Shake Shack Inc. — Q1 2023 Form 10-Q
Business context and reporting period. The unaudited quarter covered 13 weeks ended March 29, 2023, compared with 13 weeks ended March 30, 2022. Shake Shack operated and licensed 449 Shacks system-wide: 260 domestic company-operated, 35 domestic licensed and 154 international licensed. It opened six domestic company-operated and seven licensed Shacks during the quarter; there were no permanent closures.
Financial performance and key metrics
| Metric | Q1 2023 | Prior-year quarter |
|---|---|---|
| Total revenue | $253.3 million | $203.4 million |
| Shack sales | $244.3 million | $196.8 million |
| Licensing revenue | $9.0 million | $6.6 million |
| Operating loss | $3.2 million | $14.9 million |
| Net loss | $1.6 million | $11.3 million |
| Net loss attributable to Shake Shack Inc. | $1.5 million; $0.04 per share | $10.2 million; $0.26 per share |
| Cash from operating activities | $19.8 million | $8.0 million |
| Capital expenditures | $34.3 million | $28.0 million |
Total revenue increased 24.5% year over year. Operating margin improved to negative 1.3% of revenue from negative 7.3%. Shack-level operating profit, a company-defined non-GAAP measure, was $44.7 million, with an 18.3% margin on Shack sales, versus $30.0 million and 15.2%. Adjusted EBITDA, also non-GAAP, was $27.6 million with a 10.9% margin, compared with $10.4 million and 5.1%. These non-GAAP measures exclude certain costs and should be considered alongside GAAP results.
Shack-level expenses as a percentage of Shack sales improved year over year: food and paper costs were 29.4% versus 30.4%; labor was 30.4% versus 30.7%; other operating costs were 14.3% versus 15.3%; and occupancy was 7.6% versus 8.3%. Depreciation and amortization rose to $21.3 million from $16.9 million, largely reflecting new Shacks and technology investments. Income tax expense was $0.9 million despite a pre-tax loss; the reported effective tax rate was negative 114.8%.
Liquidity, debt and cash flow
Cash and cash equivalents were $293.4 million at March 29, 2023, up from $230.5 million at year-end. Current assets were $330.1 million and current liabilities $143.1 million. Operating cash flow was $19.8 million. Investing activities provided $46.5 million, primarily because of $81.5 million in marketable securities sales, partly offset by capital spending. Financing activities used $3.4 million.
Long-term debt, net of issuance costs, was $244.9 million, representing $250.0 million principal of 0% convertible senior notes due 2028. No borrowings were outstanding under the $50 million revolving credit facility; the company was in covenant compliance. The facility permits a conditional increase of up to a further $100 million. Operating lease liabilities totaled $486.1 million on the balance sheet, and finance lease liabilities were approximately $6.3 million. The Tax Receivable Agreement liability was $235.4 million.
Management said cash on hand and operating cash flow should be sufficient for operating and finance leases, capital expenditures, Tax Receivable Agreement obligations and working capital for at least the next 12 months and the foreseeable future.
Material changes and management commentary
- Same-Shack sales increased 10.3%, driven by 5.5% price/mix and 4.8% guest traffic growth. Urban Shack comparable sales rose 11.8% and suburban sales 9.0%.
- Average weekly sales were $73,000 versus $68,000 a year earlier, but declined 3.9% from the preceding quarter, primarily due to lower in-Shack traffic. System-wide sales grew 27.5% year over year to $394.7 million.
- Digital sales increased 6.2% to $89.5 million and represented 36.7% of Shack sales.
- Shack sales growth reflected new company-operated locations and menu price increases. Licensing revenue rose 36.7%, supported by net new licensed Shacks and stronger sales at existing licensed locations.
- Other income was $2.8 million versus expense of $0.3 million a year ago, primarily reflecting higher dividend income associated with increased interest rates.
- Management cited higher wages and commodity costs, particularly fries, custard and fryer oil, as cost pressures; sales leverage and pricing helped offset them. The filing provides no specific full-year financial guidance.
Risks, contingencies and unusual items
- Risks highlighted include inflation and commodity costs, labor costs or shortages, supply interruptions, timely development and opening of new Shacks, maintaining existing-Shack sales, digital-channel execution and expansion into drive-thru and other formats, COVID-19 impacts, and broader restaurant-industry risks. The company reported no material changes to its prior annual-report risk factors.
- A Fair Labor Standards Act claim concerning exempt-manager classification was settled, with a $0.9 million accrual recorded in the quarter. Adjusted EBITDA also included $1.0 million of legal settlements and $0.6 million of professional fees for a non-recurring matter.
- The $235.4 million Tax Receivable Agreement obligation is contingent on realizing tax benefits and sufficient future taxable income; no payments were made during the quarter.
- The company revised its definitions of adjusted EBITDA and adjusted pro forma net income to exclude executive transition costs, and revised the prior-period presentation to conform. Prior-period marketing expenses were also reclassified without affecting net loss.
Important facts for investors to verify
- Whether comparable-sales and traffic growth continue, and how much growth comes from pricing versus guest demand.
- Whether new-Shack openings can sustain returns while construction, labor, commodity and occupancy costs remain elevated.
- How operating cash flow compares with capital spending and growing lease commitments; the filing reports $145.0 million of additional operating lease commitments for leases not yet commenced.
- The timing and cash impact of Tax Receivable Agreement payments, which depend on future taxable income and realized tax benefits.
- Whether non-GAAP improvements reconcile to durable GAAP profitability, given the quarter’s legal items, tax expense and other-income contribution.