opportunity to further support and gradually leverage our existing infrastructure, including operations, training, marketing and our supply chain network. We have a number of exciting new markets on the list for next year, but in total, they will likely represent a lesser percentage of the overall development plan to-date, and approximately 10% of our new unit openings in 2020.

We're increasingly bullish on the variety of forms the Shack will take in the future. In '19, we've built across a mix of formats, increased our evaluation of new format options. We've added a number of premium food courts over the last year and are encouraged by those results. In the next few months, we'll be opening 2 more outlet mall locations, which have also proven strong for us. As we look ahead in the pipeline for 2020 and 2021, we'll execute a strategic mix of Shacks ranging in format between urban, freestanding pads and shopping lifestyle centers. But we're also planning to test additional formats, including a few urban Shacks with a smaller footprint that increasingly integrate digital ordering and an improved pickup experience in their design. While we expand formats and build new Shacks, we remain focused on ensuring the guest experience continues to improve in our existing Shacks, with ongoing renovations having happened or planned in some of our highest traffic and most established locations. At Theater District in New York City, one of our busiest Shacks in the country, went through a significant renovation last year. And we'll be kicking off a few more in some of our New York Shacks, including the Upper West Side and Grand Central Station in 2020. During these remodels, we'll be updating and improving layout to ensure optimal flow for multiple ordering channels, upgrading our kitchen equipment to maximize throughput and installing kiosks to bring even further experience to the guest -- convenience to the guest experience. Some of these will include temporary closures that will be incorporated into our total revenue outlook for 2020, and we'll come back to you with the specifics around that on our next call. And more than ever, we're committed to ensuring all our Shacks stand as the community gathering places they have always been and will be for years to come.

Moving on to our license business. 2019 has been a record year. I am so proud and thankful for our team, who spend a huge portion of their lives on the road building this business across the globe. This year, we've opened Shacks for the first time in Mainland China, Singapore, the Philippines and Mexico. Each of them has had an incredible start. And year-to-date, we opened 22 net licensed Shacks, of which 6 opened during the third quarter, including our first in Mexico City, our third in Osaka, Japan, our first in Busan, the second largest city in South Korea. Subsequent to the quarter, we've also opened our second Shack in Shanghai, our third in Hong Kong and our first airport location in the U.K. in London's Gatwick Airport. We've also opened another airport in the U.S. at McCarran International in Las Vegas. And in addition to our international expansion strategy, we're confident in the growth opportunity in both domestic and international airports, with a number still to come this year.

At this stage in the year, with a strong pipeline in place, we expect to open between 24 and 28 net new licensed Shacks, an increase from our previous guidance of 18 to 20 net. And we've been fortunate this year to beat our own expectations on the timing of these Shacks, and we found opportunity to pull forward a few openings that were expected for 2020 into this current year.

Given the high volatility and the timing of airport developments in certain international locations, our license openings can shift significantly period to period. And for the remainder of this year and into 2020, that timing uncertainty remains, especially with a high number of Shacks potentially opening at the very tail end of the quarter. Hence, we'll be keeping a relatively wide range for now, and we'll firm up our 2020 guidance on our February call. But our unit estimate for the year, taking into consideration those Shacks brought forward to the end of '19, is to open between 20 and 25 net new licensed Shacks. These estimates place us well on track to exceed our previous target of at least 120 licensed Shacks by the end of 2020.

Let's move on to the digital evolution of our industry and our brand, probably the most important strategic growth opportunity and shift in our business that we're working on today. And expanding our digital footprint and using technology to enhance the guest experience remains a priority, and is an important part of our ongoing investment strategy. We continue to invest in and improve our mobile app, web and kiosk functionality and experience as we strengthen overall digital product performance and remove friction and pain points for our guests. We still, however, have a lot of work ahead of us in order to alleviate what is often front-of-house congestion for guests and to simplify the overall Shack experience regardless of ordering channel.

And of course, we've been testing delivery, ultimately formalizing a partnership with Grubhub. And at this point, we have delivery available across virtually all company-operated Shacks. With Grubhub's platform integrated directly into our point of sale, we can work towards the goal of having maximum visibility and real-time communication between kitchen demand, driver availability and pickup time, all with the objective of minimizing the amount of time the guest waits for their order.

Reducing time in the end-to-end delivery process is the most effective way to protect the quality of our food, something we care deeply about, and one of the biggest challenges surrounding delivery overall. Beginning today, we'll be actively marketing our partnership with Grub nationally across a variety of campaigns and channels, together with some regionally targeted communications. As consumers transact across multiple ordering channels, we're pleased to have formalized our integrated delivery offering as part of our overall digital ecosystem.

All that said, as we mentioned on our last call, we believe the transition to Grubhub caused some noise in our Q3 numbers and will certainly have an impact through the fourth quarter and into next year. As we remove direct point-of-sale integrations with DoorDash, Postmates and Caviar, we expect an impact to our delivery revenue, especially in those regions where Grub may not be the current market leader. Any difference in pricing, placement or regional strength in non-Grub marketplaces will affect our sales for a period of time. How much volatility this will cause during this transitional period is uncertain, but the reality is this represents short to mid-term revenue risk.

Lastly, I want to give you a preview of the priorities within our strategic plan for 2020. We'll come back to you on the next earnings call with specific guidance on numbers as we execute and capitalize on the global growth opportunity we have ahead of us. Our commitments for next year are focused and straightforward, beginning with putting our people first. There's never been a greater need to invest in recruitment, retention and leadership development. We'll be expanding our test of a 4-day workweek for managers and ramping up even more towards our diversity inclusion goals. In our Shacks, we'll be squarely focused on simplifying our operations, deepening the support for our in-Shack teams. We'll be working to improve kitchen and front-of-the-house guest flow, strengthening our digital infrastructure and experience, and streamlining systems and processes to allow our operators to thrive. We'll be investing in our data and insights capabilities to better understand and personally connect with our guests, while forwarding the incredible brand strength Shake Shack has built over the last 15 years. We'll be making improvements to our current menu and testing some new menu items to drive guest excitement and frequency for years to come. Finally, we'll be designing and testing some new Shack formats to ensure our evolving guest behavior is reflected in tomorrow's Shack community gathering place. I'm really excited about what's ahead.

And with that, I'll turn the call over to Tara to share more details on our financial results.

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Tara M. Comonte, Shake Shack Inc. - President & CFO [4]

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Thank you, Randy. Total revenue in the third quarter increased 31.9% to $157.8 million compared to the same quarter last year, with Shack sales of $152.4 million representing growth of 31.5% and licensed revenue of $5.4 million, growth of 43.3%. Same-Shack sales increased 2% in the third quarter, consisting of a 1.2% increase in guest traffic and a combined increase in price/mix of 0.8%. Our digital channels continue to be a key contributor to our year-on-year growth, partially offset by a lower average item per check in the quarter, caused primarily by the strength in our LTO shake offering last year and our decision to limit certain menu items on delivery channels as we worked to streamline the guest experience.

