Shake Shack Results

Shake Shack Announces Second Quarter 2019 Financial Results

Shake Shack Inc. (NYSE: SHAK) yesterday reported its financial results for the second quarter ended June 26, 2019, a period that included 13 weeks.

Financial Highlights for the Second Quarter 2019 compared to the Second Quarter 2018:

  • Total revenue increased 31.3% to $152.7 million.
  • Shack sales increased 31.0% to $147.9 million.
  • Same-Shack sales increased 3.6%.
  • Licensed revenue increased 42.9% to $4.8 million.
  • Shack system-wide sales increased 33.2% to $225.9 million.
  • Operating income was $11.9 million, or 7.8% of total revenue, which included the impact of costs associated with the Company's enterprise-wide system upgrade implementation, Project Concrete, and other one-time items totaling $0.5 million, resulting in a decrease of 8.8%.
  • Shack-level operating profit, a non-GAAP measure, increased 13.7% to $36.2 million, or 24.4% of Shack sales.
  • Net income was $11.2 million and adjusted EBITDA*, a non-GAAP measure, increased 18.5% to $25.9 million.
  • Nineteen system-wide Shack openings, comprised of 11 domestic company-operated Shacks and 8 licensed Shacks.

Randy Garutti, Chief Executive Officer of Shake Shack, stated, “More than halfway through 2019, we are pleased to report continued strong momentum into the second quarter across all areas of the business. System-wide sales increased 33.2%, total revenue grew by 31.3% and adjusted EBITDA increased 18.5%, driven by positive same-Shack sales of 3.6% with traffic growth of 1.3%. Our digital channels, including delivery, were a key contributor to these results, in conjunction with a benefit from the shift in Easter timing within the second quarter. To further strengthen our ongoing digital evolution, and as a part of our focus on accessibility and convenience for our guests, we’re pleased to announce an integrated delivery partnership with Grubhub, which will be rolled out across the system over the remainder of this year and into early next.”

Garutti concluded, “Based on our second quarter results, we are raising our overall revenue guidance including our licensing revenue guidance. It has been a tremendous year so far for our international business, having entered Mainland China for the first time in January, the Philippines and Singapore in the second quarter, and most recently Mexico, earlier in the third quarter. To further our international growth in Asia, we are also pleased to announce our expansion into Beijing through our newly executed development agreement with Maxim's Caterers. We’ve had an incredible start in Hong Kong over the past year, and combined with our first six months in Shanghai, we're bullish on the tremendous growth opportunity we believe exists for the Shake Shack brand in Mainland China. Overall, we have strong and positive momentum across the business heading into the second half of the year and continue to execute well against a robust domestic and international development pipeline, while also testing new Shack formats, and increasing accessibility and convenience through ongoing digital innovation.”

Development Highlights

During the quarter, the Company opened 11 domestic company-operated Shacks, deepening its roots in existing markets with openings in San Diego, Los Angeles and Dallas, while expanding into the new markets of Sarasota, Columbus and Virginia Beach. Additionally, the Company opened two domestic licensed Shacks, which included its first 24-hour roadside Shack in New Jersey, and six international licensed Shacks, which included its first Shacks in the Philippines and Singapore, at the Jewel Changi Airport.

