SHAKE SHACK INC.
This section and other parts of this Quarterly Report on
Form 10-Q ("Form 10-Q") 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 included in
this Form 10-Q are forward-looking statements, including, but not limited to,
statements about our growth, strategic plan, and our liquidity. 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 any 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. Some of the factors which could cause results to differ
materially from the Company's expectations include the continuing impact of the
COVID-19 pandemic, including the potential impact of any COVID-19 variants, the
Company's ability to develop and open new Shacks on a timely basis, increased
costs or shortages or interruptions in the supply or delivery of our products,
increased labor costs or shortages, inflationary pressures, the Company's
management of its digital capabilities and expansion into new channels,
including drive-thru, our ability to maintain and grow sales at our existing
Shacks, and risks relating to the restaurant industry generally. You should
evaluate all forward-looking statements made in this Form 10-Q in the context of
the risks and uncertainties disclosed in our Annual Report on Form 10-K for the
fiscal year ended December 29, 2021 ("2021 Form 10-K"). The forward-looking
statements included in this Form 10-Q are made only as of the date hereof. We
undertake no obligation to publicly update or revise any forward-looking
statement as a result of new information, future events or otherwise, except as
otherwise required by law.
The following discussion should be read in conjunction with our 2021 Form 10-K
and the Condensed Consolidated Financial Statements and notes thereto included
in Part I, Item 1 of this Form 10-Q. All information presented herein is based
on our fiscal calendar. Unless otherwise stated, references to particular years,
quarters, months or periods refer to our fiscal years and the associated
quarters, months and periods of those fiscal years.
OVERVIEW
Shake Shack is a modern day "roadside" burger stand serving a classic American menu of premium burgers, chicken, hot dogs, crinkle cut fries, shakes, frozen custard, beer, wine and more. As ofJune 29, 2022 , there were 395 Shacks in operation system-wide, of which 230 were domestic Company-operated Shacks, 27 were domestic licensed Shacks and 138 were international licensed Shacks.Shake Shack Inc. [[Image Removed: shak-20220629_g2.jpg]] Form 10-Q | 27
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Recent Business Trends
Against a continued challenging operational backdrop, we delivered total revenue growth of 23.1% year-over-year to over$230.8 million . We also continued to build upon a strong digital business which is part of our strategy to provide a great guest experience no matter how our guests prefer to order. Same-Shack sales for the thirteen weeks endedJune 29, 2022 increased 10.1% compared to the same period last year, driven by a 7.8% increase in guest traffic and a 2.3% increase in price mix. Urban Shacks increased 19.4% compared to the same period last year, while suburban Shacks sustained growth of 2.6%. Compared to the first quarter of 2022, we saw a deceleration in traffic growth across urban and suburban Shacks, offset by price mix during the thirteen weeks endedJune 29, 2022 . For the purpose of calculating same-Shack sales growth for the thirteen weeks endedJune 29, 2022 , Shack sales for 165 Shacks were included in the comparable Shack base.
Average weekly sales were
Digital sales for the thirteen weeks endedJune 29, 2022 increased 0.6% to$84.0 million compared to the same period last year and decreased 0.3% compared to the first quarter of 2022. Total digital sales includes orders placed on theShake Shack app, website and third-party delivery platforms, which represented 37.7% of Shack sales during the second quarter of 2022. Digital sales retention was approximately 73% in fiscalJune 2022 when compared to fiscalJanuary 2021 when digital sales peaked. During the second quarter of 2022 our new purchasers in Company-owned app and web channels grew 7.7% versus the first quarter of 2022, to 4.2 million total new purchasers since mid-March of 2020.
Development Highlights
During the second quarter of 2022, we opened five new domestic Company-operated Shacks and eight new international licensed Shacks. There were no permanent Shack closures in the second quarter of 2022.
