Shake Shack Inc. — Q1 2018 Form 10-Q
Reporting period: Thirteen weeks ended March 28, 2018; comparative period ended March 29, 2017. Figures below are in U.S. dollars. Shake Shack operated and licensed 168 Shacks at quarter-end: 95 domestic company-operated, 10 domestic licensed and 63 international licensed.
Financial results
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Total revenue | $99.1 million | $76.7 million | +29.1% |
| Shack sales | $96.1 million | $74.2 million | +29.6% |
| Licensing revenue | $3.0 million | $2.6 million | +16.7% |
| Operating income | $6.5 million | $5.6 million | +15.7%; margin 6.6%, down from 7.3% |
| Net income | $5.0 million | $3.9 million | +28.9% |
| Net income attributable to Shake Shack Inc. | $3.5 million | $2.3 million | Diluted EPS $0.13 vs. $0.09 |
| Shack-level operating profit (non-GAAP) | $24.0 million | $18.7 million | Margin 25.0% vs. 25.2% |
| Adjusted EBITDA (non-GAAP) | $16.2 million | $12.2 million | Margin 16.3% vs. 15.9% |
| Cash from operating activities | $19.1 million | $9.7 million | Increase of $9.4 million |
| Capital expenditures, cash basis | $17.7 million | $13.1 million | Purchases of property and equipment |
Same-Shack sales grew 1.7% across 44 comparable Shacks. A 5.9% increase in price and sales mix was partly offset by a 4.2% decline in guest traffic. Excluding prior-year free-burger promotion transactions, same-Shack sales growth was 2.1%, while traffic declined 2.2%.
Liquidity, debt and balance sheet
- At March 28, 2018, cash and cash equivalents were $26.6 million and marketable securities were $61.1 million, for combined cash and investments of $87.8 million.
- Current assets were $95.6 million and current liabilities were $33.5 million. The company reported total assets of $500.3 million and total liabilities of $267.2 million.
- No borrowings were outstanding under the $50 million revolving credit facility; $19.3 million was available after $0.7 million of letters of credit. The facility matures in February 2020, and the company reported compliance with its covenants.
- Deemed landlord financing liabilities were $17.0 million. The Tax Receivable Agreement (TRA) liability, including accrued interest, was $172.1 million, including $0.9 million current. TRA payments depend on realizing the relevant tax benefits and sufficient future taxable income.
- Management stated that operating cash flow, cash on hand and credit-facility availability should fund operating lease obligations, capital spending, deemed landlord financing and working-capital needs for at least the next 12 months and the foreseeable future.
Material changes and management commentary
- Revenue growth was mainly driven by 24 new domestic company-operated Shacks opened between the comparable periods; five domestic company-operated and four international licensed Shacks opened during Q1 2018.
- Food and paper costs improved to 28.1% of Shack sales from 28.6%, reflecting menu pricing and cost efficiencies partly offset by rising beef costs. Labor costs rose to 27.8% from 27.6%, with wage increases, lower-volume new restaurants and opening-period staffing cited as factors. Other operating expenses increased to 11.2% from 10.3%, including facility costs and delivery commissions.
- General and administrative expense increased 39.4% to $11.8 million, reflecting increased corporate staffing and technology investment, $0.2 million of Project Concrete costs, and approximately $1.0 million of costs associated with the Home Office relocation, including a sublease loss and duplicative rent.
- The effective income tax rate fell to 19.4% from 30.0%, primarily due to the federal corporate tax rate reduction under the Tax Cuts and Jobs Act, partly offset by higher ownership of SSE Holdings and foreign withholding taxes.
- Operating cash flow increased substantially, while investing cash outflow rose to $15.9 million, mainly because of higher capital expenditures. Cash increased by $5.1 million to $26.6 million during the quarter.
Outlook, accounting and risks
- Fiscal 2018 outlook was revised to total revenue of $446–$450 million, versus the prior $444–$448 million range. Other stated outlook remained unchanged: licensing revenue $12–$13 million; same-Shack sales growth 0%–1%; 32–35 domestic company-operated openings; and 16–18 net licensed openings.
- Management forecast domestic company-operated average annual sales volume of $4.1–$4.2 million, Shack-level operating profit margin of 24.5%–25.5%, G&A of $49–$51 million, depreciation of $32 million, pre-opening costs of $12–$13 million, interest expense of $2.0–$2.2 million, and adjusted pro forma effective tax rate of 26%–27%. G&A outlook excludes approximately $4–$6 million of estimated Project Concrete costs.
- The company adopted ASC 606 on December 28, 2017 using the modified retrospective method. Q1 licensing revenue was $121,000 lower than it would have been under the prior standard; Shack sales were unchanged. Adoption reduced opening equity by $1.6 million, net of tax.
- The company expected the lease accounting standard, planned for adoption December 27, 2018, to significantly increase reported balance-sheet lease assets and liabilities; effects on income and cash flows were still being assessed.
- Risks highlighted in the filing include wage and labor-cost pressures, traffic declines, the performance of newer and lower-volume Shacks, execution of expansion plans, and the contingent, long-term cash obligations under the TRA. The company reported no material change to previously disclosed risk factors, no material legal contingencies, and no material change in market-risk exposure.
Important facts for investors to verify
- Whether same-Shack sales and guest traffic improve, given positive price/mix but declining traffic.
- Whether new Shack openings achieve expected sales volumes and margins, and how wage, facility and delivery costs evolve.
- Whether the revised revenue and operating outlook is achieved, including the effect of Project Concrete expenses excluded from the G&A range.
- How capital spending, lease-related obligations and the expected lease-accounting adoption affect liquidity and reported leverage.
- Whether sufficient future taxable income is generated to realize tax benefits and fund the $172.1 million TRA obligation over time.
- How much reported performance depends on non-GAAP measures; Shack-level operating profit and adjusted EBITDA exclude costs that remain relevant to the company’s overall results.