Shake Shack Announces Fourth Quarter and Fiscal Year 2019 Financial Results

Shake Shack Inc. (NYSE: SHAK), yesterday reported financial results for the fourth quarter and the fiscal year ended December 25, 2019, periods that included 13 and 52 weeks, respectively.

Financial Highlights for the Fourth Quarter 2019:

• Total revenue increased 21.9% to $151.4 million.
• Shack sales increased 20.8% to $145.8 million.
• Same-Shack sales decreased 3.6%.
• Licensed revenue increased 58.6% to $5.6 million.
• Shack system-wide sales increased 31.4% to $235.0 million.
• Operating income was $0.5 million, or 0.3% of total revenue, and Shack-level operating profit*, a non-GAAP measure, increased 9.4% to $29.7 million, or 20.4% of Shack sales.
• Net loss and net loss attributable to Shake Shack Inc. were $2.1 million, or $(0.06) per diluted share, respectively, primarily driven by sales performance, food and labor headwinds and investments across the business.
• Adjusted EBITDA*, a non-GAAP measure, increased 2.3% to $14.8 million.
• Adjusted pro forma net income*, a non-GAAP measure, was $2.2 million, or $0.06 per fully exchanged and diluted share.
• 25 system-wide Shack openings, including 12 domestic company-operated Shacks and 13 licensed Shacks. Four licensed Shack closures, which included three closures in Russia.

Financial Highlights for the Fiscal Year 2019:

• Total revenue increased 29.4% to $594.5 million.
• Shack sales increased 29.0% to $574.6 million.
• Same-Shack sales increased 1.3%.
• Licensed revenue increased 45.0% to $19.9 million.
• Shack system-wide sales increased 33.2% to $895.3 million.
• Operating income was $25.7 million, or 4.3% of total revenue, which included the impact of costs associated with Project Concrete and other one-time items totaling $2.4 million.
• Shack-level operating profit*, a non-GAAP measure, increased 13.4% to $128.0 million, or 22.3% of Shack sales.
• Net income was $24.1 million and net income attributable to Shake Shack Inc. was $19.8 million, or $0.61 per diluted share.
• Adjusted EBITDA*, a non-GAAP measure, increased 10.8% to $81.8 million.
• Adjusted pro forma net income*, a non-GAAP measure, increased 1.7% to $27.4 million, or $0.72 per fully exchanged and diluted share.
• 73 system-wide Shack openings, including 39 domestic company-operated Shacks and 34 licensed Shacks. Six licensed Shack closures, which included four closures in Russia. System-wide Shack count net increase of 32.2%.

* 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 (loss), 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, Chief Executive Officer of Shake Shack, stated, “2019 was another milestone year at Shake Shack. We opened our largest class of Shacks ever, with 73 across the globe, 39 company-operated and 34 licensed. A total of 49 of those new Shacks were here in the United States, and internationally, we unlocked tremendous revenue growth by entering important new markets for the first time, namely Shanghai, Mexico City, Singapore and Manila. These launches were greeted with incredible local reception and fanfare and were a reminder of the global strength and potential of the Shake Shack brand. In addition to this expansion, we invested in our digital infrastructure, both for our back-office operations, and our guest touchpoints. Total revenue increased by almost 30% to $595 million, and system-wide sales by 33% to nearly $900 million, and we delivered adjusted EBITDA growth of 11% to $82 million, while continuing to make strategic investments for the significant opportunities that lie ahead."

