Shake Shack Inc. — Q2 2017 Form 10-Q
Business context and period: The unaudited quarter covered 13 weeks ended June 28, 2017; year-to-date covered 26 weeks. Shake Shack operated and licensed 134 locations system-wide: 75 domestic company-operated, 9 domestic licensed and 50 international licensed. The company opened four company-operated and four licensed Shacks during the quarter.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Total revenue | $91.3m | $66.5m | +37.4% |
| Operating income | $11.7m | $8.9m | +31.4% |
| Operating margin | 12.9% | 13.4% | Down 0.5 pts |
| Net income | $8.2m | $6.5m | +25.0% |
| Net income attributable to Shake Shack Inc. | $4.9m | $3.3m | +47.9% |
| Diluted Class A EPS | $0.19 | $0.14 | Up $0.05 |
| Shack-level operating profit (non-GAAP) | $25.3m | $19.9m | +27.6% |
| Shack-level operating profit margin (non-GAAP) | 28.8% | 30.8% | Down 2.0 pts |
| Adjusted EBITDA (non-GAAP) | $19.4m | $14.2m | +36.4% |
For the first half, revenue was $168.1m versus $120.6m; operating income was $17.4m versus $13.6m; net income attributable to Shake Shack Inc. was $7.1m versus $4.8m; and operating cash flow was $33.7m versus $24.4m.
Comparable sales and cost trends: Q2 same-Shack sales declined 1.8%, with guest traffic down 4.3%, partly offset by 2.5% combined price and mix growth. Shack sales rose 36.6%, primarily reflecting 24 company-operated openings since the comparable prior-year period. Labor costs increased to 25.5% of Shack sales from 23.7%, attributed to wage increases, management investment and new Shacks at differing sales volumes. Food and paper costs were steady at 28.1% of Shack sales.
Cash, investment and obligations: At June 28, cash and cash equivalents were $22.4m and marketable securities were $63.1m. Current assets were $93.2m versus current liabilities of $33.1m. The company had no revolver borrowings and $19.9m available under its $50m facility, and reported compliance with covenants. First-half capital spending on property and equipment was $25.0m. The balance sheet included $11.2m of deemed landlord financing and $280.4m of Tax Receivable Agreement (TRA) obligations, including accrued interest; TRA payments depend on realizing associated tax benefits.
Changes, outlook and notable items
- Fiscal 2017 revenue guidance remained $351m–$355m, and company-operated opening guidance remained 23–24 locations. The company revised same-Shack sales growth guidance from 0% to a decline of 2%–3%, and raised net licensed-opening guidance from 12 to 15.
- Other outlook ranges were unchanged: Shack-level operating profit margin 26.5%–27.5%; G&A $38m–$40m; depreciation $22m; interest expense $1.6m–$2.0m; and adjusted pro forma effective tax rate 40%–41%. Management expected average annual sales volume of at least $3.4m for 2017 company-operated openings.
- Management cited new-unit growth and a roughly 1.5% menu price increase as revenue drivers, offset by weaker comparable traffic and higher labor costs. Q2 licensing revenue included $0.5m of previously deferred royalty revenue associated with initial publication of the Shake Shack book.
- First-half results included $0.7m of executive-transition costs in adjusted EBITDA reconciliation. The company paid $0.774m in May to satisfy a wage-and-hour settlement and related expenses; it said ordinary-course legal matters were not material.
- The company stated that it believed available cash, operating cash flow and revolver availability would fund operating needs and planned investment for at least 12 months. It cautioned that actual results may differ from forward-looking expectations; risk factors were reported as not materially changed from the 2016 Form 10-K.
- Management was evaluating new accounting standards, including revenue recognition; it noted potential changes in timing for some licensing fixed fees, while preliminary assessment suggested sales-based royalties might not change significantly. Disclosure controls were considered effective, with no material internal-control changes reported.
Key facts for investors to verify
- Whether comparable-sales weakness and the revised full-year same-Shack outlook persist, particularly given the traffic decline.
- Whether labor and other operating cost pressures continue to erode Shack-level margins as the company expands.
- Execution and sales performance of planned company-operated and licensed openings, including the stated $3.4m average annual sales-volume expectation for new company-operated Shacks.
- The timing and cash impact of the $280.4m TRA obligation, which is contingent on future tax-benefit realization and taxable income.
- How much reported growth reflects new locations, price and mix, and the one-time recognition of deferred book-related royalties; non-GAAP measures should be assessed alongside GAAP results.