SHAKE SHACK INC.
This section and other parts of this Annual Report on
Form 10-K ("Form 10-K") contain forward-looking statements, within the meaning
of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are
subject to known and unknown risks, uncertainties and other important factors
that may cause actual results to be materially different from the statements
made herein. All statements other than statements of historical fact are
forward-looking statements. Forward-looking statements discuss our current
expectations and projections relating to our financial position, results of
operations, plans, objectives, future performance and business. You can identify
forward-looking statements by the fact that they do not relate strictly to
historical or current facts. These statements may include words such as "aim,"
"anticipate," "believe," "estimate," "expect," "forecast," "future," "intend,"
"outlook," "potential," "project," "projection," "plan," "seek," "may," "could,"
"would," "will," "should," "can," "can have," "likely," the negatives thereof
and other similar expressions.
All forward-looking statements are expressly qualified in their entirety by
these cautionary statements. You should evaluate all forward-looking statements
made in this Form 10-K in the context of the risks and uncertainties disclosed
in Part I, Item 1A of this Form 10-K under the heading "Risk Factors" and in
this Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
The forward-looking statements included in this Form 10-K are made only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.
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OVERVIEW
Shake Shack is a modern day "roadside" burger stand serving a classic American menu of premium burgers, chicken sandwiches, hot dogs, crinkle cut fries, shakes, frozen custard, beer and wine. Our fine dining heritage and commitment to community building, hospitality and the sourcing of premium ingredients is what we call "fine casual." Fine casual couples the ease, value and convenience of fast casual concepts with the high standards of excellence grounded in our fine dining heritage - thoughtful ingredient sourcing and preparation, hospitality and quality. Our mission is to Stand For Something Good in all aspects of our business, including the exceptional team we hire and train, the premium ingredients making up our menu, our community engagement and the design of our Shacks. Stand For Something Good is a call to action for all of our stakeholders - our team, guests, communities, suppliers and investors - and we actively invite them all to share in this philosophy with us. This commitment drives our integration into the local communities in which we operate and fosters a deep and lasting connection with our guests. Our fiscal year ends on the last Wednesday in December. Fiscal year 2021 and 2019 included 52 weeks and fiscal year 2020 included 53 weeks. The additional operating week of fiscal 2020 is referred to as the "53rd week." For fiscal year 2020, comparable store sales percentages were calculated excluding the 53rd week in the fourth quarter. For discussion of our results of operations and changes in financial condition for fiscal 2020 compared to fiscal 2019 refer to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the fiscal year endedDecember 30, 2020 , filed onFebruary 26, 2021 .
The following definitions apply to these terms as used herein:
"Average unit volumes" are calculated by dividing total Shack sales by the number of Shacks open during the period. For Shacks that are not open for the entire period, fractional adjustments are made to the number of Shacks used in the denominator such that it corresponds to the period of associated sales. "Average weekly sales" is calculated by dividing total Shack sales by the number of operating weeks for all Shacks in operation during the period. For Shacks that are not open for the entire period, fractional adjustments are made to the number of operating weeks open such that it corresponds to the period of associated sales. "Same-Shack sales" represents Shack sales for the comparable Shack base, which is defined as the number of domestic Company-operated Shacks open for 24 full fiscal months or longer. For days that Shacks were temporarily closed, the comparative 2020 period was also adjusted. Same-Shack sales % reflects the change in year-over-year Shack sales for domestic Company-operated Shacks open for 24 full fiscal months or longer. In order to compare like-for-like periods for fiscal 2021, same-Shack sales compared the 52 weeks fromDecember 31, 2020 throughDecember 29, 2021 to the 52 weeks fromJanuary 2, 2020 throughDecember 30, 2020 . "Shack system-wide sales" is an operating measure and consists of sales from our domestic Company-operated Shacks, domestic licensed Shacks and our international licensed Shacks. We do not recognize the sales from our licensed Shacks as revenue. Of these amounts, our revenue is limited to Shack sales from domestic Company-operated Shacks and licensing revenue based on a percentage of sales from domestic and international licensed Shacks, as well as certain up-front fees such as territory and opening fees.
Recent Business Trends
Throughout 2021 we faced varying degrees of COVID-19 related pressures. Despite this, we are pleased to report revenue in the fourth quarter and full year of$203.3 million and$739.9 million , respectively. Additionally, we saw our same-Shack sales versus 2019 in growth to exit the year at 2.2% in the fourth quarter, with sequential improvement throughout 2021. Although not fully recovered, we saw improvement in some of our hardest hit markets in the fourth quarter, with our urban markets exiting the fourth quarter down only 4% versus 2019. As pleased as we are with our performance in the fourth quarter, we understand that the challenges that we faced in 2021 are not entirely behind us. Fiscal January saw a significant amount of lost sales, as some of
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our Shacks were impacted by closures or lost hours. Additionally, we saw a deceleration in our Same-Shack sales, finishing fiscal January up slightly at 2%.
Our performance in January is a sign that the issues that have impacted our business for the past two years are not entirely in our rear-view mirror. Looking forward to 2022, we anticipate continued inflationary pressures and sales deleverage which will pressure our Shack margins. Despite this, we believe thatShake Shack is uniquely positioned to manage through these headwinds. Through a combination of our largest development schedule ever, a healthy balance sheet which supports continued investments in digital and team members, and exciting new formats such as drive-thrus, we believe we will exit 2022 stronger than where we started. We are incredibly excited for this next chapter in theShake Shack story. Same-Shack sales for the fiscal fourth quarter endedDecember 29, 2021 increased 20.8% compared to the same period last year, with urban Shacks increasing 32.6% and suburban Shacks increasing 11.9%. Along with the continued recovery of both urban and suburban markets, this increase was driven by an 18.1% increase in guest traffic and a 2.7% increase in price mix. Additionally, Same-Shack sales increased 2.2% in the fourth quarter of 2021 versus the same period in 2019. Same-Shack sales for the fiscal year endedDecember 29, 2021 increased 24.2% compared to the same period last year, with urban Shacks increasing 26.1% and suburban Shacks increasing 22.7%. This increase was due to a 19.2% increase in guest traffic due to the return of in-Shack dining as well as an increase in price mix of 5.0%. Additionally, Same-Shack sales decreased 7.8% in fiscal year 2021 compared to fiscal year 2019. For the purpose of calculating same-Shack sales growth for the fiscal fourth quarter endedDecember 29, 2021 , Shack sales for 156 Shacks were included in the comparable Shack base, and for the fiscal year endedDecember 29, 2021 , Shack sales for 157 Shacks were included in the comparable Shack base. Average weekly sales was$74,000 in the fiscal fourth quarter endedDecember 29, 2021 , compared to$62,000 in the same period last year, driven by higher menu prices, the opening of 13 new domestic Company-operated Shacks and the continued growth in urban and suburban Shacks. Average weekly sales was$71,000 for the fiscal year endedDecember 29, 2021 compared to$58,000 for the same period last year, driven by the opening of 35 net new domestic Company-operated Shacks. Shack system-wide sales increased 31.9% to$314.3 million for the fiscal fourth quarter endedDecember 29, 2021 , versus the same period last year. Shack system-wide sales increased 44.2% to$1,123.1 million for the fiscal year endedDecember 29, 2021 , versus the same period last year. Average unit volume for domestic Company-operated Shacks was$3.7 million for the fiscal year endedDecember 29, 2021 compared to$3.0 million in the same period last year. Digital sales for the fiscal fourth quarter and fiscal year endedDecember 29, 2021 decreased 8.7% and increased 29.7% respectively, compared to the same periods last year. Total digital sales includes orders placed on theShake Shack app, website and third-party delivery platforms, which represented 41.6% of Shack sales during the fiscal fourth quarter endedDecember 29, 2021 . Digital sales retention was approximately 80% in fiscalDecember 2021 when compared to fiscalJanuary 2021 , when digital sales peaked. During the fourth quarter of 2021 our new purchasers in Company-owned app and web channels grew 9.6% versus the third quarter of 2021, to 3.5 million total new purchasers since mid-March of 2020.Shake Shack Inc. [[Image Removed: shak-20211229_g2.jpg]] Form 10-K | 55
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Development Highlights
During fiscal 2021, we opened 36 new domestic Company-operated Shacks and 26 new licensed Shacks. There were one permanent domestic Company-operated Shack closure and three permanent international licensed Shack closures in fiscal 2021. Below are Shacks opened during the fourth quarter of 2021.
