Leo Rhodes - Vice President of Finance and Investor Relations Randy Garutti - Chief Executive Officer Tara Comonte - Chief Financial Officer.

Nicole Miller - Piper Jaffray Jake Bartlett - SunTrust Sharon Zackfia - William Blair Chris O'Cull - Stifel Brian Vietnam - Cowen Nick Setyan - Wedbush Securities Karen Holthouse - Goldman Sachs.

Good evening and welcome to the Shake Shack's Third Quarter 2018 Earnings Conference Call and Webcast. At this time, all participants have been placed in a listen-only mode and the lines will be opened for your questions following the presentation. Please note that this conference is being recorded today November 1, 2018.

It is now my pleasure to turn the floor over to Leo Rhodes, Vice President of Finance and Investor Relations. You may begin..

Thank you, Operator and good evening to everyone. Joining me for Shake Shack conference call are Randy Garutti, our Chief Executive Officer and Tara Comonte, our Chief Financial Officer. You should all have access to our third quarter 2018 earnings release, which can be found in investor.shakeshack.com, in the news section.

Additionally, we have posted third quarter 2018 supplemental earnings materials, which can be found in the Events & Presentations section on our site or as an exhibit to our 8-K for the quarter. During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating our performance.

The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release and the appendix of our supplemental materials.

Please note, some of our statements made today 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 on February 26, 2018.

Additionally, any forward-looking statements represent our views only as of today, and we assume no obligation to update any forward-looking statements if our views change. We will begin our call this evening with the brief remarks from Randy and Tara before opening the call up to questions. I will now turn the call over to Randy..

Thanks Leo and good evening to everyone on the call. This evening we will review our third quarter financial results, provide a conference update on our extremely strategic priorities for the year and share our initial thinking for 2019. We are pleased to report that Shake Shack’s overall growth remains strong, as we head towards the end of 2018.

The performance of both our new and existing Shacks incredible hard work of all of our team members results in us raising our overall revenue guidance for the year and confirming that we remain on-track for the long-term goal to achieve over $700 million in revenue by the end of 2020.

During the third quarter, we opened seven company operated and two license Shacks, generated a $119. 6 million of revenue and delivered adjusted EBITDA of $21.3 million with year-on-year increases of nearly 27% and 18% respectively.

Shake Shack’s sales were down 0.7% for the quarter and we continue to execute our strategy of long-term overall revenue and profit growth to increasing market share. We are doing this region-by-region Shack-by-Shack of delivering industry leading sales, profitability and return metrics. I want to share additional color here.

Well sufficed to say that as a result of this strategy comp maybe down or up in some quarters down in others. But we remain committed to delivering significant top and bottom line growth, recall the certain intentional impact in a short-term on this one isolated metric.

As Shake Shack will relentlessly focused on delivering excellent experience and hospitality in every interaction with our guests. Now underpinning this, we focused on a few key strategic priorities this year.

First of all, our pipeline for both company operated license Shacks is supported by a robust and disciplined approach to the identification and evaluation of great real estate. The timing this year has ultimately have been back weighted and as impacted our total revenue. However, just take a look at the kind of Shacks we are building.

Actually got back late last night from a trip to San Francisco, where I met with our leadership team will be opening a stellar site in [indiscernible]. Last week I visited our team in Seattle, where we opened a few weeks ago to line down the block.

We continue to build quality Shake Shacks in great size this community and experience at the heart of their design and location. That will drive our brand for decades to come. We are encouraged by the early performance of 2018 class Shacks and expect to deliver a largest class of Shacks to-date in 2019.

Next on our menu, we continue to innovate around the core menu, while testing new categories and menu items to draw our guest excitement engagement. The recent opening of our innovation kitchen as well as the important addition of our new executive Chef John Karangis. A talented unisquare hospitality group of along this.

Third ,the expansion and evolution of our digital channels and experience. This quarter the future growth strategy and although we are in early stages, we believe this bring an important part of how we more meaningfully and frequently engage with our guest in the future. And finally our investment in our foundational infrastructure.

We committed investing in both our people and our systems. But we have both strong and efficient base, on which to scale, as we set our site on significant continue short and long-term growth.

Digging a bit deeper in our development progress, we opened seven domestic company operated Shacks during the third quarter, expanding our home town in New York with the opening of West Village in Williamsburg, Brooklyn, Shacks.

We opened our second Denver Shack at Highlands Ranch and expanded into new markets of Nashville, Tenancy in Birmingham Alabama. And so far the fourth quarter we have already opened six Shacks including Seattle, Philadelphia, [indiscernible], Greater L.A. Suburban, Minneapolis and West Chester New York.

As I mentioned we are looking forward to launching the Bay area in Palo Alto in the coming weeks.

For the full-year 2018, we are finding our previous pre-guided unit range and expected open 33 to 34 new company operating Shacks and in the year with 123 to 124 company operation Shacks in total, delivery approximately 37% unit growth over the prior year.

As we shared the back end weighted profile in 2018 has had a meaningful impact on our financial results, with our fourth quarter being the most significant in terms of number of new openings. At this stage 10, 11 openings remaining and at least four of those are slated for the last couple of weeks of December. Looking at next year of 2019 development.

We are once again increasing our planned number of company operated Shack openings. A preliminary estimate is to open between 36 and 40 domestic company operating Shacks in 2019 to represent year-over-year unit growth of between 29% and 32%.