Location

Type

Opening Date

Philadelphia, PA — Citizens Bank Park

Domestic Licensed

March 28

Kyoto, Japan — Shijo Karasama

International Licensed

April 1

Atlanta, GA — Old Fourth Ward

Domestic Company-Operated

April 13

Sarasota, FL — UTC Sarasota

Domestic Company-Operated

April 16

Singapore — Jewel Changi Airport

International Licensed

April 17

San Diego, CA — Little Italy

Domestic Company-Operated

April 28

Manila, Philippines — Central Square

International Licensed

May 10

Troy, MI — Somerset Collection

Domestic Company-Operated

May 13

Essex, United Kingdom — Lakeside

International Licensed

May 16

Columbus, OH — Easton Town Center

Domestic Company-Operated

May 19

Muscat, Oman — Mall of Muscat

International Licensed

May 20

Moscow, Russia — Tverskaya Square

International Licensed

May 22

Wall Township, NJ — Monmouth Travel Plaza

Domestic Licensed

May 22

Virginia Beach, VA — Virginia Beach

Domestic Company-Operated

May 22

Dallas, TX — Old Town

Domestic Company-Operated

May 27

Los Angeles, CA — Marina Del Rey

Domestic Company-Operated

May 28

San Antonio, TX — Brackenridge

Domestic Company-Operated

June 7

Cleveland, OH — Downtown Cleveland

Domestic Company-Operated

June 20

Vernon Hills, IL — Vernon Hills

Domestic Company-Operated

June 21

Subsequent to the end of the quarter, the Company opened five domestic company operated Shacks, including Shacks in the new markets of New Orleans and Salt Lake City, and three licensed Shacks, including its first international licensed Shack in Mexico City. Additionally, the Company executed a new development agreement to open 15 Shacks in the Beijing market over the next 10 years.

Second Quarter 2019 Review

Total revenue, which includes Shack sales and licensing revenue, increased 31.3% to $152.7 million in the second quarter of 2019, from $116.3 million in the second quarter of 2018. Shack sales for the second quarter of 2019 were $147.9 million compared to $112.9 million in the same quarter last year, an increase of $35.0 million, or 31.0%, due primarily to the opening of 40 new domestic company-operated Shacks between the second quarter of 2018 and the second quarter of 2019, as well as same-Shack sales growth. Licensing revenue for the second quarter was $4.8 million, an increase of 42.9% from $3.4 million in the same quarter last year, due primarily to the opening of 18 net new licensed Shacks.

Same-Shack sales increased 3.6% for the second quarter of 2019 versus a 1.1% growth in the second quarter last year. The increase in same-Shack sales consisted of a 1.3% increase in guest traffic and a combined increase of 2.3% in price and sales mix, combined with the favorable impact from the timing shift of Easter. The comparable Shack base includes those restaurants open for 24 full fiscal months or longer. For the second quarter of 2019, the comparable Shack base included 74 Shacks versus 50 Shacks for the second quarter of 2018.

Average weekly sales for domestic company-operated Shacks decreased to $85,000 for the second quarter of 2019 compared to $89,000 for the same quarter last year, primarily due to the addition of newer Shacks at a broader range of average unit volumes.

Operating income decreased to $11.9 million for the second quarter of 2019 from $13.0 million in the same quarter last year. Operating income margins decreased 340 basis points to 7.8%. These decreases included a number of one-time charges and costs related to Project Concrete totaling $0.5 million. Shack-level operating profit, a non-GAAP measure, increased 13.7% to $36.2 million for the second quarter of 2019 from $31.8 million in the same quarter last year. As a percentage of Shack sales, Shack-level operating profit margins decreased 380 basis points to 24.4%, primarily due to: (i) benefits recognized in the prior year quarter resulting in a positive impact of 100 basis points, which included sponsorship receipts for the Company's biennial leadership retreat and deferred rent related to certain historical leases with co-tenancy provisions; (ii) increased food costs associated with Chick'n Bites since its nationwide roll-out at the beginning of the year and some commodity inflation, specifically in beef and dairy; (iii) an increase in paper costs as a result of the Company's off-premise digital growth, which requires more packaging than in-Shack orders; (iv) increased labor and related expenses resulting from inflation across the country, especially in New York City, the administration and cost of regulatory factors, such as the Fair Workweek legislation and higher labor costs from newly opened Shacks, which typically carry higher labor costs during the first few months of operations; (v) delivery commissions and increased levels of marketing activity, both local and nationwide; and (vi) the impact related to the adoption of the new lease accounting standard. 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 $15.4 million for the second quarter of 2019 from $12.6 million in the same quarter last year, primarily due to the increase in the Company's investment across the business, particularly in people resources and foundational infrastructure to support its ongoing growth initiatives, including costs of $0.5 million related to Project Concrete and other one-time costs. Additionally, in connection with the financial systems launch of Project Concrete, the Company accelerated certain cash payments totaling $9.8 million to facilitate the transition. As a percentage of total revenue, general and administrative expenses decreased to 10.1% for the second quarter of 2019 from 10.8% in the second quarter last year, in which the Company will assess opportunities to reinvest into the business throughout the remainder of the year, particularly in those impacting Shack-level profitability.