Location Type Opening Date Lone Tree, CO - Park Meadows Domestic Company-operated 10/13/2021 Rochester, MI - Rochester Hills Domestic Company-operated 10/18/2021 Alabang, Philippines - Alabang Town Center International Licensed 10/21/2021 Indianapolis, IN - The Fashion Mall at Domestic Company-operated 10/28/2021
Keystone
Westgate, Singapore - Westgate Singapore International Licensed 10/30/2021 Sillim, South Korea - Sillim International Licensed 11/5/2021 Encino, CA - Encino Courtyard Domestic Company-operated 11/13/2021 Columbus, OH - Polaris Domestic Company-operated 11/29/2021 Raleigh, NC - PNC Arena Domestic Licensed 12/1/2021 Miami, FL - Dadeland Mall Domestic Company-operated 12/4/2021 Maple Grove, MN - Maple Grove Domestic Company-operated 12/6/2021 Indianapolis, IN - Downtown Indianapolis Domestic Company-operated 12/12/2021 Cheonan, South Korea - Cheonan International Licensed 12/13/2021 Shenzhen, China - Coco Park Shenzhen International Licensed 12/14/2021 Danbury, CT - Danbury Domestic Company-operated 12/15/2021 Lee's Summit, MO - Lee's Summit Domestic Company-operated 12/20/2021 Bethesda, MD - Westfield Montgomery Mall Domestic Company-operated 12/20/2021
12/27/2021
Whitehall, PA - Lehigh Valley Mall Domestic Company-operated 12/28/2021
Other Business Transactions
To further strengthen our Balance Sheet and position ourselves for growth, In
March 2021 , the Company issued $225 million aggregate principal amount of 0%
Convertible Senior Notes due 2028 ("Convertible Notes") in a private placement
to qualified institutional buyers pursuant to Rule 144A under the Securities Act
of 1933. The Company granted an option to the initial purchasers to purchase up
to an additional $25 million aggregate principal amount of Convertible Notes to
cover over-allotments, which was subsequently fully exercised during March 2021 ,
resulting in a total issuance of $250 million aggregate principal amount of
Convertible Notes. The Convertible Notes will mature on March 1, 2028 , unless
earlier converted, redeemed or repurchased in certain circumstances. Upon
conversion, the Company pays or delivers, as the case may be, cash, shares of
Class A common stock or a combination of cash and shares of Class A common
stock, at the Company's election.
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RESULTS OF OPERATIONS
The following table summarizes our results of operations for fiscal 2021 and fiscal 2020: (dollar amounts in thousands) 2021 2020 Shack sales$ 714,989 96.6 %$ 506,339 96.8 % Licensing revenue 24,904 3.4 % 16,528 3.2 % TOTAL REVENUE 739,893 100.0 % 522,867 100.0 %
Shack-level operating expenses(1):
Food and paper costs 218,262 30.5 % 153,335 30.3 %
Labor and related expenses 215,114 30.1 % 156,814 31.0 %
Other operating expenses 103,232 14.4 % 73,220 14.5 %
Occupancy and related expenses 59,228 8.3 % 51,592 10.2 %
General and administrative expenses 85,996 11.6 % 64,250 12.3 %
Depreciation and amortization expense 58,991 8.0 % 48,801 9.3 %
Pre-opening costs 13,291 1.8 % 8,580 1.6 %
Impairment and loss on disposal of assets 1,632 0.2 % 10,151 1.9 %
TOTAL EXPENSES 755,746 102.1 % 566,743 108.4 %
LOSS FROM OPERATIONS (15,853) (2.1) % (43,876) (8.4) %
Other income (expense), net 95 - % (786) (0.2) %
Interest expense (1,577) (0.2) % (815) (0.2) %
LOSS BEFORE INCOME TAXES (17,335) (2.3) % (45,477) (8.7) %
Income tax expense (benefit) (7,224) (1.0) % 57 - %
NET LOSS (10,111) (1.4) % (45,534) (8.7) %
Less: Net loss attributable to non-controlling interests (1,456) (0.2) % (3,376) (0.6) %
NET LOSS ATTRIBUTABLE TO SHAKE SHACK INC. $ (8,655) (1.2) % $ (42,158) (8.1) %
(1)As a percentage of Shack sales.
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Shack Sales
Shack sales represent the aggregate sales of food, beverages andShake Shack branded merchandise at our domestic Company-operated Shacks. Shack sales in any period are directly influenced by the number of operating weeks in such period, the number of open Shacks and same-Shack sales. Same-Shack sales means, for any reporting period, sales for the comparable Shack base, which we define as the number of domestic Company-operated Shacks open for 24 months or longer. (dollar amounts in thousands) 2021 2020 Shack sales$ 714,989 $ 506,339 Percentage of total revenue 96.6 % 96.8 % Dollar change compared to prior year$ 208,650 Percentage change compared to prior year 41.2 % Shack Sales for the fiscal year endedDecember 29, 2021 increased 41.2% to$715.0 million versus the prior year. This increase is inclusive of the impact of the 53rd week in the fiscal year endedDecember 30, 2020 , which resulted in incremental Shack sales of$10.7 million . Excluding the 53rd week, Shack sales in fiscal year 2021 increased 44.2% versus the prior year. The increase in Shack sales for fiscal 2021 was primarily due to the continued recovery from the COVID-19 pandemic, in addition to the opening of 35 net new domestic Company-operated Shacks during the fiscal year.
Licensing Revenue
Licensing revenue is comprised of license fees, opening fees for certain licensed Shacks and territory fees. License fees are calculated as a percentage of sales and territory fees are payments for the exclusive right to develop Shacks in a specific geographic area.
(dollar amounts in thousands) 2021 2020
Licensing revenue $ 24,904 $ 16,528
Percentage of total revenue 3.4 % 3.2 %
Dollar change compared to prior year $ 8,376
Percentage change compared to prior year 50.7 %
Licensing revenue for the fiscal year ended December 29, 2021 increased 50.7% to
$24.9 million versus the prior year. This increase is inclusive of the impact of
the 53rd week in the fiscal year ended December 30, 2020 , which resulted in
incremental Licensing revenue of $0.4 million . Excluding the 53rd week,
Licensing revenue in fiscal year 2021 increased 54.8%.
The increase in Licensing revenue for fiscal 2021 was primarily due to increased
strength across regions where COVID-19 related restrictions have been eased as
well as a net increase of 23 Shacks opened during fiscal 2021. Our licensed
business continues to show improvement despite the COVID-19 related challenges
that remain in various regions where our licensed Shacks operate, as we continue
to benefit from increased travel, tourism and spectator attendance at sporting
events.
Food and Paper Costs
Food and paper costs include the direct costs associated with food, beverage and
packaging of our menu items. The components of food and paper costs are variable
by nature, changing with sales volume, and are impacted by menu mix and
fluctuations in commodity costs, as well as geographic scale and proximity.
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(dollar amounts in thousands) 2021 2020
Food and paper costs $ 218,262 $ 153,335
Percentage of Shack sales 30.5 % 30.3 %
Dollar change compared to prior year $ 64,927
Percentage change compared to prior year 42.3 %
Food and paper costs for the fiscal year ended December 29, 2021 increased 42.3%
to $218.3 million versus the prior year. The increase in Food and paper costs
for fiscal 2021 was primarily due to increased sales volume associated with
continued recovery from the COVID-19 pandemic and the opening of 35 net new
domestic Company-operated Shacks during fiscal 2021.
