Shake Shack Inc. — Q1 2015 Form 10-Q
Business context and period. The unaudited quarter covered 13 weeks ended April 1, 2015; the comparable period ended March 26, 2014. Shake Shack operated and licensed restaurants, with 66 Shacks system-wide at quarter-end: 34 domestic company-operated, five domestic licensed and 27 international licensed. The company completed its IPO and related organizational transactions on February 4, 2015; it consolidated SSE Holdings while retaining a 33.3% economic interest, with the remaining 66.7% reported as non-controlling interest.
Financial performance
- Revenue: $37.8 million, up 56.3%. Shack sales were $36.0 million, up 59.2%; licensing revenue was $1.8 million, up 13.2%.
- Comparable sales: Same-Shack sales increased 11.7%, reflecting a 9.6% increase in average check and 2.1% higher guest traffic. The comparable base included 13 Shacks.
- Profit and margins: GAAP net loss was $11.3 million; net loss attributable to Shake Shack Inc. was $12.7 million, or $1.06 per diluted Class A share. Shack-level operating profit, a non-GAAP measure, was $9.3 million, or 25.7% of Shack sales, versus $5.2 million and 23.0% a year earlier. Adjusted EBITDA was $7.0 million versus $3.6 million; adjusted pro forma net income was $1.3 million, or $0.04 per fully exchanged diluted share, versus $0.6 million, or $0.02, a year earlier.
- Costs: Food and paper costs were 30.5% of Shack sales, unchanged year over year. Labor declined to 25.2% from 27.6%; other operating costs declined to 9.7% from 10.5%. Occupancy increased to 8.8% from 8.4%.
- Cash flow and capital spending: Operating cash flow was $5.2 million, compared with $1.4 million. Investing cash outflow was $8.6 million, principally property and equipment purchases, versus $1.8 million.
- Liquidity and debt: Cash was $60.8 million at April 1, compared with $2.7 million at December 31. No revolving-credit borrowings were outstanding; $19.9 million was available after letters of credit. The company repaid $36.0 million of revolver borrowings using IPO proceeds. It reported $313,000 of notes payable.
Material changes and unusual items
- Revenue growth was driven by 13 new domestic company-operated Shacks opened since the year-ago quarter and same-Shack sales growth. The company opened three domestic company-operated Shacks during the quarter.
- General and administrative expense rose to $18.4 million from $3.4 million, primarily due to $12.8 million of non-recurring IPO-related compensation expense and $0.6 million of other IPO-related expenses. Management cited approximately $13.2 million of after-tax IPO-related expenses in explaining the reported loss.
- Sales benefited from menu price increases in September 2014 and January 2015, the return of crinkle-cut fries, IPO-related press attention, and a limited-time Shackmeister Burger offering. Beef cost pressure was offset by pricing and lower costs for some other ingredients.
- The IPO generated net proceeds of approximately $106.1 million to the company after underwriting discounts and offering expenses. Proceeds were used through SSE Holdings for IPO and organizational costs, repayment of borrowings, a $11.1 million distribution to certain former owners, and general corporate purposes, including Shack openings and renovations.
Outlook, risks and contingencies
- Management said it was on track for its 2015 targets of at least 10 domestic company-operated Shack openings and five international licensed Shack openings, and was building a pipeline for 2016 and beyond. Subsequent to quarter-end, it opened a New Jersey Shack and its first Texas Shack.
- Management believed cash, operating cash flow and revolver availability would be sufficient for operating leases, capital expenditures and working capital for at least the next 12 months and the foreseeable future.
- The company expects payments under its tax receivable agreement to be significant over time. The agreement generally requires payment to continuing owners of 85% of realized tax benefits from specified tax-basis increases and related benefits.
- The revolving facility includes financial covenants and restrictions on certain actions; the company reported compliance at quarter-end. Operating leases extend through 2031 and may include contingent rent. Ordinary-course legal matters were generally insured and were not considered material; no material change to reported risk factors or contractual obligations was disclosed.
- Management cautioned that interim results are not necessarily indicative of full-year results. It reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of comparable-sales growth and Shack-level margin improvement is sustainable after menu pricing, product mix, and temporary publicity effects.
- The extent to which recurring corporate and equity-compensation costs will differ from the IPO-affected quarter, and how non-GAAP adjustments reconcile to GAAP results.
- Progress against 2015 Shack-opening targets, and the capital and pre-opening costs associated with new markets.
- The future cash impact and timing of tax receivable agreement payments, alongside lease and capital expenditure commitments.
- Revolver availability and covenant compliance as the company funds expansion; reported availability was $19.9 million, not the facility’s full $50 million commitment.