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. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact, such as our expected financial outlook for fiscal 2020, our expected operating performance for fiscal 2020, expected Shack construction and openings, expected same-Shack sales growth and trends in our business, including statements relating to the effects of COVID-19 and our mitigation efforts. Forward-looking statements can also be identified by words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "plan," "potential," "predict," "project," "seek," "may," "can," "will," "would," "could," "should," the negatives thereof and other similar expressions. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedDecember 25, 2019 ("2019 Form 10-K") and Part II, Item 1A of this Quarterly Report on Form 10-Q. The following discussion should be read in conjunction with our 2019 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. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law. OVERVIEWShake 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. As ofJune 24, 2020 , there were 292 Shacks in operation system-wide, of which 171 were domestic company-operated Shacks, 22 were domestic licensed Shacks and 99 were international licensed Shacks. COVID-19 Update We have experienced gradual improvement in the business during the second quarter of 2020, and third quarter to date. The speed of our recovery has differed depending on the location of our Shacks, with those Shacks concentrated in urban areas, such asNew York City , most impacted by the COVID-19 outbreak. Urban Shacks represent approximately half the Shacks in the comparable base, yet accounted for approximately 60% of our same-Shack sales prior to the COVID-19 outbreak. During the second quarter of 2020, same-Shack sales in our urban Shacks were down 57% and suburban Shacks were down 38% compared to the same period last year. Subsequent to the second quarter of 2020, in fiscalJuly 2020 , same-Shack sales for our urban Shacks were down 50% and suburban Shacks were down 24% compared to the same period last year. As ofJuly 22 , approximately 95% of domestic company-operated Shacks were open. As in-Shack ordering has increased over recent weeks, digital sales mix has continued to shift. During the second quarter total digital sales represented 75% of total Shack sales and more than doubled compared to the first quarter of 2020. Our native web and app channels more than tripled compared to the same period last year, and when combined, continued to be the fastest growing channels throughout Q2 and into July. For fiscal July, digital sales represented 62% of total Shack sales, retaining over 90% of the digital sales that were achieved during fiscal May even as in-Shack sales have gradually returned. In addition, we have welcomed over 800,000 first time purchasers via our own digital channels since early March, which is nearly four times higher than in the same period last year. We expect digital channels to remain a significant component of sales and ongoing growth. 28 |Shake Shack Inc. [[Image Removed: shak-20200624_g2.jpg]] Form 10-Q --------------------------------------------------------------------------------
Table of Contents
The following table presents fiscal monthly information about our current trends in Shack sales. First Quarter Second Quarter Third Quarter (dollar amounts in thousands) March 25 April 22 May 20 June 24 July 22 Average weekly sales*$ 56 $ 32 $ 50 $ 52 $ 56 Total year-over-year sales growth (decline) (11) % (56) % (32) % (32) % (23) % Same-Shack sales % (29) % (64) % (42) % (42) % (39) % *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. Our licensed business has shown gradual improvement across all regions as approximately 80% of licensed Shacks have reopened. All Shacks inHong Kong , mainlandChina ,Japan andKorea (with the exception of theIncheon Airport Shack) are now open although in most cases with limited hours and smaller capacity dining rooms. In theMiddle East , the majority of Shacks have re-opened primarily for take-out and delivery with dining rooms slowly starting to open across the region. Approximately half the Shacks in theUnited Kingdom are fully reopened. Nearly all domestic stadium and event venues remain closed. Half of all airport locations are open but operating at severely reduced sales levels while air travel remains at a fraction of its volume prior to the COVID-19 outbreak. As an example of the dynamic and quickly evolving environment, the Shack located in Terminal 3 of theLAX airport will not reopen, as the airport has chosen to take this time to tear down and replace the terminal entirely. The following table presents fiscal monthly information about our licensed sales trends. First Quarter Second Quarter Third Quarter (dollar amounts in millions) March 25 April 22 May 20 June 24 July 22 Weekly licensed sales(1)$ 4.6 $ 2.0 $ 2.4 $ 3.5 $ 4.6 Total year-over-year licensed 13 % (65) % (58) % (47) % (32) % sales growth (decline) Number of open licensed Shacks 96 56 59 91 98 * Weekly licensed sales is an operating measure and consists of sales from domestic licensed Shacks and international licensed Shacks. We do not recognize the sales from licensed Shacks as revenue. Of these amounts, revenue is limited to licensing revenue based on a percentage of sales from domestic and international licensed Shacks, as well as certain up-front fees such as territory fees and opening fees. Development Highlights During the second quarter endedJune 24, 2020 , we opened four new domestic Shacks with new locations inTopanga ,Sacramento , Charlotte andSt. Louis . With gradual sales recovery, primarily across most markets outside ofNew York City , we have restarted new Shack development. We expect to open between 6 and 11 additional domestic company-operated Shacks, back weighted towards the end of this year, for a total of 15 to 20 for the full year. However, given the ongoing uncertainties around construction, local government restrictions, and the broader operating environment during COVID-19, this number may be subject to change as target dates potentially shift. During the second quarter endedJune 24, 2020 , we opened one new international licensed Shack inChina at theShanghai Hongqiao International Airport . In fiscal June, we expanded our partnership with licenseeMaxim's Caterers Limited which targets a development agreement of 15 Shacks inSouth China by 2030, including locations inShenzhen ,Guangzhou and more. Through this expanded partnership, this agreement increases development targets for mainlandChina to 55 Shacks by 2030, of which five Shacks are open today.
