Shake Shack Inc. — FY2023 Form 10-K
Business context and reporting period. Shake Shack operates and licenses premium fast-casual restaurants. This annual report covers the 52-week fiscal year ended December 27, 2023; fiscal Q4 was the 13 weeks ended that date. The company ended the year with 518 Shacks: 295 domestic company-operated, 39 domestic licensed and 184 international licensed. The filing provides selected Q4 sales and comparable-sales data, but does not provide a clear standalone Q4 income statement in the supplied text.
Financial performance and liquidity
- Revenue: FY2023 total revenue was $1.088 billion, up 20.8% from restated FY2022 revenue of $900.5 million. Shack sales rose 20.4% to $1.047 billion; licensing revenue rose 30.4% to $40.7 million.
- Profit: Operating income was $5.9 million, versus an operating loss of $26.9 million in FY2022. Consolidated net income was $21.0 million, compared with a $23.1 million net loss; net income attributable to Shake Shack Inc. was $20.3 million, or $0.48 diluted EPS, versus a $21.2 million attributable loss and $0.54 diluted loss per share.
- Margins: Shack-level operating profit was $208.2 million, with a 19.9% margin, up from $152.2 million and 17.5% in FY2022. This non-GAAP measure excludes corporate, pre-opening and other costs. Adjusted EBITDA was $131.8 million, or 12.1% of revenue, versus $72.7 million and 8.1% a year earlier.
- Cost trends: Food and paper costs declined to 29.1% of Shack sales from 30.1%; labor declined to 29.1% from 29.6%; other operating costs declined to 14.3% from 14.9%; and occupancy declined to 7.6% from 7.9%. Depreciation and amortization increased to $91.2 million from $72.8 million.
- Cash flow and investment: Operating cash flow was $132.1 million, up from $76.7 million. Capital expenditures were $146.2 million. Cash and equivalents were $224.7 million and marketable securities were $68.6 million at year-end.
- Debt and liquidity: Long-term debt, principally the 0% convertible notes due 2028, had a carrying value of $245.6 million against $250 million principal. No revolver borrowings were outstanding; the facility allows up to $50 million, subject to covenants, and matures in 2026. The company reported covenant compliance. Operating lease liabilities totaled approximately $513.5 million, and the Tax Receivable Agreement liability was $235.6 million.
Material changes versus the prior comparable period
- Growth reflected 41 new domestic company-operated openings, the prior-year opening class operating for a full year, menu pricing and higher licensing sales. System-wide sales rose 23.5% to $1.702 billion; these include licensed Shack sales, which are not recognized as company revenue.
- FY2023 same-Shack sales increased 4.4%, driven entirely by price mix. In Q4, same-Shack sales rose 2.8%, comprising 1.4% price mix and 1.4% traffic growth; suburban Shacks grew 5.1% and urban Shacks 0.4%.
- Average weekly sales were $75,000 for FY2023 versus $73,000; domestic company-operated average unit volume was $3.9 million versus $3.8 million. Digital sales rose 6.9% for the year and represented 35.0% of Q4 Shack sales.
- Average new-Shack investment was approximately $3.0 million, or $2.6 million net of tenant allowances, up about 8.3%. Management attributed the increase to project complexity, a higher drive-thru mix, inflation and permitting and construction delays.
Outlook, risks and unusual items
- Management targeted approximately 40 new domestic company-operated Shacks in 2024 and anticipated openings in Kuala Lumpur, Tel Aviv and Toronto. It said it was encouraged by its multi-format strategy and aims to improve profitability through channel mix, labor efficiency, pricing and supply-chain initiatives. These are plans, not guarantees.
- Management said fiscal 2023 marked a return to positive pretax earnings and forecast continued progress, supporting its conclusion that deferred tax assets were generally realizable. Deferred tax asset and Tax Receivable Agreement estimates depend on future taxable income and are judgment-sensitive.
- Restatement: The company corrected material prior-period tax-accounting errors related primarily to state tax depreciation and deferred taxes on its SSE Holdings investment. The errors overstated tax expense and understated deferred tax assets; FY2022 and FY2021 statements, and specified 2022–2023 interim balance sheets and equity statements, were restated. The company said the errors did not affect prior-year revenue or pretax results. Prior annual and interim financial statements identified in the filing should no longer be relied upon.
- Controls: Management concluded internal control over financial reporting and disclosure controls were ineffective at year-end. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the restated financial statements. The material weakness concerns review controls over state deferred-tax calculations; remediation was underway but not yet established as effective.
- Other items: FY2023 results included $3.4 million of professional fees for a non-recurring matter, $0.6 million of legal-settlement expense in adjusted EBITDA reconciliation, and CEO transition costs. CEO Randy Garutti announced plans to retire in 2024; the company intended to retain him as an advisor through year-end.
- Key risks include inflation and labor costs, dependence on concentrated suppliers and one principal U.S. distributor, construction costs and delays, lease obligations, execution and returns on drive-thru expansion, international macroeconomic and geopolitical pressures, cyber threats, and competition. The company reported elevated cyberattack attempts but no identified cybersecurity incident that materially affected or was reasonably likely to materially affect it. Ordinary-course legal matters were not expected to be material; a wage-classification matter was settled with a maximum payment of $0.9 million, with accrual reduced by $0.385 million.
Important facts for investors to verify
- Review Note 3 and the restated comparative figures, including the tax and equity adjustments, and assess the remediation progress for the material weakness.
- Track same-Shack traffic versus price mix, Shack-level margins, labor and commodity costs, and the returns on new openings and drive-thru investments.
- Assess the cash demands and timing of the $235.6 million Tax Receivable Agreement liability, long-term lease commitments and planned capital expenditures.
- Check the 2024 opening pace, international licensee performance and the effect of geopolitical and macroeconomic conditions, particularly in China and the Middle East.
- Consider potential dilution and liquidity implications of the $250 million convertible notes due 2028, including their conversion terms.