Shake Shack Inc. — Q3 2023 Form 10-Q
Business context and reporting period. The quarter comprised 13 weeks ended September 27, 2023; year-to-date (“YTD”) results cover 39 weeks. Shake Shack operated or licensed 495 Shacks system-wide: 280 domestic company-operated, 39 domestic licensed and 176 international licensed. Q3 openings included 10 domestic company-operated and 15 licensed Shacks.
Financial performance
| Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Total revenue | $276.2 million | $227.8 million | $801.3 million | $662.0 million |
| Operating income (loss) | $5.7 million | $(4.8) million | $7.2 million | $(20.6) million |
| Net income (loss) | $8.1 million | $(2.3) million | $13.7 million | $(14.9) million |
| Net income (loss) attributable to Shake Shack Inc. | $7.6 million | $(2.0) million | $13.0 million | $(13.4) million |
| Diluted EPS | $0.19 | $(0.05) | $0.31 | $(0.34) |
- Q3 revenue increased 21.2% year over year. Shack sales rose 20.7% to $265.0 million; licensing revenue rose 35.1% to $11.2 million.
- Q3 operating margin was 2.0%, versus negative 2.1% a year earlier; net margin was 2.9%, versus negative 1.0%. YTD operating margin was 0.9%, versus negative 3.1%.
- Q3 Shack-level operating profit, a company-defined non-GAAP measure, was $54.0 million, with a 20.4% margin, up from $36.1 million and 16.4%. Adjusted EBITDA was $35.8 million (13.0% margin), versus $19.8 million (8.7%). These measures exclude costs and are not substitutes for GAAP results.
- Operating cash flow was $90.6 million YTD, versus $54.3 million. Capital expenditures were $113.0 million, versus $94.8 million; operating cash flow less capital expenditures was therefore approximately negative $22.4 million. Investing cash outflow also reflected net investment activity in securities.
- At September 27, cash and cash equivalents were $190.0 million and marketable securities were $95.0 million, totaling $285.0 million. Current assets were $323.2 million versus current liabilities of $152.2 million.
- Long-term debt carrying value was $245.4 million, representing $250.0 million of 0% convertible notes due 2028. No revolving-credit borrowings were outstanding; the facility allows $50.0 million of borrowing, with a potential increase subject to conditions. The company reported covenant compliance.
- Operating and finance lease liabilities totaled $522.4 million. The Tax Receivable Agreement liability was $235.6 million.
Changes versus comparable periods
- Same-Shack sales increased 2.3% in Q3, driven by 6.5% price/mix growth, partly offset by a 4.2% traffic decline. Sales growth was 3.7% at suburban Shacks and 1.0% at urban Shacks.
- Average weekly sales were $74,000, compared with $73,000 a year earlier, but decreased 3.9% from the prior quarter as traffic weakened. Management said same-Shack sales slowed versus the quarter ended June 28, 2023.
- System-wide sales increased 24.3% to $438.9 million year over year. Digital sales rose 5.4% to $83.2 million and represented 31.4% of Shack sales.
- Food and paper costs fell to 29.1% of Shack sales from 30.9%; labor fell to 28.8% from 29.4%. Management attributed improvements primarily to pricing, labor efficiencies and sales leverage, while citing higher beef and fry commodity costs and wage increases.
- Revenue and earnings improvement reflected new openings and higher prices, while traffic softened. Q3 other income increased to $3.4 million, primarily due to higher interest income amid increased rates.
Outlook, risks and notable items
- The filing provides no specific quantified forward guidance. Management said cash, cash equivalents and operating cash flow should be sufficient for operating and finance leases, capital expenditures, Tax Receivable Agreement obligations and working capital for at least the next 12 months and the foreseeable future.
- Key risks cited include opening new Shacks on time, supply interruptions or higher costs, labor availability and expense, inflation, maintaining existing-Shack sales, digital and new-channel execution, and restaurant-industry risks. The company reported no material change to the risk factors in its 2022 Form 10-K.
- YTD general and administrative expense included $2.3 million of professional fees for a non-recurring matter. Adjusted EBITDA also included a $1.0 million adjustment for legal settlements; the prior-year comparable adjustment was $6.8 million. The filing says ordinary-course legal matters were not material.
- The $235.6 million Tax Receivable Agreement obligation is contingent on realizing tax benefits, including generating sufficient future taxable income; no payments were made under the agreement during the reported YTD period.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. Chairman Daniel Meyer adopted a Rule 10b5-1 plan to sell 100,000 Class A shares, expiring April 30, 2024.
Important facts for investors to verify
- Whether same-Shack traffic and average weekly sales stabilize after the Q3 slowdown, and whether price increases can offset traffic and commodity pressures.
- New-Shack opening pace, unit economics and pre-opening costs; Q3 pre-opening costs rose to $5.0 million from $3.0 million.
- Cash generation relative to substantial development spending, lease commitments and potential Tax Receivable Agreement payments.
- The contribution of interest income and other non-operating items to reported earnings, alongside GAAP operating profitability.
- Convertible-note dilution terms, revolver availability and compliance with credit-facility covenants.