Within expectations the way our permitted disruption plan is currently laid out, we are likely to have another backend weighted development schedule, but we will keep you updated on revenue expectations and that schedule firms up.

The targeted portfolio remains the balance of roughly 80/20 existing to new markets with 2019 new markets including Providence, Sarasota in Virginia Beach, Salt Lake City, New Orleans and Columbus to name a few. Now turning to our license business. 2019 represents an increase investment and focus on this important piece of our business.

Years ago, we took a chance to expand internationally long before companies our size would normally do so. We believe that decision has been one of the more important strategies in the growth of our business.

We really like the balance of licenses and company operated Shacks, big for brand, capital light growth model is rise to so many opportunities for our team to grow. Most importantly every time we partner with an extraordinary new company around the world, we learned, we grow and we bring that learning back to the broader company.

A lightning team led by Michael Kark has done extraordinary work this year and we plan to continue to invest in our license business for many years of growth ahead. Domestically in the third quarter, we opened our first Shack in Atlanta airport, the busiest airport in the world.

We are also pleased to report that we will be opening in the [Macquarie] (Ph) airport and Dallas, Fort Worth in fourth quarter followed by Cleveland as well as one Shack in Denver International Airport to 2019. Airports now represent a proven, substantial and exciting layer of growth to our license strategy.

I love the moment earlier this week when I was boarding the plane on my way to San Francisco and watch the parade of Shack bags that roll through the [indiscernible] We are really excited about our airport growth ahead. Internationally in the third quarter, we opened our 10th Shack in UK and the new Shack in the City of London.

Later this month, we will open our second Shack in Hong Kong at Pacific Fleets bond and really strong launch of the brand there earlier this year at the IFC mall. For 2018, we expect to open 14 to 16 net license Shacks with 12 already open and two to four Shack remaining in the fourth quarter.

The lower end of this range is slightly below our initial guidance due to a few potential pushes in opening schedules. And at times as you might imagine opening gates for Shack's in airports and around the world can shift, depending on much larger development schedules. The rest assured these are green Shack's coming soon.

Our international ambitions continue to grow. Since our last call, we are going into new license agreements for both Mexico and Singapore. We are extremely proud to be working with the [indiscernible]. Our new part of Mexico with an agreements open 30 Shack's over the next 10 years. With the first Shack planned to open next year.

In Singapore we will be building upon the success of our existing relationship with the STC Group with an agreement for 10 Shacks over the next five years. The first also expected to open next year.

Our entry to Latin America and our continued growth across the Asia Pacific are critical milestones in our global expansion and we are excited to welcome these new markets and partners into the family.

With licensing agreements now in place in Japan, South Korea, Hong Kong, Shanghai and Philippines and now Singapore we remains strategically focused on Asia as an important growth driver of our international business over the next several years.

In order to further support our growth, we will be opening our first international office in 2019 in Hong Kong with our existing footprint planned future growth in Asia, [indiscernible] support both our partners and our operations by deploying our own resources within the region.

For the full-year 2019, we expect to open between 16 and 18 license Shacks with a handful of domestic Shacks in the remainder in international markets. We remain on-track to meet our goal in 120 license Shacks by the end of 2020. Now moving on to menu innovation which is core to everything we do.

Our strategy is to deliver excellence across our core menu while testing and innovating around it. In order to better support that strategy, we just opened our innovation kitchen in the third quarter, located on the lower level of our new Wes Village Shack connected to our home office.

This new space is now home to our culinary team and serves as a hub for all the menu development and innovation across the Company. As I mentioned, we are also thrilled at John Karangis, our new executive chef. In his role, John will oversee all culinary development for Shake Shack.

Bringing the team the strategic creation of innovative and exciting new menu items. Our first innovation kitchen [indiscernible] are chicken brand, launched in mid September exclusively at new West Village Shack and is now offered in select Shacks in New York City in Arizona.

Chicken wise our menu item we have been asked to add for many years and we are excited about the test to learn more about their potential from our guests over the coming months. Now let's talk about innovation and the evolution of the Shack experience.

We have got a lot happening right now and we are proud to share all of it in the native or in various stages of testing growth. But what do we know at this point? We know it is convenience is more important than ever to our guests. The demands are experiencing Shake Shack through digital channels is significant.

We know that digital channels continue to grow as a percentage of our total sales and we know that they generally have a higher average check. So here is the reality. None of this is easy, with the additional app delivery kiosk and now online ordering.

We continue to add complexity for already busy Shacks, these additional channels can at times complicate our kitchens and at peak times create certain flow issues in the front of that.

We love the fact that we are brought in the ways in which guest are experience Shake Shack our strategy remains one where we roll out these channels thoughtfully, we can test learn and iterate in order to do them really well for the long-term.

Early in the journey here we are still evolving these products along with our Shack kitchens and broader design we keep learning how to optimize in store a great guest experience. We know we have got a long way to go, we are excited about the opportunity and growth we believe continue digital expansion represents for our business.

Our recent development on the digital front is the introduction of browser based ordering from mobile and desktop that we are currently testing at just 10 Shacks. Web based store represents an additional opportunity to expand our reach to even more guests and those who may now wish to use the app.

This channel is just one week old so we will update you time goes on as we have lions share. We are also continuing to retrofit certain existing Shacks and build a select number of new Shacks with our self order kiosk.

