Shake Shack Inc. — Q3 2019 Form 10-Q
Reporting period: Unaudited 13 weeks ended September 25, 2019; year-to-date figures cover 39 weeks. Comparatives are the periods ended September 26, 2018. Shake Shack operated or licensed 254 Shacks at quarter-end.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Change / context |
|---|---|---|---|
| Total revenue | $157.8 million | $119.6 million | Up 31.9% |
| Shack sales | $152.4 million | $115.9 million | Up 31.5%; same-Shack sales up 2.0% |
| Operating income | $8.2 million | $9.3 million | Down 12.6%; margin 5.2% versus 7.8% |
| Net income | $11.4 million | $6.9 million | Includes a $3.1 million income tax benefit; prior period had $2.2 million tax expense |
| Net income attributable to Shake Shack Inc. | $10.3 million | $5.0 million | Diluted EPS $0.31 versus $0.17 |
| Shack-level operating profit (non-GAAP) | $35.1 million | $29.9 million | Up 17.4%; margin 23.1% versus 25.8% |
| Adjusted EBITDA (non-GAAP) | $23.3 million | $21.3 million | Up 9.1%; margin 14.8% versus 17.8% |
Growth in sales primarily reflected 44 domestic company-operated openings since the comparable prior-year period, plus 2.0% same-Shack sales growth. Comparable-store traffic rose 1.2%; price and mix contributed 0.8%. Higher food, labor, other operating, occupancy and depreciation costs weighed on margins. Management cited Chick'n Bites, modest dairy and beef inflation, packaging associated with digital sales, labor availability and regulation, new-store staffing, technology and repair costs, and adoption of the new lease standard.
For the 39 weeks, revenue was $443.1 million, up 32.2%; operating income was $25.2 million versus $28.9 million; net income attributable to Shake Shack Inc. was $21.9 million versus $16.1 million. Operating cash flow was $73.0 million versus $62.8 million.
Cash, liquidity and obligations
- At September 25, cash and cash equivalents were $44.5 million and marketable securities were $36.3 million. Current assets were $99.4 million and current liabilities $96.0 million.
- Cash provided by operations was $73.0 million; investing used $54.9 million, including $80.9 million in property and equipment purchases; financing provided $1.6 million. Cash increased $19.8 million during the 39-week period.
- No borrowings were outstanding under the new $50 million revolving credit facility, which matures in August 2024. The company reported covenant compliance; the facility is secured by substantially all assets of SSE Holdings and guarantors.
- Operating and finance lease liabilities totaled $347.7 million. The company also disclosed $85.6 million of additional operating lease commitments for leases not yet commenced.
- Tax Receivable Agreement obligations totaled $223.1 million, including $5.2 million current. Payments are contingent on realizing specified tax benefits and sufficient future taxable income.
Material changes, outlook and risks
- The company adopted ASC 842 lease accounting at the start of fiscal 2019, recognizing operating lease assets and liabilities. The adoption affected occupancy costs and comparability with prior periods; prior-year figures were not restated.
- In August, the Gramercy Tavern Corp. merger exchanged 2.69 million Class A shares for corresponding LLC interests and cancelled equivalent Class B shares. Shake Shack’s ownership of SSE Holdings increased to 89.8% from 79.6% at year-end 2018.
- Fiscal 2019 outlook was revised: revenue $592–$597 million; licensing revenue $18.0–$18.5 million; same-Shack sales growth approximately 1.5%; 38–40 domestic company-operated openings and 24–28 net licensed openings. Shack-level operating profit margin was projected at 22.0%–22.5%, including an estimated 50-basis-point lease-standard impact. Project Concrete costs were estimated at approximately $2 million.
- Preliminary fiscal 2020 outlook called for 40–42 new domestic company-operated Shacks and 20–25 net new licensed Shacks. Management did not provide a full-year 2020 financial forecast in the filing.
- Risks and contingencies include inflation and labor constraints, execution and new-store ramp-up, lease commitments, and future tax benefits and payments under the Tax Receivable Agreement. A California labor matter was agreed to be settled for $1.2 million, accrued at quarter-end. Management reported no material change in previously disclosed risk factors.
- The company completed implementation of a new ERP system during the quarter and modified, removed or added related internal controls; management said it would continue monitoring their effectiveness. Disclosure controls were concluded effective at period-end.
Important facts for investors to verify
- Whether same-Shack sales and traffic trends persist, and how new locations ramp against rising food, labor and occupancy costs.
- How the revised fiscal 2019 sales, openings and margin outlook compares with subsequent reported results.
- The extent to which Q3 net income growth depended on tax benefits rather than operating improvement; GAAP operating income and both disclosed non-GAAP margins declined.
- Cash requirements from capital spending, lease commitments and the $223.1 million Tax Receivable Agreement liability, including the assumptions behind future tax-benefit realization.
- Whether ERP-related controls continue to operate effectively and whether Project Concrete costs and benefits track management’s expectations.