Location Type Opening Date Monterrey, Mexico - Galerías Monterrey International Licensed
Guangzhou, China - Parc Central International Licensed
Castle Rock, CO -Castle Rock Domestic Company -operated
Fairfax, VA -Mosaic District Domestic Company -operated
Atlanta, GA -Piedmont Park Domestic Company -operated
Hangzhou, China - Kerry Centre International Licensed
Seoul, South Korea - Suyu International Licensed
Istanbul, Turkey - Bahçe?ehir International Licensed
Shenzhen, China - UniWalk International Licensed
Chesterfield, MO -Chesterfield Domestic Company -operated
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RESULTS OF OPERATIONS
The following table summarizes our results of operations for the thirteen and
twenty-six weeks ended
Thirteen Weeks Ended Twenty-SixWeeks Ended
June 29 June 30 June 29 June 30
(dollar amounts in thousands) 2022 2021 2022 2021
Shack sales $ 223,054 96.7 % $ 181,470 96.8 % $ 419,845 96.7 % $ 332,138 96.9 %
Licensing revenue 7,698 3.3 % 5,990 3.2 % 14,298 3.3 % 10,604 3.1 %
TOTAL REVENUE 230,752 100.0 % 187,460 100.0 % 434,143 100.0 % 342,742 100.0 %
Shack-level operating expenses(1):
Food and paper costs 65,987 29.6 % 54,917 30.3 % 125,871 30.0 % 99,547 30.0 %
Labor and related expenses 65,851 29.5 % 52,631 29.0 % 126,316 30.1 % 99,013 29.8 %
Other operating expenses 32,563 14.6 % 24,275 13.4 % 62,800 15.0 % 47,419 14.3 %
Occupancy and related expenses 16,657 7.5 % 14,876 8.2 % 32,933 7.8 % 28,787 8.7 %
General and administrative expenses 29,075 12.6 % 20,366 10.9 % 60,395 13.9 % 39,931 11.7 %
Depreciation and amortization expense 18,087 7.8 % 14,472 7.7 % 34,942 8.0 % 28,198 8.2 %
Pre-opening costs 2,823 1.2 % 2,258 1.2 % 5,535 1.3 % 5,834 1.7 %
Impairment and loss on disposal of assets 528 0.2 % 358 0.2 % 1,105 0.3 % 727 0.2 %
TOTAL EXPENSES 231,571 100.4 % 184,153 98.2 % 449,897 103.6 % 349,456 102.0 %
INCOME (LOSS) FROM OPERATIONS (819) (0.4) % 3,307 1.8 % (15,754) (3.6) % (6,714) (2.0) %
Other income, net 538 0.2 % 108 0.1 % 249 0.1 % 139 - %
Interest expense (315) (0.1) % (359) (0.2) % (670) (0.2) % (874) (0.3) %
INCOME (LOSS) BEFORE INCOME TAXES (596) (0.3) % 3,056 1.6 % (16,175) (3.7) % (7,449) (2.2) %
Income tax expense (benefit) 707 0.3 % 991 0.5 % (3,590) (0.8) % (10,089) (2.9) %
NET INCOME (LOSS) (1,303) (0.6) % 2,065 1.1 % (12,585) (2.9) % 2,640 0.8 %
Less: Net income (loss) attributable to
non-controlling interests (115) - % 121 0.1 % (1,235) (0.3) % (613) (0.2) %
NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ (1,188) (0.5) % 0.9 %
(1)As a percentage of Shack sales.
Shack Sales
Shack sales represent the aggregate sales of food, beverages andShake Shack branded merchandise at our domestic Company-operated Shacks and gift card breakage income. Shack sales in any period are directly influenced by the number of open Shacks and the number of operating weeks in such period. Thirteen Weeks Ended Twenty-Six Weeks Ended June 29 June 30 June 29 June 30 (dollar amounts in thousands) 2022 2021 2022 2021 Shack sales$ 223,054 $ 181,470 $ 419,845 $ 332,138 Percentage of Total revenue 96.7 % 96.8 % 96.7 % 96.9 % Dollar change compared to prior year$ 41,584 $ 87,707 Percentage change compared to prior year 22.9 % 26.4 % Shack sales for the thirteen weeks endedJune 29, 2022 increased 22.9% to$223.1 million versus the same period last year. Shack sales for the twenty-six weeks endedJune 29, 2022 increased 26.4% to$419.8 million versus the same period last year. The increases in Shack sales for the thirteen and twenty-six weeks endedJune 29, 2022 were primarily due to the opening of 30
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new domestic Company-operated Shacks between
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.