Garutti concluded, “Looking forward, we expect 2020 will be another year of strong unit growth, domestically and internationally, with 40 to 42 new company-operated Shacks and 20 to 25 net new licensed Shacks. Beyond expansion, we believe this year will be defined by our innovation pipeline with focused investments across our digital products. We’re committed to building guest experiences that are more engaging, more convenient and that will provide us with more insights throughout the purchase process. On the menu side, we’re excited about new products making the leap from our innovation test kitchen to Shacks everywhere, through LTOs and core menu additions. Long term, we expect to deliver double-digit adjusted EBITDA growth over the coming years as we continue to grow top line sales, as well as ultimately delivering leverage across various cost line items over time. We recognize this level of growth and investment, at times, can have a near-term impact on same-Shack sales and other aspects of our financial performance, but we believe the company will ultimately benefit from this strategy over time. We are excited about our future and the significant runway we have ahead, as we quickly approach a billion dollars in total system-wide sales and build a company not just for quarters, but for years to come.”

Development Highlights

During the quarter, the Company opened 12 domestic company-operated Shacks, further expanding its footprint in existing markets across the country. Additionally, the Company opened 8 international licensed Shacks during the quarter, five of which were in Asia, and five domestic licensed Shacks, all of which were located in airports.

Subsequent to the end of the quarter, the Company opened four domestic company-operated Shacks and six international licensed Shacks.

Fourth Quarter 2019 Review

Total revenue in the fourth quarter of 2019, which includes Shack sales and licensing revenue, increased 21.9% to $151.4 million from the same quarter last year. Shack sales for the fourth quarter of 2019 were $145.8 million, an increase of 20.8% from the same quarter last year due primarily to the opening of 39 new domestic company-operated Shacks between the fourth quarter of 2019 and the fourth quarter of 2018, partially offset by a decline in same-Shack sales. Licensed revenue for the fourth quarter was $5.6 million, an increase of 58.6% from $3.5 million in the same quarter last year, due to the opening of 28 net new licensed Shacks between the fourth quarter of 2019 and the fourth quarter of 2018, and the strong performance of Shacks that opened earlier in the year.

Same-Shack sales decreased 3.6% for the fourth quarter of 2019 compared to 2.3% growth in the fourth quarter last year, driven by decreased guest traffic of 5.4% partially offset by a combined increase of 1.8% in price and sales mix. A holiday calendar shift resulting in one less high traffic shopping week, and a challenging compare in the prior year holiday period due to favorable weather in New York and the Northeast, represented approximately one-third of the same-Shack sales decline. It is also believed that less menu innovation in 2019 may have contributed to the traffic decline during the quarter as the Company intentionally chose to focus on the launch of Chick'n Bites and digital enhancements throughout the year.

In August, the Company announced its decision to move forward with Grubhub as a single partner for integrated and marketed delivery. As of the end of the fourth quarter, the majority of Shacks remained integrated with multiple partners, albeit the Delivery channel experienced a significant slowdown in growth rate compared to earlier in the year.

Fiscal 2019 was also a record development year, with over 80% of new company-operated Shack openings in existing markets, as well as 10 new domestic licensed Shacks, which may have impacted traffic in the comparable base of Shacks. The comparable Shack base includes those restaurants open for 24 full fiscal months or longer and, at the end of the fourth quarter of 2019, included 85 Shacks versus 61 Shacks for the fourth quarter of 2018.

Average weekly sales for domestic company-operated Shacks decreased to $71,000 for the fourth quarter of 2019 compared to $81,000 for the same quarter last year, primarily due to the addition of newer Shacks at a broader range of average unit volumes as well as declines in sophomore and comparable base Shacks.

Operating income decreased to $0.5 million for the fourth quarter of 2019 from $2.8 million in the same quarter last year. As a percentage of revenue, operating income margin decreased to 0.3%, which included increases in general and administrative expenses related to the Company's ongoing investment in future growth, and sales deleverage. Shack-level operating profit, a non-GAAP measure, increased 9.4% to $29.7 million for the fourth quarter of 2019 from $27.2 million in the same quarter last year. As a percentage of Shack sales, Shack-level operating profit margins decreased 210 basis points to 20.4%. The decreases in operating income and Shack-level operating profit were primarily due to sales deleverage and the following:

• Increases in food and paper costs driven by the higher cost profile of Chick'n Bites; mid-single digit commodity inflation in beef and slight inflation in dairy; and an increase in paper costs, as a direct result of digital sales mix which comes with additional packaging;
• Increases in labor and related expenses driven by wage inflation across the country, less sales leverage on fixed management costs and the impact of increased staffing levels at new Shacks resulting in higher payroll costs; and
• Increases in occupancy and related expenses driven by the adoption of the new lease accounting standard that went into effect at the beginning of this fiscal year.