As a percentage of Shack sales, the increase in Food and paper costs for fiscal
2021 was primarily driven by higher beef and chicken prices partially offset by
a decrease in paper and packaging costs compared to the prior year. In addition,
higher menu prices across our channels enacted in fiscal 2021 helped offset some
of the higher Food and paper costs we experienced in fiscal 2021. The decrease
in paper and packaging costs in fiscal 2021 was due to decreased usage of bags &
clam shells compared to fiscal 2020 where orders were being packaged as 'to go'
orders as part of COVID-19 protocols that were enacted.
Labor and Related Expenses
Labor and related expenses include domestic Company-operated Shack-level hourly
and management wages, bonuses, payroll taxes, equity-based compensation,
workers' compensation expense and medical benefits. As we expect with other
variable expense items, labor costs are likely to grow as our Shack sales grow.
Factors that influence labor costs include minimum wage and payroll tax
legislation, health care costs, size and location of the Shack and the
performance of our domestic Company-operated Shacks.
(dollar amounts in thousands) 2021 2020
Labor and related expenses $ 215,114 $ 156,814
Percentage of Shack sales 30.1 % 31.0 %
Dollar change compared to prior year $ 58,300
Percentage change compared to prior year 37.2 %
Labor and related expenses or the fiscal year ended December 29, 2021 increased
37.2% to $215.1 million versus the prior year. The increase in Labor and related
expenses for fiscal 2021 was primarily due to increased staffing levels as we
continued to recover from the COVID-19 pandemic as well as the recruiting and
training of new team members amidst elevated turnover in our business, recent
investments in wages and bonuses for our Shack teams and the opening of 35 net
new domestic Company-operated Shacks during fiscal 2021. We expect to invest
more in our teams in the coming years as we build to staff our restaurants of
today and those that are to come.
As a percentage of Shack sales, Labor and related expenses declined from 31.0%
in fiscal 2020 to 30.1% in fiscal 2021. This decrease in Labor and related
expenses for fiscal 2021 was primarily due to sales leverage associated with the
continued recovery from the COVID-19 pandemic in addition to higher menu prices
throughout our channels and lower staffing levels across our Shacks, partially
offset by increased hourly wages.
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Other Operating Expenses
Other operating expenses consist of delivery commissions, Shack-level marketing expenses, repairs and maintenance, utilities and other operating expenses incidental to operating our domestic Company-operated Shacks, such as non-perishable supplies, credit card fees and property insurance.
(dollar amounts in thousands) 2021
2020
Other operating expenses$ 103,232 $ 73,220 Percentage of Shack sales 14.4 % 14.5 % Dollar change compared to prior year$ 30,012 Percentage change compared to prior year 41.0 % Other operating expenses for the fiscal year endedDecember 29, 2021 increased 41.0% to$103.2 million versus the prior year. The increase in Other operating expenses for fiscal 2021 was primarily due to higher delivery and transaction costs associated with higher sales, higher facilities costs associated with the re-opening of dining rooms and the opening of 35 net new domestic Company-operated Shacks during fiscal 2021. As a percentage of Shack sales, Other operating expenses for fiscal 2021 was relatively flat compared to fiscal 2020 primarily due to sales leverage associated with the continued recovery from the COVID-19 pandemic and higher menu prices across our channels, partially offset by higher facilities costs as noted above.
Occupancy and Related Expenses
Occupancy and related expenses consist of Shack-level occupancy expenses (including rent, common area expenses and certain local taxes), and exclude occupancy expenses associated with unopened Shacks, which are recorded separately in Pre-opening costs.
(dollar amounts in thousands) 2021 2020
Occupancy and related expenses $ 59,228 $ 51,592
Percentage of Shack sales 8.3 % 10.2 %
Dollar change compared to prior year $ 7,636
Percentage change compared to prior year 14.8 %
Occupancy and related expenses for the fiscal year ended
As a percentage of Shack sales, the decrease in Occupancy and related expenses for fiscal 2021 was primarily due to sales leverage associated with the continued recovery from the COVID-19 pandemic and higher menu prices across our channels.
General and Administrative Expenses
General and administrative expenses consist of costs associated with corporate and administrative functions that support Shack development and operations, as well as equity-based compensation expense. (dollar amounts in thousands) 2021 2020 General and administrative expenses$ 85,996 $ 64,250 Percentage of total revenue 11.6 % 12.3 % Dollar change compared to prior year$ 21,746 Percentage change compared to prior year 33.8 %
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General and administrative expenses for the fiscal year endedDecember 29, 2021 increased 33.8% to$86.0 million versus the prior year. The increase in General and administrative expenses for fiscal 2021 was primarily due to increased headcount, continued investments in wages and other team member costs to support the continued recovery from the COVID-19 pandemic, as well as investments in marketing and technology initiatives. As a percentage of total revenue, the decrease in General and administrative expenses for fiscal 2021 was primarily due to sales leverage associated with the continued recovery from the COVID-19 pandemic and higher menu prices across our channels.
Depreciation and Amortization Expense
Depreciation and amortization expense consists of the depreciation of fixed assets, including leasehold improvements and equipment.
(dollar amounts in thousands) 2021 2020 Depreciation and amortization expense$ 58,991 $ 48,801 Percentage of total revenue 8.0 % 9.3 % Dollar change compared to prior year$ 10,190 Percentage change compared to prior year 20.9 % Depreciation and amortization expense for the fiscal year endedDecember 29, 2021 increased 20.9% to$59.0 million versus the prior year. The increase in Depreciation and amortization expense for fiscal 2021 was primarily due to incremental depreciation of capital expenditures related to the opening of 35 net new domestic Company-operated Shacks during fiscal 2021. As a percentage of total revenue, the decrease in Depreciation and amortization expense for fiscal 2021 was primarily due to sales leverage associated with the recovery from the COVID-19 pandemic and higher menu prices across our channels.
Pre-Opening Costs
Pre-opening costs consist primarily of legal fees, rent, managers' salaries, training costs, team member payroll and related expenses, costs to relocate and compensate Shack management teams prior to an opening and wages, travel and lodging costs for our opening training team and other supporting team members. All such costs incurred prior to the opening of a domestic Company-operated Shack are expensed in the period in which the expense was incurred. Pre-opening costs can fluctuate significantly from period to period, based on the number and timing of domestic Company-operated Shack openings and the specific pre-opening costs incurred for each domestic Company-operated Shack. Additionally, domestic Company-operated Shack openings in new geographic market areas may initially experience higher pre-opening costs than our established geographic market areas, such as theNew York City metropolitan area, where we have greater economies of scale and incur lower travel and lodging costs for our training team. (dollar amounts in thousands)
2021 2020
Pre-opening costs $ 13,291 $ 8,580
Percentage of total revenue 1.8 % 1.6 %
Dollar change compared to prior year $ 4,711
Percentage change compared to prior year 54.9 %
Pre-opening costs for the fiscal year ended December 29, 2021 increased 54.9% to
$13.3 million versus the prior year. The increase in Pre-opening costs for
fiscal 2021 was due to the higher number of new domestic Company-operated Shacks
opened during fiscal 2021 compared to fiscal 2020, as well as those expected to
open. In addition, we incurred above average pre-opening costs for our two
drive-thru locations opened towards the end of fiscal 2021.
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Impairment and Loss on Disposal of Assets
Impairment and loss on disposal of assets include impairment charges related to our long-lived assets, which includes property and equipment, as well as operating and finance lease assets. Additionally, Impairment and loss on disposal of assets includes the net book value of assets that have been retired and consists primarily of furniture, equipment and fixtures that were replaced in the normal course of business. (dollar amounts in thousands) 2021 2020 Impairment and loss on disposal of assets$ 1,632 $ 10,151 Percentage of total revenue 0.2 % 1.9 % Dollar change compared to prior year$ (8,519) Percentage change compared to prior year (83.9) % Impairment and loss on disposal of assets for the fiscal year endedDecember 29, 2021 decreased 83.9% to$1.6 million versus the prior year. The decrease in Impairment and loss on disposal of assets in fiscal 2021 was primarily due to non-cash impairment charges of$7.6 million during fiscal 2020, related to two Shacks and the home office, and to a lesser extent, the number of maturing Shacks in our base.