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29 June 30 June 29 June 30
(dollar amounts in thousands) 2022 2021 2022 2021
Licensing revenue $ 7,698 $ 5,990 $ 14,298 $ 10,604
Percentage of Total revenue 3.3 % 3.2 % 3.3 % 3.1 %
Dollar change compared to prior year $ 1,708 $ 3,694
Percentage change compared to prior year 28.5 % 34.8 %
Licensing revenue for the thirteen weeks ended June 29, 2022 increased 28.5% to
$7.7 million versus the same period last year. Licensing revenue for the
twenty-six weeks ended June 29, 2022 increased 34.8% to $14.3 million versus the
same period last year. The increases in Licensing revenue during the thirteen
and twenty-six weeks ended June 29, 2022 were primarily due to a net increase of
26 licensed Shacks that opened between June 30, 2021 and June 29, 2022 , which
contributed $1.3 million and $2.2 million , respectively. Despite the continued
improvement in Licensing revenue, results have been impacted by various COVID-19
restrictions across China and a stronger US dollar.
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.
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29 June 30 June 29 June 30
(dollar amounts in thousands) 2022 2021 2022 2021
Food and paper costs $ 65,987 $ 54,917 $ 125,871 $ 99,547
Percentage of Shack sales 29.6 % 30.3 % 30.0 % 30.0 %
Dollar change compared to prior year $ 11,070 $ 26,324
Percentage change compared to prior year 20.2 % 26.4 %
Food and paper costs for the thirteen weeks ended June 29, 2022 increased 20.2%
to $66.0 million versus the same period last year. Food and paper costs for the
twenty-six weeks ended June 29, 2022 increased 26.4% to $125.9 million versus
the same period last year. The increases in Food and paper costs for the
thirteen and twenty-six weeks ended June 29, 2022 were primarily due to the
opening of 30 net new domestic Company-operated Shacks between June 30, 2021 and
June 29, 2022 as well as increased in commodity costs.
As a percentage of Shack sales, the decrease in Food and paper costs for the
thirteen weeks ended June 29, 2022 was primarily driven by menu price increases
partially offset by increased commodity costs. As a percentage of Shack sales,
Food and paper costs was flat for the twenty-six weeks ended June 29, 2022
primarily driven by increased commodity costs offset by menu price increases and
lower beverage costs.
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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 should 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.
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29 June 30 June 29 June 30
(dollar amounts in thousands) 2022 2021 2022 2021
Labor and related expenses $ 65,851 $ 52,631 $ 126,316 $ 99,013
Percentage of Shack sales 29.5 % 29.0 % 30.1 % 29.8 %
Dollar change compared to prior year $ 13,220 $ 27,303
Percentage change compared to prior year 25.1 % 27.6 %
Labor and related expenses for the thirteen weeks ended June 29, 2022 increased
25.1% to $65.9 million versus the same period last year. Labor and related
expenses for the twenty-six weeks ended June 29, 2022 increased 27.6% to $126.3
million versus the same period last year. The increases in Labor and related
expenses for the thirteen and twenty-six weeks ended June 29, 2022 were
primarily due to the opening of 30 net new domestic Company-operated Shacks
between June 30, 2021 and June 29, 2022 as well as increased wages and salaries
for our Shack teams.
As a percentage of Shack sales, the increases in Labor and related expenses for
the thirteen and twenty-six weeks ended June 29, 2022 were primarily due to
increased wages and salaries, partially offset by sales leverage and an increase
in labor productivity.
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.