A reconciliation of operating income to Shack-level operating profit, 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 26.7% to $19.2 million, including $1.9 million related to non-cash equity-based compensation and non-cash technology amortization, in the fourth quarter of 2019 from $15.2 million in the same quarter last year, driven by investments across the Company to support its significant growth. As a percentage of total revenue, general and administrative expenses increased to 12.7% for the fourth quarter of 2019 from 12.2% in the fourth quarter last year, due to the aforementioned items and sales performance.

Net loss was $2.1 million for the fourth quarter of 2019 compared to a loss of $0.5 million for the same period last year. Net loss attributable to Shake Shack Inc. was $2.1 million, or $0.06 per diluted share, for the fourth quarter of 2019, compared to a loss of $1.0 million, or $0.03 per diluted share, for the same period last year.

Adjusted EBITDA, a non-GAAP measure, increased 2.3% to $14.8 million. As a percentage of total revenue, adjusted EBITDA margins decreased approximately 180 basis points to 9.8% compared to 11.6% for the prior year period. These decreases were primarily due to the aforementioned items within Shack-level operating profit and the general and administrative investments to support on-going future growth. A reconciliation of net income (loss) to adjusted EBITDA, 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, was $2.2 million, or $0.06 per fully exchanged and diluted share during the fourth quarter of 2019, compared to $2.4 million, or $0.06 per diluted share during the fourth quarter of 2018. This decrease was primarily due to the aforementioned items within operating income and Shack-level operating profit. A reconciliation of net income (loss) attributable to Shake Shack Inc. to adjusted pro forma net income is set forth in the schedules accompanying this release. See “Non-GAAP Financial Measures.”

Fiscal Year 2019 Review

The Company opened its largest class of Shacks ever, with 73 Shacks across the globe, 39 company-operated and 34 licensed, with a total of 49 Shacks in the United States, strategically expanding its footprint in current markets, across New York City, California, New Jersey, Boston, Texas, the Midwest and more. Shake Shack also launched in a number of new markets, including New Orleans, Salt Lake City and Columbus. Total revenue, which includes Shack sales and licensing revenue, increased 29.4% to $594.5 million for fiscal 2019 from $459.3 million for fiscal 2018. Shack sales for fiscal 2019 were $574.6 million, an increase of 29.0% from fiscal 2018 due primarily to the opening of 39 new domestic company-operated Shacks during fiscal 2019, as well as same-Shack sales growth. Licensing revenue for fiscal 2019 was $19.9 million, an increase of 45.0% from $13.7 million for fiscal 2018, primarily due to the opening of 28 net new licensed Shacks during fiscal 2019 and the strong performance of Shacks that opened in the new markets of Shanghai, Singapore, the Philippines and Mexico City.

Same-Shack sales increased 1.3% for fiscal 2019 versus a 1.0% increase in the prior year, which was primarily driven by a combined increase of 1.8% in price and sales mix partially offset by decreased guest traffic of 0.5%. At the end of fiscal 2019, the comparable Shack base included 85 Shacks, compared to 61 Shacks for fiscal 2018.

The Company’s digital channels, including delivery, were a key contributor to same-Shack sales performance in 2019, in addition to favorable weather at the start of the year and a shift in the Easter break during the second quarter. Following the Company’s announcement to proceed with a single partner for integrated and marketed delivery, growth in this channel slowed significantly in the latter part of the year.

