Shake Shack Inc. — Q2 2020 Form 10-Q
Reporting period: Thirteen weeks ended June 24, 2020; year-to-date period was the twenty-six weeks ended June 24, 2020. Comparisons are with the periods ended June 26, 2019. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and operating trends
Shake Shack operated and licensed 292 Shacks at quarter-end: 171 domestic company-operated, 22 domestic licensed and 99 international licensed. COVID-19 materially disrupted operations; 8 domestic company-operated and 27 licensed Shacks were temporarily closed at June 24.
Management reported gradual recovery during Q2 and into July, but urban locations lagged suburban locations. Q2 same-Shack sales fell 57% in urban markets and 38% in suburban markets. As of July 22, approximately 95% of domestic company-operated Shacks were open. Digital sales were 75% of Q2 Shack sales and 62% in fiscal July.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $91.8 | $152.7 | $235.0 | $285.3 |
| Operating income (loss) | $(24.1) | $11.9 | $(24.9) | $17.0 |
| Net income (loss) | $(18.0) | $11.2 | $(19.1) | $14.8 |
| Net income (loss) attributable to Shake Shack Inc. | $(16.2) | $9.0 | $(17.2) | $11.6 |
| Operating cash flow | Not separately presented for Q2 | $18.0 | $35.9 |
- Q2 Shack sales declined 39.5% to $89.5; licensing revenue declined 53.1% to $2.3. Same-Shack sales decreased 49.0%. Shack system-wide sales were $123.8, down 45.2% year over year.
- Q2 GAAP operating margin was approximately -26.2%, compared with 7.8% a year earlier. Q2 Shack-level operating profit, a non-GAAP measure, was $1.9, or 2.2% of Shack sales, versus $36.2, or 24.4%, a year earlier.
- Q2 adjusted EBITDA, a non-GAAP measure, was a loss of $8.8, compared with income of $25.9 a year earlier; adjusted EBITDA margin was -9.6% versus 17.0%. First-half adjusted EBITDA was $5.4 versus $43.8.
- Class A diluted loss per share was $0.43 for Q2 and $0.48 for the first half; corresponding prior-year diluted earnings per share were $0.29 and $0.38.
- As a share of Shack sales, Q2 food and paper costs were 33.5% versus 29.0%; labor was 34.6% versus 27.2%; other operating expenses were 16.0% versus 11.3%; and occupancy was 13.8% versus 8.0%. Management attributed the increases largely to sales deleverage, with beef inflation, sealed-bag packaging and delivery commissions also contributing.
Liquidity, capital and obligations
- At June 24, cash and cash equivalents were $174.0 and marketable securities were $16.8, totaling $190.8. Cash increased $136.9 from year-end 2019.
- First-half cash from operations was $18.0; investing cash outflow was $17.9, including $37.6 of property and equipment purchases; financing cash inflow was $136.8, mainly reflecting $145.0 of net proceeds from Class A stock offerings.
- The company drew the full $50.0 revolving facility in March and repaid it in full, plus interest, in June. No revolver balance remained at quarter-end. The facility matures in August 2024; the May amendment requires minimum liquidity of $25.0 through July 1, 2021 and temporarily modifies covenant terms. The company reported compliance with covenants at June 24.
- Balance-sheet current assets were $204.1 and current liabilities were $96.7. Operating lease liabilities were $369.8; total lease liabilities, including finance leases, were $375.2. The company also disclosed $54.0 of additional operating lease commitments for leases without a possession date.
- Tax Receivable Agreement obligations totaled $228.1 at quarter-end. Payments are contingent on realizing related tax benefits and sufficient future taxable income.
- Stockholders’ equity totaled $451.3. The April equity offerings increased Class A shares and raised approximately $145.0 net, substantially strengthening liquidity.
Outlook, risks and notable items
- The company withdrew fiscal 2020 guidance because of substantial uncertainty and the economic impact of COVID-19. Management expected 6 to 11 additional domestic company-operated Shack openings for the balance of 2020, targeting 15 to 20 for the year, but warned timing and totals could change.
- Average weekly sales improved from $32,000 in fiscal April to $52,000 in June and $56,000 in July. Same-Shack sales in July were down 39% overall; urban locations were down 50% and suburban locations down 24% year over year.
- Management cited COVID-19-related risks including renewed restrictions or outbreaks, reduced traffic, staffing and supply disruption, commodity cost changes, and delays to construction and growth. Urban Shacks were particularly exposed. Nationwide protests and resulting curfews reduced Q2 Shack sales by an estimated $3.2.
- Beef inflation affected Q2 food and paper costs by approximately $2.5; higher paper and packaging costs added approximately $1.4. Management said beef prices had since returned to more normalized levels.
- First-half impairment and disposal charges were $2.5, including a $1.1 impairment charge at one location. A California labor-law matter was settled for $1.2, which was accrued; other ordinary-course legal matters were not considered material.
- The company obtained a $10.0 Paycheck Protection Program loan in April and returned the full balance plus interest that month. It also disclosed potential limits on use of tax-loss carryforwards following an ownership change in 2018; its analysis was still being finalized, and it did not expect that change to prevent use before expiration.
Most important facts for investors to verify
- Whether sales recovery continued after July, particularly in urban markets, and whether reopened locations remained operational.
- Whether same-Shack sales, traffic and restaurant-level margins improved as restrictions eased and digital mix changed.
- Whether cash and operating cash flow can support lease commitments, planned capital spending and Tax Receivable Agreement payments without additional financing.
- Whether the company maintains the amended credit facility’s minimum-liquidity requirement and other covenants through July 1, 2021.
- Whether COVID-19 disruptions, construction delays, commodity costs, labor expenses or tax attributes materially changed after the filing date.