Shake Shack Inc. — Q1 2016 Form 10-Q
Reporting period: Thirteen weeks ended March 30, 2016; comparatives are the thirteen weeks ended April 1, 2015. Amounts below are in U.S. dollars. Shake Shack operated 88 Shacks system-wide at quarter-end: 47 domestic company-operated, five domestic licensed and 36 international licensed.
Financial performance
| Metric | Q1 2016 | Prior-year period |
|---|---|---|
| Total revenue | $54.2 million | $37.8 million |
| Shack sales | $52.2 million | $36.0 million |
| Licensing revenue | $2.0 million | $1.8 million |
| Operating income (loss) | $4.7 million | $(10.9) million |
| Net income (loss), consolidated | $3.4 million | $(11.3) million |
| Net income (loss) attributable to Shake Shack Inc. | $1.5 million | $(12.7) million |
| Diluted Class A EPS | $0.07 | $(1.06) |
| Operating cash flow | $8.5 million | $5.2 million |
| Capital expenditures | $14.1 million | $8.6 million |
Revenue increased 43.3%; Shack sales rose 44.7%, reflecting 13 net new domestic company-operated Shacks opened since the comparable period and 9.9% same-Shack sales growth. Comparable sales growth comprised 7.3% higher traffic and a 2.6% higher average check, across 20 Shacks in the comparable base.
GAAP operating margin was 8.7% of revenue, compared with a 29.0% operating loss margin in the prior-year quarter. Shack-level operating profit, a non-GAAP measure, was $14.7 million, or 28.2% of Shack sales, versus $9.3 million, or 25.7%. Adjusted EBITDA was $10.8 million versus $7.0 million. Adjusted pro forma net income was $2.8 million, or $0.08 per fully exchanged and diluted share, versus $1.3 million, or $0.04.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $65.9 million at March 30, 2016, down from $70.8 million at year-end 2015. Current assets were $73.4 million and current liabilities $20.2 million.
- Cash provided by operations of $8.5 million did not cover $14.1 million of capital expenditures; cash declined $5.0 million during the quarter.
- No borrowings were outstanding under the revolving credit facility; availability was $19.9 million after letters of credit. The company also reported a $0.3 million liquor-license note at quarter-end, repaid March 31, 2016.
- Liabilities under the Tax Receivable Agreement (TRA) totaled $208.0 million, including $2.2 million current. Payments are contingent on realizing the related tax benefits and sufficient future taxable income; the company said it expects cash tax savings to fund payments.
- Management stated cash, operating cash flow and facility availability should be sufficient for operating needs, capital expenditures, leases and TRA obligations for at least the next 12 months and the foreseeable future.
Material changes and management commentary
- Management cited a roughly 1.5% menu price increase implemented in January, higher traffic associated with warm weather and menu innovation (including the Chick’n Shack), lower beef and dairy costs, and better fixed-cost leverage as contributors to Q1 results and Shack-level margins.
- Food and paper costs fell to 28.8% of Shack sales from 30.5%; labor remained 25.2%. Labor reflected higher starting wages, partly offset by sales growth and elimination of certain bonuses.
- General and administrative expense fell to $6.9 million from $18.4 million, principally because the prior-year quarter included $12.8 million of IPO-related non-recurring compensation expense and $0.6 million of IPO costs. Thus, the year-over-year swing to profitability was materially affected by prior-period unusual expenses.
- Three domestic company-operated Shacks opened during the quarter, including the first in California; one licensed Shack opened in Oman.
Outlook, risks and unusual items
- Fiscal 2016 outlook was raised: revenue of $245–$249 million (previously $237–$242 million); same-Shack sales growth of 4%–5% (previously 2.5%–3.0%); and 16 new domestic company-operated Shacks (previously 13). The company also expected seven licensed openings under existing agreements in the U.K., Middle East and Japan.
- Management forecast labor expense deleverage of approximately 75–100 basis points of Shack sales year over year, compared with prior guidance of 100–150 basis points, and an adjusted pro forma effective tax rate of 40%–41%, versus 43%–44% previously.
- After quarter-end, the company was considered in default for failing to furnish audited SSE Holdings financial statements required under the credit agreement if certain financial tests were not met. In May 2016, it obtained a waiver and amended the facility; no amounts were outstanding, and the event did not affect the quarter-end financial statements. The filing reported covenant compliance as of March 30.
- A proposed wage-and-hour settlement involving current and former managers provided for a $750,000 settlement fund; a $770,000 accrual, including related expenses, was recorded. Court approval steps were pending. Other ordinary-course legal matters were not considered material.
- The filing cautions that results and forward-looking statements are subject to risks and uncertainties. No material changes to the company’s previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether raised fiscal 2016 revenue, same-Shack sales and opening targets were achieved, and how comparable-sales growth and new-unit performance developed.
- Whether Q1 margin improvement persisted after accounting for lower commodity costs, price increases, traffic effects and prior-year IPO-related charges.
- Cash needs for the expansion program and the timing and affordability of TRA payments relative to realized tax savings.
- Compliance with amended credit-facility requirements following the post-quarter default and waiver.
- Final approval and payment of the wage-and-hour settlement, and any material developments in other legal or regulatory matters.
Non-GAAP measures are management-defined and should be considered alongside, not as substitutes for, GAAP results.