By the end of this year we will have approximately 20 Shacks working with kiosks all of which except as that replace, will be operating on a hybrid model, pertaining at least one traditional point of sale that also excess cash.

Kiosk represents an opportunity for us enhancing guest experience, stream line flow in Shacks and potentially help with labor challenges down the road. We continue to receive high guest experience scores are Shacks with kiosk and it's also early in our deployment of this new channel.

As mentioned on prior calls the demand for Shake Shack to be delivered remains strong and represents an opportunity for us. Our results, including a number of integrating pilots with key delivery service partners, will continue to be patient for evaluating the options of establishing more formal relationships with one or more partners.

However, at this point we are working to ensure the entire guest experience is one of the highest quality as well as operationally efficient for Shacks. In summing it all up, we are really pleased with the progress of all of our key strategic initiatives.

Each of which is critical to our continued growth and we believe we are in a strong position to execute against a significant opportunity ahead. With that I want to turn it over to Tara, who will walk you through our financial results..

Thanks Randy. Total revenue for the third quarter of 2018 which includes sales from both company operated Shacks and licensing revenue increased 26.5% to $119.6 million. Sales from our company operated Shacks increased 27.2% to $115.9 million due primarily to addition of 28 new domestic company operated Shacks since the third quarter of 2017.

Licensing revenue increased 7.3% to $3.8 million driven by a increase of 17 Shacks since the same quarter last year. Similar to prior quarter, the implementation of the new revenue accounting standards have impacted the timing of the revenue recognition for some of our licensing agreements.

As we did for the first and second quarters will include a comparison in the footnotes with the 10-Q to show our revenues reported on both the new and old standards.

The impact from the third quarter was a $144,000, and we expect the reduction of revenue recognized over the full-year that be roughly $500,000 which is consistent with previous expectations and it incorporated in to our 2018 guidance. Same-Shack sales decreased 0.7% during the third quarter.

This decline consisted of a 4% decrease in traffic partially offset by a 3.3% increase in price and mix. And included for 1.5% to 2% expense price [indiscernible] December. Similar to the first half of the year, price and mix were positively impacted by our growing digital channel which typically result in a higher average Shake than in Shack.

Although come to the metric the receipt for market attention, as we have said previously, we do not believe it is the most useful metric for which to measure our performance. For a young company focused on growing market share and building a strong and healthy business for the long-term.

We are proud of unit level metrics, our internal capsule and our overall financial performance and have taken the opportunities, updates and share our trailing 12 months regionally AUV and Shack level operating profit performance on Page 7 of our supplemental materials.

We have shared some additional revenue detail by region on Page 8 of the supplemental materials, in order to illustrate some of the current dynamic of our business particularly as it relates to the relationship between the overall revenue growth and [indiscernible] performance.

For example, as highlights on Page 8, for the trailing 12 month period in New York City and the Northeast two of our more established markets we have added roughly $15 million to $21 million of new Shack sales at a expense of approximately $700,000 and $400,000 in comp sales respectively.

On the other hand, in the Southeast in the Midwest regions, we have added roughly $16 million and $25 million in new Shack sales model to increase income sales by $1.9 million and $0.7 million respectively.

Taking a look at our business in total, for the trailing 12 months ending Q3, we have added $93 million in total sales while also experiencing the overall increase in comp sales as roughly 26%. Comparatively, in the third quarter we added $25 million in new sales while experiencing a decrease in same Shack sales of approximately $0.5 million or 0.7%.

none of us prefer to see a lower quarterly comp figure we do believe this is a metric that will continue to show some degree of volatility for as long as we are aggressively expand and growing market share.

We believe in that overarching market growth strategy that continues to pay out solid top and bottom lines dividend and we remain squarely focused on building an extraordinary company for the long-term.

Average weekly sales for domestic company operated Shacks was $86,000 for the third quarter of 2018 and the average unit volume for the trailing 12 months was $4.4 million. As noted on many previous calls AUV will continue to decrease with the addition of newer Shacks with a broader range of sales.

However due to these stronger than expected performance of some of our newer Shacks this year, we now expect company operated AUV to be between $4.2 million and $4.3 million by the end of this year a raise to our previous guidance of $4.1 million to $4.2 million.

Shack level operating profit a non-GAAP measure grew 20.7% in the third quarter to $29.9 million with Shack level operating margin of 25.8%. Food and paper costs as a percentage of Shack sales decreased slightly to 28.2% compared 28.3% in the prior year.

Looking forward to the fourth quarter, our expectation is that food and paper costs will slightly deleveraged potentially from Q3 to Q4 or being relatively flat compared to prior year on a full-year basis.

Labor and related expenses as a percentage of Shack sales increased roughly 90 basis points year-over-year to 27% driven primarily by minimum wage increases and the introduction of new lower volume Shacks to the system.

Other operating expenses as a percentage of Shack sales increased 150 basis points year-on-year to 11.6% driven primarily by commissions paid during the quarter related to our current delivery pilots and off-site events together with the impact of six operating expenses spread across the lower average unit volume Shacks.

Occupancy related expenses as a percentage of Shack sales decreased 90 basis points to 7.4% compared to the prior year primarily due to expense leverage combined with an increase in the number of build to leases.