Table of Contents Financial Highlights for the Second Quarter 2020 compared to the Second Quarter 2019: ?Total revenue decreased 39.9% to$91.8 million . ?Shack sales decreased 39.5% to$89.5 million . ?Same-Shack sales decreased 49.0%. ?Licensed revenue decreased 53.1% to$2.3 million . ?Shack system-wide sales decreased 45.2% to$123.8 million . ?Operating loss of$24.1 million compared to operating income of$11.9 million in the prior year second quarter. ?Shack-level operating profit*, a non-GAAP measure, decreased 94.7% to$1.9 million , or 2.2% of Shack sales. ?Net loss was$18.0 million and adjusted EBITDA*, a non-GAAP measure, was a loss of$8.8 million , compared to net income of$11.2 million and adjusted EBITDA of$25.9 million in the prior year second quarter. ?Net loss attributable toShake Shack Inc. was$16.2 million and adjusted pro forma net loss*, a non-GAAP measure, was$18.3 million , or a loss of$0.45 per fully exchanged and diluted share, compared to net income attributable toShake Shack Inc. of$9.0 million , adjusted pro forma net income of$10.2 million , or$0.27 per fully exchanged and diluted share, in the prior year second quarter. ?Five system-wide Shack openings, comprised of four domestic company-operated Shacks and one licensed Shack. ?As ofJune 24, 2020 , we had$190.8 million in cash and marketable securities on hand. * Shack-level operating profit, adjusted EBITDA and adjusted pro forma net income (loss) are non-GAAP measures. Reconciliations of Shack-level operating profit to operating income (loss) and adjusted EBITDA to net income (loss), the most directly comparable financial measures presented in accordance with GAAP, are set forth in the schedules within "Non-GAAP Financial Measures," herein. FISCAL 2020 OUTLOOK Given the substantial uncertainty and subsequent material economic impact caused by the COVID-19 pandemic, we have withdrawn our guidance for the fiscal year endingDecember 30, 2020 . 30 |Shake Shack Inc. [[Image Removed: shak-20200624_g2.jpg]] Form 10-Q -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS
The following table summarizes our results of operations for the thirteen and
twenty-six weeks ended
Thirteen Weeks Ended Twenty-Six Weeks EndedJune 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Shack sales$ 89,519 97.5 %$ 147,876 96.8 %$ 227,567 96.9 %$ 276,445 96.9 % Licensing revenue 2,267 2.5 % 4,837 3.2 % 7,389 3.1 % 8,877 3.1 % TOTAL REVENUE 91,786 100.0 % 152,713 100.0 % 234,956 100.0 % 285,322 100.0 % Shack-level operating expenses(1): Food and paper costs 30,027 33.5 % 42,899 29.0 % 69,591 30.6 % 80,890 29.3 % Labor and related expenses 30,933 34.6 % 40,197 27.2 % 72,699 31.9 % 77,290 28.0 % Other operating expenses 14,304 16.0 % 16,755 11.3 % 32,083 14.1 % 32,323 11.7 % Occupancy and related expenses 12,323 13.8 % 11,873 8.0 % 24,881 10.9 % 22,772 8.2 % General and administrative expenses 14,017 15.3 % 15,393 10.1 % 30,208 12.9 % 29,330 10.3 % Depreciation expense 12,089 13.2 % 9,799 6.4 % 23,857 10.2 % 18,765 6.6 % Pre-opening costs 1,734 1.9 % 3,549 2.3 % 3,977 1.7 % 6,191 2.2 % Impairment and loss on disposal of assets 434 0.5 % 377 0.2 % 2,522 1.1 % 728 0.3 % TOTAL EXPENSES 115,861 126.2 % 140,842 92.2 % 259,818 110.6 % 268,289 94.0 % OPERATING INCOME (LOSS) (24,075) (26.2) % 11,871 7.8 % (24,862) (10.6) % 17,033 6.0 % Other income, net 394 0.4 % 447 0.3 % 301 0.1 % 1,011 0.4 % Interest expense (442) (0.5) % (97) (0.1) % (554) (0.2) % (169) (0.1) % INCOME (LOSS) BEFORE INCOME TAXES (24,123) (26.3) % 12,221 8.0 % (25,115) (10.7) % 17,875 6.3 % Income tax expense (benefit) (6,092) (6.6) % 1,050 0.7 % (6,005) (2.6) % 3,097 1.1 % NET INCOME (LOSS) (18,031) (19.6) % 11,171 7.3 % (19,110) (8.1) % 14,778 5.2 % Less: net income (loss) attributable to non-controlling interests (1,820) (2.0) % 2,141 1.4 % (1,939) (0.8) % 3,202 1.1 % NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC.$ (16,211) (17.7) %$ 9,030 5.9 %$ (17,171) (7.3) %$ 11,576 4.1 % (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. 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. Thirteen Weeks Ended Twenty-Six Weeks Ended June 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Shack sales$ 89,519 $ 147,876 $ 227,567 $ 276,445 Percentage of total revenue 97.5 % 96.8 % 96.9 % 96.9 % Dollar change compared to prior year$ (58,357) $ (48,878) Percentage change compared to prior year (39.5) % (17.7) % The decrease in Shack sales for the thirteen and twenty-six weeks endedJune 24, 2020 was primarily due to lost sales related to the impact from the COVID-19 pandemic, Furthermore, Shack sales were negatively impacted by an estimated$3.2 million due to nationwide protests and resulting curfews causing temporary Shack closures and reduced operating hours during the two
