Shake Shack Inc. — Q1 2022 Form 10-Q
Business context and reporting period. The quarter covered 13 weeks ended March 30, 2022; comparisons are with the 13 weeks ended March 31, 2021. Shake Shack operated or licensed 382 Shacks at quarter-end: 225 domestic company-operated, 27 domestic licensed, and 130 international licensed. The company opened 13 Shacks during the quarter and reported no permanent closures.
Financial performance
| Metric | Q1 2022 | Prior-year quarter |
|---|---|---|
| Total revenue | $203.4 million | $155.3 million |
| Shack sales | $196.8 million | $150.7 million |
| Licensing revenue | $6.6 million | $4.6 million |
| Loss from operations | $(14.9) million | $(10.0) million |
| Net income (loss) | $(11.3) million | $0.6 million |
| Net income (loss) attributable to Shake Shack Inc. | $(10.2) million; $(0.26) per diluted share | $1.3 million; $0.01 per diluted share |
| Net cash provided by operating activities | $8.0 million | $10.0 million |
- Revenue rose 31.0% year over year; Shack sales increased 30.6% and licensing revenue increased 43.0%. Shack sales growth reflected 33 net new domestic company-operated Shacks versus a year earlier and higher traffic.
- Same-Shack sales grew 10.3% year over year (urban +19.5%; suburban +3.5%), but fell 10.5% versus Q4 2021. Average weekly sales were $68,000, up from $64,000 a year earlier but down 8.1% sequentially.
- Food and paper costs were 30.4% of Shack sales, versus 29.6%; labor was 30.7%, versus 30.8%; occupancy was 8.3%, versus 9.2%. Higher beef and chicken prices pressured food costs; menu price increases partly offset them.
- Shack-level operating profit, a non-GAAP measure, was $29.9 million, with a 15.2% margin versus $22.6 million and 15.0%. The 2022 margin includes a $1.281 million cumulative gift-card breakage adjustment, which management says added 0.5 percentage points.
- Adjusted EBITDA, also non-GAAP, was $9.6 million, or 4.7% of revenue, versus $7.1 million and 4.6%. It excludes, among other items, the $6.0 million legal settlement and the gift-card breakage catch-up adjustment; it should not be read as GAAP profit.
Cash, debt, and liquidity
- Cash and cash equivalents were $279.3 million at March 30, down from $302.4 million at December 29, 2021; marketable securities were $79.7 million. Together these totaled approximately $358.9 million.
- Operating cash flow was $8.0 million; investing cash outflow was $28.1 million, including $28.0 million of property and equipment purchases. Cash declined by $23.2 million during the quarter.
- Convertible notes had $250.0 million principal and a $243.8 million net carrying value; they bear 0% interest and mature in March 2028. No borrowings were outstanding under the $50 million revolving facility, which matures in 2026. The company reported compliance with its covenants.
- Operating and finance lease liabilities totaled $443.4 million. An additional $129.3 million of operating lease commitments related to signed leases not yet in possession.
- Liabilities under the Tax Receivable Agreement totaled $234.3 million. Payments depend on realizing the associated tax benefits and sufficient future taxable income. Management stated existing cash and marketable securities should fund operating needs, leases, capital expenditures, TRA obligations, and working capital for at least 12 months and the foreseeable future.
Changes, outlook, risks, and unusual items
- Management reported COVID-related closures and reduced hours in January and February, with materially better performance in March as cases declined and mobility recovered. Omicron-related pressures contributed to the sequential sales and traffic decline; lockdowns and closures continued to affect licensed markets, especially China.
- Labor and commodity inflation persisted. The company raised menu prices in March and expected higher inflationary pressures in coming quarters. The filing provides no quantified full-year revenue, earnings, or unit-growth guidance.
- General and administrative expense rose 60.1% to $31.3 million, including the $6.0 million predictive-scheduling settlement and approximately $4.0 million of additional wages and team costs, as well as greater digital and marketing investment.
- A related regulatory matter concerning predictive-scheduling laws remained unresolved; management could not reasonably estimate its outcome or potential liability, and no additional amount was accrued for that matter.
- The company began recognizing gift-card breakage based on accumulated redemption data as a change in estimate. It recorded $1.309 million of breakage income in Q1, including the $1.281 million cumulative catch-up. It also recorded a $0.5 million Employee Retention Credit benefit in labor expense.
- Key stated risks include COVID-19 and variants, new-Shack development and opening timing, supply interruptions, labor shortages and costs, inflation, digital and new-channel execution (including drive-thru), existing-Shack sales, and restaurant-industry risks generally. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether same-Shack sales and traffic recover from the sequential Q1 decline, particularly in urban locations and markets affected by COVID restrictions.
- Whether menu pricing offsets expected food, labor, and other cost inflation without weakening traffic or margins.
- The recurring operating impact of the $6.0 million settlement, the unresolved related regulatory matter, and the treatment of gift-card breakage and other non-GAAP adjustments.
- Whether planned Shack openings, lease commitments, and capital spending remain supportable by operating cash flow and available liquidity.
- The potential cash timing of the $234.3 million TRA liability and possible dilution or settlement effects associated with the $250 million convertible notes.