On a sequential basis, the quarter saw some seasonality impact on digital channels as well as initial volatility relating to our delivery partner transition. On that topic, and as you just heard from Randy, we've quickly progressed in our Grub integration and expect some degree of volatility to continue through the end of the year and into 2020 as we settle into this partnership and removed direct integrations with our other pilot partners. Moving through the year and into next, you'll start to see more Shake Shack and Grub marketing rollout now that we're on 1 platform and can talk to our guests and future guests in a consistent manner. We'll also start to integrate our customer data from Grub and pair it with our existing data and insights capabilities, albeit those are at an early stage of development and a key investment area for us to further build out in 2020. In addition, we'll gradually see some financial benefit as our new economic terms with Grub start flowing through our financials.

Our results to-date combined with the expected volatility from our delivery transition are reflected in our year-end same-Shack sales guidance of approximately 1.5% for the year. With the uncertainty around the short to mid-term financial impact of our delivery transition, there remains more inherent risk in our fourth quarter performance than would typically be the case at this stage in the year. We'll also be lapping our toughest year-on-year comparison this quarter due to a ramp-up of digital and delivery performance last year as well as the warmer weather we experienced during the busy 2018 holiday season.

Over the past 12 months, we've opened 44 Shacks, with 85% of all of our Shacks now outside of New York City. As a whole, for the trailing 12 months ending Q3, we've added $131 million in total sales, with growth of just under 3% in same-Shack sales, and with all regions adding new Shack sales and delivering growth in their comp base sales. While we're pleased with our same-Shack sales performance, it remains a relatively small part of the overall revenue growth of the company, with less than 7% of our total Shack sales growth over the last 12 months coming from our comp-based Shacks. As of today, our comp base represents around 54% of our total Shacks, decreasing to around 52% by the end of the year.

Our trailing 12-month average unit volume remained strong at $4.2 million at the end of the third quarter, with average weekly sales of $80,000 during the quarter. As we broaden our sales volumes by opening new Shacks across the country and expanding further in existing markets, these average unit metrics will experience gradual declines before leveling off. Consistent with our updated guidance from last quarter, we continue to expect company-operated AUV to be approximately $4.1 million for the full year 2019.

We expect license revenue to end the year between $18 million and $18.5 million, a significant raise from our prior guidance of $16 million to $17 million. This strong performance is driven primarily by our 4 new market openings earlier in the year that have maintained their performance above expectations, together with an increase in the number of new unit openings now expected. But as a reminder, we're fully expecting those large 2019 new market honeymoons to normalize as well as lowering expectations for our Hong Kong Shacks given the uncertainty in the region. We're thrilled with the performance and growth of our license business overall this year, which will impact overall license sales projections for 2020.

As we look at our 2019 revenue expectations broadly, there are a number of factors contributing to our updated guidance. As Randy mentioned, our domestic opening schedule has been somewhat more balanced this year, with a number of our Shacks having opened earlier than their originally estimated date, allowing us to gain additional sales and operating weeks from the current class. We're also pleased to be seeing our sophomore class enter their second year with less of an initial decline than we previously forecasted during the third quarter. We now expect total revenue of between $592 million and $597 million for the full year, a raise from our prior guidance of between $585 million and $590 million.

Moving on to profitability for the quarter, Shack-level operating profit for the third quarter increased 17.4% compared to the prior year to $35.1 million, with Shack-level operating profit margin of 23.1%. There are a number of new elements impacting our profitability this year, some shorter term in nature and some new costs directly related to the changing dynamics within our overall business.

Starting with food and paper costs, which were 29% of Shack sales, an increase of 80 basis points on the same quarter last year and flat sequentially. Consistent with the last 2 quarters, the year-on-year increase was driven primarily by Chick'n Bites, albeit with less of a material impact than the first half of the year. Improvements in the cost profile of this menu item have been coming into effect gradually over the last 6 months, with further supply chain efficiencies planned to come into effect early next year. As a reminder, chicken generally remains a high-cost item in our basket, specifically the premium quality, no antibiotics standard that we insist upon. Chick'n Bites remain an interesting menu item that's still in test, with much for us to continue to learn, both in terms of guest feedback and operational execution. And we'll keep you up-to-date as we decide how long this LTO will remain on the menu.

More generally in food cost, inflation of our basket as a whole remained modest in the quarter, with some increases in beef and dairy. We have, however, seen some more recent inflation in beef and expect to see that potentially carry through the fourth quarter and into next year, which could increase our overall cost of goods. Beef continues to represent the largest item within our basket, so any significant movement does impact our Shack-level operating profit margin.

We also continue to see an increase in paper cost on a year-on-year basis as a direct result of our digital sales mix, which comes with additional packaging. We expect this dynamic to remain as digital, including delivery, represents an increasing growth opportunity for our business going forward. It's also worth mentioning while on this topic, that as part of our commitment to look for ways to improve our sustainability here, those initiatives often come with cost implications, our move away from plastic straws last year being a perfect example.

Labor and related expenses were 27.3% of Shack sales, an increase of 30 basis points on the same quarter last year, representing a narrowing of the deleverage experienced over the last few quarters, thanks to the continuous focus of our operators, together with the fixed labor cost component benefiting from sales leverage. While the broader market remains as challenging as ever, in both -- in terms of both cost and availability of labor, new Shacks also continue to impact this line as they typically open with higher staffing costs. We've been bringing staffing into line in new Shacks slightly faster as the year has progressed, although the dynamic still exists, and will continue to do so for good reason. With 11 to 13 Shacks opening in the fourth quarter, we'll certainly see some of that higher opening cost continue to impact our labor line.

As we look forward to next year, we expect the challenges that come with this tight labor market to remain, both on the cost and legislation side. In fact, a number of cities in which we have a significant presence, including Chicago and Philadelphia, will formally implement a similar labor legislation to the Fair Workweek that we have in New York City over the last 2 years. These regulations add a significant amount of inefficiency to our labor model, removing the ability for more dynamic scheduling and adding payroll costs and administrative burdens to the role of our managers. We're working hard on a number of initiatives to mitigate these headwinds by continuing to remove inefficiencies from elsewhere in our model, taking various administrative tasks out of the Shacks with Project Concrete and optimizing both our scheduling methodologies and improving our tools that support them.

Other operating expenses as a percentage of Shack sales were 12.4%, an increase of 80 basis points compared to the same quarter last year, driven primarily by increased Shack-level marketing activity, in-Shack technology costs and repairs and maintenance expenses. We recently made the decision to step up our investment in our in-Shack technology and strengthen our digital infrastructure in the quarter in order to maximize the performance of our broadening array of digital products and ensure our Shacks are well set up for an ever-increasing digital future. With an increasing volume of orders originating beyond the cashier, maintaining a strong and reliable technology foundation is critical to continuing to deliver an ever-improving guest experience.

