Shake Shack Results

Shake Shack Fourth Quarter Total Revenue Grew 31.2%

Shake Shack Announces Fourth Quarter and Fiscal Year Ended 2017 Financial Results

Shake Shack

Shake Shack Inc. (NYSE:SHAK), yesterday reported financial results for the fourth quarter and the fiscal year ended December 27, 2017, periods that included 13 and 52 weeks, respectively.

Financial Highlights for the Fourth Quarter 2017:

  • Total revenue increased 31.2% to $96.1 million.
  • Shack sales increased 31.3% to $93.1 million.
  • Same-Shack sales increased 0.8%.
  • Operating income increased 17.0% to $5.8 million, or 6.1% of total revenue.
  • Shack-level operating profit*, a non-GAAP measure, increased 30.3% to $23.5 million, or 25.2% of Shack sales.
  • Net loss was $13.0 million and net loss attributable to Shake Shack Inc. was $14.4 million, or $(0.55) per diluted share, which included $12.7 million of net expense relating to the enactment of the Tax Cuts and Jobs Act of 2017 (the "TCJA").
  • Adjusted EBITDA*, a non-GAAP measure, increased 30.7% to $14.9 million.
  • Adjusted pro forma net income*, a non-GAAP measure, increased 20.0% to $3.9 million, or $0.10 per fully exchanged and diluted share.
  • 16 system-wide Shack openings, including 11 domestic company-operated Shacks and 5 licensed Shacks.

Financial Highlights for the Fiscal Year 2017:

  • Total revenue increased 33.6% to $358.8 million.
  • Shack sales increased 33.6% to $346.4 million.
  • Same-Shack sales decreased 1.2%.
  • Operating income increased 21.6% to $33.8 million, or 9.4% of total revenue.
  • Shack-level operating profit*, a non-GAAP measure, increased 25.9% to $92.3 million, or 26.6% of Shack sales.
  • Net income was $6.9 million and net loss attributable to Shake Shack Inc. was $2.3 million, or $(0.09) per diluted share, which included $12.7 million of net expense relating to the enactment of the TCJA.
  • Adjusted EBITDA*, a non-GAAP measure, increased 28.7% to $64.7 million.
  • Adjusted pro forma net income*, a non-GAAP measure, increased 25.4% to $21.0 million, or $0.57 per fully exchanged and diluted share.
  • 45 net system-wide Shack openings, including 26 domestic company-operated Shacks and 19 net licensed Shacks, representing a net 39.5% increase in system-wide Shack count.

* 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, “I'm incredibly proud of our team's achievements throughout 2017. We delivered another year of robust global growth, opening 26 new company-operated domestic Shacks and 19 net licensed Shacks, representing a nearly 40% increase on our base. 2017 marked a milestone year of digital innovation for Shake Shack, with the launch of the Shack app, self-serve kiosks at select locations and several integrated delivery pilots designed to further enhance the guest digital experience. We will continue to build on this momentum into 2018 and beyond.”

Garutti concluded, “Looking ahead, 2018 is shaping up to be another exciting year of growth with 32 to 35 new domestic company-operated Shacks, our biggest year of openings to date. We expect 16 to 18 net new licensed Shacks for the year, with a significant portion of our international growth targeted in Asia including our first Shack in Hong Kong. We’re also focused on further strengthening our infrastructure to deliver against the significant long-term opportunity we have in our sights. By the end of 2020, we plan to have more than doubled our 2017 system-wide Shack count and increase our revenue to over $700 million."

Development Highlights

During the quarter, the Company opened 11 domestic company-operated Shacks, which included Shack openings in three new markets, San Diego, St. Louis and Milwaukee, as well as the debut of its first kiosk-only, cashless environment at Astor Place in New York City. Additionally, the Company opened five international licensed Shacks during the quarter, with two openings in Japan, which included its first Shack outside of Tokyo, as well as openings in the Middle East and the United Kingdom.

