Shake Shack Inc. — Q2 2016 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 29, 2016; comparisons are to periods ended July 1, 2015. Dollar amounts below are in millions unless otherwise noted. Shake Shack operated or licensed 95 Shacks system-wide at quarter-end, including 51 domestic company-operated locations.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Total revenue | $66.5 | $48.5 | $120.6 | $86.3 |
| GAAP operating income (loss) | $8.9 | $6.2 | $13.6 | ($4.7) |
| Consolidated net income (loss) | $6.5 | $5.1 | $9.9 | ($6.1) |
| Net income (loss) attributable to Shake Shack Inc. | $3.3 | $1.1 | $4.8 | ($11.6) |
| Diluted EPS, Class A | $0.14 | $0.08 | $0.22 | ($0.96) |
- Q2 revenue rose 37.2%; company-operated Shack sales rose 38.3%. Same-Shack sales increased 4.5%, reflecting 1.2% higher guest traffic and 3.3% combined price and mix. First-half Shack sales rose 41.1%, with same-Shack sales up 6.9%.
- Q2 Shack-level operating profit, a non-GAAP measure, was $19.9 million, or 30.8% of Shack sales, versus $14.1 million and 30.3% a year earlier. Adjusted EBITDA was $15.6 million versus $11.2 million. These non-GAAP measures are company-defined and should be considered alongside GAAP results.
- Q2 operating margin was 13.4% of revenue. Food and paper costs improved to 28.1% of Shack sales from 29.4%, and labor costs to 23.7% from 24.0%; other operating costs increased to 9.3% from 8.0%.
- First-half GAAP results improved from a loss to income; prior-year results included $12.8 million of IPO-related compensation expense and $0.6 million of other IPO costs. First-half 2016 attributable earnings also reflect the larger share of SSE Holdings owned by Shake Shack Inc.
Cash, debt and liquidity
- Cash and cash equivalents were $68.4 million at June 29, 2016, down from $70.8 million at December 30, 2015. Current assets were $75.9 million and current liabilities $22.1 million.
- First-half operating cash flow was $24.4 million; capital expenditures were $26.5 million, leaving an approximate $2.1 million shortfall of operating cash flow relative to capital expenditures. Investing cash use was $26.6 million, and cash declined by $2.5 million.
- No borrowings were outstanding under the $50 million revolving facility; $19.9 million was available after letters of credit. The company repaid its $0.3 million promissory note. It reported compliance with credit covenants at quarter-end.
- Liabilities under the Tax Receivable Agreement totaled $238.5 million, including accrued interest; $2.2 million was classified as current. Payments depend on realizing the related tax benefits and are generally funded from tax savings, but may reduce cash otherwise available.
Outlook, commentary and material items
- Management raised fiscal 2016 revenue guidance to $253–$256 million from $245–$249 million and domestic company-operated Shack opening expectations to 18 from 16. Same-Shack sales growth remained 4%–5%; licensed Shack openings remained seven, net of one relocation.
- Updated labor outlook was 50 basis points of deleverage, improved from prior guidance of 75–100 basis points. Adjusted pro forma effective tax rate guidance remained 40%–41%.
- Management attributed Q2 margin support to a January menu price increase of approximately 1.5%, menu innovation and favorable mix, lower beef and dairy commodity costs, and fixed-cost leverage. It cited wage increases, new-market distribution costs, and higher repairs and maintenance as offsets.
- During the quarter, the company opened four domestic company-operated Shacks, one domestic licensed Shack and two international licensed Shacks. It cited 14 domestic company-operated openings since the comparable prior-year period.
- The company had been considered in default after failing to furnish required audited SSE Holdings financial statements under the credit facility. It obtained a waiver in May 2016; the facility was subsequently amended to remove the requirement, and no borrowings were outstanding at the time.
- A proposed $0.75 million settlement fund for wage-and-hour classification claims was being submitted for judicial approval. The company accrued $0.77 million for the matter and related expenses. Other ordinary-course legal matters were not considered material.
- Management said cash, operating cash flow and facility availability should be sufficient for operating needs, lease obligations and capital expenditures for at least 12 months. Results remain subject to execution and other risks; the filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether same-Shack sales, traffic and price/mix trends support the raised revenue outlook, and whether planned openings occur on schedule.
- Whether food-cost benefits persist and labor, repair, distribution and pre-opening costs affect Shack-level margins.
- The timing and cash impact of Tax Receivable Agreement payments, which are contingent on future tax-benefit realization.
- The status and final cost of the wage-and-hour settlement, and continued compliance with credit-facility covenants.
- How reported company-attributable earnings compare with consolidated earnings and non-GAAP adjusted pro forma results, given non-controlling interests and the changing ownership of SSE Holdings.