Shake Shack Inc. — Q3 2021 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended September 29, 2021; comparatives ended September 23, 2020. Amounts below are in millions unless stated otherwise.
Business context and operating performance
Shake Shack operated 350 Shacks system-wide at quarter-end: 205 domestic company-operated, 24 domestic licensed and 121 international licensed. Two domestic company-operated and seven licensed Shacks were temporarily closed, primarily due to COVID-19.
Management said Q3 sales were the highest in company history. Same-Shack sales rose 24.8% in the quarter, driven mainly by 25.8% higher guest traffic as in-Shack dining returned. Shack system-wide sales rose 53.1% to $298.6 million. Digital sales represented 42.3% of Shack sales. The company opened five domestic company-operated Shacks and eight licensed Shacks during the quarter; two international licensed Shacks closed permanently.
Financial results
| Metric | Q3 2021 | Q3 2020 | 39 weeks 2021 | 39 weeks 2020 |
|---|---|---|---|---|
| Total revenue | $193.9 | $130.4 | $536.6 | $365.4 |
| Shack sales | $187.0 | $126.3 | $519.1 | $353.9 |
| Operating loss | $(2.6) | $(6.8) | $(9.4) | $(31.7) |
| Net income (loss) | $(2.4) | $(6.1) | $0.2 | $(25.2) |
| Net income (loss) attributable to Shake Shack Inc. | $(2.2) | $(5.6) | $1.1 | $(22.7) |
| Diluted EPS | $(0.06) | $(0.15) | $0.01 | $(0.62) |
| Operating cash flow | — | $43.7 | $28.5 |
Q3 revenue increased 48.7% year over year, while the company remained loss-making. Shack-level operating profit, a company-defined non-GAAP measure, was $29.6 million and its margin was 15.8% of Shack sales, versus $18.7 million and 14.8% a year earlier. Adjusted EBITDA was $15.8 million, with an 8.2% margin, versus $8.2 million and 6.3%; these non-GAAP measures exclude items and should be considered alongside GAAP results.
Q3 cost pressures were visible in food and paper costs, which increased to 31.0% of Shack sales from 30.0%, and labor costs, which increased to 31.1% from 30.0%. For the first 39 weeks, the corresponding ratios were 30.3% and 30.3%, respectively. Occupancy improved as a share of Shack sales, to 7.8% in Q3 from 10.4%.
Cash, debt and liquidity
- At September 29, cash and cash equivalents were $321.4 million and marketable securities were $80.1 million, compared with $146.9 million and $36.9 million, respectively, at December 30, 2020.
- Operating cash flow for the first 39 weeks was $43.7 million. Investing used $112.2 million, including $68.9 million of property and equipment purchases and net purchases of marketable securities. Financing provided $243.0 million, largely from the convertible notes.
- The company issued $250 million principal amount of 0% convertible senior notes due 2028; carrying value was $243.3 million after unamortized discount and issuance costs. The initial conversion price was approximately $170.42 per share. No borrowings were outstanding under the $50 million revolving credit facility, which matures in March 2026. The company reported compliance with its covenants.
- Operating lease liabilities totaled $417.5 million in the lease note; the balance sheet reported operating lease liabilities of $417.5 million in aggregate. Additional operating lease commitments of $51.0 million related to leases not yet commenced. Total lease payments and other commitments remain significant.
- Liabilities under the Tax Receivable Agreement were $234.0 million. Payments depend on realization of specified tax benefits and future taxable income. Management said cash and marketable securities should cover operating and finance lease obligations, capital expenditures, TRA obligations and working capital needs for at least the next 12 months and the foreseeable future.
Changes, outlook and risks
Compared with 2020, sales and operating results improved substantially as business recovered from pandemic disruption and the company added restaurants. The 39-week net result turned slightly positive, aided in part by a $10.7 million income tax benefit. The effective tax rate for that period was 102.3%; management attributed the elevated rate primarily to the smaller pretax book loss, tax credits, equity-compensation tax benefits and a reduced valuation allowance.
Management highlighted labor and commodity inflation, including higher beef and chicken prices, and supply-chain disruptions. Disruptions did not materially affect this quarter, but management cautioned that future effects could be material. Other cited risks include COVID-19 and variants, labor shortages or higher costs, supply interruptions, new-Shack development and opening execution, digital and delivery operations, and sustaining sales at existing Shacks. The filing provides no specific forward revenue or earnings guidance.
A Fair Labor Standards Act matter was settled for $619, accrued during the first half and paid in full by September 29. The company also disclosed ordinary-course legal claims, with no material ultimate liability identified. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales recovery and same-Shack traffic growth persist, particularly as pandemic conditions and dining patterns change.
- Whether labor, food and supply-chain inflation continues to pressure Shack-level margins.
- Convertible-note dilution or repayment exposure, and the implications of the note conversion terms alongside the company’s share price.
- The timing and cash impact of lease commitments and the $234.0 million Tax Receivable Agreement liability.
- How non-GAAP Shack-level profit and adjusted EBITDA reconcile to GAAP results and which excluded costs recur.