Shake Shack Announces Third Quarter 2016 Financial Results

NEW YORK–(hospitalitybusinessnews.com)–Shake Shack Inc. , today reported its financial results for the third quarter ended September 28, 2016, a period that included 13 weeks.

Financial Highlights for the Third Quarter 2016:

  • Total revenue increased 40.0% to $74.6 million.
  • Shack sales increased 40.2% to $71.9 million.
  • Same-Shack sales increased 2.9%.
  • Operating income increased 17.5% to $9.2 million.
  • Shack-level operating profit*, a non-GAAP measure, increased 32.6% to $20.7 million, or 28.8% of Shack sales.
  • Adjusted EBITDA*, a non-GAAP measure, increased 26.3% to $15.2 million.
  • Net income attributable to Shake Shack Inc. was $3.8 million, or $0.15 per diluted share.
  • Adjusted pro forma net income*, a non-GAAP measure, increased 25.1% to $5.5 million, or $0.15 per fully exchanged and diluted share.
  • Ten system-wide Shack openings, including seven domestic company-operated Shacks and three net new licensed Shacks.

* Shack-level operating profit, adjusted EBITDA and adjusted pro forma net income are non-GAAP measures. Reconciliations of Shack-level operating profit to operating income, adjusted EBITDA to net income, and adjusted pro forma net income to net income (loss) attributable to Shake Shack Inc., the most directly comparable financial measures presented in accordance with GAAP, are set forth in the schedules accompanying this release. See “Non-GAAP Financial Measures.”

Randy Garutti, CEO of Shake Shack, stated “Shake Shack’s Q3 performance demonstrates the continued strength and opportunity of our brand. We delivered another quarter of solid results, with 40% growth in total revenue and a 28.8% Shack-level operating profit margin. We also hit some important milestones this quarter, including our 100th worldwide Shack opening and our first $1 million sales day in our domestic company-operated Shacks.

Garutti continued, “We’re executing our multi-format growth strategy with great Shacks in our current markets as well as new markets across the country. We remain encouraged by the great locations we are seeing. Based upon our updated development plans, we now expect to open 19 Shacks this year and 21 to 22 next year, representing growth of 43% and 35% in 2016 and 2017, respectively. With the recent test launch of our first ever Shack App, we are meeting our guests where they are, and are beginning to lay the groundwork to connect the digital experience with the community gathering place of the Shack. This is just our first step, but we are excited about the endless possibilities the App brings to Shake Shack and our guests.”

Development Highlights

During the quarter, the Company opened seven domestic company-operated Shacks, including the Company’s 100th opening at the Boston Seaport, its first Shack in Dallas at The Crescent, a second Shack in the Los Angeles market at The Americana in Glendale. Additionally, the Company opened three net new licensed Shacks, including its first Shack in South Korea in Seoul’s Gangnam district, as well a third Shack in the Japan market at the Tokyo International Forum.

Location Type Opening Date
Muscat, Oman — City Centre Muscat International Licensed February 6
Scottsdale, AZ — Fashion Square Domestic Company-Operated February 26
Phoenix, AZ — Uptown Plaza Domestic Company-Operated March 9
West Hollywood, CA — West Hollywood Domestic Company-Operated March 15
Las Vegas, NV — T-Mobile Arena Domestic Licensed April 6
Tokyo, Japan — Ebisu Atre West International Licensed April 15
Manama, Bahrain — City Centre Bahrain International Licensed April 30
Arlington, VA — Fashion Centre at Pentagon City Domestic Company-Operated May 4
New York, NY — Herald Square Domestic Company-Operated May 18
Forest Hills, NY — Forest HIlls Domestic Company-Operated May 26
Bloomington, MN — Mall of America Domestic Company-Operated June 9
Abu Dhabi, UAE — Marina Mall International Licensed July 9
New York, NY — Fulton Transit Center Domestic Company-Operated July 15
Seoul, Korea — Gangnam Avenue International Licensed July 22
Yonkers, NY — Cross County Shopping Center Domestic Company-Operated July 22
Boston, MA — Boston Seaport Domestic Company-Operated August 16
King of Prussia, PA — King of Prussia #2 Domestic Company-Operated September 1
Dallas, TX — The Crescent Domestic Company-Operated September 1
Riyadh, KSA — Al Faisaliah Mall International Licensed September 3
Scottsdale, AZ — Kierland Commons Domestic Company-Operated September 15
Tokyo, Japan — Tokyo International Forum International Licensed September 22
Glendale, CA — The Americana Domestic Company-Operated September 23