Table of Contents week period fromMay 28th through June 10th . These decreases were partially offset by the opening of 31 new domestic company-operated Shacks betweenJune 26, 2019 andJune 24, 2020 . Same-Shack sales decreased 49.0% in the second quarter of 2020 and 31.3% in the twenty-six weeks endedJune 24, 2020 , driven by the adverse impact of reduced traffic resulting from the COVID-19 pandemic, with Shacks located in typically dense urban locations acutely impacted by the outbreak. The decrease in same-Shack sales for the quarter was driven by a 60.1% decrease in traffic partially offset by an increase in price mix of 11.1%. This increase in price mix was driven by a 28% increase to total average check as a result of the significant shift into digital channels over the last few months, which have historically carried a higher average check than in-Shack. The decrease in same-Shack sales for the twenty-six weeks endedJune 24, 2020 was primarily driven by 38.0% decrease in guest traffic partially offset by an increase in price mix of 6.7%. In the second quarter of 2020, same-Shack sales improved from a 64% decline in fiscalApril 2020 , to a 42% decline in each of fiscal May andJune 2020 . As noted herein, fiscalJune Shack sales were negatively impacted by nationwide protest activity and resulting curfews. After adjusting for the impact of the protests, same-Shack sales showed sequential improvement, with a 39% decline in fiscalJune 2020 . For the purpose of calculating same-Shack sales growth, Shack sales for 95 Shacks were included in the comparable Shack base. Average weekly sales for domestic company-operated Shacks decreased to$45,000 for the second quarter of 2020 compared to$85,000 for the same quarter last year, due to the impact of COVID-19. Average weekly sales have, however, experienced steady increases from$32,000 in fiscalApril 2020 , to$52,000 in fiscalJune 2020 and$56,000 for fiscal July, representing an increase of 2.3 times the low point of the COVID-19 outbreak. Licensing Revenue Licensing revenue is comprised of license fees, opening fees for certain licensed Shacks and territory fees. License fees are calculated as a percentage of sales and territory fees are payments for the exclusive right to develop Shacks in a specific geographic area. Thirteen Weeks Ended Twenty-Six Weeks Ended June 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Licensing revenue$ 2,267 $ 4,837 $ 7,389 $ 8,877 Percentage of total revenue 2.5 % 3.2 % 3.1 % 3.1 % Dollar change compared to prior year$ (2,570) $ (1,488) Percentage change compared to prior year (53.1) % (16.8) % The decreases in licensing revenue for the thirteen and twenty-six weeks endedJune 24, 2020 were primarily due to lost sales related to the COVID-19 pandemic, partially offset by a net increase of 24 Shacks opened betweenJune 26, 2019 andJune 24, 2020 . Licensing revenue showed gradual improvement, with a 65% decline in fiscalApril 2020 , a 47% decline in fiscalJune 2020 , and a 32% decline in fiscalJuly 2020 . 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 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Food and paper costs$ 30,027 $ 42,899 $ 69,591 $ 80,890 Percentage of Shack sales 33.5 % 29.0 % 30.6 % 29.3 % Dollar change compared to prior year$ (12,872) $ (11,299) Percentage change compared to prior year (30.0) % (14.0) % The decreases in food and paper costs for the second quarter ofJune 24, 2020 were primarily due to a decline in sales volume related to the COVID-19 pandemic, partially offset by the opening of 31 new domestic company-operated Shacks betweenJune 26, 2019 andJune 24, 2020 . 