Shake Shack Inc. — Q2 2023 Form 10-Q Summary
Reporting period: The 13 weeks ended June 28, 2023, compared with the 13 weeks ended June 29, 2022. Year-to-date figures cover 26 weeks. Amounts are in U.S. dollars; financial statement figures below are rounded to millions unless noted.
Business context and operating performance
Shake Shack operated 471 Shacks system-wide at quarter-end: 270 domestic company-operated, 35 domestic licensed and 166 international licensed. During Q2, it opened 10 domestic company-operated and 13 international licensed Shacks, and one international licensed Shack closed permanently.
- Same-Shack sales increased 3.0%, comprising a 4.3% increase in price mix and a 1.3% decline in guest traffic. Management said sales growth slowed from Q1; traffic was negative across urban and suburban Shacks.
- Average weekly sales were $77,000, versus $76,000 a year earlier. System-wide Shack sales rose 21.2% to $426.3 million. Digital sales rose 3.4% to $86.9 million and represented 33.2% of Shack sales.
- Management attributed company-operated Shack sales growth mainly to new openings and menu prices, partly offset by a decline in items per check. Licensing revenue growth reflected new licensed Shacks and higher sales at existing licensed locations, particularly domestic airports.
Financial results
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Total revenue | $271.8 | $230.8 | $525.1 | $434.1 |
| Shack sales | $261.8 | $223.1 | $506.1 | $419.8 |
| Licensing revenue | $10.0 | $7.7 | $19.0 | $14.3 |
| Operating income (loss) | $4.7 | $(0.8) | $1.6 | $(15.8) |
| Net income (loss) | $7.2 | $(1.3) | $5.6 | $(12.6) |
| Net income (loss) attributable to Shake Shack Inc. | $6.9 | $(1.2) | $5.4 | $(11.4) |
| Diluted EPS | $0.16 | $(0.03) | $0.13 | $(0.29) |
| Adjusted EBITDA (non-GAAP) | $37.1 | $22.9 | $64.6 | $33.3 |
| Adjusted EBITDA margin (non-GAAP) | 13.6% | 9.9% | 12.3% | 7.7% |
Q2 revenue increased 17.8%; first-half revenue increased 20.9%. The Q2 operating margin was 1.7% of revenue, versus a 0.4% loss margin a year earlier. Shack-level operating profit, a company-defined non-GAAP measure, was $54.9 million, or 21.0% of Shack sales, versus $42.4 million, or 19.0%.
Q2 cost ratios improved year over year for food and paper (29.0% versus 29.6% of Shack sales), labor (28.7% versus 29.5%) and other operating expenses (13.8% versus 14.4%). Occupancy was 7.6% versus 7.5%. Pre-opening costs increased to $5.6 million from $2.8 million, reflecting more openings, higher team wages and opening-related occupancy costs. Depreciation and amortization rose to $22.3 million from $18.1 million, primarily due to new Shacks and technology investments.
Other income increased to $3.2 million in Q2 and $6.1 million in the first half, primarily reflecting higher interest income as rates rose. Q2 general and administrative expenses included $1.7 million of professional fees for a non-recurring matter; first-half fees for that matter were $2.3 million. Adjusted EBITDA adds back certain items and is not a GAAP measure; the filing notes the measure’s limitations.
Cash flow, debt and liquidity
- First-half operating cash flow was $62.2 million, up from $35.2 million. Investing activities used $85.4 million, including $74.8 million of property and equipment purchases and net investment activity. Financing activities used $3.6 million.
- Cash and cash equivalents were $203.7 million at June 28, down from $230.5 million at fiscal year-end. Marketable securities were $91.5 million, consisting of U.S. Treasuries with contractual maturities under 12 months. Total current assets were $329.5 million and current liabilities $150.2 million.
- Long-term debt, net of issuance costs, was $245.1 million. It represents $250 million of 0% convertible notes due 2028. The notes’ initial conversion price was approximately $170.42 per share; convertible notes were included in Q2 diluted EPS, contributing to diluted weighted-average shares of 43.9 million versus 39.4 million basic shares.
- No borrowings were outstanding under the $50 million revolving credit facility; the company was covenant-compliant. A fourth amendment dated June 29, 2023 updated benchmark-rate provisions to use a base rate or SOFR plus applicable margin.
- Total lease liabilities were $501.4 million, principally operating leases. The company also disclosed $132.9 million of additional operating lease commitments for leases without a possession date, commencing in 2023 or later.
- The liability under the Tax Receivable Agreement was $235.4 million. The company generally owes certain holders 85% of tax benefits actually realized or deemed realized; payments depend on factors including future taxable income. Management said cash on hand and operating cash flow should fund obligations, capital expenditures and working capital for at least the next 12 months and the foreseeable future.
Outlook, risks and other notable matters
The filing provides no specific revenue, earnings, margin, opening or capital-expenditure guidance. Management’s liquidity assessment is not a financial forecast. Forward-looking risks identified include execution and timing of new Shack openings, food supply disruptions or higher commodity costs, labor availability and wage inflation, inflationary pressures, digital and channel investments, maintaining sales at existing Shacks, and restaurant-industry risks. The filing reports no material changes to the risk factors in the 2022 Form 10-K and no material changes in market-risk exposure.
Legal proceedings arise in the ordinary course; the company said the ultimate liability for these matters was not material as of June 28, 2023. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether same-Shack traffic stabilizes: Q2 comparable sales growth relied on price mix despite lower guest traffic.
- Whether improved Shack-level and adjusted EBITDA margins persist as wage, commodity, utility and occupancy costs evolve; compare non-GAAP measures with GAAP results.
- Whether new Shack growth delivers expected sales and returns, given higher pre-opening costs, capital spending and substantial lease commitments.
- How cash generation and liquidity develop after capital expenditures, and the timing and funding of contingent Tax Receivable Agreement payments.
- The potential dilution and settlement terms of the 2028 convertible notes, and the terms and covenant capacity of the amended revolving credit facility.