Subsequent to the end of the quarter, the Company opened its first Shack in Houston at The Galleria, a third Shack in the Los Angeles area in Hollywood and a second Shack in Georgia at the Perimeter Mall in Atlanta, as well as a domestic licensed Shack at the Wells Fargo Center in Philadelphia.

Third Quarter 2016 Review

Total revenue, which includes Shack sales and licensing revenue, increased 40.0% to $74.6 million in the third quarter of 2016, from $53.3 million for the third quarter of 2015. Shack sales for the third quarter of 2016 were $71.9 million, an increase of 40.2% from $51.3 million in the same quarter last year, due primarily to the opening of new Shacks, as well as same-Shack sales growth. Licensing revenue for the third quarter was $2.7 million, an increase of 34.9% from $2.0 million in the same quarter last year, due primarily to the opening of new licensed Shacks.

Same-Shack sales were 2.9% for the third quarter of 2016 versus 17.1% growth in the third quarter last year. The comparable Shack base includes those restaurants open for 24 months or longer. For the third quarter of 2016, the comparable Shack base included 26 Shacks versus 16 Shacks for the third quarter of 2015.

Average weekly sales for domestic company-operated Shacks remained constant at $103,000 for the third quarter of 2016 compared to the same quarter last year.

Shack-level operating profit, a non-GAAP measure, increased 32.6% to $20.7 million for the third quarter of 2016 from $15.6 million in the same quarter last year. As a percentage of Shack sales, Shack-level operating profit margins decreased 160 basis points to 28.8%, primarily due to increased labor and related expenses resulting from the company-wide increase to the starting hourly wage that was implemented at the beginning of the fiscal year, as well as an increase in medical claims. A reconciliation of Shack-level operating profit to operating income, the most directly comparable GAAP financial measure, is set forth in the schedules accompanying this release. See “Non-GAAP Financial Measures.”

General and administrative expenses increased to $7.9 million for the third quarter of 2016 from $5.7 million in the same quarter last year. The increase was primarily driven by higher payroll expense from increased headcount at the home office to support growth plans as well as the costs associated with the Annual Leadership Retreat which occurred in Q2 of last year but are included in Q3 this year. As a percentage of total revenue, general and administrative expenses decreased to 10.6% for the third quarter of 2016 from 10.8% in the third quarter last year, primarily due to the increased levels of Shack sales.

Adjusted EBITDA, a non-GAAP measure, increased 26.3% to $15.2 million. As a percent of total revenue, adjusted EBITDA margins decreased approximately 220 basis points to 20.3% compared to 22.5% for the year ago period. A reconciliation of adjusted EBITDA to net income, the most directly comparable GAAP financial measure, is set forth in the schedules accompanying this release. See “Non-GAAP Financial Measures.”

Net income attributable to Shake Shack Inc. was $3.8 million, or $0.15 per diluted share, for the third quarter of 2016, compared to $1.5 million, or $0.10 per diluted share, for the same period last year.

Adjusted pro forma net income, a non-GAAP measure, increased 25.1% to $5.5 million, or $0.15 per fully exchanged and diluted share during the third quarter of 2016, compared to $4.4 million, or $0.12 per diluted share during the third quarter of 2015. A reconciliation between net income (loss) attributable to Shake Shack Inc. and adjusted pro forma net income is included in the accompanying financial data.

Updated 2016 Outlook

For the fiscal year ending December 28, 2016, the Company is revising its financial outlook to the following:

  • Raising total revenue to between $264 million and $265 million (vs. $253 million to $256 million).
  • Same-Shack sales growth between 4% and 5%.
  • 19 (vs. 18) new domestic company-operated Shacks to be opened in 2016.
  • 10 net new licensed Shacks (vs. 7).
  • Approximately 50 to 60 basis points (vs. approximately 50 basis points) of deleverage in labor and related expenses as a percentage of Shack sales, on a year-over-year basis.
  • Adjusted pro forma effective tax rate between 40% and 41%.