32 |Shake Shack Inc. [[Image Removed: shak-20200624_g2.jpg]] Form 10-Q -------------------------------------------------------------------------------- Table of Contents As a percentage of Shack sales, the increase in food and paper costs for the thirteen and twenty-six weeks endedJune 24, 2020 was primarily due to sales deleverage resulting from the impact of COVID-19, significant inflation in beef prices, increased paper and packaging costs, a number of incremental payroll costs and higher delivery commissions. For the large part of the second quarter of 2020, we experienced significant inflation in beef, with cost nearly double that of last year for most of June. Beef prices have since returned to more normalized levels, however this increase negatively impacted Food and Paper costs by approximately$2.5 million . Furthermore, the Company had significantly higher paper and packaging costs, with all orders packaged in sealed bags, impacting Food and Paper costs by approximately$1.4 million . For the twenty-six weeks endedJune 24, 2020 , as a percentage of Shack sales, the increase in food and paper costs were due to sales deleverage resulting from the COVID-19 pandemic, lower chicken costs primarily from lapping the promotional launch of Chick'n Bites, which carried higher costs, and was partially offset by significant inflation in beef prices, higher paper and packaging costs and a non-recurring inventory adjustment, as described in the "Non-GAAP Financial Measures" section, herein. Labor and Related Expenses Labor and related expenses include domestic company-operated Shack-level hourly and management wages, bonuses, payroll taxes, equity-based compensation, workers' compensation expense and medical benefits. As we expect with other variable expense items, we expect labor costs to grow as our Shack sales grow. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs, size and location of the Shack and the performance of our domestic company-operated Shacks. Thirteen Weeks Ended Twenty-Six Weeks Ended June 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Labor and related expenses$ 30,933 $ 40,197 $ 72,699 $ 77,290 Percentage of Shack sales 34.6 % 27.2 % 31.9 % 28.0 % Dollar change compared to prior year$ (9,264) $ (4,591) Percentage change compared to prior year (23.0) % (5.9) % The decreases in labor and related expenses for the thirteen and twenty-six weeks endedJune 24, 2020 were primarily due to significant reductions in staffing expenses across all Shacks associated with the impact of COVID-19. These decreases were partially offset by the opening of 31 new domestic company-operated Shacks betweenJune 26, 2019 andJune 24, 2020 , and incremental payroll costs of$2.4 million as a result of a temporary 10% premium pay raise to hourly employees, guaranteed bonuses for Shack managers, and payments related to scheduling changes for hourly team members as teams navigated the challenging operating conditions caused by COVID-19, during the second quarter of 2020. As a percentage of Shack sales, the increase in labor and related expenses for the thirteen and twenty-six weeks endedJune 24, 2020 was primarily due to sales deleverage associated with the impact of COVID-19 and, to a lesser extent, increases in starting wages, partially offset by the reduction of labor hours. Other Operating Expenses Other operating expenses consist of Shack-level marketing expenses, repairs and maintenance, utilities and other operating expenses incidental to operating our domestic company-operated Shacks, such as non-perishable supplies, credit card fees and property insurance. Thirteen Weeks Ended Twenty-Six Weeks Ended June 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Other operating expenses$ 14,304 $ 16,755 $ 32,083 $ 32,323 Percentage of Shack sales 16.0 % 11.3 % 14.1 % 11.7 % Dollar change compared to prior year$ (2,451) $ (240) Percentage change compared to prior year (14.6) % (0.7) % The decreases in other operating expenses for the thirteen and twenty-six weeks endedJune 24, 2020 were primarily due to the reduction in expenses across all Shacks associated with the impact of COVID-19, partially offset by the opening of 31 new domestic company-operated Shacks betweenJune 26, 2019 andJune 24, 2020 , and higher delivery expense associated with increased penetration of delivery sales during the quarter.