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29 June 30 June 29 June 30
(dollar amounts in thousands) 2022 2021 2022 2021
Other operating expenses $ 32,563 $ 24,275 $ 62,800 $ 47,419
Percentage of Shack sales 14.6 % 13.4 % 15.0 % 14.3 %
Dollar change compared to prior year $ 8,288 $ 15,381
Percentage change compared to prior year 34.1 % 32.4 %
Other operating expenses for the thirteen weeks ended June 29, 2022 increased
34.1% to $32.6 million versus the same period last year. Other operating
expenses for the twenty-six weeks ended June 29, 2022 increased 32.4% to $62.8
million versus the same period last year. The increases in Other operating
expenses for the thirteen and twenty-six weeks ended June 29, 2022 were
primarily due to the opening of 30 net new domestic Company-operated Shacks
between June 30, 2021 and June 29, 2022 as well as increased facilities costs
and transaction costs.
As a percentage of Shack sales, the increase in Other operating expenses for the
thirteen weeks ended June 29, 2022 was primarily due to increased transaction
and facilities costs as noted above, partially offset by sales leverage. As a
percentage of Shack sales, the increase in Other operating expenses for the
twenty-six weeks ended June 29, 2022 was primarily due to increased transaction
and facilities costs as noted above, partially offset by sales leverage and
delivery mix.
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.
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Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29 June 30 June 29 June 30
(dollar amounts in thousands) 2022 2021 2022 2021
Occupancy and related expenses $ 16,657 $ 14,876 $ 32,933 $ 28,787
Percentage of Shack sales 7.5 % 8.2 % 7.8 % 8.7 %
Dollar change compared to prior year $ 1,781 $ 4,146
Percentage change compared to prior year 12.0 % 14.4 %
Occupancy and related expenses for the thirteen weeks ended June 29, 2022
increased 12.0% to $16.7 million versus the same period last year. Occupancy and
related expenses for the twenty-six weeks ended June 29, 2022 increased 14.4% to
$32.9 million versus the same period last year. The increases in Occupancy and
related expenses for the thirteen and twenty-six weeks ended June 29, 2022 were
primarily due to the opening of 30 net new domestic Company-operated Shacks
between June 30, 2021 and June 29, 2022 .
As a percentage of Shack sales, the decreases in Occupancy and related expenses
for the thirteen and twenty-six weeks ended June 29, 2022 were primarily due to
sales leverage.
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.
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29 June 30 June 29 June 30
(dollar amounts in thousands) 2022 2021 2022 2021
General and administrative expenses $ 29,075 $ 20,366 $ 60,395 $ 39,931
Percentage of Total revenue 12.6 % 10.9 % 13.9 % 11.7 %
Dollar change compared to prior year $ 8,709 $ 20,464
Percentage change compared to prior year 42.8 % 51.2 %
General and administrative expenses for the thirteen weeks ended June 29, 2022
increased 42.8% to $29.1 million versus the same period last year. General and
administrative expenses for the twenty-six weeks ended June 29, 2022 increased
51.2% to $60.4 million versus the same period last year.
The increase in General and administrative expenses for the thirteen weeks ended
June 29, 2022 was primarily due to expenses incurred related to the Company
retreat as well as investments in marketing and technology initiatives. The
increase in General and administrative expenses for the twenty-six weeks ended
June 29, 2022 was primarily due to an accrual of $6.8 million related to legal
matters, expenses incurred related to the Company retreat as well as investments
in marketing and technology initiatives.
As a percentage of Total revenue, the increases in General and administrative
expenses for the thirteen weeks ended June 29, 2022 was primarily due to the
aforementioned investment spend. As a percentage of Total revenue, the increase
in General and administrative expenses for the twenty-six weeks ended June 29,
2022 was primarily due to the aforementioned legal accrual and investment spend.
Depreciation and Amortization Expense
Depreciation and amortization expense consists of the depreciation of fixed assets, including leasehold improvements and equipment.