Occupancy and related expenses as a percentage of Shack sales were 8.2%, an increase of 80 basis points, driven primarily by the adoption of the new lease accounting standard that went into effect at the beginning of this fiscal year. A high-level summary of the impact of the new lease standard can be found, as in prior quarters, in our supplemental materials. While our top line growth remains strong, our 2019 Shack-level operating profit margin has been impacted by the items I've mentioned: the increasing mix of chicken within our basket, inflation in beef and dairy, labor costs and regulation in our key markets, the cost of new Shack openings and both the investment in and costs associated with our digital growth. In addition this year, we also have the negative impact of an approximate 50 basis point headwind to Shack-level operating profit margin resulting from the new lease accounting standard that went into effect at the beginning of this year, albeit the impact is close to neutral on a net income basis.

Taking all of these factors into consideration, we are updating our Shack-level operating profit margin guidance for the full year to be between 22% and 22.5%. Total G&A for the third quarter was $17.1 million and included $1.8 million related to noncash equity compensation as well as approximately $1.4 million related to our ERP system upgrade Project Concrete and other onetime costs. The year-on-year increase in our G&A is entirely driven by our significant business growth to-date, paired with ongoing investments for growth ahead. We're adding resources across almost all areas of the company: in our operational support, our technology and digital capabilities, our expanding marketing activities and of course, in our people resources function. In addition, we now have additional costs related to our first international office up and running in Hong Kong, critical to supporting our high-growth license business in Asia.

The core finance and people resources systems within Project Concrete went live at the end of June, and our teams are now working through the optimization of associated business processes across the organization. We're also now in the midst of the next phase of this initiative, focused on our invoice, supplier and inventory management platform. The new system and associated process redesigns are firmly targeted at the Shacks, intended to lessen many of the time-consuming and administrative tasks currently being performed by the teams there.

Over the course of the broader Project Concrete implementation, we've capitalized a significant portion of the project cost. Based on spend to-date, we expect the 2019 operating expense of Project Concrete to be approximately $2 million and 2019 capital spend to be between $5.5 million and $6 million. We'll update you more specifically around final 2020 spend in our February call. However, in terms of go-forward impact, this type of technology implementation falls under the cloud computing asset model and will result in those capitalized costs being amortized in G&A over the remaining life of the associated client software agreement, which ranges from 3 to 7 years.

Our expectations for total G&A in 2019, which includes Project Concrete and equity-based compensation, remain in line with prior guidance at $67 million to $68 million. Within this number, we expect to end the year between $57.5 million and $58.5 million for core G&A and an approximately $7.5 million for equity-based comp.

Sales performance will likely result in year-on-year leverage in 2019 in the total G&A line, and is not a trend that we expect to carry into 2020. As we've emphasized many times, and with a strong balance sheet, we see many areas of opportunity for continued investment to drive long-term returns and plans to prioritize those into and through next year.

Depreciation increased 40.8% to $10.5 million for the quarter, driven primarily by the addition of those 44 new Shacks since this time last year. We expect depreciation to be between $41 million and $42 million for 2019, in line with our prior guidance.

Preopening expenses in the quarter were $4.5 million, with the year-over-year increase driven by the higher number of Shack openings during the quarter compared to last year, and also a number of expenses related to future openings being recorded in the quarter. For the full year, we expect preopening costs to be between $13 million and $14 million, with our biggest class of Shack openings to-date in 2019.

Interest expense declined $459,000 compared to the prior year, driven entirely by the change in accounting treatment related to build-to-suit leases, which had previously been accounted for in this line and are now recorded within occupancy. For the full year, we now expect interest expense to be between $450,000 and $500,000, the slight increase from prior guidance driven by additional interest on TRA payments and an increase in the number and timing of equipment leases from new Shack openings.

Adjusted EBITDA in the third quarter increased from the same quarter in the prior year to $23.3 million and adjusted EBITDA margin in the quarter was 14.8%. On an adjusted pro forma basis, we earned $10 million or $0.26 per fully exchanged and diluted share. Included within these pro forma results is a $0.07 tax benefit from increased levels of stock-based compensation activity during the quarter, which is also the primary driver of our negative 3.9% pro forma effective tax rate. Our underlying effective tax rate, which excludes the net impact of the excess tax benefits I just mentioned, was 25.4%. A reconciliation of our tax rate is included in the appendix of our supplemental materials.

Our third quarter rate saw a catch-up benefit as we now expect a slightly lower annual effective tax rate, primarily due to higher tax credits and favorable state mix. We continue, however, to expect our pro forma effective tax rate for the full year to be between 26.5% and 27.5%, although likely towards the lower end of this range.

We're proud of the team this year and continued performance of the business despite the headwinds impacting our 2019 Shack-level profitability. We're making foundational investments across the company to support growth, and strategic investments to deliver additional top line growth and bottom line cost efficiencies over time. We're working to optimize our existing operating model and mitigate operating profitability headwinds with targeted initiatives across the business, including supply chain, labor, kitchen design and more. Suffice it to say, we have a lot of work going on across the company right now, not just to expand this great brand further domestically and globally, but to ensure we're building a business infrastructure and a guest experience to drive continued success for many years to come.

I'll now pass you back to Randy.

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [5]

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Thanks, Tara. Before we move to Q&A, I just want to take a moment to acknowledge and congratulate Tara on the recent expansion of her role to President and CFO. She's had such a positive impact on our company over the past few years, both in terms of her partnership with all of our key leaders, but also on a broader strategic development and execution as we build our company for the growth ahead. And as we grow, it is more important than ever that I'm focused on what's ahead for Shake Shack. I remain really close to our global and domestic development strategies, our site selection, our guest experience, our menu strategy and our ongoing innovation. Tara's broader role enhances my ability to do these things even better as we prioritize and execute our strategic priorities so critical to our growth, while building a strong, long-lasting and scalable business built for generations to come.

With that, we'll open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Nicole Miller, Piper Jaffray.

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

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Two quick questions. The first one is very big-picture, long-term. You had some fantastic accelerated development this quarter, and taking that into consideration and looking a couple of years out for us modeling that far, it's very soon, relatively soon, that we see you closing on 450 stores, which was a goal you set a while ago. So how do you feel about that? And what does that look like going forward? And then just a second and final question, which is a pivot. It's really hard to tell from your tone if the same-store sales guidance is just cautionary and very well-documented, understood, or the trend -- current trend to-date.

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [3]

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Thanks, Nicole. So on the long term, we still have never changed our initial guidance of 450 domestic company-operated Shacks, right? As of today, we've got 156 of those, so we're just about 1/3 of the way there. Now because there's so much growth still to come, we haven't changed that. But how do we look at it? A part of it, I mentioned in my earlier comments, when we're thinking about the number of formats that we can do, which are increasingly interesting to us, whether it's food courts, outlets and some smaller formats. We're actually going to open a restaurant here in Manhattan at the end of the year, or maybe early next year, depending, it's one of those that's right on the cusp, that will be a little bit smaller and with very few seats inside and built for really, the digital and delivery experience. So that will be an interesting test for us. And we've got a few more of those, not just urban, but some throughout the country that we're going to test that are different formats that will teach us some things. So look, we continue to be encouraged. We continue to believe there's a huge opportunity out there, both domestically and as you saw, internationally, with so much of the good start we've had. This has been well over 40% growth in sales this year. It's been a tremendous year internationally. So we're really bullish on where we're headed.

