Shake Shack Inc. — Q1 2021 Form 10-Q
Business context and period: The filing covers the 13 weeks ended March 31, 2021, compared with the 13 weeks ended March 25, 2020. Shake Shack operated and licensed 321 restaurants at quarter-end: 192 domestic company-operated and 129 licensed. Four company-operated and 16 licensed Shacks were temporarily closed, primarily due to COVID-19.
Financial performance
| Metric | Q1 2021 | Prior-year quarter |
|---|---|---|
| Total revenue | $155.3 million | $143.2 million |
| Shack sales | $150.7 million | $138.0 million |
| Licensing revenue | $4.6 million | $5.1 million |
| Operating loss | $10.0 million | $0.8 million |
| Net income (loss) | $0.6 million | $(1.1) million |
| Net income (loss) attributable to Shake Shack Inc. | $1.3 million | $(1.0) million |
| Operating cash flow | $10.0 million | $7.5 million |
| Capital expenditures | $23.2 million | $19.2 million |
Revenue rose 8.5%, with Shack sales up 9.1%, primarily reflecting 25 net new domestic company-operated Shacks since the prior-year period and improved comparable sales. System-wide Shack sales increased 3.0% to $228.3 million. Same-Shack sales rose 5.7%, versus a 17.4% decline in Q4 2020; price and sales mix increased 18.0%, partly offset by a 12.3% decline in guest traffic.
Shack-level operating profit, a company-defined non-GAAP measure, fell 14.3% to $22.6 million, or 15.0% of Shack sales, from $26.4 million, or 19.1%. Food and paper costs rose to 29.6% of Shack sales from 28.7%; labor to 30.8% from 30.3%; and other operating expenses to 15.4% from 12.9%, including higher delivery commissions. GAAP operating loss widened despite higher sales. Adjusted EBITDA declined to $7.1 million from $14.3 million; adjusted EBITDA margin was 4.6% versus 10.0%.
The company reported net income despite a $10.5 million pretax loss, principally because of an $11.1 million income tax benefit. Management attributed the unusually high effective tax rate to low pretax income, tax credits and equity-compensation tax benefits, and a reduction in a valuation allowance. GAAP diluted EPS was $0.01; adjusted pro forma diluted EPS, a non-GAAP measure, was $0.04.
Liquidity, debt and cash flows
- Cash and cash equivalents were $375.0 million and marketable securities were $40.9 million at March 31, 2021, totaling $415.9 million. Cash increased $228.1 million during the quarter.
- Operating activities provided $10.0 million; investing activities used $27.2 million, primarily for property and equipment; financing activities provided $245.4 million, largely from the convertible note issuance.
- In March, the company issued $250 million principal amount of 0% convertible senior notes due 2028, receiving $243.8 million net proceeds. Notes were recorded at $242.9 million net of unamortized 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. Its maturity was extended to March 2026; the company reported covenant compliance. Certain financial covenant tests were suspended for a period under amendments.
- Operating lease liabilities totaled approximately $386.9 million on the lease maturity schedule. The company also disclosed $56.0 million of additional operating lease commitments for leases not yet in possession.
- Liabilities under the Tax Receivable Agreement totaled $234.0 million. Payments are contingent on realizing tax benefits and generating sufficient future taxable income.
Outlook, management commentary and risks
Management described improving sales trends amid reopening and continued recovery, while noting that major urban markets, including Manhattan, remained materially below pre-pandemic levels as office, event and tourism traffic recovered. Most Shacks had reopened dining rooms by fiscal April, many with capacity restrictions. Digital sales were 60% of Shack sales in Q1; digital mix fell to 51% in fiscal April as in-Shack dining increased, while management reported retention of 90% of fiscal January digital sales in April.
Through April 28, same-Shack sales were up 86% year over year; the filing cautions that comparisons were affected by the prior-year pandemic disruption. Management targeted 35–40 new domestic company-operated Shacks and 15–20 new licensed Shacks in fiscal 2021, and expected 16–18 openings by midyear. These plans remained subject to COVID-19 uncertainty. The filing provides no full-year revenue or earnings guidance.
Key risks include ongoing pandemic effects, capacity restrictions and uneven urban recovery; guest traffic declines; rising food, packaging and labor costs; delivery commissions; and execution and funding needs associated with restaurant growth. Forward-looking statements are subject to risks described in the company’s 2020 Form 10-K, and the company disclaims an obligation to update them except as required by law.
The company recorded accruals of $595,000 for a proposed Fair Labor Standards Act settlement and $1.18 million for a California labor-law settlement. It said other ordinary-course legal matters were not material. The filing reported no material changes to previously disclosed risk factors, contractual obligations, off-balance-sheet arrangements or market-risk exposure.
Most important facts for investors to verify
- Whether same-Shack sales recovery persists and translates into improved guest traffic, not only higher pricing and sales mix.
- Whether margins recover from Q1 levels as food, packaging, labor and delivery-related costs evolve.
- Progress against the 2021 restaurant-opening targets, including construction and lease commitments.
- The potential dilution, conversion and repayment implications of the $250 million convertible notes.
- The timing and cash impact of lease commitments and the $234.0 million Tax Receivable Agreement liability.
- The sustainability of reported net income, given that the quarter’s positive result depended on a substantial income tax benefit; assess GAAP results separately from management’s non-GAAP measures.