Table of Contents As a percentage of Shack sales, the increase in other operating expenses for the thirteen and twenty-six weeks endedJune 24, 2020 was primarily due to higher delivery commission associated with increased delivery sales and sales deleverage associated with the impact of COVID-19, as described herein. 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. Thirteen Weeks Ended
Twenty-Six Weeks Ended
June 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Occupancy and related expenses$ 12,323 $ 11,873 $ 24,881
Percentage of Shack sales 13.8 % 8.0 % 10.9 %
8.2 %
Dollar change compared to prior year$ 450 $ 2,109 Percentage change compared to prior year 3.8 % 9.3 % This increases in occupancy and related expenses for the thirteen and twenty-six weeks endedJune 24, 2020 were primarily due to the opening of 31 new domestic company-operated Shacks betweenJune 26, 2019 andJune 24, 2020 . As a percentage of Shack sales, the increase in occupancy and related expenses for the thirteen and twenty-six weeks endedJune 24, 2020 was primarily due to sales deleverage associated with the impact of COVID-19. 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 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 General and administrative expenses$ 14,017 $ 15,393 $ 30,208 $ 29,330 Percentage of total revenue 15.3 % 10.1 % 12.9 % 10.3 % Dollar change compared to prior year$ (1,376) $ 878 Percentage change compared to prior year (8.9) % 3.0 % The decrease in general and administrative expenses for the thirteen and twenty-six weeks endedJune 24, 2020 were primarily due to reduced staffing levels, and cuts across the majority of discretionary spend categories, partially offset by increased technology expense to support further digital enhancements, as well as higher professional fees of approximately$0.3 million related to the April equity offering and the implementation of the CARES Act, with additional costs expected in the third quarter of 2020. As a percentage of total revenue, the increases in general and administrative expenses for the thirteen and twenty-six weeks endedJune 24, 2020 were primarily due to sales deleverage associated with the impact of COVID-19. Depreciation Expense Depreciation expense consists of the depreciation of fixed assets, including leasehold improvements and equipment. Thirteen Weeks Ended Twenty-Six Weeks Ended June 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Depreciation expense$ 12,089 $ 9,799 $ 23,857 $ 18,765 Percentage of total revenue 13.2 % 6.4 % 10.2 %
6.6 %
Dollar change compared to prior year$ 2,290 $ 5,092 Percentage change compared to prior year 23.4 % 27.1 %
34 |
Table of Contents The increases in depreciation expense for the thirteen and twenty-six weeks endedJune 24, 2020 were primarily due to incremental depreciation of capital expenditures related to the opening of 31 new domestic company-operated Shacks betweenJune 26, 2019 andJune 24, 2020 . As a percentage of total revenue, the increases in depreciation expense for the thirteen and twenty-six weeks endedJune 24, 2020 were primarily due to sales deleverage associated with the impact of COVID-19. Pre-Opening Costs Pre-opening costs consist primarily of legal fees, rent, managers' salaries, training costs, employee 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 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Pre-opening costs$ 1,734 $ 3,549 $ 3,977 $ 6,191 Percentage of total revenue 1.9 % 2.3 % 1.7 % 2.2 % Dollar change compared to prior year$ (1,815) $ (2,214) Percentage change compared to prior year (51.1) % (35.8) % The decreases in pre-opening costs for the thirteen and twenty-six weeks endedJune 24, 2020 were due to the lower number of new domestic company-operated Shacks opened during the current period compared to the prior-year period. Impairment and Loss on Disposal of Property and Equipment 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. Thirteen Weeks Ended Twenty-Six Weeks Ended June 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Impairment and loss on disposal of property and equipment$ 434 $ 377 $ 2,522
Percentage of total revenue 0.5 % 0.2 % 1.1 %
0.3 %
Dollar change compared to prior year$ 57 $ 1,794 Percentage change compared to prior year 15.1 % 246.4 % The increase in impairment and loss on disposal of property and equipment for the thirteen and twenty-six weeks endedJune 24, 2020 was primarily due to the number of Shacks maturing in our base and renovations. For the twenty-six weeks endedJune 24, 2020 , the increase was also due to an asset impairment charge of$1.1 million in the current period. Other Income, Net Other income, net consists of interest income, dividend income and net unrealized and realized gains and losses from the sale of marketable securities.
