Shake Shack Inc. — Q3 2022 Form 10-Q
Reporting period: Thirteen weeks ended September 28, 2022; year-to-date figures cover 39 weeks. Comparisons are with the periods ended September 29, 2021. Dollar amounts are in millions unless noted.
Business context
Shake Shack operated or licensed 402 Shacks at quarter-end: 232 domestic company-operated, 30 domestic licensed and 140 international licensed. During the quarter it opened two domestic company-operated and six licensed Shacks, and one international licensed Shack closed.
Financial and operating results
| Metric | Q3 2022 | Q3 2021 | 39 weeks 2022 | 39 weeks 2021 |
|---|---|---|---|---|
| Total revenue | $227.8 (+17.5%) | $193.9 | $662.0 (+23.4%) | $536.6 |
| Operating loss | $(4.8) | $(2.6) | $(20.6) | $(9.4) |
| Net income (loss) | $(2.3) | $(2.4) | $(14.9) | $0.2 |
| Net income (loss) attributable to Shake Shack Inc. | $(2.0) | $(2.2) | $(13.4) | $1.1 |
| Diluted EPS | $(0.05) | $(0.06) | $(0.34) | $0.01 |
| Adjusted EBITDA | $19.5 | $15.8 | $51.2 | $43.6 |
| Adjusted EBITDA margin | 8.6% | 8.2% | 7.7% | 8.1% |
- Q3 same-Shack sales rose 6.3%, comprising 2.9% higher traffic and 3.4% price/mix. Urban same-Shack sales grew 10.9%; suburban sales grew 2.2%. Management noted traffic growth decelerated from Q2, partly offset by price/mix.
- Q3 system-wide sales were $353.2 million, up 18.3% year over year. Digital sales were $78.9 million, or 35.9% of Shack sales.
- Q3 Shack-level operating profit was $35.8 million, with a 16.3% margin versus 15.8% a year earlier. For the 39-week period, margin was 16.8%, unchanged year over year; 2022 includes $1.3 million of gift-card breakage catch-up income.
- Q3 labor costs improved to 29.4% of Shack sales from 31.1%, while other operating costs rose to 15.5% from 14.2%. Food and paper costs were 30.9% versus 31.0%.
Cash, debt and liquidity
- At September 28, cash and cash equivalents were $257.0 million and marketable securities were $80.0 million, versus cash of $302.4 million at December 29, 2021.
- For the 39 weeks, operating cash flow was $54.3 million (prior year $43.7 million); capital expenditures were $94.8 million. Investing cash outflow was $95.2 million, and cash declined $45.4 million.
- Convertible notes had $250.0 million principal, carry a 0% coupon and mature in March 2028; carrying value was $244.3 million. No revolving-credit borrowings were outstanding; the facility allows up to $50 million and matures in March 2026. The company reported covenant compliance.
- Operating lease liabilities totaled $469.9 million. Tax Receivable Agreement liabilities were $234.9 million; payments depend on realizing tax benefits and future taxable income.
- Management stated existing cash and marketable securities should fund operations, leases, capital expenditures, TRA obligations and working capital for at least 12 months and the foreseeable future.
Changes, outlook and notable items
- Revenue grew, but year-to-date results shifted from a small prior-year profit to a $14.9 million net loss. Higher sales were accompanied by inflationary and expansion-related costs; operating loss widened in both reported periods.
- General and administrative expense rose 30% in Q3 and 44% year to date, reflecting higher team costs and investments in marketing and technology; the year-to-date increase also included legal accruals and retreat costs.
- The company recorded $6.75 million of accruals for settlements of private and regulatory actions relating to New York City predictive-scheduling laws.
- A change in gift-card breakage estimation generated a $1.28 million cumulative catch-up in Q1; total gift-card breakage income for the 39 weeks was $1.42 million. The company also recorded a $0.47 million Employee Retention Credit benefit.
- No quantified forward guidance was provided. Cited risks include inflation, labor costs or shortages, supply disruptions, COVID-19 impacts, timely Shack openings, digital and drive-thru execution, and sustaining sales at existing Shacks. Management reported effective disclosure controls and no material change in risk factors from its prior annual report.
Most important facts for investors to verify
- Whether same-Shack traffic and sales momentum can persist given the reported Q3 traffic deceleration.
- How food, labor, utilities, occupancy and other cost inflation affects Shack-level margins and GAAP profitability.
- Capital spending and opening pace, including the 37 Shacks under construction, and the returns from new locations.
- Cash needs and timing of lease and Tax Receivable Agreement payments; assess liquidity alongside the $250 million notes and substantial lease obligations.
- Final costs or developments related to the New York City scheduling-law matters and any other legal contingencies.
- Adjusted EBITDA and Shack-level profit are non-GAAP measures; review their reconciliations and the excluded costs alongside GAAP results.