Shake Shack Inc. — Q1 2017 Form 10-Q
Reporting period: Thirteen weeks ended March 29, 2017; comparable period ended March 30, 2016. Amounts below are in millions unless stated otherwise. Shake Shack operated and licensed 127 Shacks at quarter-end: 71 domestic company-operated, 7 domestic licensed and 49 international licensed.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Total revenue | $76.7 | $54.2 |
| Shack sales | $74.2 | $52.2 |
| Operating income / margin | $5.6 / 7.3% | $4.7 / 8.7% |
| Net income | $3.9 | $3.4 |
| Net income attributable to Shake Shack Inc. | $2.3 | $1.5 |
| Diluted EPS | $0.09 | $0.07 |
| Operating cash flow | $9.7 | $8.5 |
| Capital expenditures, cash basis | $13.1 | $14.1 |
- Revenue grew 41.7%; Shack sales increased 42.2%, primarily reflecting 24 domestic company-operated openings since the prior-year quarter. Licensing revenue increased 28.9% to $2.6 million.
- Same-Shack sales fell 2.5%, with guest traffic down 3.4%, partly offset by 0.9% combined price and sales mix. Shack-level operating profit, a non-GAAP measure, rose 26.9% to $18.7 million, but its margin fell to 25.2% from 28.2%.
- Adjusted EBITDA, a non-GAAP measure, increased 28.9% to $12.2 million. GAAP net income attributable to the company was $2.3 million; adjusted pro forma net income was $3.7 million, or $0.10 per fully exchanged diluted share. These non-GAAP measures have company-defined adjustments and should be considered alongside GAAP results.
- Cash and cash equivalents were $15.7 million and marketable securities were $57.8 million at March 29. The company had $19.9 million available under its revolving facility and no revolver borrowings. Deemed landlord financing liabilities were $8.0 million.
- Total liabilities included $277.4 million in obligations under the Tax Receivable Agreement (TRA), including accrued interest. The company said payments depend on realizing the associated tax benefits and sufficient future taxable income. Total assets were $555.4 million; current assets were $83.8 million versus current liabilities of $28.8 million.
- Cash increased $4.1 million during the quarter. Investing activities used $8.3 million; financing activities provided $2.7 million, including stock-option proceeds and partly offset by TRA payments.
Changes, outlook and management commentary
- Despite strong revenue growth, operating margin and Shack-level margin declined. Management cited negative same-Shack sales, higher hourly wages, investment in management teams, and more newer or target-volume Shacks. Lower beef commodity costs and a roughly 1.5% menu price increase implemented at the end of December 2016 supported food-cost performance.
- Management revised fiscal 2017 same-Shack sales guidance from 2%–3% growth to 0%. Revenue guidance increased from $349–$353 million to $351–$355 million. The company forecast 23–24 domestic company-operated openings and 12 net licensed openings, versus prior forecasts of 22–23 and 11, respectively.
- Other fiscal 2017 outlook: Shack-level operating profit margin of 26.5%–27.5%; G&A expense of $38–$40 million; depreciation of $22 million; interest expense of $1.6–$2.0 million; and adjusted pro forma effective tax rate of 40%–41%. Management expected new company-operated Shacks to average at least $3.3 million in annual sales volume with Shack-level margins of at least 21%.
- Management stated that operating cash, cash on hand and revolver availability should fund operating leases, capital expenditures and working capital for at least the next 12 months and foreseeable future. Revolver covenants were met at quarter-end.
Risks, contingencies and unusual items
- Same-Shack sales weakness and traffic decline, wage inflation, operating-cost deleverage, commodity-price changes, and foreign-exchange effects on licensed operations are relevant business risks. Management reported no material changes to the risk factors in its 2016 Form 10-K.
- A wage-and-hour class settlement received final court approval; $0.8 million was accrued at quarter-end and $0.8 million was paid on May 1, 2017. Other ordinary-course legal matters were not expected to be material.
- The company recorded a $6.4 million additional TRA liability in the quarter and paid $1.5 million under the agreement. The TRA represents a substantial contractual obligation, although payments depend on tax-benefit realization and other conditions.
- The quarter included $0.1 million of executive-search costs, excluded from certain non-GAAP measures. The filing cautions that forward-looking statements are subject to risks and actual results may differ; interim results are not necessarily indicative of full-year results.
- The company changed its same-Shack sales methodology effective March 29, 2017: Shacks now enter the comparable base at the beginning of their 25th full fiscal month, rather than their 105th full fiscal week.
Key facts for investors to verify
- Whether traffic and same-Shack sales stabilize, and whether the revised zero-growth guidance is achieved.
- Whether labor and other operating costs continue to pressure Shack-level and GAAP operating margins.
- Execution against the increased opening targets and the expected sales and margin profile of new Shacks.
- Cash generation and capital spending relative to expansion needs, including the timing and cash impact of TRA payments.
- The effect of the same-Shack sales methodology change on comparability, and the assumptions embedded in non-GAAP adjusted results.