Shake Shack Inc. — Q3 2016 Form 10-Q
Reporting period: Thirteen weeks ended September 28, 2016; year-to-date figures cover 39 weeks. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Business context
Shake Shack operated and licensed 105 Shacks system-wide: 58 domestic company-operated, six domestic licensed and 41 international licensed. In the quarter, it opened seven domestic company-operated Shacks and three net new licensed Shacks. The company owned 67.7% of SSE Holdings; the balance was reported as non-controlling interests.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Total revenue | $74.6 | $53.3 | $195.2 | $139.5 |
| Operating income | $9.2 | $7.8 | $22.8 | $3.1 |
| Net income | $6.8 | $6.2 | $16.7 | $0.1 |
| Net income attributable to Shake Shack Inc. | $3.8 | $1.5 | $8.5 | $(10.0) |
| Operating cash flow | — | — | $40.5 | $30.9 |
Q3 revenue grew 40.0%, led by new company-operated units; Shack sales rose 40.2% and licensing revenue 34.9%. Same-Shack sales increased 2.9%, reflecting 3.6% combined price and mix growth offset by a 0.7% decline in traffic. Q3 operating margin was 12.3%, versus 14.6% a year earlier; consolidated net margin was 9.1%, versus 11.6%. Shack-level operating profit, a non-GAAP measure, increased 32.6% to $20.7 million, but its margin declined to 28.8% from 30.4%. Diluted GAAP EPS was $0.15, versus $0.10. Adjusted pro forma diluted EPS, a non-GAAP measure, was $0.15, versus $0.12.
For the first 39 weeks, operating margin improved to 11.7% from 2.2%, and the company shifted to $8.5 million attributable net income from a $10.0 million loss. The comparison reflects prior-year IPO-related compensation and expenses, including $12.8 million of non-recurring compensation costs. Year-to-date adjusted EBITDA, a non-GAAP measure, was $38.8 million versus $28.3 million.
Liquidity, debt and cash flow
At September 28, cash and cash equivalents were $12.2 million and current marketable securities were $61.3 million. The company reported $19.9 million available under its $50 million revolving facility, with no borrowings outstanding; it was in compliance with its covenants. The $0.3 million promissory note was repaid during the period. Current assets were $81.9 million and current liabilities $26.1 million.
Year-to-date operating cash flow was $40.5 million. Investing cash outflow was $99.3 million, including $60.1 million of net marketable-security purchases and $39.3 million of property and equipment purchases. Financing provided $0.2 million; cash declined $58.6 million to $12.2 million. Management stated that operating cash flow, cash on hand and facility availability should fund operating, capital and working-capital needs for at least the next 12 months.
Material changes, outlook and risks
- Q3 food and paper costs improved to 28.4% of Shack sales from 29.1%, helped by menu pricing, lower beef and dairy costs and supply-chain efficiencies. Labor rose to 25.3% from 23.7%, primarily from higher starting wages and medical claims; other operating costs also increased as a share of sales.
- Fiscal 2016 outlook was revised to revenue of $264–$265 million, 4%–5% same-Shack sales growth, 19 domestic company-operated openings and 10 net licensed openings. The prior revenue range was $253–$256 million, with 18 company-operated and seven net licensed openings. Adjusted pro forma tax-rate guidance remained 40%–41%.
- Preliminary fiscal 2017 outlook: revenue of $348–$352 million; same-Shack sales growth of 2%–3%; 21–22 domestic company-operated openings and 10 net licensed openings; Shack-level operating margin of 26.5%–27.5%; G&A of $37–$39 million; and depreciation of $21 million. The comp outlook includes 1.5%–2.0% planned menu price increases and nominal traffic and mix increases.
- Liabilities under the Tax Receivable Agreement (TRA) totaled $263.9 million, including accrued interest, up from $173.1 million at year-end. The agreement generally requires payment of 85% of specified tax benefits; payment timing depends on realization of those benefits and future taxable income.
- A wage-and-hour class settlement for current and former managers had a $770,000 accrual, including related expenses. The court granted preliminary approval on October 25, 2016. Other ordinary-course legal matters were not considered material. Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective.
Investor verification priorities
- Check whether reported same-Shack sales growth and traffic trends persist; Q3 comps depended on price and mix while traffic declined.
- Assess whether labor, repair and maintenance, and new-market opening costs pressure margins as the restaurant base expands.
- Review the assumptions, expected timing and cash-flow implications of the $263.9 million TRA liability.
- Track execution against revised 2016 and preliminary 2017 opening, revenue and margin targets; these are forward-looking estimates, not guarantees.
- Distinguish GAAP results from management’s non-GAAP measures, and account for the prior-year IPO-related expenses when comparing periods.