Core G&A excluding project concrete one-time items increased 27% year-on-year to $11.7 million in the third quarter driven by ongoing Investments across the business to support our short and long-term growth plans.

In the third quarter, we also recorded a one-time charges of approximately $1.5 million of which $1.2 million was related to a legal matter and approximately 300,000 associated with project concrete. The work on project concrete or ELT upgrade initiative is progressing very well.

We are now in the second implementation which we continue to much of 2019 and we continue to add scope here the business can benefit and it makes economic sense to do this. But with respect to this project and accounting standard update released in August, changed the treatment for implementation cost associated with clients based software solution.

As a result of this we now expect a significant portion of project concrete implementation costs to be capitalized versus our initial expectation of comps mostly operating nature. We expect to spend approximately $1.5 million of onetime G&A and approximately $1 million in capital in 2018, which remainder of the project costs falling in 2019.

Adjusted EBITDA on the first quarter grew 17.5% from the same quarter and the prior year $21.3 million and adjusted EBITDA margin as a percentage of total revenues was 17.8%.

In the third quarter on an adjusted pro forma basis, we earned $7.9 million or $0.21 from fully exchange in values to Shack compared to $6.2 million or $0.17 from the same quarter last year. Stock compensation added a $0.01 benefit on the current quarter. Moving on to full-year expectation for 2018, our updated guidance is as follow.

We are raising full-year total revenues to be between $450 million and $452 million an increase to our prior guidance of $446 million to $450 million representing an increase of approximately 25% to 26% over prior year.

We have tighten our range for the new domestic company operating [indiscernible] growth to be between 33 or 34 representing a unit growth rate of over 37% year-on-year.

We expect to open 14 to 16 new license Shack across our domestic and international footprints compared to our previous guidance of 16 to 18 Shakes due to timing shift and the opening for several license locations.

Based on trends to-date, we expect full-year license revenue to be approximately $13 million including an estimated $500,000 impact of the new revenue reorganization standard.

We expect average unit volume of company operated Shakes to be $4.2 million to $4.3 million for the full-year and increase over our previous guidance of $4.1 million to $4.2 million. We continue to expect same Shack sales to be 0% to 1% for the full-year, which is consistent with prior guidance. Albeit slightly towards the lower end FX range.

Shack level operating profit margin guidance for the full-year remains 24.5% to 25.5%. We now expect the core G&A expense to be between $48 million and $58 million exclusive of project concrete about the one-time charges versus on previous guidance to $49 million to $51 million.

We estimate the project [indiscernible] spend is roughly $1.5 million in G&A and $1 million in cash spend for 2018. We expect pre-opening costs to be approximately $13 million, depreciation of $30 million to $31 million, due to our late revenue schedule versus our previous guidance of $31 million to $32 million.

Interest expense was approximately $2.5 million, which is in line with our prior guidance. We now expect our annual adjusted pro forma effective tax rates for 2018 to be 27% to 28% for the year which excludes any effects from [indiscernible] for a tax benefits in stock based compensation to-date.

The increasing rate is primarily driven by the relevant impact of tax credits from a larger than expected income range. After full-year 2019, we will provide detailed guidance on our fourth quarter call in February. However, we would like to share some directional headlines at this point.

We expect to open between 36 to 40 domestic company operated Shacks representing a company operated unit growth rates of between 29% and 32%. We also expect to open between 16 and 18 net new license Shacks in 2019. We expect modest headwinds within food and paper costs driven primarily by expected increases in distribution costs.

We expect continued deleverage on the labor line driven by the ongoing pressure and historically low unemployment market regulatory minimum wage increases and the impact of lower and easy Shacks.

As it relates to G&A, we will continue to invest across the business in people, systems and infrastructure to support and scale this business and continue to deliver long-term sustainable growth. Specific to project concrete. We expect to spend approximately $3 to $4 million in one-time G&A in 2019 with a similar level in CapEx.

Depreciation expense will be higher in 2019 compared to this year due primarily [indiscernible]. Our new lease accounting standards becomes effective in Q1 of 2019 and we will continue to evaluate the potential impact on our financial. At this stage we believe there will be some general impact primarily in relation to our existing leases.

Current lease are focused in Shack that are open not just the lease process reflects a more depreciation and interest volume. Going forward all costs will be reflected in the occupancy line.

We will say now that all leases and we fully capitalized going forward to our balance sheet will significantly expand with certain right of use assets on these liability. Without taking this more specific - for 2019 guidance, mostly completed all of our analysis.

So wrapping up our financials for the quarter, we continue to be pleased with our performance and the opportunities that lie ahead. We have confidence in our financial results, the performance of our Shacks and the investments we are making to drive success in years to come and that we will ensure the sustainable long-term health of this business.

With that, I will turn it back to Randy for closing remarks..

Thanks Tara. Before we move to Q&A, I will just take a quick look at our strategic priorities for next year. As you can see we are growing quickly. We remain committed to meeting our near long-term financial targets while remaining focused on excellence, experience and hospitality.

To get there, we need to be focused on going deep on few key initiatives. First, committed to excellence in our people. We all know what this means and how important our team has always been to our company's success.

More than ever with unemployment at historic lows increasingly higher costs and availability of great talent you can count on us being a leading priority. We will be making increased investments in our teams. Next, consistently delivering a great experience at the Shack.