Other Income (Expense), Net
Other income (expense), net consists of adjustments to liabilities under our tax
receivable agreement, dividend income, interest income and net unrealized and
realized gains and losses from marketable securities.
(dollar amounts in thousands) 2021 2020
Other income (expense), net $ 95 $ (786)
Percentage of total revenue - % (0.2) %
Dollar change compared to prior year $ 881
Percentage change compared to prior year (112.1) %
Other income (expense), net for the fiscal year ended December 29, 2021 improved
112.1% to $0.1 million versus the prior year. The improvement in Other income
(expense), net for fiscal 2021 was primarily due to the absence of expense
related to the adjustment under the Tax Receivable Agreement, partially offset
by an increase in unrealized losses related to our investments in marketable
securities, compared to fiscal 2020.
Interest Expense
Interest expense generally consists of interest on the current portion of our
liabilities under the Tax Receivable Agreement, imputed interest related to our
financing equipment leases, amortization of deferred financing costs, interest
and fees on our Revolving Credit Facility and amortization of debt issuance
costs.
(dollar amounts in thousands) 2021 2020
Interest expense $ (1,577) $ (815)
Percentage of total revenue (0.2) % (0.2) %
Dollar change compared to prior year $ (762)
Percentage change compared to prior year 93.5 %
Interest expense for the fiscal year ended December 29, 2021 increased 93.5% to
$1.6 million versus the prior year. The increase in Interest expense for fiscal
2021 was primarily due to the amortization debt issuance costs related to our
Convertible Notes which were issued in March 2021 .
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Income Tax Expense (Benefit)
We are the sole managing member ofSSE Holdings , and as a result, consolidate the financial results ofSSE Holdings .SSE Holdings is treated as a partnership forU.S. federal and most applicable state and local income tax purposes. As a partnership,SSE Holdings is not subject toU.S. federal and certain state and local income taxes. Any taxable income or loss generated bySSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject toU.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss ofSSE Holdings , as well as any stand-alone income or loss generated byShake Shack Inc. We are also subject to withholding taxes in foreign jurisdictions. (dollar amounts in thousands) 2021 2020 Income tax expense (benefit)$ (7,224) $ 57 Percentage of total revenue (1.0) % - % Dollar change compared to prior year$ (7,281) Percentage change compared to prior year (12,773.7) % Our effective income tax rates for fiscal 2021 and fiscal 2020 were 41.7% and (0.1)%, respectively. The increase in our effective income tax rate from fiscal 2020 to fiscal 2021 was primarily driven by the increase in the income tax benefit from the release of the valuation allowance and higher tax credits, partially offset by higher foreign tax expense.
Net Loss Attributable to Non-controlling Interests
We are the sole managing member ofSSE Holdings and have the sole voting power in, and control the management of,SSE Holdings . Accordingly, we consolidate the financial results ofSSE Holdings and report a non-controlling interest on our Consolidated Statements of Income (Loss), representing the portion of net income (loss) attributable to the other members ofSSE Holdings . The Third Amended and Restated Limited Liability Company Agreement ofSSE Holdings provides that holders of LLC Interests may, from time to time, requireSSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest inSSE Holdings . The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) and other comprehensive income (loss) toShake Shack Inc. and the non-controlling interest holders. (dollar amounts in thousands) 2021 2020 Net loss attributable to non-controlling interests$ (1,456) $ (3,376) Percentage of total revenue (0.2) % (0.6) % Dollar change compared to prior year$ 1,920 Percentage change compared to prior year (56.9) % Net loss attributable to non-controlling interests for the fiscal year endedDecember 29, 2021 improved 56.9% to$1.5 million versus the prior year. The improvement in Net loss attributable to non-controlling interests for fiscal 2021 was primarily due to an improvement in net results compared to fiscal 2020 and a decrease in the non-controlling interest holders' weighted average ownership, which was 7.0% and 7.7% for fiscal 2021 and fiscal 2020, respectively. NON-GAAP FINANCIAL MEASURES To supplement the Consolidated Financial Statements, which are prepared and presented in accordance with accounting principles generally accepted inthe United States of America ("GAAP"), we use the following non-GAAP financial measures: Shack-level operating profit, Shack-level operating profit margin, EBITDA, adjusted EBITDA, adjusted EBITDA margin, adjustedShake Shack Inc. [[Image Removed: shak-20211229_g2.jpg]] Form 10-K | 63
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pro forma net income (loss), adjusted pro forma earnings (loss) per fully exchanged and diluted share and adjusted pro forma effective tax rate (collectively the "non-GAAP financial measures").
Shack-Level Operating Profit
We define Shack-level operating profit as Shack sales less Shack-level operating expenses including Food and paper costs, Labor and related expenses, Other operating expenses and Occupancy and related expenses.
How This Measure Is Useful
When used in conjunction with GAAP financial measures, Shack-level operating profit and Shack-level operating profit margin are supplemental measures of operating performance that we believe are useful measures to evaluate the performance and profitability of our Shacks. Additionally, Shack-level operating profit and Shack-level operating profit margin are key metrics used internally by our management to develop internal budgets and forecasts, as well as assess the performance of our Shacks relative to budget and against prior periods. It is also used to evaluate team member compensation as it serves as a metric in certain of our performance-based team member bonus arrangements. We believe presentation of Shack-level operating profit and Shack-level operating profit margin provides investors with a supplemental view of our operating performance that can provide meaningful insights to the underlying operating performance of our Shacks, as these measures depict the operating results that are directly impacted by our Shacks and exclude items that may not be indicative of, or are unrelated to, the ongoing operations of our Shacks. It may also assist investors to evaluate our performance relative to peers of various sizes and maturities and provides greater transparency with respect to how our management evaluates our business, as well as our financial and operational decision-making.
Limitations of the Usefulness of this Measure
Shack-level operating profit and Shack-level operating profit margin may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of Shack-level operating profit and Shack-level operating profit margin is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Shack-level operating profit excludes certain costs, such as General and administrative expenses and Pre-opening costs, which are considered normal, recurring cash operating expenses and are essential to support the operation and development of our Shacks. Therefore, this measure may not provide a complete understanding of the operating results of our Company as a whole and Shack-level operating profit and Shack-level operating profit margin should be reviewed in conjunction with our GAAP financial results. A reconciliation of Shack-level operating profit to Income (loss) from Operations, the most directly comparable GAAP financial measure, is as follows. (dollar amounts in thousands) 2021 2020 2019 Income (loss) from operations(1)$ (15,853) $ (43,876) $ 25,685 Less: Licensing revenue 24,904 16,528 19,894 Add: General and administrative expenses 85,996 64,250 65,649 Depreciation and amortization expense 58,991 48,801 40,392 Pre-opening costs 13,291 8,580 14,834 Impairment and loss on disposal of assets(2) 1,632 10,151 1,352 Shack-level operating profit$ 119,153 $ 71,378 $ 128,018 Total revenue$ 739,893 $ 522,867 $ 594,519 Less: Licensing revenue 24,904 16,528 19,894 Shack sales$ 714,989 $ 506,339 $ 574,625 Shack-level operating profit margin(3) 16.7 % 14.1 % 22.3 %
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(1)Fiscal 2020 included a
(2)Fiscal 2020 included a non-cash impairment charge of
(3)As a percentage of Shack sales.
EBITDA and Adjusted EBITDA
EBITDA is defined as Net income (loss) before Interest expense (net of interest income), Income tax expense (benefit) and Depreciation and amortization expense. Adjusted EBITDA is defined as EBITDA (as defined above) excluding equity-based compensation expense, deferred lease costs, Impairment and loss on disposal of assets, amortization of cloud-based software implementation costs, as well as certain non-recurring items that we don't believe directly reflect our core operations and may not be indicative of our recurring business operations.