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Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29 June 30 June 29 June 30
(dollar amounts in thousands) 2022 2021 2022 2021
Depreciation and amortization expense $ 18,087 $ 14,472 $ 34,942 $ 28,198
Percentage of Total revenue 7.8 % 7.7 % 8.0 % 8.2 %
Dollar change compared to prior year $ 3,615 $ 6,744
Percentage change compared to prior year 25.0 % 23.9 %
Depreciation and amortization expense for the thirteen weeks ended June 29, 2022
increased 25.0% to $18.1 million versus the same period last year. Depreciation
and amortization expense for the twenty-six weeks ended June 29, 2022 increased
23.9% to $34.9 million versus the same period last year. The increases in
Depreciation and amortization expense for the thirteen and twenty-six weeks
ended June 29, 2022 were predominantly due to incremental depreciation of
capital expenditures related to the opening of 30 net new domestic
Company-operated Shacks between June 30, 2021 and June 29, 2022 .
As a percentage of Total revenue, the increase in Depreciation and amortization
expense for the thirteen weeks ended June 29, 2022 was primarily due to new
Shack openings as well as additional technology projects placed into service
between June 30, 2021 and June 29, 2022 . As a percentage of Total revenue, the
decrease in Depreciation and amortization expense for the twenty-six weeks ended
June 29, 2022 was primarily due to sales leverage associated with increased
sales volume partially offset by increased costs from new Shack openings between
June 30, 2021 and June 29, 2022 .
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. Thirteen Weeks Ended Twenty-Six Weeks Ended June 29 June 30 June 29 June 30 (dollar amounts in thousands) 2022 2021 2022 2021 Pre-opening costs$ 2,823 $ 2,258 $ 5,535 $ 5,834 Percentage of Total revenue 1.2 % 1.2 % 1.3 % 1.7 % Dollar change compared to prior year$ 565 $ (299) Percentage change compared to prior year 25.0 % (5.1) % Pre-opening costs for the thirteen weeks endedJune 29, 2022 increased 25.0% to$2.8 million versus the same period last year. Pre-opening costs for the twenty-six weeks endedJune 29, 2022 decreased 5.1% to$5.5 million versus the same period last year. The increase in Pre-opening costs for the thirteen weeks endedJune 29, 2022 was due to a higher base rent and legal costs for unopened domestic Company-operated Shacks compared to the prior-year period partially offset by lower wages and team costs. The decrease in Pre-opening costs for the twenty-six weeks endedJune 29, 2022 was due to lower wages and team costs for unopened domestic Company-operated Shacks due to the timing of openings as well as the lower number of new domestic Company-operated Shacks opened compared to the prior-year period.
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.
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Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29 June 30 June 29 June 30
(dollar amounts in thousands) 2022 2021 2022 2021
Impairment and loss on disposal of assets $ 528 $ 358 $ 1,105 $ 727
Percentage of Total revenue 0.2 % 0.2 % 0.3 % 0.2 %
Dollar change compared to prior year $ 170 $ 378
Percentage change compared to prior year 47.5 % 52.0 %
Impairment and loss on disposal of assets for the thirteen weeks ended June 29,
2022 increased 47.5% to $0.5 million versus the same period last year.
Impairment and loss on disposal of assets for the twenty-six weeks ended
June 29, 2022 increased 52.0% to $1.1 million versus the same period last year.
The increases in Impairment and loss on disposal of assets for the thirteen and
twenty-six weeks ended June 29, 2022 were primarily due to the number of Shacks
maturing in our base.
Other Income, Net
Other income, net consists of interest income, dividend income and net unrealized and realized gains and losses from marketable securities.
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29 June 30 June 29 June 30
(dollar amounts in thousands) 2022 2021 2022 2021
Other income, net $ 538 $ 108 $ 249 $ 139
Percentage of Total revenue 0.2 % 0.1 % 0.1 % - %
Dollar change compared to prior year $ 430 $ 110
Percentage change compared to prior year 398.1 % 79.1 %
Other income, net for the thirteen weeks ended June 29, 2022 increased 398.1% to
$0.5 million versus the same period last year. Other income, net for the
twenty-six weeks ended June 29, 2022 increased 79.1% to $0.2 million versus the
same period last year. The increases in Other income, net for the thirteen and
twenty-six weeks ended June 29, 2022 were primarily due to sponsorship credits
received from our partners and increases in dividend income partially offset by
increases in unrealized losses related to our investments in marketable
securities.
