Business context and reporting period
Shake Shack Inc.’s unaudited Form 10-Q covers the 13 and 26 weeks ended June 26, 2019, compared with periods ended June 27, 2018. At quarter-end, the system had 237 Shacks: 140 domestic company-operated, 17 domestic licensed and 80 international licensed. During the quarter, the company opened 11 domestic company-operated and eight licensed Shacks.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $152.7 million | $116.3 million | $285.3 million | $215.4 million |
| Operating income | $11.9 million | $13.0 million | $17.0 million | $19.5 million |
| Net income | $11.2 million | $10.6 million | $14.8 million | $15.6 million |
| Net income attributable to Shake Shack Inc. | $9.0 million | $7.6 million | $11.6 million | $11.1 million |
| Diluted Class A EPS | $0.29 | $0.26 | $0.38 | $0.39 |
| Operating cash flow | Not separately presented for the quarter | $35.9 million | $40.9 million |
Q2 revenue grew 31.3%; company-operated Shack sales rose 31.0%, while same-Shack sales increased 3.6% (traffic +1.3%; price and mix +2.3%). Shack-level operating profit, a non-GAAP measure, was $36.2 million, or 24.4% of Shack sales, versus $31.8 million and 28.2% a year earlier. GAAP operating margin fell to 7.8% from 11.2%. For the first half, revenue increased about 32%, while operating income and net income declined year over year.
First-half investing cash outflow was $29.7 million, including $56.0 million of property and equipment purchases; financing cash outflow was $1.2 million. Cash and cash equivalents were $29.7 million and marketable securities $36.1 million at quarter-end. There were no revolver borrowings; $19.3 million was available after letters of credit. The company reported $321.8 million of lease liabilities, including $316.8 million operating lease liabilities, and $217.4 million of obligations under its tax receivable agreement (TRA). Total assets were $898.2 million and total liabilities $597.6 million.
Material changes versus the prior comparable period
- Q2 operating income declined 8.8% despite strong sales growth, as Shack-level margin contracted 3.8 percentage points. Food and paper costs rose to 29.0% of Shack sales from 28.1%; labor rose to 27.2% from 26.3%; and occupancy rose to 8.0% from 6.6%.
- Management attributed cost pressure to Chick’n Bites and beef and dairy inflation, additional packaging for off-premise digital orders, labor inflation and regulation (including Fair Workweek requirements), delivery commissions, increased marketing, new-Shack ramp-up costs, and prior-year benefits that did not recur.
- Operating cash flow decreased $5.0 million in the first half. Management cited lower Shack-level margins, infrastructure investment and $9.8 million of accelerated cash payments related to the Project Concrete financial systems launch.
- The company adopted ASC 842 lease accounting in fiscal 2019. It recognized operating lease assets and liabilities; prior-year figures were not recast, limiting direct comparability of lease-related expenses and balance-sheet measures.
Guidance, outlook, risks and unusual items
Management raised fiscal 2019 revenue guidance to $585–$590 million from $576–$582 million, licensing revenue to $16–$17 million from $15–$16 million, domestic company-operated openings to 38–40 from 36–40, and net licensed openings to 18–20 from 16–18. Same-Shack sales guidance was revised to approximately 2% from 1%–2%. Shack-level operating profit margin guidance was approximately 23.0%, versus the prior range of 23.0%–24.0%. The margin is a non-GAAP measure and includes an estimated 50-basis-point impact from lease accounting.
Other fiscal 2019 outlook included average annual sales volume of $4.0–$4.1 million per domestic company-operated Shack; G&A of $66.4–$68.2 million, including $3.0–$3.5 million of Project Concrete costs; depreciation of $41–$42 million; and pre-opening costs of $13–$14 million. Management cautioned that actual results may differ due to disclosed risks and uncertainties.
On August 2, 2019, after quarter-end, Shake Shack replaced its revolver with a new $50 million facility maturing in 2024, with a potential increase of up to $100 million subject to conditions. No amounts were outstanding under either facility at the relevant dates. A $1.2 million accrual covered a proposed settlement of a California labor-code claim. The filing reported no material changes to previously disclosed risk factors and no material liability from other ordinary-course legal matters.
Most important facts for investors to verify
- Whether same-Shack sales and new-unit growth can offset continued labor, food, occupancy and delivery-related cost pressure.
- How margins perform against the revised approximately 23% fiscal-year Shack-level outlook, recognizing its non-GAAP definition and lease-accounting impact.
- The pace and returns of planned openings, and the cash demands of capital spending, lease commitments and new locations.
- Cash generation relative to the $217.4 million recorded TRA obligation, whose payment timing depends on tax benefits and future taxable income.
- The effect of ASC 842 and other non-GAAP adjustments when comparing current results with prior periods or other companies.