For same-store sales, we never give mid-quarter guidance. But look, based on the trends we've seen in the fourth quarter to-date as well as the volatility we absolutely expect and as we've noted, have seen already with the Grub transition, and so much of the shifting of all of these third-party marketplaces, we do expect a lot of volatility in this year and ending the year. And that's all part of our guidance. Look, when we look at the beginning of the year, we had initially guided to 0 to 1% same-store sales. We believe we'll be right around 1.5% right now. We've had a solid year, and the compares are tougher this quarter, and we'll keep you posted on what it looks like for next year. But there's going to be noise in the numbers for a while through this transition. We ultimately believe it's an important strategy we're on and the right one for this next step in our digital experience. But it's not going to come without its challenges in the near term.

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Operator [4]

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Our next question is from Sharon Zackfia, William Blair.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [5]

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I guess, just a question, it's kind of a related question, on the margin guidance being refined for this year. Is that just a direct reflection of the comp guidance change? And then secondarily, is there any way to help quantify what you're seeing with the delivery disruption, maybe in a market like New York, where Seamless is so strong, or Grub, what things look like there versus somewhere where Postmates or DoorDash might be stronger?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [6]

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Sharon, thanks. I'll start with the second question. Look, we're not going to quantify it just yet. It's pretty noisy. Even if you follow our day today, today was the actual launch day of Grub. We were actually trending on Twitter in the top 10 trending things for the last few hours. It's been kind of a huge day for us with Grub. And it is going to be a region-by-region conversation. That said, we have 2 years of people who have built up habits, whether it's on Postmates or DoorDash or Caviar. Very little of our tests were with Grub during this time. And we're going to have to move those people over. So when those third-party -- other third parties are eventually not integrated into our system, in the near term, which will happen in this -- probably this next quarter if not sooner, we will see what happens. And we're going to have to do a lot of marketing, a lot of work, to move people over to the Grub platform, which we think we'll do. That said, in New York, it's a strong Grub marketplace, but we have done a lot with those other marketplaces in this last couple of years. In places like L.A., where Grub is not the market leader, that's going to be even harder work. So we just have seen it. We're not going to break out what that is, and we'll talk about that as best we can in the next quarter. But we expect it to be pretty noisy. But we feel really good about the path that we're on. It's just going to -- it's going to have some turns and twists as we go here. I'll let Tara speak to the op profit.

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Tara M. Comonte, Shake Shack Inc. - President & CFO [7]

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Sharon, yes. I mean, I think the 22% to 22.5% is our best estimate of where we're going to end the year right now. I think some of the new things that we're seeing since we last talked to you, and you see some of them in our numbers, we're definitely beginning to see some more inflation come through in beef, which is some new news since we last spoke to you. And we expect it's going to continue through the fourth quarter and potentially into next year. And in addition, and you saw this in the Q3 numbers a little bit, our other OpEx just being a bit higher than it has been trending earlier in the year. We've got some marketing going on in there. We obviously still have delivery commissions in there. And we have R&M, which has always been in there. But also that decision to really strengthen some of our technology in-Shack so that our Shacks are really, really well set up for not just the digital business they have today and the multiple digital channels that they've got coming in today, but also for increasing growth in digital as time goes on. So there are a lot of headwinds in Shack-level operating margin, I listed many of them. And we're really busy across the company doing as many things as we possibly can to mitigate them where they're within our control. I listed a number of those. Obviously, beef is a challenging one, but supply chain is a good example, where Randy alluded to the fact that we'll be more focused on existing markets next year. That helps us start to leverage some of our existing cost base and some of our existing infrastructure, supply chain being one of them.

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Sharon Zackfia, William Blair & Company L.L.C., Research Division - Partner & Group Head of Consumer [8]

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That's really helpful. I think one other thing you mentioned on the comp was on the day average ticket size that you streamlined some of the offerings for delivery. Could you expand upon that? And if that is kind of order of magnitude of what you did, how that might impact the fourth quarter as well?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [9]

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Yes. So one of the things that has been a part of these pilots for the last 2 years has been testing what things travel well, which things don't and which Shacks. So there's been on and off over the course of this year, as it compares to last year, we've had various items, whether it's beverages, sodas, sometimes shakes, sometimes LTOs, sometimes regional specialties, not included in the offering. That's been something we needed to learn as we've tried to figure out how to make these a great guest experience. And when you have multiple partners as we did, you have so much happening in the kitchen that you really want to streamline this.

Now as we move forward with Grub, and again, part of our strategy in doing this is we can streamline that a little bit. We can begin to bring back some of those things because we can count a little bit better on driver availability and the ability to execute on those things. So we believe that has an impact on some of the items per check and some of the impact on the numbers for this quarter.

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Operator [10]

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Our next question is from Katherine Fogertey, Goldman Sachs.

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Katherine Irene Fogertey, Goldman Sachs Group Inc., Research Division - VP & Derivatives Research Strategist [11]

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I have 2 questions here. So first of all, can you expand a little bit more on what you mean with increased marketing cadence you're going to be doing around Grub now that you're kind of nationally launched here? Will this include free promos and the like, TV, anything on that? And then the second question I have is with we're seeing higher beef inflation and dairy inflation here, is that impacting or changing the way that you're thinking about taking price? Is it possible that you take more price if we see higher inflation on these?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [12]

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So on the Grub rollout, we've been pretty quiet about it. It's been happening over the last few months. We've just gotten to kind of nearly all Shacks rolled out now. And today was really the beginning of marketing. And for the most part, we've actually never really marketed delivery ourselves. It's been mostly partner-based and marketplace driven. So we now are marketing, we have a deep program going with Grub. If you look at our Twitter for the most -- one of our most engaged Tweets ever was today, our #SHACKUP tweet, where we were doing these really cool neon Shack Up signs that people can win, and we had a ton of people come on and hit it back. We've also been doing some free delivery promos. Those things will come in and out, you'll see a lot of it. It will be national in certain areas, and it'll be regional for certain other things. Where we determine there's some interest, we may do some more regional promos. So you're going to just kind of see that on our channels, on Grub's channels and throughout in an active way over this next period of time. And part of our partnership will be that there's a significant contribution that Grub will make in marketing dollars to fund a lot of conversation about this over the next period of time.

