Shake Shack Inc. — Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended September 26, 2018; comparisons are with periods ended September 27, 2017. Shake Shack operated or licensed 188 Shacks system-wide at period-end: 107 domestic company-operated, 11 domestic licensed and 70 international licensed.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Total revenue | $119.6 million | $94.6 million | $335.0 million | $262.7 million |
| Operating income | $9.3 million | $10.6 million | $28.9 million | $28.0 million |
| Net income | $6.9 million | $7.9 million | $22.5 million | $19.9 million |
| Net income attributable to Shake Shack Inc. | $5.0 million | $5.0 million | $16.1 million | $12.1 million |
| Diluted EPS | $0.17 | $0.19 | $0.56 | $0.46 |
| Operating margin | 7.8% | 11.2% | 8.6% | 10.7% |
- Q3 revenue rose 26.5%, principally reflecting 28 domestic company-operated Shack openings since the prior-year comparable period. Shack sales increased 27.2%; licensing revenue rose 7.3%.
- Same-Shack sales fell 0.7% in Q3: guest traffic decreased 4.0%, partly offset by 3.3% from price and sales mix. For the 39 weeks, same-Shack sales rose 0.6%, with 4.2% price/mix growth partly offset by a 3.6% traffic decline.
- Q3 operating income fell 11.9% despite higher sales. Shack-level operating profit, a non-GAAP measure, increased 20.7% to $29.9 million, but its margin declined to 25.8% from 27.2%. Adjusted EBITDA rose 17.5% to $21.3 million; adjusted EBITDA margin was 17.8% versus 19.2%.
- For the 39 weeks, operating income increased 3.2%, while net income attributable to Shake Shack Inc. rose 32.9%. Diluted EPS increased to $0.56 from $0.46. The year-to-date effective tax rate declined to 20.2% from 27.5%, primarily reflecting the federal corporate tax-rate reduction.
- Q3 labor expense increased to 27.0% of Shack sales from 26.1%; other operating expense increased to 11.6% from 10.1%. Management cited minimum-wage increases, lower-volume and newly opened Shacks, delivery commissions, repairs and maintenance, and fixed costs. Food and paper expense was 28.2% of Shack sales, slightly below the prior-year 28.3%.
Cash, liquidity and obligations
- At September 26, 2018, cash and cash equivalents were $29.3 million and marketable securities were $61.8 million. Current assets were $103.9 million versus current liabilities of $48.8 million.
- Operating cash flow for the 39 weeks was $62.8 million, compared with $54.0 million. Investing activities used $58.9 million, including $60.1 million of property and equipment purchases. Cash increased $7.8 million to $29.3 million.
- No amounts were drawn on the $50 million revolving credit facility; availability was $19.3 million after letters of credit. The company reported compliance with all covenants. Deemed landlord financing liabilities were $19.9 million, up from $14.5 million at year-end 2017.
- Total liabilities under the Tax Receivable Agreement were $202.0 million, including $0.9 million current. Payments depend on realizing the associated tax benefits and sufficient future taxable income. The company said operating cash, cash on hand and facility availability should fund needs for at least the next 12 months and foreseeable future.
Outlook, commentary and notable items
- Fiscal 2018 outlook was raised for revenue to $450–$452 million from $446–$450 million; expected domestic company-operated openings were revised to 33–34, and average annual sales volume to $4.2–$4.3 million. Same-Shack sales growth remained 0%–1%; Shack-level operating profit margin remained 24.5%–25.5%. Other outlook included licensing revenue of approximately $13 million, G&A of $48–$50 million excluding one-time charges, depreciation of $30–$31 million, and pre-opening costs of approximately $13 million.
- Preliminary fiscal 2019 outlook called for 36–40 domestic company-operated openings and 16–18 net licensed openings. The filing cautions that forward-looking results are subject to risks and may differ materially from expectations.
- Q3 operating results included $1.5 million of Project Concrete and other one-time costs, including a $1.2 million accrual for a California labor-law settlement and $0.3 million of Project Concrete costs. Management reported a $1.2 million after-tax impact, or $0.04 per diluted share, from these items. The company also cited Home Office relocation costs during the year-to-date period.
- ASC 606 was adopted at the start of fiscal 2018 using the modified retrospective method. It reduced reported licensing revenue by $0.1 million for Q3 and $0.4 million for the 39 weeks versus the former accounting method. The company planned to adopt the new lease standard in December 2018 and expected a significant balance-sheet impact due to its real estate lease portfolio; the impact estimate was still under review.
- The filing reported no material change in risk factors, market-risk exposure, contractual obligations or off-balance-sheet arrangements from the prior annual report. Disclosure controls were deemed effective; no material internal-control changes were reported.
Investor verification priorities
- Assess whether traffic trends—down 4.0% in Q3 and 3.6% year to date—stabilize, and whether price increases can offset traffic weakness.
- Track labor and other operating costs, Shack-level and GAAP margins, and the contribution and initial economics of new openings.
- Compare subsequent results with revised fiscal 2018 guidance and preliminary 2019 opening plans; review assumptions underlying the non-GAAP measures.
- Review the coming lease-standard adoption and its balance-sheet effects, along with the timing and cash consequences of the $202.0 million Tax Receivable Agreement liability.
- Monitor the California settlement, Project Concrete spending, and other relocation or non-recurring costs for further developments.