How These Measures Are Useful
When used in conjunction with GAAP financial measures, EBITDA and adjusted EBITDA are supplemental measures of operating performance that we believe are useful measures to facilitate comparisons to historical performance and competitors' operating results. Adjusted EBITDA is a key metric used internally by our management to develop internal budgets and forecasts and also serves as a metric in our performance-based equity incentive programs and certain of our bonus arrangements. We believe presentation of EBITDA and adjusted EBITDA provides investors with a supplemental view of our operating performance that facilitates analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance.
Limitations of the Usefulness of These Measures
EBITDA and adjusted EBITDA may differ from similarly titled measures used by
other companies due to different methods of calculation. Presentation of EBITDA
and adjusted EBITDA is not intended to be considered in isolation or as a
substitute for, or superior to, the financial information prepared and presented
in accordance with GAAP. EBITDA and adjusted EBITDA exclude certain normal
recurring expenses. Therefore, these measures may not provide a complete
understanding of our performance and should be reviewed in conjunction with our
GAAP financial measures. A reconciliation of EBITDA and adjusted EBITDA to Net
income (loss), the most directly comparable GAAP measure, is as follows.
Shake Shack Inc. [[Image Removed: shak-20211229_g2.jpg]] Form 10-K | 65
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(in thousands) 2021 2020 2019 Net income (loss)$ (10,111) $ (45,534) $ 24,128 Depreciation and amortization expense 58,991 48,801 40,392 Interest expense, net 1,577 815 434 Income tax expense (benefit) (7,224) 57 3,386 EBITDA 43,233 4,139 68,340 Equity-based compensation 8,703 5,560 7,600 Amortization of cloud-based software implementation costs(1) 1,245 1,444 312 Deferred lease costs(2) 245 92 2,608 Impairment and loss on disposal of assets(3) 1,632 10,151 1,352 Legal Settlement(4) 560 - - Debt offering related costs(5) 231 - - Executive transition costs(6) 179 150 126
Other (income) loss related to adjustment of liabilities under tax receivable agreement
(2) 1,147 (808)
Project Concrete(7) - (229) 2,111
Hong Kong office(8) - - 199
Other(9) - 285 -
ADJUSTED EBITDA $ 56,026 $ 22,739 $ 81,840
Adjusted EBITDA margin(10) 7.6 % 4.3 % 13.8 %
(1)Represents amortization of capitalized implementation costs related to
cloud-based software arrangements that are included within General and
administrative expenses.
(2)For fiscal 2020, this amount includes a $0.9 million reduction in Occupancy
and related expenses related to the closing of the Company's Shack in Penn
Station .
(3)For fiscal 2020, this amount includes a non-cash impairment charge of $7.6
million related to two Shacks and our home office.
(4)Expense incurred to establish an accrual related to the settlement of a legal
matter. Refer to Note 17, Commitments and Contingencies, in the accompanying
Consolidated Financial Statements, for additional information.
(5)Costs incurred in connection with the Company's Convertible Notes, issued in
March 2021 , including consulting and advisory fees. Refer to Note 8, Debt, in
the accompanying Consolidated Financial Statements, for additional information.
(6)Represents fees paid in connection with the search and hiring of certain
executive and key management positions.
(7)Represents consulting and advisory fees related to the Company's
enterprise-wide system upgrade initiative called Project Concrete.
(8)Represents costs associated with establishing our first international
regional office in Hong Kong .
(9)Represents incremental expenses incurred related to an inventory adjustment
and certain team member-related expenses.
(10)Calculated as a percentage of total revenue, which was $739.9 million ,
$522.9 million and $594.5 million for fiscal 2021, fiscal 2020 and fiscal 2019,
respectively.
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Adjusted Pro Forma Net Income (Loss) and Adjusted Pro Forma Earnings (Loss) Per Fully Exchanged and Diluted Share
Adjusted pro forma net income (loss) represents Net income (loss) attributable toShake Shack Inc. assuming the full exchange of all outstandingSSE Holdings, LLC membership interests ("LLC Interests") for shares of Class A common stock, adjusted for certain non-recurring items that we do not believe are directly related to our core operations and may not be indicative of our recurring business operations. Adjusted pro forma earnings (loss) per fully exchanged and diluted share is calculated by dividing adjusted pro forma net income (loss) by the weighted average shares of Class A common stock outstanding, assuming the full exchange of all outstanding LLC Interests, after giving effect to the dilutive effect of outstanding equity-based awards.
How These Measures Are Useful
When used in conjunction with GAAP financial measures, adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share are supplemental measures of operating performance that we believe are useful measures to evaluate our performance period over period and relative to our competitors. By assuming the full exchange of all outstanding LLC Interests, we believe these measures facilitate comparisons with other companies that have different organizational and tax structures, as well as comparisons period over period because it eliminates the effect of any changes in Net income (loss) attributable toShake Shack Inc. driven by increases in our ownership ofSSE Holdings , which are unrelated to our operating performance, and excludes items that are non-recurring or may not be indicative of our ongoing operating performance.
Limitations of the Usefulness of These Measures
Adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share may differ from similarly titled measures used by other companies due to different methods of calculation. Presentation of adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share should not be considered alternatives to net income (loss) and earnings (loss) per share, as determined under GAAP. While these measures are useful in evaluating our performance, they do not account for the earnings attributable to the non-controlling interest holders and therefore do not provide a complete understanding of the Net income (loss) attributable toShake Shack Inc. Adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share should be evaluated in conjunction with our GAAP financial results. A reconciliation of adjusted pro forma net income (loss) to Net income (loss) attributable toShake Shack Inc. , the most directly comparable GAAP measure, and the computation of adjusted pro forma earnings (loss) per fully exchanged and diluted share are set forth below.Shake Shack Inc. [[Image Removed: shak-20211229_g2.jpg]] Form 10-K | 67
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(in thousands, except per share amounts) 2021 2020 2019
Numerator:
Net income (loss) attributable to Shake Shack Inc. $ (8,655) $ (42,158) $ 19,827
Adjustments:
Reallocation of Net income (loss) attributable to
non-controlling interests from the assumed exchange of
LLC Interests(1) (1,456) (3,376) 4,301
Executive transition costs(2) 179 150 126
Project Concrete(3) - (229) 2,111
Legal settlement(4) 560 - -
Debt offering related costs(5) 231 - -
Other Income (loss) related to the adjustment of
liabilities under tax receivable agreement (2) 1,147 (808)
Asset impairment charge(6) - 7,644 -
Reduction in Occupancy andrelated expenses due to Shack
closure(7) - (897) -
Revolving Credit Facility amendments related costs(8) 323 - -
Hong Kong office(9) - - 199
Tax effect of change in tax basis related to the - - 1,161
adoption of new accounting standards(10)
Other(11) - 285 -
Impact to income tax benefit(10) 6,175 15,089 446
Adjusted pro forma net income (loss) $ (2,645) $ (22,345) $ 27,363 Denominator:
Weighted average shares of Class A common stock outstanding-diluted 39,085 37,129 32,251
Adjustments:
Assumed exchange of LLC Interests for shares of Class A
common stock(1) 2,927 3,096 5,921
Adjusted pro forma fully exchanged weighted average shares of Class A common
stock outstanding-diluted 42,012 40,225 38,172
Adjusted pro forma earnings (loss) per fully exchanged share-diluted
$ (0.06) $ (0.56) $ 0.72 2021 2020 2019 Earnings (loss) per share of Class A common stock-diluted$ (0.22) $ (1.14) $ 0.61 Assumed exchange of LLC Interests for shares of Class A common (0.02) 0.01 0.02 stock(1) Non-GAAP adjustments(12) 0.18 0.57 0.09
Adjusted pro forma earnings (loss) per fully exchanged share-diluted
$ (0.06) $ (0.56) $ 0.72 (1)Assumes the exchange of all outstanding LLC Interests for shares of Class A common stock, resulting in the elimination of the non-controlling interest and recognition of the net income (loss) attributable to non-controlling interests.
(2)Represents costs incurred in connection with our executive search, including fees paid to an executive recruiting firm.