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Tara M. Comonte, Shake Shack Inc. - President & CFO [13]

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Katie, and then in related to price, I mean we have typically always been quite conservative in terms of how we think about price, typically taking 1.5% to 2% every year. And I think you will see us do the same next month. We expect to take within that range as we did this time last year at the end of December. So I don't think at this point, we are planning to take more price to offset those headwinds. Now having said that, I think it's definitely available to us, and it's something that we're keeping a close eye on. Our pricing strategy methodology continues to become more sophisticated as we expand across the country into different markets. And I think as we start to really build out these digital channels, particularly now with delivery being a formal part of the offering, we also have the ability to potentially differ price by channel, something that we have never done. So I think it's a watch-and-see. We will see how some of these headwinds play into next year and how some of these channels perform and definitely reserve the right to use price should we ever -- should we ever feel the need. I do think you will see us overall remain relatively conservative, though, just because the brand is still so early in terms of its expansion, quite frankly, across the country. And it's still a very young company, and certainly, very young in certain markets across the U.S. So it's an area that I don't expect us to move suddenly to be super aggressive in, but it's definitely a lever that we have available to us that we continue to look at.

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Katherine Irene Fogertey, Goldman Sachs Group Inc., Research Division - VP & Derivatives Research Strategist [14]

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That's very helpful. And going back to the guidance and the fact that we're starting on a pretty heavy marketing calendar and promotions around Grub, with your guidance for 1.5% comp for the year, do you contemplate a lift from advertising around delivery?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [15]

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Well, it's all built into the guidance, which at the end of the day, I think it's going to be a lot of shifting, a lot of change, a lot of it that is hard for us to predict, which is why we've given the range that we've given right now in this approximately 1.5%. I think the fourth quarter is going to be a really interesting quarter for us to watch. And as I said earlier, we've got a lot of people who've built up behaviors on other marketplaces where they -- we're going to need to move them over to Grub. That's a lot of work, a lot of time and it's going to be a real project here for a while. So it takes time.

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Tara M. Comonte, Shake Shack Inc. - President & CFO [16]

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Yes. And Katie, we really have to see how this channel plays out and how that delivery line plays out over the next few quarters as we unintegrate those other partners. So I think we alluded to it in our prepared remarks that, that Q4 comp number, it has a higher level of risk associated with it, that I think would be typical for us at this time in the year. There's just -- there's a lot of change going on in an increasingly important piece of our business.

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Operator [17]

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Our next question is from Lauren Silberman, Crédit Suisse.

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Lauren Danielle Silberman, Crédit Suisse AG, Research Division - Senior Analyst [18]

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I just wanted to clarify on delivery. It seems like you're available on Grub across the system. Are you also off of the other delivery platforms? And then on your decision to be exclusive with Grub, we've seen many restaurant companies moving away from exclusivity in lieu of multiple partnerships. So can you just speak to the strategic decision to partner with just one at the risk of losing sales?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [19]

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Yes. So look, at the moment, we are available pretty -- on Grub at almost -- less than a handful of Shacks are not available, so pretty much everyone across the country. We are still available on certain marketplaces for the time being on Postmates, DoorDash and Caviar, although probably in the very near future, certainly in this fourth quarter, they will become unintegrated. So whether they choose to keep us on their platforms or not, that will be up to them. But our agreement with Grub is to only integrate directly and market with them.

So why did we do that? For the same reasons we've been talking about, setting aside any other company's decisions, our decision has been consistent, as we've talked about in the last few quarters and when we announced this in the last quarter. We're going after the greatest guest experience we possibly can, making sure that food gets there in the best way it can. And what we've seen with so many different platforms is that it's been more challenging for our operators, more challenging for our guests. So we want to give a clear channel where that can happen in the best way possible. We also are going to benefit from the data that we learn about our guests, about Grub, people and how we can harness that. We're going to be able to directly market with them. And that will be exciting for us. We also believe over the long term, and this is -- we're a long-term thinking company, we're not just going to jump on for the next quarter, that this has the best potential to be the best revenue we can get. And lastly, the overall improved economics that we expect through our Grub deal, they will be better in the OpEx line than the economics we've had in various pilots over the last few years.

So all of those things together, this is the next step. It may not be the forever step. We may, at some point in the future, reconsider that as we learn. But today, it's the next step we're making. It's an important one and we believe it's the right step for Shake Shack today.

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Lauren Danielle Silberman, Crédit Suisse AG, Research Division - Senior Analyst [20]

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And then just on the delivery mix, are you seeing a relatively similar mix across markets or pretty wide dispersion across Shacks?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [21]

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Very wide dispersion, always has been through these pilots and that's been partner -- there are certain ones that are Shack-related, right? And then the -- most of it is partner strength. So you have certain regions where various partners are stronger than others. And interestingly, in our pilots, we've had certain Shacks within a region be very different between partners. Overall, we think Grub's going to do the best job of all the potential partners we had of bridging that gap across the company. But that's certainly going to impact certain Shacks at times. Grub's got to continue to win market share in markets where they're not winning. That's their job to do that. And we hope our presence on there can help them do that in the markets they want to continue to improve upon. And the markets where they're already strong, we hope to capitalize. So we'll be watching all of the regional data really closely as it goes.

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Operator [22]

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Our next question is from Jake Bartlett, SunTrust.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [23]

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Randy, I'm still a little confused as to what has been disruptive so far. It sounds like you've been rolling out to Grubhub, but that you're still integrated with the other partners. It sounded, though, from your comments that you're already seeing a disruption from the transition to Grub. So help me understand what has gone on to-date to impact your same-store sales? And then really, the path forward? I guess you talked about disintegrating with those partners really fairly shortly, but the next step is that, and then we just kind of rebuild with Grub?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [24]

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Yes. Jake, I think when you are -- we've been piloting in these last couple of years with all these different marketplaces. What creates noise is when pricing, whether it be delivery fees, service charges and other things, placement on their third-party marketplace site, various promotions that those companies may have done, when those things change, it makes a lot of noise. And as you might imagine, those things have changed from time to time. Especially since our announcement with Grub. So that's been really part of it. And again, for all the reasons I just mentioned with the previous questions, again, we believe this is the right next turn. We're not just going to turn them all on just for the sake of sales here. We want to make sure that we're building something that's lasting, that the guest has a good experience, and most importantly. And the #1 contributor for us to delivery being good is time, is making sure there's a driver available, that person is synced up with the timing in our kitchen and that person gets their food as quickly as possible. If we can do that, long-term success is going to be the most important factor we're looking for.

So again, we've said this consistently, and we'll say it again, we expect some volatility in this piece of the business for some time.

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [25]

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Okay. And -- but just to clarify, it's volatility that you've already seen kind of quarter-to-date or into -- towards the -- since you made that announcement, that you've been impacted by it so far?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [26]

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

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Jake Rowland Bartlett, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [27]

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Got it. And can you just talk about some other drivers to same-store sales? I believe in 2020, you were going to potentially get more active with menu innovation after focusing in on digital integration and simplifying operations in Chick'n Bites. Is menu innovation a significant driver in 2020? And then also lastly, if you could just touch on cannibalization. It's -- you're talking about kind of infilling markets, and it seems like that's going to be an even bigger part in 2020 than it has been in a long time. How much should that be a potential drag to same-store sales?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [28]

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So most of the potential contributors to same-store sales growth that we're looking at in the future, we always talk about menu innovation. This year has been a lot about Chick'n Bites, mostly entirely about it, right? We've had some wins and some losses on some of our shakes that were better than others. So some of the innovation we'll be doing is we'll be doing a trio of premium shakes in this upcoming couple of quarters, which we're excited about, a little bit more offering on the shake side. We'll be -- we haven't announced it yet, but we'll be doing some LTO work next year with some of our classic items. All towards the goal, though, of continuing to drive this digital piece of our business and simplifying our operations.

