Shake Shack Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 25, 2019 (52 weeks). The filing also reports unaudited fourth-quarter results. Unless stated otherwise, amounts are U.S. dollars.
Business context
Shake Shack operates company-owned restaurants and licenses its brand. At year-end it had 275 Shacks: 163 domestic company-operated, 22 domestic licensed and 90 international licensed. Fiscal 2019 expansion included 39 new company-operated Shacks and 34 licensed openings.
Financial and operating results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $594.5 million; up 29.4% | $459.3 million |
| Company-operated Shack sales | $574.6 million; up 29.0% | $445.6 million |
| Licensing revenue | $19.9 million; up 45.0% | $13.7 million |
| Same-Shack sales | Up 1.3% | Up 1.0% |
| Operating income / margin | $25.7 million / 4.3% | $31.7 million / 6.9% |
| Net income | $24.1 million | $21.9 million |
| Net income attributable to Shake Shack Inc. | $19.8 million; diluted EPS $0.61 | $15.2 million; diluted EPS $0.52 |
| Shack-level operating profit / margin (non-GAAP) | $128.0 million / 22.3% | $112.9 million / 25.3% |
| Adjusted EBITDA / margin (non-GAAP) | $81.8 million / 13.8% | $73.9 million / 16.1% |
| Cash from operating activities | $89.9 million | $85.4 million |
| Purchases of property and equipment | $106.5 million | $87.5 million |
Revenue growth was led mainly by new restaurant openings; same-Shack sales contributed about $4.3 million to the increase. Comparable sales reflected 1.8% combined price and mix growth, partly offset by a 0.5% decline in guest traffic. Domestic company-operated average unit volume fell to $4.09 million from $4.39 million, primarily as newer, lower-volume locations entered the system.
Cost pressure reduced margins: food and paper costs rose to 29.3% of Shack sales from 28.3%, and labor costs to 28.0% from 27.4%. Other operating and occupancy costs also increased as a share of Shack sales. Management cited beef and dairy inflation, higher packaging and delivery-related costs, wage inflation, staffing at new Shacks and lease-accounting effects.
Fourth quarter: Revenue was $151.4 million versus $124.3 million a year earlier. Operating income was $0.5 million versus $2.8 million; net loss was $2.1 million versus $0.5 million. Diluted loss per share was $0.06 versus $0.03.
Liquidity, debt and commitments
- Year-end cash and cash equivalents were $37.1 million and marketable securities were $36.5 million. The company reported $50 million available under its revolving credit facility and no outstanding borrowings.
- Operating cash flow was $89.9 million; investing activities used $80.7 million and financing activities provided $3.2 million. Cash increased $12.3 million during the year.
- Property and equipment purchases were $106.5 million, reflecting substantial investment in restaurant growth. Management said cash, operating cash flow and revolver availability should cover expected needs for at least 12 months and the foreseeable future.
- Operating and finance lease liabilities totaled $340.4 million on the balance sheet. Contractual operating lease payments were $461.3 million undiscounted; additional operating lease commitments of $67.8 million related to leases not yet commenced.
- Liabilities under the Tax Receivable Agreement (TRA) totaled $234.4 million, including $7.8 million expected to be paid in fiscal 2020. The TRA generally requires payment to certain non-controlling holders of 85% of qualifying realized or deemed tax benefits.
- The $50 million revolver matures in August 2024, includes customary covenants and was in compliance at year-end. No cash dividends were expected.
Changes, outlook and notable items
- Management forecast fiscal 2020 revenue of $712–$720 million, including approximately $15 million from a 53rd week; licensing revenue of $21–$22 million; and a low-single-digit decrease in same-Shack sales, normalized for the extra week.
- Fiscal 2020 guidance included 40–42 domestic company-operated openings, 20–25 net licensed openings, domestic company-operated AUV of $3.7–$3.8 million and Shack-level operating profit margin of 22.0%–22.5%. Management expected operating profit to rise in dollars and margin to begin stabilizing.
- Management identified labor inflation and regulation as key margin challenges, and expected continued wage pressure. Other stated priorities included digital ordering and delivery, the Grubhub partnership, menu innovation and continued investment in Project Concrete systems upgrades.
- The company cited Hong Kong unrest and the early-2020 coronavirus outbreak as risks to restaurant traffic and operations. It also closed all Russian Shacks during 2019 and reported closures at some Hong Kong locations amid protests.
- Fiscal 2019 included $2.4 million of one-time costs, primarily associated with Project Concrete. A $1.2 million accrual remained for a California employment-related settlement. Ordinary-course legal matters were not expected to be material.
- The adoption of the new lease-accounting standard in late 2018 brought operating lease assets and liabilities onto the balance sheet and affected expense comparisons; prior-year figures were not recast. The company reported no impairment charges in 2017–2019. Auditors issued unqualified opinions on the financial statements and internal controls.
Key facts for investors to verify
- Whether FY2020 revenue and opening guidance was achieved, and how the 53rd week affects comparisons.
- Whether same-Shack sales, guest traffic and AUV trends improved or weakened as the store base expanded.
- Whether food, labor, occupancy, delivery and technology costs continued to compress margins.
- Cash generation and capital spending relative to restaurant expansion, lease payments and the TRA liability.
- The operating and financial effects of coronavirus-related disruption, Hong Kong conditions and international licensee performance.
- TRA payment assumptions and the extent to which future taxable income supports the recorded liability and deferred tax assets.