Shake Shack Inc. — Fiscal 2018 Form 10-K
Business context and reporting period. The filing covers the 52-week fiscal year ended December 26, 2018; it is an annual report, not a standalone quarterly filing. Shake Shack operates and licenses premium fast-casual restaurants. At year-end it had 208 Shacks: 124 domestic company-operated, 12 domestic licensed and 72 international licensed. Fiscal fourth-quarter figures are unaudited.
Financial and operating results
| Metric | Fiscal 2018 | Fiscal 2017 |
|---|---|---|
| Total revenue | $459.3 million | $358.8 million |
| Shack sales | $445.6 million | $346.4 million |
| Licensing revenue | $13.7 million | $12.4 million |
| Operating income | $31.7 million; 6.9% margin | $33.8 million; 9.4% margin |
| Net income | $21.9 million | $8.9 million |
| Net income (loss) attributable to Shake Shack Inc. | $15.2 million; diluted EPS $0.52 | $(0.3) million; diluted EPS $(0.01) |
| Operating cash flow | $85.4 million | $70.9 million |
| Adjusted EBITDA (non-GAAP) | $73.9 million; 16.1% margin | $64.7 million; 18.0% margin |
| Shack-level operating profit (non-GAAP) | $112.9 million; 25.3% margin on Shack sales | $92.3 million; 26.6% margin |
Revenue rose 28.0%; Shack sales increased 28.6%, largely from 34 new company-operated Shacks. Same-Shack sales grew 1.0%: price and mix contributed 3.7%, offset by a 2.7% decline in guest traffic. Domestic company-operated average unit volume fell to $4.39 million from $4.60 million, primarily as newer, lower-volume locations entered the base. System-wide sales, including licensed Shack sales not recorded as company revenue, increased 26.3% to $671.9 million. Adjusted EBITDA and Shack-level profit are non-GAAP measures.
At December 26, 2018, cash and cash equivalents were $24.8 million and short-term marketable securities were $62.1 million. Current assets were $101.1 million versus current liabilities of $59.9 million. The company had no revolver borrowings and $19.3 million of availability after letters of credit. Reported total debt of $20.8 million consisted of deemed landlord financing; it is distinct from operating lease commitments. Operating cash flow was $85.4 million, while investing activities used $86.6 million, including $87.5 million of property and equipment purchases. Total assets were $610.5 million.
Material changes and unusual items
- Operating income declined despite strong revenue growth, as labor and related expenses rose to 27.4% of Shack sales from 26.5%, and other operating expenses rose to 11.6% from 10.3%. Shack-level operating margin and adjusted EBITDA margin also contracted.
- Fiscal 2018 net income compares with a prior year affected by a one-time $127.2 million benefit in other income from reducing Tax Receivable Agreement liabilities after the 2017 tax law change, alongside $138.6 million of additional 2017 tax expense from remeasuring deferred tax assets. These items make reported annual net income comparisons unusually distorted.
- Fiscal 2018 included $3.9 million of identified one-time costs, including a $1.2 million employment-related settlement and Project Concrete costs. The settlement was accrued at year-end.
- The company adopted ASC 606 in fiscal 2018; prior-period figures were not restated. Management reported fiscal 2018 licensing revenue was $0.7 million lower than it would have been under the prior standard.
- The Tax Receivable Agreement liability totaled $203.7 million, including $5.8 million expected to be paid in fiscal 2019. Fiscal-year contractual obligations totaled $748.1 million, including $339.6 million of operating lease obligations, $46.7 million of deemed landlord financing and $158.0 million of purchase obligations.
Outlook, commentary and risks
For fiscal 2019, management forecast revenue of $570–$576 million, licensing revenue of $15–$16 million, same-Shack sales growth of 0%–1%, 36–40 domestic company-operated openings and 16–18 net licensed openings. It projected domestic company-operated AUV of $4.0–$4.1 million and Shack-level operating margin of 23%–24%. Management expected absolute operating profit to increase but margins to decline, citing wage pressure, packaging and distribution costs, a broader mix of unit volumes and approximately 50 basis points of margin impact from lease-accounting adoption. The same-Shack outlook includes approximately 1.5% of menu price increases taken in December 2018.
The company continued to target fiscal 2020 revenue above $700 million, at least 200 domestic company-operated openings and at least 120 net licensed openings; these are targets, not guarantees. Management highlighted Project Concrete, digital ordering and measured domestic and international expansion as growth priorities. Fiscal 2019 plans also included entry into Salt Lake City, New Orleans, Mexico, Singapore and the Philippines, among other markets.
- Key risks include rising labor, food, packaging and construction costs; intense competition; weaker traffic or negative same-Shack sales; and new Shack performance, cannibalization and expansion execution.
- Operations depend on concentrated suppliers and one broadline distributor for most U.S. distribution. Food-safety incidents, delivery-partner issues, cybersecurity events and brand damage could impair sales.
- International licensing is exposed to currency, geopolitical, sanctions and supply-chain risks. Lease commitments and the Tax Receivable Agreement create significant long-term cash obligations; payments under the latter depend partly on future taxable income.
The company reported effective internal control over financial reporting, and the auditor issued unqualified opinions on the financial statements and internal controls. Management stated it did not expect ordinary-course legal matters, other than the accrued settlement, to be material.
Important facts for investors to verify
- Whether same-Shack sales and traffic trends improve against the 2019 outlook, and how pricing affects guest visits.
- Whether new locations meet expected sales and profitability as average unit volumes and Shack-level margins face pressure.
- Actual cash spending on expansion and Project Concrete, and the timing and funding of lease, purchase and Tax Receivable Agreement obligations.
- The effect of ASC 842 adoption on reported assets, liabilities and store-level expenses; management estimated a net increase of $207–$217 million in lease assets and $202–$212 million in lease liabilities.
- How much of reported earnings growth reflects recurring operations rather than tax, ownership and non-GAAP adjustments; review reconciliations and the non-controlling interest structure.