We really want to make sure, with so much of the business changing, and so much of the flow in the Shacks and the food moving in and out of Shacks has been the biggest concern for us and something we still need to work a lot on. So we're going to be working on those things. That's really going to be the biggest part of our goals for menu innovation.

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Operator [29]

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Our next question is from Andy Barish, Jefferies.

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Andrew Marc Barish, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [30]

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Just to follow up on that last question from Jake, on a couple of things as we look out. You've talked about some honeymoon impact coming off. Is that starting to show up in overall average unit volumes? And then the point of development in more existing markets, do you think that's a little bit of a headwind in 2020 to same-store sales as we look forward?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [31]

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Well, we're learning a lot here. And obviously, it's still such a new thing. Remember, we opened about 1/3 of our restaurant in the last year, and we're going to do -- not quite but roughly the same in next year with the early guidance we've given, right? So, so many new Shacks coming in. So much to learn. Generally, the sophomore class, as we mentioned here, has done a little bit better than we expected. It's kind of hit around its historical average of about -- generally, we model our sophomore class down around 5%. Some are down more than that, if they're really big launches, some are up. But generally, we feel pretty good about it. There's been a few big Shacks that'll be entering in Q4, that'll be sophomoring in Q4, Seattle, Palo Alto, some of our big ones. But I think as we think about going to less new markets, it's hard to say what will happen, but my expectation is that -- my hope is that we'll have less of these huge bangs in the first year, and a little bit more of an even performance that allows us to grow over the long term. This is a long-term comment I'm making, but I think it's something we've got to -- we've got to continue to study and continue to see. It's been fun for us, whenever we've not had a huge start, we've often seen those restaurants continue to grow at a nice pace. So our hope is that, that's where we go with all of this as we go deeper in new markets, going deeper in our current markets. We've got more of that dynamic. So we'll see. We'll keep you posted. But as of now, the business is performing similarly to how it has when it comes to sophomore and potential cannibalization.

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Tara M. Comonte, Shake Shack Inc. - President & CFO [32]

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And long term, Andy, there are obviously benefits for us, as we mentioned, as we focus more on existing markets, just leveraging that infrastructure in the system that's already there. Whether it comes to -- whether it relates to brand marketing in-market or even centralized marketing; whether it's just operational support, training, recruiting, really supply chain for sure, across the board. And these aren't light switch items, they don't change overnight with 1 additional Shack in the market. But over time, as we do continue to build out around our existing footprint, it just allows us to start to think about better use of those existing resources and leverage over the long term.

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Operator [33]

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Our next question is from Chris O'Cull, Stifel.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [34]

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Tara, you mentioned the company doesn't expect G&A leverage next year, but can you help frame up what type of growth rate we should expect in terms of G&A, maybe next year or at least over the next few years?

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Tara M. Comonte, Shake Shack Inc. - President & CFO [35]

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Chris, we have -- how are you? We haven't -- we haven't given those numbers at this point. We'll give you our 2020 guidance, obviously, in February, as we mentioned. I think it's just -- at this point, just more headline commentary around that line item. And just again, around where we are in the bigger, long-term growth journey of this business. We still feel really early in terms of that expansion, whether it be domestically or globally. So there's just -- there is a -- as Randy said it, we're not managing this business for the quarter. We're managing the business for the long term. And we still see plenty of opportunity for continued investment for growth, for top line growth and for bottom line leverage or for bottom line efficiency. And so I think you should just -- the comment was to make sure that you expect that to continue. We've been very consistent in that. As I say, we'll give you more details in February. But right now, we're investing across the board. You'll expect to see a lot in guest experience. Randy talked about Shack innovation and design. We're investing in training and people and recruitment and development, in our technology infrastructure. It really is -- and across people. So that's not going to stop anytime soon, and we feel really good about it. We feel really good about those areas that we're investing in, both this year and for a period of time to come.

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [36]

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Yes. I appreciate that. And then just a modeling question. The licensing revenue guidance you guys gave implies about $4 million in revenue in the fourth quarter. And I may have missed this, but was there any reason that you don't expect the current run-rate to continue, especially given you're going to have more license openings this year than you expected?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [37]

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Are you asking about the run-rate for the fourth quarter or into 2020?

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Christopher Thomas O'Cull, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [38]

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Fourth quarter.

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [39]

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Yes. I don't have it broken out. I think -- look, we've been -- part of why we've been able to raise that guidance is we've done so well this year with so many of those big-hitting Shacks, right? Shanghai, Singapore, Mexico and Philippines are just an outstanding start. We'll see how that goes. It's hard to say where that goes in the fourth quarter. Part of the potential limitation there, though, Chris, is Hong Kong. We have definitely been impacted there. I talked about it in my notes, mostly related it to 2020, but we've definitely been impacted there. We've got a lot of closures. We have our 3 Shacks that are open there in some of the best locations you can imagine in Hong Kong, and that city has changed right now. So in this term, that's part of the balancing of the fourth quarter potential.

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Operator [40]

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Our next question is from John Glass, Morgan Stanley.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [41]

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First, I know you're not going to talk about 2020 now, but maybe at a high level, how we should think about Shack-level margin, particularly the pressure -- given the pressure it had this year? Is it a foregone conclusion it's likely down, just given -- Randy, you talked about 4-day workweek for some managers and Fair Workweek and all these other pressures? A conversation came up earlier about pricing. Is there a margin level which you are willing to fight for to say, 22% is a good Shack-level margin for our business and we're able to control factors such that we can achieve that in 2020 and beyond? How do you think about '20, just high level?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [42]

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Well, look, I think where we're at today, down from our expectations this year but still a pretty fantastic business at 22% to 22.5%. I think we'll always fight for margin in every way. As we look at next year, John, it's not a foregone conclusion that it should go down, okay? We're not saying that. We have not given that explicit guidance, and we will do that coming up here. But the major factors -- a few things happening, okay? Beef is all of a sudden, quite a bit up. We need to watch that very closely. That will be our #1 impact to COGS and what happens there. Labor, we will see similar kind of mid-single digit increases but less so than this year. So we do have a lot of the Fair Workweek stuff, which is really an unknown in so many new markets as to how that's going to work and its cost. We've certainly seen it impact our New York Shacks quite a bit. And that's been a hard thing on our margins here in New York with Fair Workweek. So as we look at OpEx, there's a lot we're attacking there, including the delivery cost, which hopefully will go down. But a lot of things.