Location     Type     Opening Date
Dallas, TX — Preston Royal     Domestic Company-Operated    

September 29

Yokohama, Japan — Minatomirai     International Licensed    

September 29

New York, NY — Astor Place     Domestic Company-Operated     October 10
Washington D.C. — The Wharf     Domestic Company-Operated     October 12
San Diego, CA — UTC     Domestic Company-Operated     October 20
Troy, MI — Troy     Domestic Company-Operated     October 25
London, United Kingdom — Cambridge Circus     International Licensed     October 26
Manama, Bahrain — The Avenues Mall     International Licensed     October 29
Tokyo, Japan — Roppongi     International Licensed     November 2
El Segundo, CA — El Segundo     Domestic Company-Operated     November 5
Milwaukee, WI — Third Ward     Domestic Company-Operated     December 6
St. Louis, MO — Central West End     Domestic Company-Operated     December 11
Columbia, MD — Mall in Columbia     Domestic Company-Operated     December 20
Las Vegas, NV — Las Vegas N. Premium Outlets     Domestic Company-Operated     December 20
San Diego, CA — Mission Valley     Domestic Company-Operated     December 21
Jeddah, KSA — Red Sea Mall     International Licensed     December 21
 

Subsequent to the end of the quarter, the Company opened three international licensed Shacks, including the Company's eighth Shack in Saudi Arabia at the Gallery Mall, its seventh Shack in Japan at Tokyo Dome and its sixth Shack in South Korea at the ICN airport.

Fourth Quarter 2017 Review

Total revenue, which includes Shack sales and licensing revenue, increased 31.2% to $96.1 million in the fourth quarter of 2017, from $73.3 million for the fourth quarter of 2016. Shack sales for the fourth quarter of 2017 were $93.1 million, an increase of 31.3% from $70.9 million in the same quarter last year due primarily to the opening of 26 new domestic company-operated Shacks. Licensing revenue for the fourth quarter was $3.0 million, an increase of 27.9% from $2.4 million in the same quarter last year, primarily due to the opening of 19 net new licensed Shacks and the initial strength of newer Shacks in South Korea.

Same-Shack sales increased 0.8% for the fourth quarter of 2017 versus 1.5% growth in the fourth quarter last year. The comparable Shack base includes those restaurants open for 24 full fiscal months or longer. For the fourth quarter of 2017, the comparable Shack base included 43 Shacks versus 29 Shacks for the fourth quarter of 2016.

Average weekly sales for domestic company-operated Shacks was $85,000 for the fourth quarter of 2017 compared to $90,000 for the same quarter last year, a 5.6% decrease, primarily due to the addition of newer Shacks at lower average unit volumes.

Operating income increased 17.0% to $5.8 million for the fourth quarter of 2017 from $5.0 million in the same quarter last year. Operating income margins decreased 70 basis points to 6.1%. Shack-level operating profit, a non-GAAP measure, increased 30.3% to $23.5 million for the fourth quarter of 2017 from $18.0 million in the same quarter last year. As a percentage of Shack sales, Shack-level operating profit margins decreased 20 basis points to 25.2% primarily due to (i) 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 and regulatory factors, such as the Fair Workweek legislation in New York; (ii) other operating expense deleverage driven mainly by certain fixed expenses and an increase in facility costs as our Shacks mature; and (iii) the introduction of a broader range of unit volume Shacks into the system. 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 $11.7 million for the fourth quarter of 2017 from $8.3 million in the same quarter last year. As a percentage of total revenue, general and administrative expenses increased to 12.1% for the fourth quarter of 2017 from 11.3% in the fourth quarter last year, primarily due to higher payroll expense from increased headcount at the home office to support future growth plans, technology development costs related to our digital products, initial costs related to Project Concrete, the Company's operational and financial systems upgrade initiative, and duplicative non-cash deferred rent related to the Company's new home office.

In December 2017, the Tax Cuts and Jobs Act of 2017 (the "TCJA") was enacted into law. The TCJA provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended, including a reduction of the U.S. federal corporate income tax rate from 35% to 21%, among other provisions. As a result of the TCJA, the Company recognized a $125.9 million benefit in other income related to the reduction in liabilities under its tax receivable agreement. The Company also recognized an additional $138.6 million of income tax expense as a provisional amount, relating to the remeasurement of its deferred tax assets.

Net loss attributable to Shake Shack Inc. was $14.4 million, or $(0.55) per diluted share, for the fourth quarter of 2017, compared to income of $3.9 million, or $0.15 per diluted share, for the same period last year.

