Shake Shack Inc. — Q2 2015 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended July 1, 2015; comparable periods ended June 25, 2014. Amounts are in U.S. dollars. Shake Shack operated and licensed 71 Shacks at quarter-end: 37 domestic company-operated, 5 domestic licensed and 29 international licensed.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Total revenue | $48.5m | $27.7m | $86.3m | $51.9m |
| Operating income (loss) | $6.2m | $2.1m | $(4.7)m | $3.4m |
| Net income (loss), consolidated | $5.1m | $1.9m | $(6.1)m | $3.0m |
| Net income (loss) attributable to Shake Shack Inc. | $1.1m | $1.9m | $(11.6)m | $3.0m |
| Diluted Class A EPS | $0.08 | $0.06 | $(0.96) | $0.10 |
| Operating margin | 12.9% | 7.7% | (5.5)% | 6.5% |
Q2 Shack sales increased 77.9% to $46.6m; licensing revenue grew 20.1% to $1.9m. Same-Shack sales rose 12.9%, from a 8.6% increase in average check and 4.3% higher traffic. Management reported Shack-level operating profit of $14.1m, or 30.3% of Shack sales, and adjusted EBITDA of $11.2m; both are non-GAAP measures. Adjusted pro forma net income was $3.4m, or $0.09 per fully exchanged and diluted share.
For the first half, operating cash flow was $17.6m, capital spending was $16.9m, and cash increased by $62.2m to $64.9m. The cash increase largely reflects the IPO. At July 1, current assets were $71.7m and current liabilities were $16.6m. No revolving borrowings were outstanding; the company had $19.9m of facility availability after letters of credit. It also had a $0.3m liquor-license note payable.
Changes and notable items
- Q2 revenue growth reflected 14 domestic company-operated Shack openings since the prior-year comparison, plus same-Shack growth. Three domestic company-operated and two international licensed Shacks opened during the quarter; the Madison Square Park Shack reopened after renovations.
- Shack-level operating margin improved to 30.3% from 25.6%. Management cited menu price increases, the return of crinkle-cut fries, sales mix, higher sales leverage and other temporary factors, including IPO publicity and the Madison Square Park closure’s possible benefit to other Manhattan Shacks.
- First-half G&A rose to $24.4m from $7.0m, including $12.8m of non-recurring IPO-related compensation and $0.6m of IPO expenses, as well as public-company and staffing costs. The IPO-related awards and organizational transactions also materially affect the first-half loss attributable to the company and EPS; these figures are not directly comparable without considering the transaction and non-controlling interests.
- The February 2015 IPO raised $106.1m net to the company after underwriting discounts and offering expenses. Proceeds were used through SSE Holdings for IPO and transaction costs, repayment of $36.0m of revolving debt, an $11.1m distribution to certain former owners, and corporate purposes including Shack development and renovations.
Outlook, liquidity and risks
- Management said it expected to open 12 domestic company-operated Shacks in 2015 and remained on track for five international licensed Shack openings. It described a developing pipeline for 2016 and beyond and continued focus on same-Shack sales and expansion.
- Management believed operating cash flow, cash and revolver availability would fund operating leases, capital expenditures and working capital for at least the next 12 months. It also said future Tax Receivable Agreement payments could be significant: Shake Shack generally owes continuing owners 85% of realized or deemed tax benefits.
- The $50m revolving facility is secured and includes financial covenants and other restrictions; the company reported compliance at quarter-end. Lease obligations extend through 2031, and the filing describes purchase commitments and ordinary-course legal claims, with no material ultimate legal liability identified.
- Risks noted include commodity costs, labor and healthcare costs, execution and timing of new openings, and the uncertainties identified in the company’s 2014 Form 10-K. The filing reported no material changes to risk factors or market-risk exposure and no material change in off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile GAAP results with non-GAAP Shack-level profit, adjusted EBITDA and adjusted pro forma earnings, including the IPO compensation adjustments.
- Assess whether 12.9% Q2 same-Shack growth and the reported margin improvement persist after temporary factors and price increases.
- Track opening cadence, capital spending and cash generation as the company pursues its 2015 development targets.
- Evaluate the potential cash demands of leases and the Tax Receivable Agreement, alongside revolver availability and covenant requirements.
- Consider the LLC structure: Shake Shack Inc. held 33.3% of SSE Holdings at quarter-end, with the remaining 66.7% represented as non-controlling interests.