Shake Shack Inc. — Q2 2022 Form 10-Q
Reporting period: The 13 weeks ended June 29, 2022; year-to-date figures cover the 26 weeks ended June 29, 2022. Comparisons are with the corresponding 2021 periods. Dollar amounts below are in millions unless stated otherwise.
Business context
Shake Shack operated 395 Shacks system-wide at quarter-end: 230 domestic company-operated, 27 domestic licensed and 138 international licensed. In Q2, it opened five domestic company-operated and eight international licensed Shacks; it reported no permanent closures.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Year to date 2022 | Year to date 2021 |
|---|---|---|---|---|
| Total revenue | $230.8 | $187.5 | $434.1 | $342.7 |
| Operating income (loss) | $(0.8) | $3.3 | $(15.8) | $(6.7) |
| Net income (loss) | $(1.3) | $2.1 | $(12.6) | $2.6 |
| Net income (loss) attributable to Shake Shack Inc. | $(1.2) | $1.9 | $(11.4) | $3.3 |
| Diluted EPS | $(0.03) | $0.05 | $(0.29) | $0.06 |
| Operating cash flow | Not reported by quarter | Not reported by quarter | $35.2 | $37.0 |
Q2 revenue rose 23.1%. Shack sales increased 22.9% to $223.1 million; licensing revenue grew 28.5% to $7.7 million. Same-Shack sales increased 10.1%, comprising 7.8% traffic growth and 2.3% price mix. Urban same-Shack sales rose 19.4%, versus 2.6% for suburban locations. Average weekly sales were $76,000, compared with $72,000 a year earlier.
Q2 Shack-level operating profit, a company-defined non-GAAP measure, was $42.0 million, with an 18.8% margin versus 19.2%. Adjusted EBITDA was $22.1 million versus $20.6 million, but adjusted EBITDA margin declined to 9.6% from 11.0%. These measures exclude certain expenses; they are not substitutes for GAAP results.
Q2 expense pressures included labor costs of 29.5% of Shack sales versus 29.0%, and other operating expenses of 14.6% versus 13.4%. Food and paper costs improved to 29.6% from 30.3%; occupancy costs declined to 7.5% from 8.2%. General and administrative expense rose 42.8% to $29.1 million, including spending on a company retreat, marketing and technology initiatives.
Cash, debt and liquidity
- At June 29, cash and cash equivalents were $278.3 million and marketable securities were $79.6 million, versus $302.4 million and $80.0 million, respectively, at December 29, 2021.
- For the first half, operating cash flow was $35.2 million; investing cash outflow was $55.5 million, including $55.3 million of property and equipment purchases; financing cash outflow was $3.8 million. Cash declined $24.1 million from year-end.
- Long-term debt had a $244.1 million carrying value, representing $250.0 million principal of 0% convertible notes due 2028. No amounts were drawn on the $50 million revolving credit facility; the company reported covenant compliance.
- The revolving facility requires minimum liquidity of $25 million beginning in July 2022. Operating lease liabilities totaled approximately $456.8 million on the balance sheet.
- Liabilities under the Tax Receivable Agreement were $234.9 million. Payments depend on realization of tax benefits and sufficient future taxable income.
Management stated that cash and marketable securities should be sufficient for operating and finance lease obligations, capital expenditures, Tax Receivable Agreement obligations and working capital for at least the next 12 months and the foreseeable future.
Material changes, outlook and risks
- Year-to-date net loss attributable to the company was $11.4 million, compared with $3.3 million of income in the prior-year period. Management attributed the decline in operating results in part to higher costs and a $6.8 million legal accrual.
- The $6.8 million accrual related to settlements of private and regulatory actions concerning New York City predictive scheduling laws. The filing says other ordinary-course legal matters were not material.
- The company recorded $1.368 million of gift-card breakage income year to date, including a $1.281 million cumulative catch-up adjustment following a change in estimate. The company also recorded a $0.470 million Employee Retention Credit benefit in labor expense.
- Digital sales were $84.0 million in Q2, up 0.6% year over year, and represented 37.7% of Shack sales. Management noted decelerating traffic growth versus Q1, offset by price mix. Licensing results were affected by COVID-19 restrictions in China and a stronger U.S. dollar.
- No specific numerical revenue, earnings or Shack-opening guidance is provided in the supplied filing text. Risks highlighted include pandemic effects, labor and supply constraints, inflation, development and opening execution, existing-Shack sales, and digital and drive-thru expansion.
Most important facts for investors to verify
- Whether sales growth and pricing can offset labor, commodity, facilities and other operating cost inflation, and the resulting pressure on margins.
- The recurring impact of the $6.8 million scheduling-law settlements and whether further legal exposure arises.
- Cash generation relative to new-Shack capital expenditures, lease commitments and the $25 million minimum-liquidity covenant.
- Future taxable income and timing of potential Tax Receivable Agreement payments, against the reported $234.9 million liability.
- Whether traffic, digital sales and international licensing trends—particularly in China—remain consistent with management’s operating commentary.