Adjusted EBITDA, a non-GAAP measure, increased 30.7% to $14.9 million. As a percent of total revenue, adjusted EBITDA margins decreased approximately 10 basis points to 15.5% compared to 15.6% for the year ago period. 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 $3.9 million, or $0.10 per fully exchanged and diluted share during the fourth quarter of 2017, compared to $3.3 million, or $0.09 per diluted share during the fourth quarter of 2016. 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 2017 Review

Total revenue increased 33.6% to $358.8 million for fiscal 2017, from $268.5 million for fiscal 2016. The growth in Shack sales was primarily driven by the opening of 26 new domestic company-operated Shacks, partially offset by a decline in same-Shack sales.

Shack sales for fiscal 2017 were $346.4 million, an increase of 33.6% from fiscal 2016. Same-Shack sales decreased 1.2% during fiscal year 2017 versus 4.2% growth in the prior year. For fiscal 2017, the comparable Shack base included 43 Shacks, compared to 29 Shacks for fiscal 2016.

Average unit volume for domestic company-operated Shacks was $4.6 million for 2017 compared to $5.0 million for the prior year, a 7.7% decrease, primarily due to the addition of newer Shacks at lower average unit volumes.

Operating income increased 21.6% to $33.8 million for the fourth quarter of 2017 from $27.8 million in the same quarter last year. Operating income margins decreased 100 basis points to 9.4%. Shack-level operating profit, a non-GAAP measure, increased 25.9% to $92.3 million for fiscal 2017 from $73.3 million for fiscal 2016. As a percentage of Shack sales, Shack-level operating profit margins decreased approximately 170 basis points to 26.6% primarily due to (i) 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 and regulatory factors, such as the Fair Workweek legislation in New York; (ii) other operating expense deleverage driven mainly by certain fixed expenses and an increase in facility costs as our Shacks mature; and (iii) the introduction of a broader range of unit volume Shacks into the system. 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 $39.0 million for fiscal 2017 from $30.6 million for fiscal 2016, primarily due to higher payroll expense from increased headcount at the home office to support future growth plans, technology development costs related to our digital products, initial costs related to Project Concrete, the Company's operational and financial systems upgrade initiative, and duplicative non-cash deferred rent related to the Company's new home office. As a percentage of total revenue, general and administrative expenses decreased to 10.9% for fiscal 2017 from 11.4% in fiscal 2016, primarily due to increased levels of Shack sales.

In December 2017, the TCJA was enacted into law. The TCJA provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended, including a reduction of the U.S. federal corporate income tax rate from 35% to 21%, among other provisions. As a result of the TCJA, the Company recognized a $125.9 million benefit in other income related to the reduction in liabilities under its tax receivable agreement. The Company also recognized an additional $138.6 million of income tax expense as a provisional amount, relating to the remeasurement of its deferred tax assets.

Net loss attributable to Shake Shack Inc. was $2.3 million, or $(0.09) per diluted share, for fiscal 2017, compared to income of $12.4 million, or $0.53 per diluted share, for the same period a year ago.

Adjusted EBITDA, a non-GAAP measure, increased 28.7% to $64.7 million from $50.2 million for the fiscal year. As a percent of total revenue, adjusted EBITDA decreased roughly 70 basis points to 18.0% compared to 18.7% for the year ago period. 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 $21.0 million, or $0.57 per fully exchanged and diluted share for fiscal 2017, compared to $16.8 million, or $0.46 per fully exchanged and diluted share for fiscal 2016. 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.”

2018 Outlook

For the fiscal year ending December 26, 2018, the Company is providing the following financial outlook:

  • Total revenue of between $444 million and $448 million inclusive of licensing revenue.
  • Licensing revenue to be between $12 and $13 million.
  • Same-Shack sales to be flat, which includes approximately 1.5% to 2% of menu price increases taken in December 2017.
  • Between 32 and 35 new domestic company-operated Shacks to be opened in fiscal 2018.
  • Between 16 and 18 net new licensed Shacks to be opened in fiscal 2018.
  • Average annual sales volume for total domestic company-operated Shacks is expected to be between $4.1 million and $4.2 million.
  • Shack-level operating profit margin between 24.5% and 25.5%.
  • General and administrative expenses to between $49 million and $51 million, excluding approximately $4 to $6 million of costs related to Project Concrete, the Company's operational and financial systems upgrade initiative.
  • Depreciation expense of approximately $32 million.
  • Pre-opening costs of between $12 million and $13 million.
  • Interest expense between $2.0 million and $2.2 million.
  • Adjusted pro forma effective tax rate to between 26.0% and 27.0%.