(3)Represents consulting and advisory fees related to our enterprise-wide system upgrade initiative called Project Concrete.
(4)Expense incurred to establish an accrual related to the settlement of a legal matter. Refer to Note 17, Commitments and Contingencies, in the accompanying Consolidated Financial Statements, for additional information. (5)Costs incurred in connection with the Company's Convertible Notes, issued inMarch 2021 , including consulting and advisory fees. Refer to Note 8, Debt, in the accompanying Consolidated Financial Statements, for additional information.
(6)For fiscal year 2020, this amount includes a non-cash impairment charge of
(7)For fiscal 2020, this amount includes a
(8)Expense incurred in connection with the Company's amendments on the Revolving Credit Facility, including the write-off of previously capitalized costs on the Revolving Credit Facility.
(9)Represents costs associated with establishing our first international
regional office in
(10)For fiscal 2021, fiscal 2020 and fiscal 2019, amounts represent the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 83.5%, 40.2% and 6.1%, respectively, which include provisions forU.S. federal income taxes, certain LLC entity-level taxes and foreign withholding taxes, assuming the highest statutory rates apportioned to each applicable state, local and foreign jurisdiction.
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(11)Represents incremental expenses incurred related to an inventory adjustment and certain team member-related expenses.
(12)Represents the per share impact of non-GAAP adjustments for each period. Refer to the reconciliation of Adjusted Pro Forma Net Income (Loss) above, for additional information.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, short-term investments and availability under our Revolving Credit Facility. InMarch 2021 , we issued 0% Convertible Senior Notes ("Convertible Notes"), and received$243.8 million of proceeds, net of discounts. Refer to Note 8, Debt, in the accompanying Consolidated Financial Statements, for additional information.
As of
On
Our primary requirements for liquidity are to fund our working capital needs, operating and finance lease obligations, capital expenditures and general corporate needs. Our requirements for working capital are generally not significant because our guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items. Our ongoing capital expenditures are principally related to opening new Shacks, existing Shack capital investments (both for remodels and maintenance), as well as investments in our corporate technology infrastructure to support our home office,Shake Shack locations, and digital strategy. In addition, we are obligated to make payments to certain members ofSSE Holdings under the Tax Receivable Agreement. As ofDecember 29, 2021 , such obligations totaled$234.0 million . Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. Although the amount of any payments that must be made under the Tax Receivable Agreement may be significant, the timing of these payments will vary and will generally be limited to one payment per member per year. The amount of such payments are also limited to the extent we utilize the related deferred tax assets. The payments that we are required to make will generally reduce the amount of overall cash flow that might have otherwise been available to us or toSSE Holdings , but we expect the cash tax savings we will realize from the utilization of the related deferred tax assets to fund the required payments.
COVID-19 Pandemic Update
In response to the uncertain market conditions resulting from the COVID-19 pandemic, we have taken the following actions in fiscal 2020 and fiscal 2021.
•InMarch 2020 , we drew down the full$50.0 million available under the Revolving Credit Facility to enhance liquidity and financial flexibility given the uncertain market conditions created by the COVID-19 pandemic. We repaid this amount in full, plus interest, inJune 2020 . •OnApril 17, 2020 , we announced an ATM Program, under which we may offer and sell shares of our Class A common stock having an aggregate price of up to$75.0 million from time to time. OnApril 21, 2020 , we completed the sale of 233,467 shares of our Class A common stock pursuant to the ATM Program and received$9.8 million of proceeds, net of commissions. The proceeds were used to purchase newly-issued LLC Interests.Shake Shack Inc. [[Image Removed: shak-20211229_g2.jpg]] Form 10-K | 69
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•On
•InMay 2020 , we entered into an amendment to our Revolving Credit Facility that provides for a number of enhanced modifications to reflect the current and ongoing impact from COVID-19. Our Revolving Credit Facility was further amended inMarch 2021 , resulting in a modification of the applicable covenants and restrictions in the Credit Agreement to permit the incurrence of the Convertible Notes, including obligations and transactions in connection therewith. Refer to Note 8, Debt, in the accompanying condensed consolidated financial statements, for additional information. As ofDecember 29, 2021 , we were in compliance with all covenants.
•In
We believe our existing cash and marketable securities balances will be sufficient to fund our operating and finance lease obligations, capital expenditures, Tax Receivable Agreement obligations and working capital needs for at least the next 12 months and the foreseeable future.
Summary of Cash Flows
The following table presents a summary of our cash flows from operating, investing and financing activities.
(in thousands) 2021
2020
Net cash provided by operating activities
(144,890) (69,397)
Net cash provided by financing activities 242,021 141,821 Increase in cash and cash equivalents 155,533 109,774
Cash and cash equivalents at beginning of period 146,873 37,099
Cash and cash equivalents at end of period
Operating Activities
For fiscal 2021, net cash provided by operating activities was$58.4 million compared to$37.4 million for fiscal 2020, an increase of$21.0 million . The increase was primarily due to a decrease in net loss of$35.4 million partially offset by an increase in the impact of non-cash charges of$1.1 million and an increase in operating assets and liabilities of$15.5 million . The$15.5 million change in our operating asset and liability balances was primarily driven by an increase in settlement of payables.
Investing Activities
For fiscal 2021, net cash used in investing activities was$144.9 million compared to$69.4 million for fiscal 2020, an increase of$75.5 million . This increase was primarily due to an increase of$32.5 million in capital expenditures in fiscal 2021 to support our real estate development and digital initiatives and increased purchases of marketable securities of$27.0 million .
Financing Activities
For fiscal 2021, net cash provided by financing activities was$242.0 million compared to$141.8 million for fiscal 2020, an increase of$100.2 million . This increase was primarily due to$243.8 million in net cash proceeds from the issuance of the Convertible Notes, net of discount and a reduction in payments made under the Tax Receivable Agreement in fiscal 2021 compared to fiscal 2020, partially offset by$145.7 million in net cash proceeds from the issuance of Class A common stock related to the equity offering inApril 2020 .
