Shake Shack Inc. — FY2015 Form 10-K
Business context and period. This filing reports the 52-week fiscal year ended December 30, 2015; fiscal 2014 had 53 weeks. Shake Shack operates and licenses premium “fine casual” burger restaurants. At year-end it had 84 Shacks: 44 domestic company-operated, five domestic licensed and 35 international licensed. The unaudited fourth-quarter figures are included below; amounts are in millions except per-share data.
Financial performance
| Metric | FY2015 | FY2014 | Q4 2015 | Q4 2014 |
|---|---|---|---|---|
| Total revenue | $190.6 | $118.5 | $51.1 | $34.8 |
| Operating income (loss) | $6.8 | $3.1 | $3.7 | $(1.0) |
| Consolidated net income (loss) | $3.1 | $2.1 | $3.0 | $(1.4) |
| Net income (loss) attributable to Shake Shack Inc. | $(8.8) | $2.1 | $1.2 | $(1.4) |
| Class A diluted EPS | $(0.65) | $0.07 | $0.07 | $(0.05) |
- FY2015 revenue rose 60.8%; company-operated Shack sales rose 63.5% to $183.2 million, while licensing revenue increased 13.6% to $7.4 million. Q4 revenue was approximately 46.8% above Q4 2014.
- FY2015 same-Shack sales growth was 13.3%, versus 4.1% in 2014. Domestic company-operated average unit volume increased 7.9% to $5.0 million.
- GAAP operating margin was 3.5%, versus 2.7%. Shack-level operating profit, a non-GAAP measure, was $52.9 million, or 28.9% of Shack sales, versus $26.9 million, or 24.0%.
- Adjusted EBITDA, a non-GAAP measure, rose 117.7% to $41.1 million; its margin was 21.6%, versus 15.9%. Adjusted pro forma net income was $12.0 million, or $0.32 per fully exchanged diluted share; these measures exclude specified items and are not GAAP results.
- Cash from operations was $41.3 million; investing cash outflow was $34.5 million and financing cash inflow was $61.4 million. Year-end cash and cash equivalents were $70.8 million.
- Total debt was $0.3 million, consisting of a liquor-license note; no revolver borrowings were outstanding. The $20 million revolving facility had $19.9 million available. Current assets were $78.9 million and current liabilities $24.0 million.
Changes, unusual items and reporting considerations
- Growth reflected 13 new domestic company-operated Shacks and eight new international licensed Shacks. The 2014 comparison included an extra fiscal week, which contributed $2.8 million of prior-year Shack sales.
- Shake Shack Inc. completed its IPO in February 2015 and consolidated SSE Holdings while owning 54.6% at year-end. The $11.9 million of income attributable to non-controlling owners, combined with IPO-related compensation and other costs, meant consolidated net income of $3.1 million translated to a parent-company-attributable loss of $8.8 million.
- FY2015 G&A increased 108.0% to $37.8 million, including $10.1 million of incremental IPO-related expenses, $4.2 million of stock-based compensation and a $0.8 million legal-settlement accrual. The filing separately reports $12.8 million of non-recurring IPO compensation expense in its adjusted EBITDA reconciliation.
- The company recorded a $0.8 million liability for a proposed wage-and-hour settlement with former and current managers; court approval was pending when the filing was signed. Other ordinary-course legal matters were not considered material.
- In Q4 the company corrected certain immaterial prior-interim-period accounting errors involving non-controlling interests and tax/Tax Receivable Agreement calculations. It said the corrections did not affect the affected interim periods’ income statements or cash flows.
Outlook, risks and contingencies
- For FY2016, management expected revenue of $237–$242 million and same-Shack sales growth of 2.5%–3.0%. It planned at least 13 new domestic company-operated Shacks and seven licensed openings, including a domestic licensed Shack in Las Vegas.
- Management projected FY2016 new domestic Shacks to average at least $3.3 million in annual sales with Shack-level operating margins of at least 22%. Longer term, it cited target-volume Shack sales of $2.8–$3.2 million and margins of 18%–22%; it cautioned that expansion outside established urban markets could lower overall averages.
- Management expected 100–150 basis points of labor-cost deleverage as a share of Shack sales in FY2016 and an adjusted pro forma effective tax rate of 43%–44%. It identified rising wages as a key near-term challenge; a company-wide starting-wage increase took effect January 1, 2016.
- The Tax Receivable Agreement created $173.1 million of recorded obligations at year-end, representing 85% of specified tax benefits. Management believed cash, operating cash flow and revolver availability would fund obligations and planned investment for at least 12 months, but payments depend on tax-benefit realization and future taxable income.
- Contractual obligations totaled $425.6 million, including $176.1 million of operating lease commitments, $173.1 million under the Tax Receivable Agreement and $73.7 million of purchase obligations. These amounts are not equivalent in timing or certainty; the TRA estimate assumes sufficient future taxable income.
- Key risks include dependence on a small number of suppliers and one primary U.S. distributor; food, labor and construction cost inflation; execution, site availability and profitability of rapid expansion; potential sales cannibalization; food safety and reputational exposure; and foreign-exchange, political and supply-chain risks in licensed markets. The company also disclosed concentrated control by continuing equity owners and no expected cash dividends.
Investor verification priorities
- Review Q4 comparability against FY2014’s 53rd week and distinguish quarterly GAAP results from full-year and non-GAAP measures.
- Assess the drivers and sustainability of 13.3% same-Shack growth, including price increases, traffic and menu mix.
- Track FY2016 wage pressure, Chick’n Shack labor requirements, new-Shack sales and margins, and openings against guidance.
- Examine the assumptions, payment timing and liquidity implications of the $173.1 million Tax Receivable Agreement liability and deferred tax assets.
- Monitor supplier/distributor concentration, international licensing conditions, and settlement approval and payment for the wage-and-hour matter.