Average unit volume for domestic company-operated Shacks was $4.1 million for 2019 compared to $4.4 million for the prior year, a 6.8% decrease, primarily due to the addition of newer Shacks at lower average unit volumes.

Operating income decreased to $25.7 million for fiscal 2019 from $31.7 million for fiscal 2018 and operating income margins decreased 260 basis points to 4.3%, which included $2.4 million of one-time charges, comprised primarily of costs related to Project Concrete. Shack-level operating profit, a non-GAAP measure, increased 13.4% to $128.0 million for fiscal 2019 from $112.9 million for fiscal 2018. As a percentage of Shack sales, Shack-level operating profit margins decreased approximately 300 basis points to 22.3% primarily due to:

• Increases in food and paper costs driven by a higher cost profile of Chick'n Bites, which launched in January 2019; significant commodity inflation in beef and some inflation with dairy; and an increase in paper costs, as a direct result of digital sales mix which comes with additional packaging;
• Increases in labor and related expenses driven by ongoing wage inflation attributable to the availability of labor across the country, as well as the impact of increased staffing levels at new Shacks resulting in higher payroll costs; and
• Increases in occupancy and related expenses driven by the adoption of the new lease accounting standard that went into effect at the beginning of the 2019 fiscal year, as well as a benefit recognized in the prior year for deferred rent related to certain historical leases with co-tenancy provisions.

A reconciliation of operating income to Shack-level operating profit, 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 $65.6 million for fiscal 2019 from $52.7 million for fiscal 2018, primarily due to the increase in the Company's investment across the business to support its growth, and $2.4 million of one-time charges, primarily related to Project Concrete. As a percentage of total revenue, general and administrative expenses decreased to 11.0% for fiscal 2019 from 11.5% in fiscal 2018, primarily due to the timing of various initiatives and leverage on strong sales.

Net income was $24.1 million for fiscal 2019 compared to income of $21.9 million for fiscal 2018. Net income attributable to Shake Shack Inc. was $19.8 million, or $0.61 per diluted share, for fiscal 2019, compared to an income of $15.2 million, or $0.52 per diluted share, for fiscal 2018.

Adjusted EBITDA, a non-GAAP measure, decreased 10.8% to $81.8 million from $73.9 million for the fiscal year. As a percentage of total revenue, adjusted EBITDA decreased roughly 230 basis points to 13.8% for fiscal 2019 from 16.1% in fiscal 2018. This decrease was primarily due to the aforementioned items within Shack-level operating profit and the general and administrative investments to support growth. A reconciliation of net income (loss) to adjusted EBITDA, 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, was $27.4 million, or $0.72 per fully exchanged and diluted share for fiscal 2019, compared to $26.9 million, or $0.71 per fully exchanged and diluted share for fiscal 2018. A reconciliation of net income (loss) attributable to Shake Shack Inc. to adjusted pro forma net income is set forth in the schedules accompanying this release. See “Non-GAAP Financial Measures.”

2020 Outlook

For the fiscal year ending December 30, 2020, the Company is providing the following financial outlook:

About Shake Shack

Shake Shack is a modern day “roadside” burger stand known for its 100% all-natural Angus beef burgers, chicken sandwiches and flat-top Vienna beef dogs (no hormones or antibiotics - ever), spun-fresh frozen custard, crinkle cut fries, craft beer and wine and more. With its fresh, simple, high-quality food at a great value, Shake Shack is a fun and lively community gathering place with widespread appeal. Shake Shack’s mission is to Stand for Something Good®, from its premium ingredients and caring hiring practices to its inspiring designs and deep community investment. Since the original Shack opened in 2004 in NYC’s Madison Square Park, the company has expanded to more than 280 locations in 30 U.S. States and the District of Columbia, including more than 95 international locations including London, Hong Kong, Shanghai, Singapore, Philippines, Mexico, Istanbul, Dubai, Tokyo, Moscow, Seoul and more.