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.
Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29 June 30 June 29 June 30
(dollar amounts in thousands) 2022 2021 2022 2021
Interest expense $ (315) $ (359) $ (670) $ (874)
Percentage of Total revenue (0.1) % (0.2) % (0.2) % (0.3) %
Dollar change compared to prior year $ 44 $ 204
Percentage change compared to prior year (12.3) % (23.3) %
Interest expense for the thirteen weeks ended June 29, 2022 decreased 12.3% to
$0.3 million versus the same period last year. Interest expense for the
twenty-six weeks ended June 29, 2022 decreased 23.3% to $0.7 million versus the
same period last year. The decrease in Interest expense for the thirteen weeks
ended June 29, 2022 was primarily due to sponsorship credits received from our
banking partners.
The decrease in Interest expense for the twenty-six weeks ended June 29, 2022
was primarily due to the write-off of previously capitalized costs of $0.3
million associated with the amendment of our Revolving Credit Facility during
the thirteen weeks ended March 31, 2021 as well as sponsorship credits received
from our banking partners partially offset by amortization expense related to
our Convertible Notes issued in March 2021 .
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Income Tax Expense (Benefit)
We are the sole managing member ofSSE Holdings and, as a result, consolidate the financial results ofSSE Holdings .SSE Holdings is treated as a partnership forU.S. federal and most applicable state and local income tax purposes. As a partnership,SSE Holdings is not subject toU.S. federal and certain state and local income taxes. Any taxable income or loss generated bySSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject toU.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss ofSSE Holdings , as well as any stand-alone income or loss generated by us. We are also subject to withholding taxes in foreign jurisdictions. Thirteen Weeks Ended Twenty-Six Weeks Ended June 29 June 30 June 29 June 30 (dollar amounts in thousands) 2022 2021 2022 2021 Income tax expense (benefit)$ 707 $ 991 $ (3,590) $ (10,089) Percentage of Total revenue 0.3 % 0.5 % (0.8) % (2.9) % Dollar change compared to prior year$ (284) $ 6,499 Percentage change compared to prior year (28.7) % (64.4) % Our effective income tax rates for the thirteen weeks endedJune 29, 2022 andJune 30, 2021 were (118.6)% and 32.4%, respectively. The decrease was primarily driven by an increase in foreign tax expense, increase in expense due to shortfalls in equity-based compensation, and an increase in pre-tax loss. Additionally, an increase in our ownership interest inSSE Holdings increases our share of the taxable income (loss) ofSSE Holdings . Our weighted average ownership interest inSSE Holdings was 93.1% and 93.0% for the thirteen weeks endedJune 29, 2022 andJune 30, 2021 , respectively. Our effective income tax rates for the twenty-six weeks endedJune 29, 2022 andJune 30, 2021 were 22.2% and 135.4%, respectively. The decrease in rate was primarily driven by a decrease in the valuation allowance, a decrease in the benefit associated with equity-based compensation, partially offset by the increase in pre-tax loss and higher foreign tax expense. Our weighted average ownership interest inSSE Holdings was 93.1% and 93.0% for the twenty-six weeks endedJune 29, 2022 andJune 30, 2021 , respectively.