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Revolving Credit Facility
InAugust 2019 , we entered into a revolving credit facility agreement ("Revolving Credit Facility"), which permits borrowings up to$50.0 million , of which the entire amount is available immediately, with the ability to increase available borrowings up to an additional$100.0 million , to be made available subject to satisfaction of certain conditions. The Revolving Credit Facility also permits the issuance of letters of credit upon our request of up to$15.0 million . InMarch 2020 , we drew down the full$50.0 million available under the Revolving Credit Facility to enhance liquidity and financial flexibility given the uncertain market conditions created by the COVID-19 pandemic. We repaid this amount in full, plus interest, inJune 2020 . InMay 2020 , we entered into a first amendment to the Revolving Credit Facility ("First Amendment"), which, among other things, provides for modified financial covenant compliance requirements for a period of time. The First Amendment requires us to maintain minimum liquidity of$25.0 million throughJuly 1, 2021 and outstanding borrowings during the applicable period covered by the First Amendment bear interest at either: (i) LIBOR plus a percentage ranging from 1.0% to 2.5% or (ii) the base rate plus a percentage ranging from 0.0% to 1.5%, in each case depending on our net lease adjusted leverage ratio. InMarch 2021 , the Company entered into a second amendment to the Revolving Credit Facility ("Second Amendment"). The Second Amendment modified the applicable covenants and restrictions in the Revolving Credit Facility to permit the incurrence of the Convertible Notes (as defined below), including obligations and transactions in connection therewith. In addition, the Second Amendment, among other things, (i) extended the period applicable to the increased interest rate margin as set forth in the First Amendment; (ii) shortened the maturity date of the Revolving Credit Facility fromAugust 2024 toSeptember 2022 and (iii) added mechanics relating to the transition from the use of LIBOR to the Secured Overnight Financing Rate ("SOFR") upon the discontinuance or unavailability of LIBOR. Subsequently, and also inMarch 2021 , the Company entered into a third amendment to the Revolving Credit Facility ("Third Amendment") asWells Fargo Bank resigned as administrative agent under the Revolving Credit Facility and assigned its commitments thereunder toJPMorgan Bank, N.A. The Third Amendment appointsJPMorgan Bank, N.A. as administrative agent under the Revolving Credit Facility. In addition, the Third Amendment, among other things, extends the maturity date of the Revolving Credit Facility fromSeptember 2022 toMarch 2026 . As ofDecember 29, 2021 andDecember 30, 2020 , no amounts were outstanding under the Revolving Credit Facility. The obligations under the Revolving Credit Facility are secured by a first-priority security interest in substantially all of the assets ofSSE Holdings and the guarantors. The obligations under the Revolving Credit Facility are guaranteed by each ofSSE Holdings' direct and indirect subsidiaries (with certain exceptions). The Revolving Credit Facility requires the Company to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios. The Company is not subject to these coverage ratios for a period of time due to the Second Amendment to the Revolving Credit Facility described above. In addition, the Revolving Credit Facility contains other customary affirmative and negative covenants, including those which (subject to certain exceptions and dollar thresholds) limit the Company's ability to incur debt; incur liens; make investments; engage in mergers, consolidations, liquidations or acquisitions; dispose of assets; make distributions on or repurchase equity securities; engage in transactions with affiliates; and prohibits the Company, with certain exceptions, from engaging in any line of business not related to its current line of business. As ofDecember 29, 2021 , the Company was in compliance with all covenants. As ofDecember 29, 2021 , the Revolving Credit Facility had unamortized deferred financing costs of$0.1 million , and was included in Other assets on the Consolidated Balance Sheets. Total interest expense related to the Revolving Credit Facility was$0.5 million ,$0.5 million and nil, respectively, for fiscal 2021, fiscal 2020 and fiscal 2019. Interest expense for fiscal 2021 primarily included the write-off of previously capitalized costs on the Revolving Credit Facility. Convertible Notes InMarch 2021 , the Company issued$225.0 million aggregate principal amount of 0% Convertible Senior Notes due 2028 ("Convertible Notes") in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The Company granted an option to the initial purchasers to purchase up to an additional$25.0 million aggregate principalShake Shack Inc. [[Image Removed: shak-20211229_g2.jpg]] Form 10-K | 71
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amount of Convertible Notes to cover over-allotments, which was subsequently fully exercised duringMarch 2021 , resulting in a total issuance of$250.0 million aggregate principal amount of Convertible Notes. The Convertible Notes will mature onMarch 1, 2028 , unless earlier converted, redeemed or repurchased in certain circumstances. Upon conversion, the Company pays or delivers, as the case may be, cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company's election. The Convertible Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately precedingDecember 1, 2027 , only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending onJune 30, 2021 (and only during such fiscal quarter), if the last reported sale price of the Company's Class A common stock, par value$0.001 per share, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price for the Convertible Notes on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the "measurement period") in which the trading price (as defined in the Indenture) perone thousand dollar principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate for the Convertible Notes on each such trading day; (3) if the Company calls such Convertible Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the Convertible Notes called (or deemed called) for redemption; and (4) upon the occurrence of specified corporate events as set forth in the Indenture. On or afterDecember 1, 2027 , until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Convertible Notes may convert all or any portion of their Convertible Notes at any time, regardless of the foregoing circumstances. The Convertible Notes had an initial conversion rate of 5.8679 shares of Class A common stock perone thousand dollar principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately$170.42 per share of Class A common stock.Shake Shack may not redeem the Convertible Notes prior toMarch 6, 2025 . The Company may redeem for cash all or any portion of the Convertible Notes, at the Company's option, on or afterMarch 6, 2025 if the last reported sale price of Class A common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid special interest, if any, to, but excluding, the redemption date. In addition, ifShake Shack undergoes a fundamental change (as defined in the indenture governing the Convertible Notes), subject to certain conditions, holders may require it to repurchase for cash all or any portion of their Convertible Notes at a repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid special interest, if any, to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events that occur prior to the maturity date of the Convertible Notes or if the Company delivers a notice of redemption in respect of some or all of the Convertible Notes, the Company will, in certain circumstances, increase the conversion rate of the Convertible Notes for a holder who elects to convert the Convertible Notes in connection with such a corporate event or convert the Convertible Notes called (or deemed called) for redemption during the related redemption period, as the case may be. Contemporaneously with the issuance of the Convertible Notes,Shake Shack Inc. entered into an intercompany note withSSE Holdings ("Intercompany Note").SSE Holdings promises to payShake Shack Inc. , for value received, the principal amount with interest of the Intercompany Note inMarch 2028 .Shake Shack Inc. will exercise its right to convert the Intercompany Note to maintain at all times a one-to-one ratio between the number of common units, directly or indirectly, held byShake Shack Inc. and the aggregate number of outstanding shares of common stock. As ofDecember 29, 2021 , the Convertible Notes had a gross principal balance of$250.0 million and a balance of$243.5 million , net of unamortized discount and debt issuance costs of$6.5 million . As ofDecember 29, 2021 , the unamortized balance of discount and debt issuance costs was recorded as a contra-liability and netted with Long-term debt on the Consolidated Balance Sheets and was being amortized as interest expense using the effective interest method. Total amortization expense was$0.9 million and was included in Interest expense in the Consolidated Statements of Income (Loss). In connection with the issuance of
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the Convertible Notes, the Company also incurred consulting and advisory fees of
At
Contractual Obligations
Material contractual obligations arising in the normal course of business primarily consist of operating and finance lease obligations, long-term debt, liabilities under Tax Receivable Agreement and purchase obligations. The timing and nature of these commitments are expected to have an impact on our liquidity and capital requirements in future periods. Refer to Note 9, Leases, in the accompanying Consolidated Financial Statements included in Item 8 for additional information relating to our operating and financing leases and Note 8, Debt, in the accompanying Consolidated Financial Statements included in Item 8 for additional information related to our long-term debt. Liabilities under Tax Receivable Agreement include amounts to be paid to the non-controlling interest holders, assuming we will have sufficient taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. Refer to Note 14, Income Taxes, and Note 17, Commitments and Contingencies, in the accompanying Consolidated Financial Statements, for additional information relating to our Tax Receivable Agreement and related liabilities. Purchase obligations include all legally binding contracts, including commitments for the purchase, construction or remodeling of real estate and facilities, firm minimum commitments for inventory purchases, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. The majority of our purchase obligations are due within the next 12 months.
OFF-BALANCE SHEET ARRANGEMENTS
Except for operating leases entered into in the normal course of business where we have not yet taken physical possession of the leased property, certain letters of credit entered into as security under the terms of several of our leases and the unrecorded contractual obligations set forth above, we did not have any off-balance sheet arrangements as ofDecember 29, 2021 .
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements and related disclosures in conformity withU.S. generally accepted accounting principles ("GAAP") requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclose contingent assets and liabilities. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. The critical accounting policies and estimates described below are those that materially affect or have the greatest potential impact on our Consolidated Financial Statements, and involve difficult, subjective or complex judgments made by management. Because of the uncertainty inherent in these matters, actual results may differ from those estimates we use in applying our critical accounting policies and estimates. The following discussion should be read in conjunction with the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K.
Valuation of Long-Lived Assets
We assess potential impairments to our long-lived assets, which includes property and equipment and operating lease assets, whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of an asset is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows
Shake Shack Inc. [[Image Removed: shak-20211229_g2.jpg]] Form 10-K | 73
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expected to be generated by the asset. The evaluation is performed at the lowest level of identifiable cash flows, which is primarily at the individual Shack level. Significant judgment is involved in determining the assumptions used in estimating future cash flows, including projected sales growth and operating margins. If the carrying amount of the asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized as the amount by which the carrying amount of the asset exceeds the fair value of the asset, considering external market participant assumptions. Since the determination of future cash flows is an estimate of future performance, there may be future impairments in the event that future cash flows do not meet expectations.
Leases
We currently lease all of our domestic Company-operated Shacks, our home office,
and certain equipment under various non-cancelable lease agreements that expire
on various dates through 2038. Upon the possession of a leased asset, we
determine its classification as an operating or financing lease. All of our real
estate leases are classified as operating leases and most of our equipment
leases are classified as finance leases.