Preliminary 2017 Outlook

For the fiscal year ending December 27, 2017, the Company is providing the following preliminary financial outlook:

  • Total revenue between $348 million and $352 million.
  • Same-Shack sales growth between 2% and 3%, which includes approximately 1.5% to 2.0% of menu price increases to be taken in early January and nominal traffic and mix increases.
  • Between 21 and 22 new domestic company-operated Shacks (with average annual sales volumes of at least $3.2 million and Shack-level operating profit margins of at least 21%).
  • 10 net new licensed Shacks to be opened in fiscal 2017.
  • Shack-level operating profit margin between 26.5% and 27.5%.
  • General and administrative expenses between $37 million and $39 million.
  • Depreciation expense of approximately $21 million.
  • Adjusted pro forma effective tax rate between 40% and 41%.

 

SHAKE SHACK INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)

(in thousands, except per share amounts)

Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 28, 2016 September 30, 2015 September 28, 2016 September 30, 2015
Shack sales $ 71,871 96.4% $ 51,275 96.2% $ 188,430 96.5% $ 133,905 96.0%
Licensing revenue 2,696 3.6% 1,998 3.8% 6,774 3.5% 5,626 4.0%
TOTAL REVENUE 74,567 100.0% 53,273 100.0% 195,204 100.0% 139,531 100.0%
Shack-level operating expenses(1):
Food and paper costs 20,393 28.4% 14,929 29.1% 53,529 28.4% 39,650 29.6%
Labor and related expenses 18,216 25.3% 12,176 23.7% 46,640 24.8% 32,445 24.2%
Other operating expenses 6,577 9.2% 4,376 8.5% 17,475 9.3% 11,579 8.6%
Occupancy and related expenses 6,009 8.4% 4,206 8.2% 15,541 8.2% 11,248 8.4%
General and administrative expenses 7,885 10.6% 5,728 10.8% 22,265 11.4% 30,165 21.6%
Depreciation expense 3,719 5.0% 2,636 4.9% 10,229 5.2% 7,274 5.2%
Pre-opening costs 2,598 3.5% 1,401 2.6% 6,708 3.4% 4,054 2.9%
Loss on disposal of property and equipment —% 17 —% —% 17 —%
TOTAL EXPENSES 65,397 87.7% 45,469 85.4% 172,387 88.3% 136,432 97.8%
OPERATING INCOME 9,170 12.3% 7,804 14.6% 22,817 11.7% 3,099 2.2%
Other income, net 151 0.2% —% 197 0.1% —%
Interest expense (89) -0.1% (83) -0.2% (267) -0.1% (245) -0.2%
INCOME BEFORE INCOME TAXES 9,232 12.4% 7,721 14.5% 22,747 11.7% 2,854 2.0%
Income tax expense 2,443 3.3% 1,528 2.9% 6,058 3.1% 2,776 2.0%
NET INCOME 6,789 9.1% 6,193 11.6% 16,689 8.5% 78 0.1%
Less: net income attributable to non-controlling interests 3,023 4.1% 4,665 8.8% 8,163 4.2% 10,100 7.2%
NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. $ 3,766 5.1% $ 1,528 2.9% $ 8,526 4.4% $ (10,022) -7.2%
Earnings (loss) per share of Class A common stock:
Basic $ 0.16 $ 0.11 $ 0.38 $ (0.80)
Diluted $ 0.15 $ 0.10 $ 0.37 $ (0.80)
Weighted-average shares of Class A common stock outstanding:
Basic 24,023 13,757 22,310 12,590
Diluted 24,554 14,785 22,805 12,590

(1) As a percentage of Shack sales.

SHAKE SHACK INC.

