Shake Shack Inc. quarterly report, Q1 FY2024

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Shake Shack Inc. — Q1 2024 Form 10-Q

Reporting period: Thirteen weeks ended March 27, 2024; comparison is the thirteen weeks ended March 29, 2023. Amounts below are in U.S. dollars unless noted.

Business context

Shake Shack operates and licenses restaurants. At quarter-end, it had 525 Shacks system-wide: 299 Company-operated and 226 licensed. During the quarter, it opened four Company-operated and four licensed Shacks and recorded one permanent licensed Shack closure.

Financial and operating performance

  • Revenue: $290.5 million, up 14.7% year over year. Shack sales were $280.6 million, up 14.9%; licensing revenue was $10.0 million, up 10.3%.
  • Comparable sales and scale: Same-Shack sales increased 1.6%, as a 3.7% price/mix increase was partly offset by a 2.1% decline in guest traffic. Average weekly sales were $73,000, flat year over year. System-wide sales rose 12.3% to $443.3 million.
  • Digital: Digital sales increased 15.3% to $103.2 million and represented 36.8% of Shack sales.
  • Profitability: GAAP operating income was $34,000, versus an operating loss of $3.2 million a year earlier. Consolidated net income was $2.2 million versus a $1.6 million loss; net income attributable to Shake Shack Inc. was $2.0 million, or $0.05 per diluted share, versus a $1.5 million loss, or $(0.04) per diluted share.
  • Margins and non-GAAP measures: Restaurant-level profit was $54.7 million, with a 19.5% margin on Shack sales, versus $44.7 million and 18.3%. Adjusted EBITDA was $35.9 million, or 12.4% of revenue, versus $27.6 million and 10.9%. These are company-defined non-GAAP measures.
  • Cost trends: Food and paper costs improved to 28.6% of Shack sales from 29.4%, and labor improved to 29.1% from 30.4%. Other operating costs rose to 14.9% from 14.3%, and occupancy rose to 7.9% from 7.6%. General and administrative expense was 12.4% of revenue in both periods.
  • Cash flow and investment: Operating cash flow was $30.7 million, up from $19.8 million. Capital expenditures for property and equipment were $33.1 million. Investing activities provided $11.3 million, including $44.4 million of marketable-security maturities; financing activities used $6.4 million. Cash increased $35.6 million during the quarter.
  • Liquidity and debt: Cash and cash equivalents were $260.2 million and marketable securities were $24.6 million at quarter-end. Long-term debt was $245.9 million, representing $250 million principal of 0% convertible notes due 2028, net of discount and issuance costs. No borrowings were outstanding under the $50 million revolving facility; the company was in compliance with its covenants.
  • Other obligations: Operating lease liabilities were $527.5 million, and the liability under the Tax Receivable Agreement (TRA) was $236.7 million. TRA payments are contingent on realizing related tax benefits and having sufficient taxable income.

Material changes and management commentary

  • Revenue growth primarily reflected 39 net new Company-operated Shacks opened since the prior-year period, as well as pricing; same-Shack guest traffic declined.
  • Higher delivery commissions, marketing spend, facilities costs, variable rent, occupancy taxes, and depreciation weighed on expense ratios. Management cited labor efficiencies and pricing as offsets to some cost pressure.
  • Licensing revenue growth benefited from 37 net new licensed Shacks since the prior-year period, partly offset by lower sales at existing licensed Shacks, particularly in China and the Middle East.
  • G&A increased 14.8%, including growth-support costs, prior-period restatement expenses, professional fees for non-recurring matters, and marketing and technology investment; the absence of prior-year one-time legal settlements partly offset these increases.
  • Management stated that existing cash and cash from operations should be sufficient for operating and lease obligations, capital expenditures, TRA obligations, and working capital for at least the next 12 months and the foreseeable future. The filing provides no specific earnings or sales guidance for the year.

Risks, contingencies, and unusual items

  • Control weakness: Disclosure controls were deemed ineffective because of a previously reported material weakness in controls over state deferred-tax calculations and related income tax expense or benefit. Remediation is underway, including a steering committee, a newly hired Head of Tax, outside consultants, and enhanced review procedures; management had not concluded remediation was complete.
  • Restatement-related costs: The company reported $1.4 million of restatement costs in adjusted EBITDA reconciliation and cited restatement-related costs in G&A. Adjusted EBITDA also excluded $0.5 million of CEO transition costs and $1.2 million of other non-recurring professional fees.
  • Business risks: The filing highlights execution of new Shack openings, labor and supply availability and costs, inflation, existing-Shack sales, digital and delivery initiatives, and restaurant-industry risks. Management also cautions that actual results may differ materially from forward-looking statements.
  • Legal and commitments: Ordinary-course legal matters, generally covered by insurance, were not expected to result in material liability. The company disclosed $148.4 million of additional operating lease commitments for leases not yet in possession, commencing in 2024 or later.
  • Insider trading plans: The Chairman, CEO, and CFO adopted Rule 10b5-1 plans during the quarter for planned sales of 100,000, 293,523, and 9,000 Class A shares, respectively.

Important facts for investors to verify

  • Whether same-Shack traffic stabilizes or improves, given the 2.1% quarterly decline and the contribution of pricing to comparable-sales growth.
  • Whether new Shack openings sustain sales growth while keeping labor, delivery, occupancy, and other operating costs controlled.
  • Progress and testing results for remediation of the material weakness in state deferred-tax controls.
  • Cash generation and capital spending relative to lease obligations, the $236.7 million TRA liability, and future expansion commitments.
  • Performance of licensed Shacks in China and the Middle East and the effect on licensing royalties.
  • The potential dilution or settlement implications of the 2028 convertible notes; diluted EPS for the quarter included 1.467 million shares related to the notes.