Table of Contents Thirteen Weeks Ended Twenty-Six Weeks Ended June 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Other income, net$ 394 $ 447 $ 301 $ 1,011 Percentage of total revenue 0.4 % 0.3 % 0.1 %
0.4 %
Dollar change compared to prior year$ (53) $ (710) Percentage change compared to prior year (11.9) % (70.2) % The decrease in other income, net for the thirteen weeks endedJune 24, 2020 was primarily due to a decrease in dividend income partially offset by unrealized gains related to our investments in marketable securities. For the twenty-six weeks endedJune 24, 2020 , the decrease was primarily due to a decrease in dividend income and unrealized losses related to our investments in marketable securities. Interest Expense Interest expense primarily 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, imputed interest on deferred compensation, imputed interest on our deemed landlord financing liability, and interest and fees on our Revolving Credit Facility. Thirteen Weeks Ended Twenty-Six Weeks Ended June 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Interest expense$ (442) $ (97) $ (554) $ (169) Percentage of total revenue (0.5) % (0.1) % (0.2) % (0.1) % Dollar change compared to prior year$ (345) $ (385) Percentage change compared to prior year 355.7 % 227.8 % The increases in interest expense for the thirteen and twenty-six weeks endedJune 24, 2020 was primarily due to an increase in interest and fees associated with our Revolving Credit Facility in the current year. Income Tax Expense We are the sole managing member ofSSE Holdings , which 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 generated bySSE Holdings . Thirteen Weeks Ended
Twenty-Six Weeks Ended
June 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Income tax expense$ (6,092) $ 1,050 $ (6,005)
Percentage of total revenue (6.6) % 0.7 % (2.6) %
1.1 %
Dollar change compared to prior year$ (7,142) $ (9,102) Percentage change compared to prior year (680.2) % (293.9) % Our effective income tax rates for the thirteen weeks endedJune 24, 2020 andJune 26, 2019 were 25.3% and 8.6%, respectively. The increase was primarily driven by lower pre-tax book income resulting in a loss, causing the tax credits to have an increasing effect on the tax rate, as well as the recognition of a valuation allowance against foreign tax credits that are not expected to be realized before the expiration of the carryforward period. 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 92.3% and 81.0% for the thirteen weeks endedJune 24, 2020 andJune 26, 2019 , respectively. Our effective income tax rates for the twenty-six weeks endedJune 24, 2020 andJune 26, 2019 were 23.9% and 17.3%, respectively. The increase was primarily driven by lower pre-tax book income resulting in a loss, causing the tax credits to have an increasing effect on the tax rate, as well as the recognition of a valuation allowance against foreign tax credits that are not 36 |Shake Shack Inc. [[Image Removed: shak-20200624_g2.jpg]] Form 10-Q -------------------------------------------------------------------------------- Table of Contents expected to be realized before the expiration of the carryforward period. These were partially offset by a reduction in the tax effect of changes related to the adoption of new accounting standards, for which there were none during the twenty-six weeks endedJune 24, 2020 . Additionally, as noted above, 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 92.0% and 80.3% for the twenty-six weeks endedJune 24, 2020 andJune 26, 2019 , 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, representing the portion of net income 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 and other comprehensive income toShake Shack Inc. and the non-controlling interest holders. Thirteen Weeks Ended Twenty-Six Weeks Ended June 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Net income (loss) attributable to non-controlling interests$ (1,820) $ 2,141 $ (1,939) $ 3,202 Percentage of total revenue (2.0) % 1.4 % (0.8) % 1.1 % Dollar change compared to prior year$ (3,961) $ (5,141) Percentage change compared to prior year (185.0) % (160.6) % The decreases in net income (loss) attributable to non-controlling interests for the thirteen and twenty-six weeks endedJune 24, 2020 were primarily due to a decline in net results causing a loss for the period, and a decrease in the non-controlling interest holders' weighted average ownership, which was 7.7% and 19.0% for the thirteen weeks endedJune 24, 2020 andJune 26, 2019 , respectively, and 8.0% and 19.7% for the twenty-six weeks endedJune 24, 2020 andJune 26, 2019 , respectively. NON-GAAP FINANCIAL MEASURES To supplement the consolidated financial statements, which are prepared and presented in accordance withU.S. generally accepted accounting principles ("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").
