Shake Shack Inc. — Q1 2020 Form 10-Q
Reporting period: Thirteen weeks ended March 25, 2020; comparative period ended March 27, 2019. Amounts are in U.S. dollars unless stated otherwise. The filing was signed May 4, 2020.
Business context
Shake Shack operated and licensed 287 Shacks at quarter-end: 167 domestic company-operated, 22 domestic licensed and 98 international licensed. COVID-19 disruptions began sharply affecting operations during the latter part of the quarter. As of March 25, 12 company-operated and 37 licensed Shacks were temporarily closed.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $143.2 million | $132.6 million |
| Shack sales | $138.0 million | $128.6 million |
| Licensing revenue | $5.1 million | $4.0 million |
| Operating income (loss) | ($0.8 million) | $5.2 million |
| Net income (loss), consolidated | ($1.1 million) | $3.6 million |
| Net income (loss) attributable to Shake Shack Inc. | ($1.0 million) | $2.5 million |
| Diluted EPS | ($0.03) | $0.08 |
| Operating cash flow | $7.5 million | $17.2 million |
Revenue rose 8.0%, principally from new company-operated Shacks and licensed openings, but same-Shack sales fell 12.8%. The decline reflected a 14.9% traffic decrease, partly offset by 2.1% from price and sales mix. Same-Shack sales were down about 2% in the first two fiscal months and about 29% in March.
Shack-level operating profit, a company-defined non-GAAP measure, was $26.4 million, or 19.1% of Shack sales, versus $27.0 million and 21.0%. Adjusted EBITDA was $14.3 million versus $17.8 million, with margin of 10.0% versus 13.5%. These measures exclude certain costs and should be considered with GAAP results.
Expense pressure and sales deleverage drove the operating loss. Labor was 30.3% of Shack sales versus 28.9%; occupancy was 9.1% versus 8.5%; and other operating expenses were 12.9% versus 12.1%. Depreciation rose 31.3% to $11.8 million. Impairment and asset-disposal expense was $2.1 million, including a $1.1 million non-cash impairment charge at one Shack. Food and paper costs improved to 28.7% of Shack sales from 29.5%.
Cash, debt and liquidity
At March 25, cash and cash equivalents were $87.8 million and marketable securities were $16.4 million, together $104.2 million. Current assets were $115.4 million and current liabilities $102.8 million. The company drew the full $50.0 million revolving credit facility in March; reported long-term debt was $50.0 million. It was in covenant compliance at quarter-end. The facility matures in August 2024 and is secured by substantially all assets of SSE Holdings and guarantors.
Operating cash flow decreased to $7.5 million from $17.2 million. Investing activities provided $0.6 million, including proceeds from security sales, while purchases of property and equipment used $19.2 million. Financing activities provided $42.6 million, primarily from the revolver draw. Lease liabilities totaled $371.0 million; additional operating lease commitments of $55.2 million related to leases not yet in possession. Tax Receivable Agreement obligations were $228.2 million, subject to realization of related tax benefits and future taxable income.
Subsequent to quarter-end, the company raised $145.7 million net from an underwritten stock offering and ATM sales, issuing a total of about 3.65 million Class A shares. The ATM program permits up to $75.0 million of sales; the initial ATM sale generated $9.8 million net. As of April 29, management reported $246.8 million in cash and marketable securities, excluding deposits in transit, foreign currency and other reconciling items.
COVID-19, outlook and risks
Effective March 16, domestic company-operated Shacks shifted to to-go service and closed dining rooms. Management reported a steep immediate sales decline. Average weekly sales fell from $70,000 for the week ended March 11 to $24,000 for the weeks ended March 25 and April 1, then recovered to $49,000 for the week ended April 29. Year-over-year sales growth was down 34% in the week ended April 29; same-Shack sales were down 45%. As of April 29, 17 company-operated Shacks and 61 of 120 licensed Shacks were temporarily closed.
The company withdrew fiscal 2020 guidance because of pandemic uncertainty. It suspended non-essential capital spending and most future Shack construction, reduced staffing and operating costs, implemented salary reductions and sought rent deferrals or abatements. Eight nearly completed Shacks were expected to be completed and opened when possible. Management cited improving domestic sales from digital ordering and delivery, and limited reopenings in parts of Asia, but said timing of recovery to pre-pandemic levels could not be estimated. Reopening was expected to entail labor inefficiencies and continuing safety-related costs.
In May, the company amended its credit facility, including modified covenant requirements and a $25.0 million minimum-liquidity requirement through July 1, 2021. The amendment also increased applicable borrowing spreads. The company stated that available resources and actions taken were expected to cover obligations and working capital for at least 12 months, while warning that prolonged disruption, weak consumer demand, renewed closures, staffing or supply problems, and credit-covenant pressure could adversely affect results and liquidity.
The company entered a $10.0 million Paycheck Protection Program loan in April and returned the full $10.005 million, including interest, on April 27. The CARES Act’s financial-statement impact had not yet been quantified. A California labor-law settlement of $1.2 million was accrued; other ordinary-course legal matters were not considered material. No significant changes to contractual obligations or off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Whether sales and same-Shack sales continued recovering after the April 29 trend data, and whether dining-room restrictions or closures returned.
- Whether the $50.0 million revolver, amended covenants and minimum-liquidity condition remain manageable as operating cash flow changes.
- How the equity proceeds, share issuance and any further ATM sales affect liquidity and dilution.
- Whether cost reductions, rent arrangements and reopening expenses support Shack-level margins as sales recover.
- Whether new restaurant openings, lease commitments and the $228.2 million Tax Receivable Agreement obligation remain supportable under updated cash-flow and taxable-income expectations.
- The eventual impact of the CARES Act and any changes in impairment assumptions, inventory reserves or legal contingencies.