It's just so important that we keep evolving our guest experience both on delivering on the basics day-in and day-out and maximizing those moments where we connect with our guests. In addition we will be working to cultivate loyal and connected Shack community, leading a platform of incredible brand that we have built.

While committed to deeper understanding and connecting with our guests more personally, digitally and face-to-face. This process of experiencing great interactions will continue to strengthen the relationships we have with our guests and what our brand means to them.

[indiscernible] we will be innovating for future growth and we do this by investing in our infrastructure, continuously refining how we operate, improving our product offerings and identifying opportunities beyond today's future.

All this while standing for something good, taking care of our team and focusing many years down the road on the unique opportunity that Shake Shack has around the world. Thanks again to everyone for joining the call tonight and with that operator, please go ahead and open up the line for any questions..

Thank you. [Operator Instructions] And we will take our first question from Nicole Miller with Piper Jaffray. Please go ahead..

Thank you, good afternoon. Could you start talking a little bit about the top-line first and the price that you have in the quarter.

And if there is any comments about price versus mix? And then when you think about the environment that you have outlined and there some inflation, how much do you need to take to keep up and how much pricing power do you feel that you have?.

Thanks Nicole. So right now we got about 1.5% to 2% price running through the system from the decision we made last December. We will give official guidance on this later in the year. But generally we are expecting about 1.5% price through the system into 2019.

So, if you look at the 15 years, almost the Shake Shack have existed, we have been in the range of 1.5% to 2% pricing nearly every year that entire time. We have never been in the price that we could, and we have always taken the price that we believe we should.

We have a very long-term view on this business and we are not just going to take price just because we think we have great pricing power and what we are doing will continue to expand a little bit smarter year-after-year about pricing add while another Tier 2 this year.

And we will have some regions that will go up 2% to 3%, some regions that will go back to 1% and all that is balanced on the pricing studies, pricing feelings that we have and anything that we think makes it a great experience for the long-term for our guests. We don’t take a lot more than that to offset the continued pressures this year. Right.

So we continue to tell the world that we will keep rolling this top-line, keep rolling our bottom line.

We have not given any profit guidance for next year, but as we have said for many years and is likely that our profit overtime, for the next few years will continue decline a little bit before it levels off and our business reach more than normal run rates.

So with all that, we are going to continue to be cautious, but you read every day now about high inflation coming and opportunities. If we see more opportunity what we can take a little bit price next year we may choose to do so. But as of now plan for the end of December about another 1.5% coming our way..

That is very helpful. So last question congratulations on the innovations kitchen being open.

If I did the math right on top, you did have positive mix, so that you confirmed now and then also understand if there is things you are doing in that kitchen around menu innovation that can benefit mixed shift and also maybe potentially expand their parts? Thanks..

Yes, absolutely. I think we have shown for years now, the opportunity to take a little bit of price, and continue to expand on mix. Now there is a lot in there, there is digital channels, which are increasing alternative sales and continue to have a higher mix attachment to the entire overall Shake. Right.

But when we look at the mix percentage and menu innovation, we have got a few things that we are looking at.

We have got our veggie Shack, which assessing in about 20 Shacks, we have got our chicken bites, which are testing just in three Shacks in New York and a few in Arizona that is really an opportunity for us a brand new innovation, a brand new item. But we are not rushing to get that out.

It's really new for us and then we are going to continue to go around the core. Right now we are running our LTO with our hot chicken, which was one of our favorite ever LTOs that we ran last year, so much so that we really bring an LTO back but that one we did, that is got a little bit of a premium price.

So we think we can continue to engineer some good opportunity to drive price mix while keeping overall value in really strong place..

Thank you..

And we will move on to Jake Bartlett with SunTrust..

Great, thanks for taking the question. Tara maybe first question on the guidance for same-store sales, you mentioned being towards the lower end of the annual range. My math is that that kind of - that implies a roughly negative two in the fourth quarter.

Just want to confirm that you do expect a deceleration from what we saw in the third quarter?.

Hey Jake, so when we look at comp, I mean first of all we continue to say that, it will be a volatile metric for us. And so [indiscernible] as each quarter goes on basically based on what we are seeing that performance to-date, which is reflected in that commentary.

In addition you may remember we started our delivery pilots in earnest at the beginning in Q4 rather than very, very tail end of Q3 and last year and so that is going to have a meaningful impact on the comp for Q4 coming up..

Got it, and then just digging into the kind of the idea the cannibalization is having a big impact on this on the negative comps now, but the volatility, the difference between the second quarter is about a 180 basis points and I'm struggling to understand which stores would have could have kind of caused that much of a differential, meaning is it really opening in Williamsburg, Brooklyn going to have that much of an impact or Staten Island kind of really you know in the second quarter.

So I just want sort of dig into exactly how confident you are that it is the cannibalization that is having the impact and also whether you just kind of dig into whether there is any other factors like promotions or whether, I think it was pretty rainy in the quarter? And then I have one more follow up..

It's a little bit of cumulative impact of a number of things, as we see it continue to grow so much of this business, if you look at our some of the supplemental that we shared in the deck you know the New York City and Northeast still makes up nearly two thirds of our comp base sales and we opened a lot of restaurants in those two markets.

We added a lot of sales. So look we never want have a negative comps not something we ever are happy with and we are always going to drive towards our strategies of having that be positive and we will not rest on that.