Net Income (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 Condensed 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. Thirteen Weeks Ended Twenty-Six Weeks Ended June 29 June 30 June 29 June 30 (dollar amounts in thousands) 2022 2021 2022
2021
Net income (loss) attributable to non-controlling interests$ (115) $ 121 $ (1,235) $ (613) Percentage of Total revenue - % 0.1 % (0.3) % (0.2) % Net income (loss) attributable to non-controlling interests for the thirteen weeks endedJune 29, 2022 declined to a loss of$0.1 million from income of$0.1 million in the same period last year. The decline in Net income (loss) attributable to non-controlling interests was primarily due to a decrease in net results compared to the same period last year, partially offset by a decrease in the non-controlling interest holders' weighted average ownership, which was 6.9% and 7.0% for the thirteen weeks endedJune 29, 2022 andJune 30, 2021 , respectively. Net loss attributable to non-controlling interests for the twenty-six weeks endedJune 29, 2022 increased to a loss of$1.2 million from a loss of$0.6 million in the same period last year. The increase in Net loss attributable to non-controlling interests was primarily due to a decrease in net results compared to the same period last year, partially offset by a decrease in the non-Shake Shack Inc. [[Image Removed: shak-20220629_g2.jpg]] Form 10-Q | 35
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controlling interest holders' weighted average ownership, which was 6.9% and
7.0% for the twenty-six weeks ended
NON-GAAP FINANCIAL MEASURES
To supplement the Condensed 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, adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share (collectively the "non-GAAP financial measures").
Shack-Level Operating Profit
Shack-level operating profit is defined 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 to develop our 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 employee compensation as it serves as a metric in certain performance-based employee 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 the Shacks, as these measures depict the operating results that are directly impacted by the Shacks and exclude items that may not be indicative of, or are unrelated to, the ongoing operations of the Shacks. It may also assist investors to evaluate the Company's performance relative to peers of various sizes and maturities and provides greater transparency with respect to how management evaluates our business, as well as the 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 the Company's Shacks. Therefore, this measure may not provide a complete understanding of the Company's operating results as a whole and Shack-level operating profit and Shack-level operating profit margin should be reviewed in conjunction with the Company's GAAP financial results. A reconciliation of Shack-level operating profit to Income (loss) from operations, the most directly comparable GAAP financial measure, is set forth below.
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Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29 June 30 June 29 June 30
(dollar amounts in thousands) 2022 2021 2022 2021
Income (loss) from operations $ (819) $ 3,307 $ (15,754) $ (6,714) Less: Licensing revenue 7,698 5,990 14,298 10,604 Add: General and administrative expenses 29,075 20,366 60,395 39,931 Depreciation and amortization expense 18,087 14,472 34,942 28,198 Pre-opening costs 2,823 2,258 5,535 5,834 Impairment and loss on disposal of assets 528 358 1,105 727 Shack-level operating profit$ 41,996 $ 34,771 $ 71,925 $ 57,372 Total revenue$ 230,752 $ 187,460 $ 434,143 $ 342,742 Less: Licensing revenue 7,698 5,990 14,298 10,604 Shack sales$ 223,054 $ 181,470 $ 419,845 $ 332,138 Shack-level operating profit margin(1,2) 18.8 % 19.2 % 17.1 % 17.3 %
(1)As a percentage of Shack sales.
(2)For the twenty-six weeks endedJune 29, 2022 , Shack-level operating profit margin includes the$1,281 cumulative catch-up adjustment for gift card breakage income, recognized in 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 the disposal of assets, amortization of cloud-based software implementation costs, as well as certain non-recurring items that we do not believe directly reflect the core operations and may not be indicative of 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 to develop internal budgets and forecasts and also serves as a metric in our performance-based equity incentive programs and certain 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 its ongoing business operations because they exclude items that may not be indicative of the Company's 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 the
GAAP financial measures. A reconciliation of EBITDA and adjusted EBITDA to Net
income (loss), the most directly comparable GAAP measure, are set forth below.