Table of Contents 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 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 employee compensation as it serves as a metric in certain of our 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 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 operating income, the most directly comparable GAAP financial measure, is as follows. Thirteen Weeks Ended Twenty-Six Weeks Ended June 24 June 26 June 24 June 26 (dollar amounts in thousands) 2020 2019 2020 2019 Operating income (loss)$ (24,075) $ 11,871 $ (24,862)
$ 17,033 Less: Licensing revenue 2,267 4,837 7,389 8,877 Add: General and administrative expenses 14,017 15,393 30,208 29,330 Depreciation expense 12,089 9,799 23,857 18,765 Pre-opening costs 1,734 3,549 3,977 6,191 Loss on disposal of property and equipment 434 377 2,522 728 Shack-level operating profit$ 1,932 $ 36,152 $ 28,313 $ 63,170 Total revenue$ 91,786 $ 152,713 $ 234,956 $ 285,322 Less: licensing revenue 2,267 4,837 7,389 8,877 Shack sales$ 89,519 $ 147,876 $ 227,567 $ 276,445 Shack-level operating profit margin 2.2 % 24.4 % 12.4 % 22.9 %
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Table of Contents EBITDA and Adjusted EBITDA EBITDA is defined as net income before interest expense (net of interest income), income tax expense and depreciation and amortization expense. Adjusted EBITDA is defined as EBITDA (as defined above) excluding equity-based compensation expense, deferred lease cost, losses on the disposal of property and equipment, 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, the most directly comparable GAAP measure, is as follows. Thirteen Weeks Ended Twenty-Six Weeks Ended June 24 June 26 June 24 June 26 (in thousands) 2020 2019 2020 2019 Net income (loss)$ (18,031) $ 11,171 $ (19,110) $ 14,778 Depreciation expense 12,089 9,799 23,857 18,765 Interest expense, net 442 97 554 169 Income tax expense (6,092) 1,050 (6,005) 3,097 EBITDA (11,592) 22,117 (704) 36,809 Equity-based compensation 1,419 2,235 2,719 3,955 Amortization of cloud-based software implementation costs(1) 368 - 628 - Deferred lease costs(2) 479 715 149 1,300 Impairment and loss on disposal of property and equipment(3) 434 377 2,522 728 Other income related to adjustment of liabilities under tax receivable agreement - - - (14) Executive transition costs(4) 34 88 68 126 Project Concrete(5) 24 213 (237) 685 Hong Kong office(6) - 171 - 171 Other(7) - - 285 - Adjusted EBITDA$ (8,834) $ 25,916 $ 5,430 $ 43,760 Adjusted EBITDA margin(8) (9.6) % 17.0 % 2.3 % 15.3 %
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(1) Represents amortization of capitalized implementation costs related to cloud-based software arrangements that are included within general and administrative expenses. (2) Reflects the extent to which lease expense is greater than or less than contractual fixed base rent. (3) For the twenty-six weeks endedJune 24, 2020 , this amount includes a non-cash impairment charge of$1.1 million related to one Shack. (4) Represents fees paid in connection with the search and hiring of certain executive and key management positions. (5) Represents consulting and advisory fees related to the our enterprise-wide system upgrade initiative called Project Concrete. (6) Represents costs associated with establishing our first international office inHong Kong . (7) Represents incremental expenses incurred related to an inventory adjustment and certain employee-related expenses. (8) Calculated as a percentage of total revenue, which was$91,786 and$234,956 for the thirteen and twenty-six weeks endedJune 24, 2020 , respectively, and$152,713 and$285,322 for the thirteen and twenty-six weeks endedJune 26, 2019 , respectively. 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 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 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 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 does not provide a complete understanding of the net income 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. 40 |Shake Shack Inc. [[Image Removed: shak-20200624_g2.jpg]] Form 10-Q --------------------------------------------------------------------------------