We make judgments regarding the probable term for each lease, which can impact
the classification and accounting for a lease as financing or operating, as well
as the amount of straight-lined rent expense in a particular period. Generally,
our real estate leases have initial terms ranging from 10 to 15 years and
typically include two five-year renewal options. Renewal options are typically
not included in the lease term as it is not reasonably certain at commencement
date that we would exercise the options to extend the lease. Our real estate
leases typically provide for fixed minimum rent payments and/or contingent rent
payments based upon sales in excess of specified thresholds. When the
achievement of such sales thresholds are deemed to be probable, contingent rent
is accrued in proportion to the sales recognized during the period. Fixed
minimum rent payments are recognized on a straight-line basis over the lease
term starting on the date we take possession of the leased property. Lease
expense incurred before a Shack opens is recorded in Pre-opening costs. Once a
Shack opens, we record the straight-line lease expense and any contingent rent,
if applicable, in Occupancy and related expenses on the Consolidated Statements
of Income (Loss). Many of our leases also require us to pay real estate taxes,
common area maintenance costs and other occupancy costs which are included in
Occupancy and related expenses on the Consolidated Statements of Income (Loss).
We calculate operating lease assets and lease liabilities as the present value
of fixed lease payments over the reasonably certain lease term beginning at the
commencement date. We measure the lease liability by discounting the future
fixed contractual payments included in the lease agreement, using our
incremental borrowing rate ("IBR"). There are no explicit rates provided in our
leases. The IBR is derived from the average of the yield curves obtained from
using the notching method and the recovery rate method. The most significant
assumption in calculating the incremental borrowing rate is our credit rating.
We determined our credit rating based on a comparison of the financial
information of SSE Holdings to other public companies and then used their
respective credit ratings to develop our own.
For operating leases, fixed lease payments are recognized as operating lease
cost on a straight-line basis over the lease term. For finance leases and
impaired operating leases, the asset is depreciated on a straight-line basis
over the remaining lease term, along with recognition of interest expense
associated with accretion of the lease liability. For leases with a lease term
of 12 months or less ("short-term lease"), any fixed lease payments are
recognized on a straight-line basis over such term, and are not recognized on
the Consolidated Balance Sheets. Variable lease cost for both operating and
finance leases, if any, is recognized as incurred.
We expend cash for leasehold improvements to build out and equip our leased
premises. Generally, a portion of the leasehold improvements and building costs
are reimbursed by our landlords as landlord incentives pursuant to agreed-upon
terms in our lease agreements. If obtained, landlord incentives usually take the
form of up-front cash, full or partial credits against our future minimum or
contingent rents otherwise payable by us, or a combination thereof. In most
cases, landlord incentives are received after we take possession of the
property, as we meet required milestones during the construction of the
property. We include these amounts in the measurement of the initial operating
lease liability, which are also reflected as a reduction to the initial
measurement of the right-of-use asset.
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Self-Insurance Liabilities
We are self-insured for our employee medical and dental plans and we recognize a liability that represents our estimated cost of claims incurred but not reported as of the balance sheet date. Our estimated liability is based on a number of assumptions and factors, which requires significant judgment including historical claims experience, severity factors, litigation costs, inflation and other actuarial assumptions. Our history of claims experience is short and our significant growth rate could affect the accuracy of our estimates. If a greater amount of claims are reported, or if medical costs increase beyond our expectations, our liabilities may not be sufficient and we could recognize additional expense.
Equity-Based Compensation
Equity-based compensation expense is measured based on the grant-date fair value of those awards. For awards with graded-vesting features and service conditions only, compensation expense is recognized on a straight-line basis over the total requisite service period for the entire award. For awards with graded-vesting features and a combination of service and performance conditions, compensation expense is recognized using a graded-vesting attribution method over the vesting period based on the most probable outcome of the performance conditions. Actual distributed shares are calculated upon conclusion of the service and performance periods. For stock option awards, the grant-date fair value of the awards is determined using the Black-Scholes option pricing model and involves several assumptions, including the expected term of the option, expected volatility and risk-free interest rate. We have limited historical data of our own to utilize in determining our assumptions. As such, for stock options granted in fiscal 2021 and 2020, we based our volatility assumption on a combined weighted average of our own historical data and that of a selected peer group. The weighted average volatility used in determining the grant date fair value of awards granted in fiscal 2021 and fiscal 2020 was 45.4% and 42.3%, respectively. Forfeitures are recognized as they occur for all equity awards.
Income Taxes
In determining the provision for income taxes for financial statement purposes, we make estimates and judgments which affect our evaluation of the carrying value of our deferred tax assets as well as our calculation of certain tax liabilities. We evaluate the carrying value of our deferred tax assets on a quarterly basis. In completing this evaluation, we consider all available positive and negative evidence. Such evidence includes historical operating results, the existence of cumulative earnings and losses in the most recent fiscal years, taxable income in prior carryback year(s) if permitted under the tax law, expectations for future pre-tax operating income, the time period over which our temporary differences will reverse, and the implementation of feasible and prudent tax planning strategies. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including projected Shack openings, revenue growth, and operating margins, among others. Deferred tax assets are reduced by a valuation allowance if, based on the weight of this evidence, it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized in future periods. Concluding that a valuation allowance is not required is difficult when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. As ofDecember 29, 2021 , we are in a three-year cumulative loss position. This is considered significant evidence that is difficult to overcome. However, the three-year cumulative loss position is not solely determinative, and, accordingly, management considers all available positive and negative evidence in our analysis. Although we are in a three-year cumulative loss position as ofDecember 29, 2021 , we have a recent history of earnings prior to the onset of the COVID-19 pandemic. We expect to return to profitability as the effects of the pandemic subside and we begin to generate sufficient taxable income to utilize our deferred tax assets. We have recorded a valuation allowance against the capital loss resulting from the portion of the basis difference in our investment inSSE Holdings that will only reverse upon the eventual sale of our interest inSSE Holdings as well as certain state tax credits and foreign tax credits that are not expected to be utilized prior to expiration. As ofDecember 29, 2021 , we had$298.7 million of net deferred tax assets, net of valuation allowances. We expect to realize future tax benefits related to the utilization of these assets. However, since future financial results may differ from previous estimates, periodic adjustments to our valuation allowance may be necessary. If we determine in the future that we will not be able to fully utilize all or part of these deferred tax assets, we would record a valuation allowance through earnings in the period the determination was made, which would have an adverse effect on our results of operations and earnings in future periods.
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Liabilities Under Tax Receivable Agreement
As described in Note 14, in the accompanying Consolidated Financial Statements included in Item 8, we are a party to the Tax Receivable Agreement under which we are contractually committed to pay the non-controlling interest holders 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related TRA Payments. Therefore, we would only recognize a liability for TRA Payments if we determine it is probable that we will generate sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. Estimating future taxable income is inherently uncertain and requires judgment. In projecting future taxable income, we consider our historical results and incorporate certain assumptions, including projected Shack openings, revenue growth, and operating margins, among others. As ofDecember 29, 2021 , we recognized$234.0 million of liabilities relating to our obligations under the Tax Receivable Agreement, after concluding that it was probable that we would have sufficient future taxable income to utilize the related tax benefits. There were no transactions subject to the Tax Receivable Agreement for which we did not recognize the related liability, as we concluded that we would have sufficient future taxable income to utilize all of the related tax benefits generated by all transactions that occurred in fiscal 2021. If we determine in the future that we will not be able to fully utilize all or part of the related tax benefits, we would de-recognize the portion of the liability related the benefits not expected to be utilized. Additionally, we estimate the amount of TRA Payments expected to be paid within the next 12 months and classify this amount as current on our Consolidated Balance Sheets. This determination is based on our estimate of taxable income for the next fiscal year. To the extent our estimate differs from actual results, we may be required to reclassify portions of our liabilities under the Tax Receivable Agreement between current and non-current.
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