Shake Shack Inc. — Q2 2021 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended June 30, 2021, compared with periods ended June 24, 2020. The company operates and licenses Shake Shack restaurants. At quarter-end, it had 339 locations system-wide: 200 domestic company-operated and 139 licensed. One company-operated and eight licensed locations were temporarily closed due to COVID-19.
Financial results
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Total revenue | $187.5 million | $91.8 million | $342.7 million | $235.0 million |
| Operating income (loss) | $3.3 million | $(24.1) million | $(6.7) million | $(24.9) million |
| Net income (loss) | $2.1 million | $(18.0) million | $2.6 million | $(19.1) million |
| Net income (loss) attributable to Shake Shack Inc. | $1.9 million | $(16.2) million | $3.3 million | $(17.2) million |
| Diluted EPS | $0.05 | $(0.43) | $0.06 | $(0.48) |
| Operating cash flow | Not separately provided for the quarter | $37.0 million | $18.0 million |
Q2 Shack sales rose 102.7% to $181.5 million and licensing revenue increased 164.2% to $6.0 million. Same-Shack sales grew 52.7%; system-wide Shack sales increased 127.7% to $281.9 million. Q2 Shack-level operating profit, a non-GAAP measure, was $34.8 million, or 19.2% of Shack sales, versus $1.9 million, or 2.2%, a year earlier. Adjusted EBITDA, also non-GAAP, was $20.6 million versus a loss of $8.8 million. First-half adjusted EBITDA was $27.8 million versus $5.4 million.
Q2 cost ratios improved year over year: food and paper costs were 30.3% of Shack sales (33.5%); labor was 29.0% (34.6%); and occupancy was 8.2% (13.8%). Other operating costs were 13.4% (16.0%). First-half operating income remained negative despite the recovery in sales.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $340.1 million and marketable securities were $80.1 million, totaling $420.2 million in cash and securities. Total current assets were $438.2 million against current liabilities of $124.5 million.
- First-half cash provided by operations was $37.0 million; investing activities used $88.0 million, including $44.7 million in property and equipment purchases and net purchases of marketable securities; financing activities provided $244.2 million.
- The company issued $250.0 million principal of 0% convertible senior notes due 2028 in March. Their balance was $243.0 million net of 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.
- Operating lease liabilities totaled $400.2 million; additional operating lease commitments of $51.7 million related to leases not yet in possession. Tax Receivable Agreement liabilities totaled $234.0 million.
Changes, outlook and risks
- The sharp year-over-year improvement primarily reflects recovery from COVID-19 restrictions and comparison with the prior-year period, as well as 29 net new domestic company-operated Shacks opened since June 2020. Q2 comparable sales growth was driven by a 61.5% increase in guest traffic, attributed to the return of in-Shack dining.
- Management reported continued sales momentum across regions, including improving urban sales; suburban locations were closer to pre-pandemic levels. Average weekly sales were $72,000 in Q2 and $74,000 in fiscal June.
- Digital sales were 47% of Shack sales in Q2. Digital sales retention was approximately 80% in fiscal June versus the January peak. The company emphasized continued digital and physical-format investment and long-term growth, but provided no specific financial guidance in this filing.
- Eight domestic company-operated Shacks and ten licensed Shacks opened in Q2; there were no permanent closures. Management said licensed revenue improved as travel and stadium activity returned and COVID-related restrictions eased, while eight licensed Shacks remained temporarily closed.
- Risks include the continuing effects of COVID-19 and restrictions, uncertain recovery patterns, and the impact of future capital-market volatility on access to financing. Management also cited higher delivery commissions and costs for gloves and other disposables in the first half. It stated existing cash and marketable securities should fund operating needs, leases, capital expenditures and TRA obligations for at least the next 12 months.
- The company reported a $619,000 settlement of an employment claim, with $24,000 remaining accrued at quarter-end. It reported compliance with credit-facility covenants; certain leverage and fixed-charge coverage tests were suspended for a period under amendments. No material changes to reported risk factors or market-risk exposure were identified.
Investor verification points
- Assess the sustainability of comparable-sales growth against pandemic-era comparisons, reopening-driven traffic, and the evolving mix of urban and suburban sales.
- Review restaurant-level cost trends, particularly labor, food, delivery and other operating expenses, as sales and operations normalize.
- Verify the terms, potential dilution and conversion conditions of the $250 million convertible notes, alongside the company’s lease obligations and $234.0 million TRA liability.
- Reconcile non-GAAP Shack-level profit and adjusted EBITDA with GAAP results; these measures exclude costs management says are recurring or necessary to the business.
- Monitor the pace and returns of new Shack openings, digital investment, and the recovery of licensed locations and travel-related sales.