Business context and reporting period
Shake Shack Inc. filed this unaudited Form 10-Q for the 13 and 39 weeks ended September 30, 2015; comparatives ended September 24, 2014. At quarter-end, the system had 75 Shacks: 41 domestic company-operated, five domestic licensed and 29 international licensed. The IPO and related organizational transactions in February 2015 changed the company’s tax and ownership structure; Shake Shack consolidated SSE Holdings while reporting non-controlling interests.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | 39 weeks 2015 | 39 weeks 2014 |
|---|---|---|---|---|
| Total revenue | $53.3m | $31.8m | $139.5m | $83.8m |
| Operating income | $7.8m | $0.8m | $3.1m | $4.1m |
| Consolidated net income | $6.2m | $0.5m | $0.1m | $3.5m |
| Net income (loss) attributable to Shake Shack Inc. | $1.5m | $0.5m | ($10.0m) | $3.5m |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $30.9m | $11.4m |
- Q3 revenue increased 67.4%; Shack sales rose 70.0% to $51.3m, while licensing revenue increased 20.4% to $2.0m. Same-Shack sales grew 17.1%, comprising 8.1% higher guest traffic and a 9.0% combined price and sales-mix increase.
- Q3 operating margin was 14.6%, versus 2.4%. Shack-level operating profit, a non-GAAP measure, was $15.6m (30.4% of Shack sales), versus $7.6m (25.1%). Adjusted EBITDA was $13.0m versus $5.7m; adjusted pro forma net income was $4.4m, or $0.12 per fully exchanged diluted share, versus $1.2m, or $0.03.
- Q3 diluted GAAP EPS attributable to Shake Shack was $0.10, versus $0.02. For the 39 weeks, the $10.0m attributable loss reflects the post-IPO ownership/tax presentation and substantial IPO-related compensation costs; the filing reports $12.8m of non-recurring compensation expense in the period.
- Food and paper costs declined to 29.1% of Shack sales from 31.0%; labor fell to 23.7% from 25.4%. Management cited pricing, lower dairy and fry costs, higher sales leverage and reduced labor needs from the return of crinkle-cut fries. Slightly higher beef costs partly offset food-cost improvement.
- Cash was $69.8m at September 30, compared with $2.7m at December 31, 2014. Operating cash flow of $30.9m and investing outflows of $25.3m were accompanied by $61.5m of financing inflows, principally net IPO proceeds. Capital spending was $25.3m.
- No revolver borrowings remained at quarter-end; $19.9m was available after letters of credit. The facility commitment is $50m, with $20m immediately available; the company reported covenant compliance. A $0.3m liquor-license note also remained outstanding.
- Current assets were $75.8m and current liabilities $20.0m. Total liabilities were $136.7m, including a $92.4m tax receivable agreement obligation ($91.3m long-term and $1.1m current). The agreement generally requires payment to continuing equity owners of 85% of realized or deemed tax benefits.
Material changes, outlook, and risks
Growth in sales reflected 15 domestic company-operated Shack openings since the prior-year comparison date, as well as strong same-Shack sales. Four domestic company-operated Shacks opened during Q3. General and administrative expense for the 39 weeks rose to $30.2m from $12.2m, mainly due to IPO-triggered equity compensation, public-company costs and added personnel; the quarter’s G&A was $5.7m versus $5.2m.
Management said two additional domestic company-operated Shacks and one international licensed Shack opened after quarter-end, achieving its stated goal of 12 domestic company-operated openings for fiscal 2015. The first Tokyo Shack was expected to open in November 2015 ahead of schedule, with two further international licensed openings expected during the remainder of fiscal 2015. Management also cited a growing development pipeline for 2016 and beyond. No specific financial guidance was provided.
Management believed cash, operating cash flow and revolver availability would fund operating needs, capital expenditures and tax receivable agreement obligations for at least 12 months. Key exposures include commodity costs, labor and health-care costs, rent and opening costs, as well as the execution and funding demands of expansion. The company reported no material change in previously disclosed risk factors or market-risk exposure. Ordinary-course legal matters were generally insured and were not considered material; no material changes to contractual obligations or off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- How much same-Shack growth is sustained by traffic versus pricing and mix, and whether the 17.1% Q3 increase persists.
- Whether new Shack openings meet sales and margin expectations as the company expands into new markets; the filing notes newer target-volume Shacks can have lower sales despite similar build-out costs.
- The quality and comparability of reported earnings: distinguish GAAP attributable income from consolidated results and non-GAAP adjusted measures, particularly given IPO-related compensation and the tax/ownership structure.
- The timing and cash impact of the $92.4m tax receivable agreement obligation, and the company’s assumptions that tax savings will fund payments.
- Capital spending, cash generation and revolver availability as expansion continues, together with compliance with facility covenants.