Shake Shack Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 28, 2022 (52 weeks); comparisons are with fiscal 2021, ended December 29, 2021. The filing also reports fourth-quarter operating trends. Shake Shack operates and licenses premium fast-casual restaurants; at year-end it had 436 Shacks: 254 domestic company-operated and 182 licensed.
Key financial and operating metrics
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $900.5 million | $739.9 million |
| Shack sales | $869.3 million | $715.0 million |
| Licensing revenue | $31.2 million | $24.9 million |
| Loss from operations | $(26.9) million | $(15.9) million |
| Net loss | $(26.0) million | $(10.1) million |
| Net loss attributable to Shake Shack Inc. | $(24.1) million; $(0.61) per diluted share | $(8.7) million; $(0.22) per diluted share |
| Cash from operating activities | $76.7 million | $58.4 million |
| Cash used in investing activities | $(143.4) million | $(144.9) million |
| Capital expenditures | $142.6 million | $101.5 million |
| Adjusted EBITDA (non-GAAP) | $70.5 million; 7.8% margin | $56.0 million; 7.6% margin |
Shack-level operating profit, a non-GAAP measure, was $151.0 million, with a 17.4% margin, versus $119.2 million and 16.7% in FY2021. These measures exclude corporate and other costs and are not substitutes for GAAP results.
At year-end, cash and cash equivalents were $230.5 million and marketable securities were $80.7 million. The company had $250.0 million principal amount of 0% convertible notes due 2028 (carrying value $244.6 million) and no revolver borrowings; the revolving facility allows up to $50 million, subject to terms. Operating lease liabilities were approximately $469.5 million. The recognized Tax Receivable Agreement liability was $234.9 million, contingent on future taxable income and other conditions.
Changes versus the prior comparable period
- Total revenue rose 21.7%; Shack sales rose 21.6%, reflecting higher traffic, menu pricing and 36 net new domestic company-operated Shacks. Licensing revenue increased 25.3%, primarily from new licensed locations and higher sales at existing locations.
- Same-Shack sales increased 7.8% for the year, driven by 4.9% traffic growth and 2.9% price/mix. In Q4, same-Shack sales rose 5.1%, with price/mix up 6% and traffic down 0.9%; urban sales grew 8.1% and suburban sales 2.5%.
- Despite revenue growth, the GAAP operating loss and net loss widened. General and administrative expense rose 38.1% to $118.8 million, including growth-related team costs and technology and marketing investments, plus a $6.7 million legal accrual. Other operating costs rose to 15.1% of Shack sales from 14.4%, including higher utilities, cleaning and maintenance costs.
- Food and paper costs declined to 30.1% of Shack sales from 30.5%, and labor costs declined to 29.6% from 30.1%, reflecting pricing and sales leverage partly offset by inflation and wage increases. Occupancy costs also fell as a share of sales, to 7.9% from 8.3%.
- Digital sales declined 9.4% for the year as guests returned to in-Shack dining; digital channels represented 36.2% of Q4 Shack sales. Digital sales are orders through company app, website and third-party delivery platforms.
- Cash from operations improved, but capital spending remained elevated. Cash fell by $71.9 million during FY2022, partly reflecting investment in new Shacks and equipment; FY2021 cash flow included proceeds from the convertible note issuance.
Outlook, management commentary and risks
- Management targeted approximately 40 new domestic company-operated Shacks in 2023 and at least 10–15 additional drive-thru openings; there were 11 drive-thrus at FY2022 year-end. It also planned full kiosk retrofits across domestic company-operated Shacks by the end of 2023.
- Management cited a long-term potential domestic company-operated footprint of at least 450 Shacks, but gave no timeframe. It expects further 2023 menu price increases beyond the usual pattern if inflation warrants them; no quantified revenue or earnings guidance was provided.
- Management said profitability had not fully recovered to pre-pandemic levels and emphasized restoring Shack margins while managing costs. FY2022 construction and openings faced permitting delays, equipment availability issues, supply-chain disruption and inflation. Average new-Shack investment was about $2.7 million, or $2.4 million net of landlord allowances.
- Key risks include labor availability and wage inflation; food, energy and construction costs; supply concentration (including one supplier providing about 42% of beef patties and a single broadline distributor handling much U.S. food distribution); competition and price sensitivity; construction and permitting delays; COVID-related and international-market volatility; and digital, cybersecurity and third-party delivery execution risks.
- Unusual items included a $1.3 million cumulative gift-card breakage adjustment recorded as Shack sales; a $6.7 million accrual for legal settlements, including predictive-scheduling and California labor matters; and a $0.1 million non-cash impairment charge for one Shack. The company reported ordinary-course legal proceedings and said it did not expect their ultimate liability to be material to financial condition, results or cash flows.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded internal controls were effective. Audit critical matters included deferred-tax-asset realizability, the Tax Receivable Agreement liability and lease accounting.
Most important facts for investors to verify
- Whether traffic and same-Shack sales hold up as pricing increases, particularly after Q4 traffic declined 0.9%.
- Whether margin recovery continues after the FY2022 GAAP operating loss and the higher G&A, facilities and maintenance costs.
- Actual opening pace, construction cost and returns for new company-operated and drive-thru Shacks, given delays and capital needs.
- Liquidity and capital allocation: cash generation versus capital expenditures, lease commitments, convertible-note obligations and the $234.9 million recognized TRA liability.
- Progress in reducing exposure to concentrated suppliers and the broadline distributor, and performance of international licensed markets amid volatile conditions.
- Subsequent developments in the legal matters and the assumptions supporting deferred tax assets and future TRA payments.