SELECTED BALANCE SHEET DATA AND OPERATING DATA

(UNAUDITED)

(in thousands) September 28,

2016

December 30,

2015

SELECTED BALANCE SHEET DATA:
Cash and cash equivalents(1) $ 12,227 $ 70,849
Total assets $ 511,944 $ 379,547
Total liabilities $ 320,522 $ 222,528
Total equity $ 191,422 $ 157,019

(1) The decrease in cash and cash equivalents was driven by the purchase of approximately $60.1 million of marketable
securities (net of sales) during the thirty-nine weeks ended September 28, 2016, which are no longer included in the cash and
cash equivalents balance as of September 28, 2016
.

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands)

September 28,

2016

September 30,

2015

September 28,

2016

September 30,

2015

SELECTED OPERATING DATA:
Same-Shack sales growth 2.9% 17.1% 5.3% 14.3%
Shacks in the comparable base 26 16 26 16
Shack system-wide sales $ 116,543 $ 81,507 $ 295,728 $ 219,754
Average weekly sales
Domestic company-operated $ 103 $ 103 $ 98 $ 98
Shack-level operating profit $ 20,676 $ 15,588 $ 55,245 $ 38,983
Shack-level operating profit margin 28.8% 30.4% 29.3% 29.1%
Adjusted EBITDA $ 15,154 $ 11,998 $ 38,798 $ 28,323
Adjusted EBITDA margin 20.3% 22.5% 19.9% 20.3%
Capital expenditures $ 12,720 $ 8,398 $ 39,268 $ 25,327
Shack counts (at end of period):
System-wide 105 75 105 75
Domestic company-operated 58 41 58 41
Domestic licensed 6 5 6 5
International licensed 41 29 41 29

SHAKE SHACK INC.
NON-GAAP FINANCIAL MEASURES
(UNAUDITED)

To supplement its consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles (“GAAP”), the Company uses the following non-GAAP financial measures: Shack-level operating profit, EBITDA, adjusted EBITDA, adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share (collectively the “non-GAAP financial measures”). The Company believes that these non-GAAP financial measures, when used in conjunction with GAAP financial measures, provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by management in its financial and operational decision making. The presentation of this financial information 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. The non-GAAP measures used by the Company are not necessarily comparable to similarly titled measures used by other companies due to different methods of calculation.

Shack-Level Operating Profit

Shack-level operating profit and Shack-level operating profit margin are supplemental measures of operating performance and are not required by, nor presented in accordance with, GAAP. The Company believes that Shack-level operating profit and Shack-level operating profit margin, when used in conjunction with GAAP financial measures, are important measures used to by management to evaluate the performance and profitability of each Shack, individually and in the aggregate. A reconciliation of Shack-level operating profit to operating income, the most directly comparable GAAP measure, is set forth below.

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands)

September 28,

2016

September 30,

2015

September 28,

2016

September 30,

2015

Shack-level operating profit $ 20,676 $ 15,588 $ 55,245 $ 38,983
Add:
Licensing revenue 2,696 1,998 6,774 5,626
Less:
General and administrative expenses 7,885 5,728 22,265 30,165
Depreciation expense 3,719 2,636 10,229 7,274
Pre-opening costs 2,598 1,401 6,708 4,054
Loss on disposal of property and equipment 17 17
Operating income $ 9,170 $ 7,804 $ 22,817 $ 3,099
Total revenue $ 74,567 $ 53,273 $ 195,204 $ 139,531
Less: licensing revenue 2,696 1,998 6,774 5,626
Shack sales $ 71,871 $ 51,275 $ 188,430 $ 133,905
Shack-level operating profit margin 28.8% 30.4% 29.3% 29.1%

SHAKE SHACK INC.
NON-GAAP FINANCIAL MEASURES
(UNAUDITED)

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are non-GAAP supplemental measures of operating performance that do not represent and should not be considered alternatives to net income or cash flow from operations, as determined by GAAP. EBITDA and Adjusted EBITDA are used by management to measure the operating performance of their business, facilitate internal comparisons to historical performance and competitors’ operating results. Adjusted EBITDA is also utilized as a metric in the Company’s bonus and equity incentive programs. A reconciliation of EBITDA and Adjusted EBITDA to net income, the most directly comparable GAAP measure, is set forth below.