So look, there comes a point in this business where I know people are -- yourselves going to say, "Well, what's it going to look like for the long term?" That's not a number we've given, but it is something we're very confident in leveling off over time. We've got and we still are continuing to add at various volumes of -- away from where we used to be at these super high AUVs, that's starting to level. And as it does, we expect that op profit will level with it and something that over time, we can get back to growing. For the moment, we're still under pressure there. And we'll see how next year goes. It's the best we can really say at this time. But we'll keep -- we'll do that explicitly in the next call.

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John Stephenson Glass, Morgan Stanley, Research Division - MD [43]

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If I could just ask one quick follow-up on Chick'n Bites, which you mentioned is one of the major initiatives this year. We've talked about it every quarter, but you still refer to it as an LTO. Why is that? I mean isn't it big enough now that you're kind of stuck with it in the sense that there's a big sales mix there or large enough that you'd notice it? So is it more like just modifying the product or modifying pricing or however else you want to maybe modify it? Or is there really an opportunity or possibility, I should say, that you actually just don't continue with it for some reason?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [44]

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Yes. No, we're definitely not stuck with anything, certainly not that. Again, why we say that is we're still we're looking to understand, number one, guest satisfaction, which we think is pretty good. But also our own ability to make these as consistently excellent as we want. So there's supply chain initiatives that we've been through to get our costs in line, which have been great. There's also supply chain initiatives for the just improvement of consistency in the product. So much as a young company here, we've got a lot of work to do and how we roll things out and how we listen and learn from our guests and the way that we understand their shifts.

So the reason we haven't said that is even though you will see it in all Shacks -- not all, nearly all Shacks, it's something we still are not sure we want to keep forever, and we'll see. People like them. I know my kids order them. And we're still learning. So that doesn't mean we couldn't remove something that's been on the menu this year. So we'll keep an eye on it.

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Operator [45]

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Our next question is from Jeffrey Bernstein, Barclays.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [46]

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Two questions as well. The first one, just on the topic already discussed in terms of pricing power and seemingly, you're not in a rush to take the incremental pricing. Although it would seem like, structurally speaking, now would be a good time in terms of justification, but I'm just wondering how you measure pricing power, whether there's any concern that maybe you don't have as much and therefore you want to wait? Or how you go about testing or arriving at what kind of pricing power you actually have? And then I had one follow-up.

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [47]

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We're spending more time and efforts right now, both internally and externally, answering that question. Yes. We've always felt like we have great pricing power. We've always been very conservative, with a very long-term view on our pricing. Again, there was only one other time in our history that we went kind of above 2%. And that's when beef really skyrocketed a number of years ago. So something we're keeping an eye on. We're not opposed to lots of different pricing opportunities next year in variations. I think as we look at December, and we've modeled this out and the prices we kind of want to be out in the regions we want to be at, in that kind of 1.5% to 2% range is probably where we'll land in this next one. That doesn't mean we couldn't take more next year. It doesn't mean we're not -- also unwilling to consider pricing in various channels, which has opportunity, whether it's delivery or otherwise, to protect our margins. And those are all things we're really deeply considering right now and doing quite a bit of research and homework on them to try to find something. So you'll probably see us test some things next year. You'll probably see some interesting new regional things that we're looking at and continue to get a little bit more aggressive there. But for the meantime, we're going to stick with our conservative approach for the next near term.

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Jeffrey Andrew Bernstein, Barclays Bank PLC, Research Division - Director & Senior Equity Research Analyst [48]

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Got you. And Randy, you mentioned before, so many new Shacks, so much to learn, which is obviously a great thing. Just wondering how you think about the recent investments you've made in the people and infrastructure and supply chain? Do you think you guys are ready to handle the further outsized unit growth? Just wondering how you assess the corporate, where it stands at this point?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [49]

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I think there's been a lot this year, with Project Concrete, with the next phase, as Tara mentioned, of Project Concrete coming, which deeply impacts the Shacks the most, all of our ordering, invoicing, procurement and inventory, that's a big one. And so much of this growth, we're looking -- we're targeting a similar number of Shacks next year as we did this year. That's the right number probably for us for this year. But all of that is to make sure that we're building great Shacks for the long term that give us the opportunity to do what we want to do. You look at our focuses for next year: people, simplification of ops and really winning the guest experience. Those are things we want to make sure we're doing well, no matter how many Shacks we open. And we don't want to open too many, that allows us to not do that well. So our focus will be on continuing to execute at a high level as we have and build great community gathering places for the long term.

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Operator [50]

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Our next question is from Andrew Charles, Cowen and Company.

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - Director [51]

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Randy, is Grub delivery now active through the Shake Shack app and website? And as we sit here on the first day of the platform is live nationwide, will there be a conscious effort on your end to try and channel delivery through the app and website, through Shake Shack's app and website, to help maximize data collection?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [52]

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Eventually, but not today. Data collection is one of the most important parts of why we chose Grub. We're going to have an active opportunity to understand truly our guests who come through their marketplace, and that's going to be huge for us. So we can also directly market there when we choose to. Today, you cannot do a delivery through the app or the web, but it's something that we've targeted. It is absolutely a goal for us, but we don't have a date on when that will happen yet. We really want to focus on our own -- the digital offerings that we're doing right now as well as getting delivery going on Grub. But huge opportunity down the road for us if we can continue to give people reasons to use our app in new and exciting ways.

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Andrew Michael Charles, Cowen and Company, LLC, Research Division - Director [53]

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Sure. And then, Tara, I want to come back to the margins. In the context of the updated 2019 restaurant margin guidance that's brushing up against the high end of long-term guidance of 18% to 22%, the long-term margin guidance was issued at the time of the January 2015 IPO, so before you joined the company, obviously. And since that time, we've seen persistent mid-single-digit labor inflation, it's obviously an issue before third-party delivery companies were a factor and the adoption of Fair Workweek acts that were not contemplated in the original guidance. So can you talk about the confidence you have as we think about the long-term margin guidance and what would you need to see that would lead to -- lead you to reconsider the long-term margin range?

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Tara M. Comonte, Shake Shack Inc. - President & CFO [54]

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Yes. Andrew, yes, I mean we still feel really good that when we look at our -- the Shacks that we are signing off in our real estate reviews, our real estate committees that on average, going forward, we still feel good about the $3 million and the 20% Shack-level operating margins. So you're right, the business has changed, I think, a lot in the last few years. And I'm sure we'll continue to go through periods of more change. But those numbers still -- those numbers still hold for us to the extent that we feel that they differ, then we'll update you. But I think we've still got a long way to go. Again, at 156 domestic company-operated Shacks as of today, there's still a long runway before we get to 450, and we're adding Shacks of all volumes still across the board. So -- but it's the right question. There's certainly -- we talk about the changing dynamic of our operating model and we're working hard to make sure that as that changes and new costs come into the business with digital, whilst we also believe that will deliver incremental top line growth, that we're working hard to mitigate other costs, where they're within our control. Project Concrete is a perfect example of that, making sure that we streamline that operational process within the Shacks, making sure we take out administrative tasks and just continue to become more and more efficient in that core operating model so that we can continue to invest in the future.

