Shake Shack Inc. — Q1 2019 Form 10-Q Summary
Reporting period: Thirteen weeks ended March 27, 2019; comparable period ended March 28, 2018. Shake Shack operated and licensed 218 restaurants at quarter-end: 129 domestic company-operated, 15 domestic licensed, and 74 international licensed.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $132.6 million | $99.1 million | +33.8% |
| Shack sales | $128.6 million | $96.1 million | +33.8% |
| Same-Shack sales | +3.6% | Not stated here | Traffic +1.6%; price and mix +2.0% |
| Operating income | $5.2 million | $6.5 million | -20.8% |
| Operating margin | 3.9% | 6.6% | -2.7 percentage points |
| Net income | $3.6 million | $5.0 million | Lower year over year |
| Net income attributable to Shake Shack Inc. | $2.5 million | $3.5 million | Lower year over year |
| Diluted EPS | $0.08 | $0.13 | Lower year over year |
| Operating cash flow | $17.2 million | $19.1 million | -$1.9 million |
Shack-level operating profit, a company-defined non-GAAP measure, rose 12.5% to $27.0 million, but its margin fell to 21.0% from 25.0%. Adjusted EBITDA increased 10.4% to $17.8 million; adjusted EBITDA margin declined to 13.5% from 16.3%. These measures exclude certain costs and should be considered alongside GAAP results.
Cash and cash equivalents were $31.9 million and marketable securities were $47.7 million at March 27, 2019. Operating cash flow was $17.2 million; capital expenditures were $25.0 million. Cash increased $7.1 million to $31.9 million, with securities sales contributing to liquidity. No revolving-credit borrowings were outstanding; $19.3 million was available after letters of credit. The $50 million revolving facility was scheduled to mature in February 2020. The company reported covenant compliance.
There was no material funded debt outstanding under the revolver, but the balance sheet included $291.6 million of operating lease liabilities and $4.5 million of finance lease liabilities following adoption of the new lease standard. Total assets were $847.0 million and total liabilities were $561.2 million.
Material changes and drivers
- Revenue growth reflected 34 new domestic company-operated Shacks opened over the year and higher licensing revenue, alongside 3.6% same-Shack sales growth. Shack system-wide sales increased 33.5% to $195.2 million.
- During the quarter, the company opened five domestic company-operated Shacks, four international licensed Shacks, and three domestic licensed airport Shacks—12 system-wide openings in total.
- Costs increased faster than Shack sales in several categories: food and paper costs rose to 29.5% of Shack sales from 28.1%; labor to 28.9% from 27.8%; other operating costs to 12.1% from 11.2%; and occupancy to 8.5% from 8.0%.
- Management attributed cost pressure to Chick’n Bites promotion costs, higher beef and packaging costs, wage and regulatory pressures including New York City Fair Workweek requirements, delivery commissions, recently opened restaurants, and lease-accounting effects.
- Shake Shack adopted ASC 842 lease accounting on December 27, 2018. Adoption added substantial lease assets and liabilities and affected occupancy expense, depreciation, and taxes; prior-year amounts were not restated.
- The effective tax rate increased to 36.2% from 19.4%, mainly reflecting the lease-standard adoption and increased ownership of SSE Holdings. Shake Shack owned 79.9% of SSE Holdings at quarter-end.
Outlook, risks, and unusual items
- Fiscal 2019 guidance was raised for total revenue to $576–$582 million from $570–$576 million and for same-Shack sales growth to 1%–2% from 0%–1%. Other stated targets were unchanged: 36–40 domestic company-operated openings; 16–18 net licensed openings; average annual sales volume of $4.0–$4.1 million; Shack-level operating profit margin of 23%–24%; and adjusted pro forma effective tax rate of 26.5%–27.5%.
- Other outlook ranges included licensing revenue of $15–$16 million, G&A of $66.4–$68.2 million, depreciation of $41–$42 million, and pre-opening costs of $13–$14 million. Management noted the margin outlook includes an estimated 50-basis-point impact from lease-accounting adoption.
- Quarter results included $0.5 million of Project Concrete and other one-time costs. Adjusted pro forma net income was $4.9 million, or $0.13 per fully exchanged diluted share, versus $5.7 million, or $0.15, a 12.5% decline.
- Outstanding Tax Receivable Agreement obligations were $204.6 million, including $5.1 million current. Payments are contingent on realizing the related tax benefits and generating sufficient taxable income; $0.7 million was paid during the quarter.
- The company disclosed $65.1 million of additional operating-lease commitments for leases without possession dates, expected to commence in 2019. A California labor-code matter was agreed to settle for $1.2 million, accrued at quarter-end. Other ordinary-course legal matters were not considered material.
- Management stated that cash from operations, cash on hand, and revolver availability should fund operating and lease obligations, capital spending, and working-capital needs for at least the next 12 months. Forward-looking results remain subject to disclosed business risks; the filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether same-Shack sales and the revised fiscal-year revenue outlook are achieved, and how much growth comes from new units versus comparable locations.
- Whether food, labor, delivery, occupancy, and digital-channel costs stabilize; GAAP operating margin declined despite higher revenue and Shack-level profit dollars.
- The cash requirements and timing of planned openings, capital expenditures, lease commitments, and Tax Receivable Agreement payments.
- The February 2020 revolving-credit-facility maturity, renewal or refinancing plans, and continued compliance with its covenants.
- The ongoing effects of ASC 842 on reported margins, earnings, cash flows, and comparability with prior periods.