That said, when we add nearly $35 million in this last twelve months in just those two regions and we looked a little bit on comp that may happen from time-to-time and we are still in its really early phase of filling some of these markets.

Also if you really look at the data that we shared, sometimes the opposite of that counts, right, we are showing the opposite effect in the Southeast and in our West regions that are new regions, newer regions for us where we can continue to show the opposite. So I think it's really a region-by-region Shack-by-Shack conversation.

If you look over the course of the trailing 12, you know we have - over the course the last couple of years you know we have had slight ups and downs in the comp base and we have added a heck a lot of sales. So I think that is really the point that we see, for our balanced approach to market share..

Got it. And then last question on delivery, have you at this point I'm been testing it for a little over a year, have you concluded that it is a good thing for you to do meaning that the economics have proven themselves out.

Now you are just kind of you are working to pick a partner to move forward with or is there some, is it still in question in terms of the mentality that the profitability of that part of the business may be the additional complexity is adding? Just wanted to dig where you are?.

Yes. Well we believe what is most important, we don't listen to our guests. Our guests are telling us more-and-more that they had times would appreciate us bringing their Shake Shack to them so that is over to the office. We want to meet that demand. We think that demand is only going to continue to increase in this next few years.

What we want to make sure we do is have a long-term great business model that balances that great guest experience. And we still have work to do there. Its why we haven’t chosen a single partner, the local partners yet.

We really are learning a lot in the last four quarters of testing with various partners, seeing who has got strengths in what region and why and we believe there is still some learning to go before we would lock down anything and when we do it needs to be compelling long-term opportunity for us..

Great. Thank you very much. I appreciate it..

Moving on to Sharon Zackfia with William Blair. Sharon, your line is open. If you are on mute please un-mute yourself..

Sorry, I was on mute. So, Randy, a follow-up on that. I think on the digital side, which when encompass delivery, in your comments it's sounded like perhaps there were some operational dynamics that were holding you back a little bit on the digital side.

Could you talk about what you guys can do with the kitchen, with labor, with the back of house and maybe even front of house to help expedite for those consumers do want to use digital to come pick up, but also those that would like to use delivery?.

Absolutely Sharon. I mean where you know you go back to the couple of four years, the only writing down on your paycheck was you [indiscernible], you talk to a human being, you waited and we get your boss when it was ready. Today that exists. Delivery people on bikes and cars with big bags exist.

People who are getting an alert on their phone, if they ordered on our app or on our kiosk. And sometimes yet people who may not used to getting phone, so we are using their name. And you kind of opened up this various channels of the way people can get to their Shake Shack.

And as much as well as some of the packaging that gets added certainly for the delivery piece. Now we just add online ordering which we are super excited about, I think that is going to be a great channel for us down the road. And I think all that is a long way of saying we have got to work through those challenges.

It's not in our challenges especially for some of the existing very high volume Shack and some of that makeup or topics, right. These are sort of busy and the pickup area didn't magically get any bigger.

So what we are doing, as you are looking some of the Shacks, looking our West Village Shack here the innovation kitchen some of the others recently really trying to expand a pickup area trying to make guest flow as comfortable as possible.

Trying to separate some of the out of Shack dining experience and delivery from the in Shack and make it as seamless as possible experience. But we are acknowledging while it is in the comments that it could take some time, it could takes some evolution.

There are channels that we haven't read yet that we are looking forward to thinking through, that will evolve the way in which you will move through and get you paycheck and we got to be flexible, we got to be willing to invest and you will see that in many of our comments and investments we want to make.

And we have got to learn, we got to learn how it works and all of a sudden you have four new channels. So our [indiscernible] is doing a great job, they have got a lot to do and it will be something we will be working on I think for a long time..

Are you at the point yet where you are doing any segmentation or anything to try to drive traffic from those folks who are using digital ordering?.

Yes, a little bit, more and more we are experimenting with various segmentation. We got a lot smarter on that. You know so much of our new data both from our big social media following that we have with our apps gives us opportunities to reach out to people in new ways that we haven’t been able to do before. And with some really cool thing.

These are small and not material to our business but they are indicative of Shake Shack.

You just look at a couple of weeks ago, we ran a quick thing Bumble the dating app, which was so fun, it was an opportunity to take a date Screen Shack and you know get a burger, buy a burger get a burger and a lot of people took us up on and it was a really cool fun thing that was so on brand for us.

So on brand with whom we believe our guest is and it's allowed us to connect in a way that felt just really personal and that is the way we are going to use our digital channels to go forward. But again we are just, just going to starting we had so much opportunity in the future on that..

Yes Sharon its Tara. I think what you are touching on the ability to do that is a big part of where you will continue to see us invest across the business.

And when we talk about investing in people and systems it's not just back in times the LPs, it’s things like building and get data insight capabilities and whether that be a part of our tech infrastructure or building that relatively new method for the company within the marketing organization.

So it’s certainly high on our priority list, we think it's super powerful. I mean a whole bunch of value and then today and going forward, but again its where you will see us continue to build that item over the coming years..

Thank you..

And we will take Chris O'Cull with Stifel..

Good afternoon guys. Randy I appreciate the importance in investing in menu innovation, but aspects of menu innovation are you expecting to improve with a new kitchen and the new culinary leadership. I mean should we expect more items better testing regional variation et cetera.

If you would comment on that?.

