Shake Shack Inc. — FY2020 Form 10-K
Business context and reporting period. Shake Shack operates and licenses premium fast-casual restaurants. This annual report covers the 53-week fiscal year ended December 30, 2020; the prior fiscal year had 52 weeks. The extra week contributed $11.1 million of revenue, including $10.7 million of Shack sales. COVID-19 materially affected operations, particularly dine-in traffic and urban locations.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $522.9 million | $594.5 million |
| Operating income (loss) | $(43.9) million | $25.7 million |
| Net income (loss) | $(45.5) million | $24.1 million |
| Net income (loss) attributable to Shake Shack Inc. | $(42.2) million | $19.8 million |
| Diluted EPS | $(1.14) | $0.61 |
| Net cash from operating activities | $37.4 million | $89.9 million |
| Net cash used in investing activities | $(69.4) million | $(80.7) million |
| Net cash from financing activities | $141.8 million | $3.2 million |
Revenue fell 12.1% as reported, or 13.9% excluding the extra week. Shack sales declined 11.9% as reported and 13.7% excluding the extra week; licensing revenue fell 16.9%. Same-Shack sales declined 27.8%, reflecting a 36.9% traffic decrease, partly offset by 9.1% favorable price and mix.
Shack-level operating profit, a non-GAAP measure, fell 44.2% to $71.4 million; margin contracted to 14.1% from 22.3%. Adjusted EBITDA, also non-GAAP, was $22.7 million, or 4.3% of revenue, versus $81.8 million and 13.8%. GAAP operating margin was (8.4)%, compared with 4.3% in FY2019.
Cost pressure and lower sales leverage raised food and paper costs to 30.3% of Shack sales from 29.3%, labor costs to 31.0% from 28.0%, and occupancy costs to 10.2% from 8.4%. Depreciation rose 20.8% to $48.8 million. FY2020 included a $7.6 million non-cash impairment charge related to two Shacks and home-office expansion space.
Fourth-quarter performance and material changes
FY2020 fourth-quarter revenue was $157.5 million, compared with $151.4 million a year earlier; the extra week benefited reported results. The quarter recorded an operating loss of $12.2 million and net loss of $20.3 million, versus operating income of $0.5 million and net loss of $2.1 million in Q4 FY2019. Fourth-quarter same-Shack sales were down 17.4% year over year, with urban Shacks down 31% and suburban Shacks approximately flat.
Management reported sequential sales recovery through the year. Digital sales were 59% of total Shack sales in Q4. Company-owned app and web channels added more than 2 million first-time purchasers between mid-March 2020 and the end of fiscal January 2021. For context after year-end, same-Shack sales were down 5% in fiscal January 2021 and down 16% in the first three weeks of fiscal February.
Cash and cash equivalents were $146.9 million and short-term marketable securities were $36.9 million at year-end, versus cash of $37.1 million and securities of $36.5 million a year earlier. Operating cash flow declined by $52.5 million. Financing cash flow included approximately $145.0 million of net proceeds from Class A share offerings; the offerings increased the share count.
No revolving-credit borrowings were outstanding at year-end. The company had drawn and repaid the full $50 million revolver during 2020 and stated it was covenant-compliant. Operating lease liabilities totaled approximately $379.4 million on the balance sheet; liabilities under the Tax Receivable Agreement were $233.0 million. The company said cash, securities and other available resources were sufficient for at least the next 12 months and the foreseeable future.
Outlook, risks and unusual items
- Management targeted 35–40 new domestic company-operated Shacks and 15–20 new licensed Shacks in FY2021, and planned 45–50 new domestic company-operated Shacks in FY2022. These are targets, not guarantees.
- Management expected continued recovery to vary by market: urban locations, particularly Manhattan, were lagging suburban locations, and recovery depended on reopening conditions, office activity and tourism.
- Planned initiatives included expanding company-channel delivery, with a largely nationwide rollout expected by the end of Q2 FY2021, and testing drive-thru locations, targeting five to eight by the end of 2022.
- Principal risks include continued COVID-19 disruption, weak urban and travel-related traffic, labor and commodity inflation, dependence on concentrated suppliers and a principal domestic distributor, execution and profitability of new locations, and competition in digital ordering and delivery.
- In Q4 the landlord notified the company of early termination of its Penn Station lease; the closure took effect in fiscal February 2021. The company recorded impairment charges during FY2020. A previously agreed California labor settlement had a $1.18 million accrual at year-end; other ordinary-course legal matters were not expected to be material.
- The company does not expect to pay cash dividends. Its Tax Receivable Agreement requires payment to certain holders of 85% of specified realized or deemed tax benefits; actual payment timing depends on future taxable income and other factors.
Important facts for investors to verify
- Whether same-Shack sales, guest traffic and urban-market recovery continue to improve after the reported January and February 2021 trends.
- Whether FY2021–FY2022 opening targets are achieved and new units reach expected sales and profitability.
- How digital-channel growth, delivery commissions, labor costs and food inflation affect margins and cash generation.
- Liquidity and funding needs relative to substantial lease commitments, the $233.0 million Tax Receivable Agreement liability, and the revolver’s covenant requirements.
- Share dilution from the 2020 equity offerings and any future LLC-interest exchanges; FY2020 cash growth was substantially supported by equity financing.
The auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The filing identifies deferred-tax-asset measurement, Tax Receivable Agreement liability measurement and lease accounting/impairment as critical audit matters.