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Operator [55]

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Our next question is from John Ivankoe, JPMorgan.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [56]

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I have a couple of development questions, if I may. First, Randy, as you guys were talking about smaller-format urban stores that was really going to be digitally focused, how would that different -- differ from Astor Place, if at all? Or is Astor Place basically kind of the precursor of what you may roll out in a further way?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [57]

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That's great. For those who don't know, Astor Place was our first kiosk Shack ever in New York City, pretty prime location. I think the difference there, John, of the few that we're going to try next year, is mostly about footprint. Astor Place is still a pretty big Shack. I think it's probably around 3,500 square feet and has quite a bit of seats. Some of these that we're going to try are going to have less seats. They may not always, so that's one piece of it, just doing a little bit smaller format. Seeing when -- and again, this is not going to be our -- certainly not be our whole development schedule, but we're probably going to try a few Shacks in that 2,000 to 2,500 square foot range. And then also, really, the design will do its best to separate in a more -- in a better guest experience fashion, regular in-Shack guest experience from the digital pickup experience.

One of the things we found, with so many couriers, drivers, people picking up on the app and web channels, throw that in with kiosk in a Shack, there's just a -- it's busy at the pickup. It's really busy. It's something we are committed to making better. And it's not everywhere, and it's not all the time, but it's not as good as it can be. And we need to make it great, all the time at every Shack. So we're going to try some of these and see if some of these formats can work towards -- with a higher increase every year recently of the percentage of sales going towards digital, those are orders that are originating outside of Shake Shacks. So the way and the space that we give towards orders originating in Shake Shacks needs to evolve. So this is one way to test and learn, and we're pretty excited about it and we'll see. And we'll keep you posted which Shacks to keep an eye on for those.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [58]

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Okay, perfect. And these are related questions, but I'm going to go opposite ways with them. So talk about your experience in the higher-end food courts, which I would imagine probably wouldn't have as much digital, it would be more of a -- you're kind of happening to pop in and you choose Shake Shack because it might be the best alternative there. So talk about your experience in the high-end food courts, what's that -- what that has taught you, if the average unit volumes are close to the system average, and I don't know if they are or they aren't, and what kind of a margin that you get in obviously, what's a very different type of location than many of your others?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [59]

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Yes. Sure. We've seen some recent good success in some of the food courts. We're generally not going to be a food court brand necessarily. But when there are food courts that can be distinctive where Shake Shack can have a distinct position and feel really great for our brand, we want to do them. We won't break out average unit volumes, but they're pretty solid. Now granted, in some of those, depending on the mall itself, there's usually a limited hours. So generally, they're probably not going to be of the highest volume Shacks, but they're very efficient. They have a different OpEx line. They have a different labor line. We generally don't have bathrooms. We generally don't have HVAC to the same extent, right? The build-outs can often be less. But we can still produce some pretty solid sales. So we really like them. In each, what we also like about it, John, is the opportunity often to do 2 in a place that we might have previously pegged for 1. For example, King of Prussia Mall, we have 1 outside in the flagship and then we have 1 inside in the food court. In Somerset in the suburb of Detroit in Troy, we have a Shack on the road right there, and we have a Shack just about a mile away in the Somerset mall. When we see those opportunities, we really like that, because we think it's 2 different audiences that we can capture simultaneously. And when we can hit that, allows us a really good opportunity to maximize market share whenever we have the opportunity.

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John William Ivankoe, JP Morgan Chase & Co, Research Division - Senior Restaurant Analyst [60]

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Perfect. And then finally, one of your fast casual kind of peers, Chipotle, is obviously going down the road at a fairly accelerated pace in terms of their digitally optimized pickup lanes, the drive-throughs, it may be using some different language. But have you guys begun to pencil out something like that? Do you think the brand is ready, especially as you have second, third, fourth units in certain metropolitan areas and have some more suburban locations, to where that may make something for the brand as the consumer gets trained?

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [61]

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Yes. It might. It's not something we have on the books right now in design, but it's something we talk quite a bit about a lot. And whether that becomes through drive-through or not was what you said, I'm not sure that's what we're looking for. I think what we want to figure out is where is the digital future of preordering and how can you most easily get that food and stay or get that food and go wherever you choose to gather with your community.

So we've got our eyes on those type of ideas, John. We'll keep you posted. Nothing to announce just yet.

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Operator [62]

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Our next question is from Brett Levy, MKM Partners.

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Brett Saul Levy, MKM Partners LLC, Research Division - Executive Director [63]

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We've seen some news, interesting news out of Microsoft today, where they talked about the productivity of the 4-day workweek. Can you give a little bit more segmentation on how many units you're doing the 4-day workweek in? And really, what you're seeing in terms of either sales productivity, profitability or even the internal metrics? And then just if you could share the number of units with really, kiosk footprints.

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [64]

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Sure. So we probably don't have the artificial intelligence capabilities that Microsoft does to examine this, but what I can tell you, though, is we've got about 1/3 of our Shacks who are doing 4-day workweek, okay? About 1/4 of our Shacks are doing kiosks. So let's separate those issues for a second. 4-day workweek is a big deal. It's something that we've dreamed of doing this for so long, and it's something that we're still in test on. This is not something you take lightly or roll out too quickly. So at about 1/3 of those Shacks, we're really listening to our managers, understanding what their lifestyles are like, what are the things that they want. We're hearing things like, "Wow, this is so powerful. I don't need to get childcare for a fifth day. Wow, this is amazing." We're hearing things like, "You know, I saw that, and that caused me to apply to Shake Shack. That was pretty cool." Or, "You know what? It's hard for me to imagine going to work for another company where I have work a fifth day." So the recruiting possibilities are huge. As you know, we have deep goals for diversity and inclusion. That helps this issue in a big way. So these are all the positive goals.

Some of the things we still have to work through is making sure that people can get all the impact, training and desire that they want that you get in that extra day, so it's different. And then we have to make sure we can cover our restaurants and still protect our margins in a way that makes a lot of sense. So we are cautious about it. We're excited about it. And it's something we are continuing to invest in. It is not something that's locked in forever, but we're looking to learn.

On kiosks, we have about -- again, about 40-plus Shacks. There's some more that will be rolling out with kiosks. Still a lot to learn there in terms of its guest experience, number one. We still have to invest more to make the guest experience even better than it is. We're finding in a lot of Shacks, people really love them and they sometimes prefer them. And there's still going to be a group of people who would rather talk to a cashier, and we're going to have that human element there with hospitality every time whenever we -- even when we have kiosks. So a lot of learning there still before we go see any kind of deeper rollout. We're going to kind of keep going with what we've got and see some of the new Shacks doing kiosks, and we'll see how we go. A lot of data there that we like, and we'll keep an eye on it.

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Operator [65]

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

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Randall J. Garutti, Shake Shack Inc. - CEO & Director [66]

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Okay. Thanks, I appreciate everyone for being on the call tonight, and always appreciate your support. Thanks so much, and we look forward to being in touch. Have a good night.

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Operator [67]

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This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.