Table of Contents Thirteen Weeks Ended Twenty-Six Weeks EndedJune 24 June 26 June 24 June 26 (in thousands, except per share amounts) 2020 2019 2020 2019 Numerator: Net income (loss) attributable toShake Shack Inc. $ (16,211) $ 9,030 $ (17,171) $ 11,576 Adjustments: Reallocation of net income attributable to non-controlling interests from the assumed exchange of LLC Interests(1) (1,820) 2,141 (1,939) 3,202 Executive transition costs(2) 34 88 68 126 Project Concrete(3) 24 213 (237) 685 Hong Kong office(4) - 171 - 171 Other(5) - - 285 - Other income related to
adjustment of liabilities under
tax receivable agreement - - - (14) Tax effect of change in tax basis related to the adoption of new accounting standards(6) - - - 1,161 Income tax expense(7) (286) (1,397) 1,533 (1,712) Adjusted pro forma net income (loss)$ (18,259) $ 10,246 $ (17,461) $ 15,195 Denominator: Weighted-average shares of Class A common stock outstanding-diluted 37,309 31,015 35,876 30,703 Adjustments: Assumed exchange of LLC Interests for shares of Class A common stock(1) 3,117 7,088 3,131 7,314 Adjusted pro forma fully exchanged weighted-average
shares of Class A common
stock outstanding-diluted 40,426 38,103 39,007 38,017
Adjusted pro forma earnings (loss) per fully exchanged share-diluted
$ (0.45) $ 0.27 $ (0.45) $ 0.40 Thirteen Weeks Ended Twenty-Six Weeks Ended June 24 June 26 June 24 June 26 2020 2019 2020 2019
Earnings (loss) per share of Class A common stock - diluted
$ (0.43) $ 0.29 $ (0.48) $ 0.38 Assumed exchange of LLC Interests for shares of Class A common stock(1) (0.01) - (0.01) 0.01 Non-GAAP adjustments(8) (0.01) (0.02) 0.04 0.01 Adjusted pro forma earnings (loss) per fully exchanged share-diluted$ (0.45) $ 0.27 $ (0.45) $ 0.40 (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) Represents costs associated with establishing our first international office inHong Kong . (5) Represents incremental expenses incurred related to an inventory adjustment and certain employee-related expenses. (6) Represents tax effect of change in tax basis related to the adoption of the new lease accounting standard for the thirteen and twenty-six weeks endedJune 26, 2019 . (7) Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 24.1% and 30.2% for the thirteen and twenty-six weeks endedJune 24, 2020 , respectively, and 19.3% and 19.4% for the thirteen and twenty-six weeks endedJune 26, 2019 , respectively. Additionally, the thirteen and twenty-six weeks endedJune 24, 2020 includes the establishment of a valuation allowance. (8) Represents the per share impact of non-GAAP adjustments for each period. Refer to the reconciliation of Adjusted Pro Forma Net Income above for further details.
Table of Contents 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 24, 2020 , we maintained a cash and cash equivalents balance of$174.0 million and a short-term investments balance of$16.8 million . OnJune 8, 2018 , we filed a Registration Statement on Form S-3 with theSEC which permits us to issue a combination of securities described in the prospectus in one or more offerings from time to time. To date, we have not experienced difficulty accessing the capital markets; however, future volatility in the capital markets may affect our ability to access those markets or increase the costs associated with issuing debt or equity instruments. 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 infrastructure. In addition, we are obligated to make payments to certain members ofSSE Holdings under the Tax Receivable Agreement. As ofJune 24, 2020 , such obligations totaled$228.1 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 In response to the uncertain market conditions resulting from the COVID-19 pandemic, we have taken the following actions. •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. •OnApril 21, 2020 , we completed an underwritten offering of 3,416,070 shares of our Class A common stock, resulting in$135.9 million of proceeds, net of underwriting discounts and commissions. The proceeds were used to purchase newly-issued LLC Interests. •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. InMarch 2020 , we drew down the full$50,000 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 . As ofJune 24, 2020 , we were in compliance with all covenants. We believe our existing cash and marketable securities balances, combined with the actions we have taken in response to COVID-19, 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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