Shake Shack Inc. [[Image Removed: shak-20220629_g2.jpg]] Form 10-Q | 37
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Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29 June 30 June 29 June 30
(dollar amounts in thousands) 2022 2021 2022 2021
Net income (loss) $ (1,303) $ 2,065 $ (12,585) $ 2,640
Depreciation and amortization expense 18,087 14,472 34,942 28,198
Interest expense, net 315 359 670 874
Income tax expense (benefit) 707 991 (3,590) (10,089)
EBITDA 17,806 17,887 19,437 21,623
Equity-based compensation 3,452 1,958 6,640 3,639Amortization of cloud-based software implementation costs
351 314 683 627
Deferred lease costs(1) (773) (75) (1,650) 129
Impairment and loss on disposal of assets 528 358 1,105 727
Legal matters 750 24 6,750 619
Gift card breakage cumulative catch-up adjustment - - (1,281) -
Debt offering related costs(2) - - - 236
Executive transition costs - 179 - 179
Adjusted EBITDA $ 22,114 $ 20,645 $ 31,684 $ 27,779
Adjusted EBITDA margin(3) 9.6 % 11.0 % 7.3 % 8.1 %
(1)Reflects the extent to which lease expense is greater than or less than contractual fixed base rent.
(2)Costs incurred in connection with the Company's Convertible Notes, issued in
(3)Calculated as a percentage of Total revenue, which was
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, it does not account for the earnings attributable to the non-controlling interest holders and therefore 38 |Shake Shack Inc. [[Image Removed: shak-20220629_g2.jpg]] Form 10-Q
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does 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.
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Thirteen Weeks Ended Twenty-Six Weeks Ended
June 29 June 30 June 29 June 30
(in thousands, except per share amounts) 2022 2021 2022 2021
Numerator:
Net income (loss) attributable to Shake Shack Inc. $ (1,188) $ 1,944 $ (11,350) $ 3,253
Adjustments:
Reallocation of Net income (loss)
attributable to non-controlling interests
from the assumed exchange of LLC
Interests(1) (115) 121 (1,235) (613)
Legal matters 750 24 6,750 619
Gift card breakage cumulative catch-up
adjustment - - (1,281) -
Debt offering related costs(2) - - - 236
Executive transition costs - 179 - 179
Revolving Credit Facility amendments
related costs(3) - - - 323
Impact to income tax expense (benefit)(4) 684 112 (911) 136
Adjusted pro forma net income (loss) $ 131 $ 2,380 $ (8,027) $ 4,133
Denominator:
Weighted average shares of Class A common stock outstanding-diluted 39,227 43,789 39,195 43,289
Adjustments:
Assumed exchange of LLC Interests for
shares of Class A common stock(1) 2,906 - 2,913 -
Dilutive effect of stock options 104 - - -
Dilutive effect of convertible notes 1,467 - - -
Adjusted pro forma fully exchanged weighted averageshares of Class
A common stock outstanding-diluted 43,704 43,789 42,108 43,289
Adjusted pro forma earnings (loss) per fully exchanged share-diluted
$ - $ 0.05 $ (0.19) $ 0.10
Thirteen Weeks Ended Twenty-Six Weeks
Ended
June 29 June 30 June 29 June 30
2022 2021 2022 2021
Earnings (loss) per share of Class A common stock-diluted $ (0.03) $ 0.05 $ (0.29) $ 0.06
Assumed exchange of LLC Interests for shares of
Class A common stock(1) - - (0.01) -
Non-GAAP adjustments(5) 0.03 - 0.11 0.04Adjusted pro forma earnings (loss) per fully exchanged share-diluted
$ -
(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. Refer to Note 11, Earnings (Loss) per Share, in the accompanying Condensed Consolidated Financial Statements, for additional information.
(2)Costs incurred in connection with the Company's Convertible Notes, issued in
(3)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. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information. (4)Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 14.9% and 25.0% for the thirteen and twenty-six weeks endedJune 29, 2022 , respectively, and 27.0% and 167.8% for the thirteen and twenty-six weeks endedJune 30, 2021 , respectively. Amounts 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.
(5)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.
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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. As ofJune 29, 2022 , we maintained a Cash and cash equivalents balance of$278.3 million and a short-term investments balance of$79.6 million within Marketable securities. InMarch 2021 , we issued 0% Convertible Senior Notes ("Convertible Notes"), and received$243.8 million of proceeds, net of discounts. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information.
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 ofJune 29, 2022 , such obligations totaled$234.9 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.
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.
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