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(in thousands)

September 28,

2016

September 30,

2015(1)

September 28,

2016

September 30,

2015(1)

Net income $ 6,789 $ 6,193 $ 16,689 $ 78
Depreciation expense 3,719 2,636 10,229 7,274
Interest expense, net 66 83 198 245
Income tax expense 2,443 1,528 6,058 2,776
EBITDA 13,017 10,440 33,174 10,373
Equity-based compensation(2) 1,577 1,172 3,817 3,142
Deferred rent(3) 560 369 1,807 1,338
Loss on disposal of property and equipment(4) 17 17
Non-recurring compensation expenses related to the IPO(5) 12,818
IPO-related expenses(6) 635
ADJUSTED EBITDA $ 15,154 $ 11,998 $ 38,798 $ 28,323
(1) Effective September 28, 2016, the Company no longer excludes pre-opening costs from its computation of Adjusted EBITDA. Adjusted EBITDA for the thirteen and thirty-nine weeks ended September 30, 2015 has been restated to conform to the current period computation methodology.
(2) Represents non-cash equity-based compensation expense and relate solely to stock options and performance stock units granted subsequent to the Company’s IPO.
(3) Reflects the extent to which rent expense is greater than or less than cash rent payments.
(4) Includes the loss on disposal of property and equipment in the ordinary course of business.
(5) Non-recurring compensation expense incurred in connection with the Company’s IPO. Includes expense recognized upon settlement of outstanding unit appreciation rights, the related employer withholding taxes and the accelerated vesting of outstanding restricted Class B units.
(6) Costs incurred in connection with the Company’s IPO, including legal, accounting and other related expenses.

SHAKE SHACK INC.
NON-GAAP FINANCIAL MEASURES
(UNAUDITED)

Adjusted Pro Forma Net Income and Adjusted Pro Forma Earnings Per Fully Exchanged and Diluted Share

Adjusted pro forma net income represents net income (loss) attributable to Shake Shack Inc. assuming the full exchange of all outstanding SSE Holdings, LLC membership interests (“LLC Interests”) for shares of Class A common stock, adjusted for certain non-recurring items that management believes are not reflective of their core operations and may not be indicative of their recurring business operations. Adjusted pro forma earnings per fully exchanged and diluted share is calculated by dividing adjusted pro forma net income 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 stock options.

Adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share are supplemental measures of operating performance that do not represent and should not be considered alternatives to net income (loss) and earnings (loss) per share, as determined by GAAP. Management believes adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share supplement GAAP measures and enables them to more effectively evaluate their performance period-over-period and relative to competitors. A reconciliation of adjusted pro forma net income to net income (loss) attributable to Shake Shack Inc., the most directly comparable GAAP measure, and the computation of adjusted pro forma earnings per fully exchanged and diluted share are set forth below.

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(in thousands, except per share amounts)

September 28,
2016

September 30,
2015

September 28,
2016

September 30,
2015

Numerator:
Net income (loss) attributable to Shake Shack Inc. $ 3,766 $ 1,528 $ 8,526 $ (10,022)
Adjustments:
Reallocation of net income attributable to non-controlling interests from the assumed exchange of LLC Interests(1) 3,023 4,665 8,163 10,100
Non-recurring compensation expenses incurred in connection with the IPO(2) 12,818
IPO-related expenses(3) 635
Income tax expense(4) (1,318) (1,818) (3,171) (4,397)
Adjusted pro forma net income $ 5,471 $ 4,375 $ 13,518 $ 9,134
Denominator:
Weighted-average shares of Class A common stock outstanding—diluted 24,554 14,785 22,805 12,590
Adjustments:
Assumed exchange of LLC Interests for shares of Class A common stock(1) 12,314 22,493 13,988 23,660
Dilutive effect of stock options 1,071
Adjusted pro forma fully exchanged weighted-average shares of Class A common stock outstanding—diluted 36,868 37,278 36,793 37,321
Adjusted pro forma earnings per fully exchanged share—diluted $ 0.15 $ 0.12 $ 0.37 $ 0.24

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