Yes, thanks for that and welcome to the call and thanks, thanks for taking interest in Shake Shack. I think it's all the above. Most notably it is time to market you know we literally have been doing menu innovation in the basement of Shack kitchens around New York City all these years.

It takes a time, takes effort and then you got to open restaurants. Now we finally have our own kitchen, we have a brand new chef who is not replacing. He is a new position, in addition to the great culinary interaction we have had on our team for years.

So at he comes with a fine dining background having cooked at Unit Square Cafe and then also having done serious volumes with Unit Square events our events company. So John's expertise we are really excited about. I think what we expect is number one, continuous commitment to improving our core menu.

How we do things better, how do we make them smarter, how we do things in the most effective way behind our line to make them great and impact throughput overtime. In addition to that John is going to be endlessly creative with the team and we are looking at new things like chicken bites that is a whole new category for us.

But I'm not sure what we will do with that yet, it’s way too early to say, but we are getting some great feedback from our guests. It opened up a whole new opportunity potentially for snacking in the afternoon or in addition for a shift from [indiscernible] they have gotten Hot Dog before and I think for frequency.

So all that I think Shake Shack, Shake Shack coming from where we come. We have an opportunity and a license to do a lot of things. Most of that will focus on our core. But I think we have got opportunity to have some fun and we have always done that, but just a little I think really fire power that to a new level..

That is helpful. And then just one last one when I think of the Shacks in the Southeast and Midwest, I would think they would have very large trade areas. I'm based international and I guess the trade area dry time and nationally be 20 to 30 minutes.

So I'm trying to understand how you view delivery in these types of markets where you could have such large drive time trade areas?.

Yes, we are seeing some real interesting data on that. There are some throughout the country that are sort of typical suburban that we are amazed at the delivery opportunity there. And it's not so much - we have got to be careful, also we want to have a tight radius on these things right.

We don't want it driven for an hour even if a delivery company would take that out. We want to make sure we really balance the sales with great experience, so we are going to keep those radiuses pretty tight to make sure that it's a tight timeframe and a really good product.

But I do think your start on in saying that as you go around the country or different situation from us sitting here in New York or the urban centers, there is opportunity to reach people who may not have reached before, either at their office or at their home and we think that is part of the long-term opportunity for delivery and digital down..

Okay, great. Thanks guys..

And we will take Andrew Charles with Cowen..

Hey guys its actually Brian Vietnam for Andrew and thanks for taking the question. Just on the traffic figures. So recognizing the comp base still, it's still small. The two year traffic is kind of down mid single-digit year-to-date.

As you guys have sort of gotten to know your customers more an experiment with new ways to engage with customers through digital channels.

Is there any measurable impacts from order, I guess order consolidation perhaps manifest and more entrees per transaction or something to that effect?.

Yes is something. There is no question when you have a growing percentage of digital orders that are generally a larger order. We are looking at how that is impacting things. But overall when we look at traffic, we look at comp, we remain consistent with our commentary here and our results have remained consistent.

Today as of this quarter, only 54 Shack is a comp base that is less right around half, few more to be added to the end of the year. So it’s just something that we are going to see very be variable in the near-term. When we have Shacks that continue to have long honeymoons when we open in these big huge exciting -.

We just opened in Seattle a couple weeks ago. It's crazy. The line is down the block, its super exciting. I guarantee you at this time next year know it won't be the same kind of thing as it is right now.

It will level off and just being a great business and that is something we got to go up and down with over time and if you look at all the data we gave, we have had our ups and had our downs and I think that will balance out all of which leading to really high that we are focused on high sales in general and higher profits.

So we are pretty confident about where it's headed..

Great, thanks guys..

And now we will take John Ivankoe with JP Morgan..

Hi, this is actually Andrew on for John. My question is about Project concrete. I'm just wondering is there any other sustained costs on G&A beyond the three to four million one-time in 2019. And then if you could just kind of talk about the benefits you guys expect from the work the ERP system going forward..

Yes, so we will give some level of detail on 2019 guidance when we guide to G&A respectively. But when you upgrade a system, which we are doing, it tends to cost you a bit more than annual basis going forward. So you know that that may be wrapped up in that. The bulk of the cost is in the one-time which we shared with you.

In terms of the benefit, you know there are multiple benefits across the system both from ability to scale more effectively, ability to scale more efficiently taking - lowering the need to add people and using technology instead and importantly taking admin out of our Shacks and that was one of the priorities that really takes out this whole project, which is as a pretty small companies still today you know we did a great job building this Company to where it is without investing significantly in infrastructure when it comes to back office systems.

And on occasion we could [indiscernible] on our Shack managers when it comes to some back office facilities particularly when it comes to some of the people, typically hiring and managing and so forth and also what we call opportunity to take process.

So we are looking to say that much of that admin [indiscernible] responsible so that our operators can really focus on what we want them to do, which is delivering great hospitality and a great guest experience in the Shack. So we are excited, but it's a big lift, it can impact everyone in the Company but everyone super excited about this.

And it's the right time for us to do it. We could probably have delayed a couple of years or a few years, but we want to do it now before we are too late because when you do these sorts of things they can be a distraction and they are expensive. And the bigger you are the more those inflate.

So we feel that this is a really great time for us to be doing it while we are in the sort of 100ish Shack and that will take us through this year through much of next year. But we are really excited about the quality of the infrastructure and [indiscernible] that would be less burden..