Net income was $11.2 million, or 7.3% of total revenue, for the second quarter of 2019, compared to $10.6 million, or 9.1% of total revenue, for the same period last year. Net income attributable to Shake Shack Inc. was $9.0 million, or 5.9% of total revenue, for the second quarter of 2019, compared to $7.6 million, or 6.5% of total revenue, for the same period last year. Earnings per diluted share was $0.29 for the second quarter of 2019 compared to $0.26 for the same period last year.

Adjusted EBITDA, a non-GAAP measure, increased 18.5% to $25.9 million. As a percentage of total revenue, adjusted EBITDA margins decreased approximately 180 basis points to 17.0% compared to 18.8% for the year ago period. This decrease was primarily due to the aforementioned items within Shack-level operating profit. 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.”

Adjusted pro forma net income, a non-GAAP measure, decreased 6.5% to $10.2 million, or $0.27 per fully exchanged and diluted share during the second quarter of 2019, compared to $11.0 million, or $0.29 per fully exchanged and diluted share during the second quarter of 2018. A reconciliation of adjusted pro forma net income to net income attributable to Shake Shack Inc., the most directly comparable GAAP financial measure, is set forth in the schedules accompanying this release. See “Non-GAAP Financial Measures.”

Updated 2019 Outlook

These forward-looking projections are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of the Company's Form 10-K for the fiscal year ended December 26, 2018 under the heading “Risk Factors.” These forward-looking projections should be reviewed in conjunction with the consolidated financial statements and the section titled “Trends in Our Business” which forms the basis of our assumptions used to prepare these forward-looking projections. You should not attribute undue certainty to these projections and we undertake no obligation to revise or update any forward-looking information, except as required by law.

For the fiscal year ending December 25, 2019, we have revised our financial outlook to the following with changes from the previous outlook in bold:

Current Outlook

Previous Outlook

Total revenue (inclusive of licensing revenue)

$585 million to $590 million

$576 million to $582 million

Licensing revenue

$16 million to $17 million

$15 million to $16 million

Same-Shack sales growth (%)(1)

approximately 2%

1% to 2%

Domestic company-operated Shack openings

38 to 40

36 to 40

Licensed Shack openings, net

18 to 20

16 to 18

Average annual sales volume for domestic company-operated Shacks

$4.0 million to $4.1 million

$4.0 million to $4.1 million

Shack-level operating profit margin (%)(2)(3)

approximately 23.0%

23.0% to 24.0%

Total general and administrative expenses

$66.4 million to $68.2 million

$66.4 million to $68.2 million

Core general and administrative

$56 million to $57 million

$56 million to $57 million

Equity-based compensation

$7.4 million to $7.7 million

$7.4 million to $7.7 million

Costs related to Project Concrete

$3.0 million to $3.5 million

$3.0 million to $3.5 million

Project Concrete capitalized costs

$4.5 million to $5.0 million

approximately $4 million

Depreciation expense

$41 million to $42 million

$41 million to $42 million

Pre-opening costs

$13 million to $14 million

$13 million to $14 million

Interest expense

$0.3 million to $0.4 million

$0.3 million to $0.4 million

Adjusted pro forma effective tax rate (%)(4)

26.5% to 27.5%

26.5% to 27.5%

  1. Includes approximately 1.5% of menu price increases taken in December 2018.
  2. Includes approximately 50 basis points of impact from the adoption of the new lease accounting standard.
  3. Shack-level operating profit margin is a non-GAAP measure. A reconciliation to the most directly comparable GAAP measure, operating income, has not been provided as we cannot project certain reconciling items, such as gains or losses on disposal of property and equipment, without unreasonable effort given the uncertainty around the timing and amount of such gains or losses. Losses on disposal of property and equipment were less than $1 million for each of the fiscal years 2018, 2017 and 2016.
  4. Adjusted pro forma effective tax rate is a non-GAAP measure. A reconciliation to the most directly comparable GAAP measure, income tax expense, has not been provided as we cannot project income tax expense without unreasonable effort due to our inability to predict changes in our ownership interest in SSE Holdings, LLC resulting from redemptions of LLC Interests by non-controlling interest holders and equity-based award activity. Income tax expense for fiscal years 2018, 2017 and 2016 was $8.9 million, $151.4 million and $6.4 million, respectively.



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