Great. Thank you..

Next is Jeffrey Bernstein, with Barclays..

Thanks. This is actually [Jeff Priest] (Ph) on for Jeff Bernstein When you guys are thinking about the menu innovation items that could be coming out of the innovation kitchen.

How do you think about the rollout timeline? And also are you looking for more LTO items or more menu items? And on your menu how much space do you think you actually have to add full time items? And I have one follow-up. Thanks..

Yes, it's a great question. I think the answer to the timing really depends. What we can do now is do a lot more testing for instance chicken bites are doing your New York City and Arizona well [indiscernible] two completely different markets. And sometimes we may not choose to have a view towards going things out super fast, we may think - regional.

So right now with the testing of veggie-Shack just a few markets around the country in places that we have gotten more feedback about the desire for a veggie burger. So I think that is really dependent on the item. As it pertains to the whole menu, we don't want to keep adding and adding and adding, you got to take things off from time-to-time.

We have been pretty focused on that for a decade. We have been very strict about just increasing the size of the menu. Really chicken Shack has been the main thing ever that has really been added to the menu as a new category. So if we think about other things, we will be cautious about that, we will make sure that we feel good about the throughput.

There is more things that we do to develop, just this year we actually took off peanut butter. Just for a number of operational, food safety reasons that was a tough decision. We have lot to move on peanut butter including me and my kids.

But the reality is with something that we just decided was not worth having on the menu after all of the thinking about it. And it opens up time and throughput opportunity you a little bit better on our other Shakes that may have a great option to sell more..

Great. And then Tara on the implied fourth quarter G&A that is a relatively wide range for just one quarter. Can you give us some of the puts and takes us to what would cause you end up at both the high and the low end of that range? Thanks..

Yes, some of it is people and as you know we are hiring across most aspects of the business and sometimes we hire to plan schedule, sometimes it takes longer to hire. We also have just so many growth initiatives down across the Company right now and they didn’t necessarily all end up fooling where they originally [indiscernible] Q4 into Q1.

We can't have a little bit of a step up in Q4 when it comes to things like given professional fees NOA, but I would say a lot of it is in the growth or in the growth initiative and one they actually take off and speed with which they scale..

So based off that commentary it seems as though you would think you are going to be towards the higher end of that range unless things start to get pushed later in the year into the next quarter?.

I mean, we gave the range because right now the ranges are best estimates. So when we [indiscernible] we ended up. But right now we have got a lot of moving pieces across the organization and there is a lot of activity and a lot of investment. And so hence the range, this is no. we are not a steady state.

We are building an investing for long-term growth and that is why there is a range in a line item like that..

Great. Thanks..

And we will move on to Nick Setyan with Wedbush Securities..

Hi, this is actually [Marshall] (Ph) on for Nick. I had a question on delivery similar to those asked already. But would you be able to share where you are today in terms of number of units as well as your plans on rolling out two additional units..

Yes, I think delivery - the coverage of delivery across the system..

Yes..

I mean it is [indiscernible] we have got on at any point in time but generally speaking we have got the vast majority of our unit covered by delivery..

Okay, great. Thank you..

And next we will have Karen Holthouse with Goldman Sachs. Please go ahead..

Hi, this is actually [Jared] (Ph) on for Karen today. I wanted to just ask a question I guess sort of laid to comp and traffic. You know we have seen a lot of the QSRs that have already reported continue to talk about the sort of value or as an industry in some pretty tough competition.

I know you guys might be somewhat about higher tier than the McDonald's of the world, but are you seeing any pressure from those outside competition..

You know we have always believe that our competition is a little bit different than that. That is not to say that we don't of course compete with anyone selling food anywhere.

But I think generally we focus on premium experience that Shake Shack has always got, the ingredients that we use, there is just as a great report out that gave us an A, versus some other brands compared to - and how that we use no hormones or antibiotics in all of our proteins. We make investments that way.

It has never been our approach to compete by price. We are know we are a little more expensive, we know we are worth it and we know our product has a really great degree of premium. And we are taking - as I talked about earlier, we are a little bit more patient on how much price we do take when we charge for those things.

If we want to make sure we remain in great value in the midst of all that..

Great thanks. If I could just follow-up on one kind of switching gears. Labor obviously is a topic of concern as well across the industry. Can you guys talk about how you are thinking about that into 2019. Thanks..

Yes, we think it's going to continue to go up. You know we have seen kind of roughly mid single digit increases in wages around our system, we expect a similar amount again next year.

You have got many places where minimum wages are going up significantly and in places where it is or is not you still end up paying a certain premium amount to get the kind of team members that we really like to have at Shake Shacks.

It's a competitive environment, there is a lot of on demand jobs that have begun to compete with traditional restaurant jobs and workers and it's major challenge for our team. Without a doubt it's one of our greatest challenges probably always will be and yet something we want to focus on something we love to invest in.

And the kind of strategy that we know we have got to win on. So we are expecting higher costs and a lot of challenges especially as we ramp up growth, but we are going to go and get that done and bring on some great people to our team..

Thanks. I appreciate the color..

And there are no further questions. I woo like to turn the call back over to Randy Garutti..

Just want to say thanks everyone for being on the call with us tonight and we will look forward to welcome you to Shake Shacks soon. Have a great night..