2020 Targets

By the end of fiscal year 2020, the Company is targeting:

  • At least 200 domestic company-operated Shacks and at least 120 global licensed Shacks, and
  • Over $700 million in total revenue.

SHAKE SHACK INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(UNAUDITED)

(in thousands, except per share amounts)

 
    Fiscal Quarter Ended   Fiscal Year Ended
   

December 27

 

December 28

 

December 27

 

December 28

   

2017

 

2016

 

2017

 

2016

Shack sales   $ 93,130   96.9 %   $ 70,920   96.8 %   $ 346,388   96.5 %   $ 259,350   96.6 %
Licensing revenue   3,006   3.1 %   2,351   3.2 %   12,422   3.5 %   9,125   3.4 %
TOTAL REVENUE   96,136   100.0 %   73,271   100.0 %   358,810   100.0 %   268,475   100.0 %
Shack-level operating expenses(1):                        
Food and paper costs   26,691   28.7 %   20,223   28.5 %   98,337   28.4 %   73,752   28.4 %
Labor and related expenses   25,048   26.9 %   18,900   26.6 %   91,740   26.5 %   65,540   25.3 %
Other operating expenses   10,425   11.2 %   7,471   10.5 %   35,805   10.3 %   24,946   9.6 %
Occupancy and related expenses   7,456   8.0 %   6,279   8.9 %   28,197   8.1 %   21,820   8.4 %
General and administrative expenses   11,651   12.1 %   8,291   11.3 %   39,003   10.9 %   30,556   11.4 %
Depreciation expense   6,094   6.3 %   4,273   5.8 %   21,704   6.0 %   14,502   5.4 %
Pre-opening costs   2,642   2.7 %   2,812   3.8 %   9,603   2.7 %   9,520   3.5 %
Loss on disposal of property and equipment   291   0.3 %   34   %   608   0.2 %   34   %
TOTAL EXPENSES   90,298   93.9 %   68,283   93.2 %   324,997   90.6 %   240,670   89.6 %
OPERATING INCOME   5,838   6.1 %   4,988   6.8 %   33,813   9.4 %   27,805   10.4 %
Other income, net   127,501   132.6 %   868   1.2 %   128,123   35.7 %   1,065   0.4 %
Interest expense   (499 ) (0.5 )%   (107 ) (0.1 )%   (1,643 ) (0.5 )%   (374 ) (0.1 )%
INCOME BEFORE INCOME TAXES   132,840   138.2 %   5,749   7.8 %   160,293   44.7 %   28,496   10.6 %
Income tax expense   145,817   151.7 %   292   0.4 %   153,354   42.7 %   6,350   2.4 %
NET INCOME (LOSS)   (12,977 ) (13.5 )%   5,457   7.4 %   6,939   1.9 %   22,146   8.2 %
Less: net income attributable to non-controlling interests   1,431   1.5 %   1,537   2.1 %   9,204   2.6 %   9,700   3.6 %
NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC.   $ (14,408 ) (15.0 )%   $ 3,920   5.4 %   $ (2,265 ) (0.6 )%   $ 12,446   4.6 %
                         
Earnings (loss) per share of Class A common stock:                        
Basic   $ (0.55 )     $ 0.16       $ (0.09 )     $ 0.54    
Diluted   $ (0.55 )     $ 0.15       $ (0.09 )     $ 0.53    
Weighted-average shares of Class A common stock outstanding:                        
Basic   26,305       24,895       25,876       22,956    
Diluted   26,305       36,858       25,876       23,449    

_______________

(1) As a percentage of Shack sales.

 

SHAKE SHACK INC.

SELECTED BALANCE SHEET AND OPERATING DATA

(UNAUDITED)

(dollar amounts in thousands)

         

 

 

December 27

 

December 28

 

 

2017

 

2016

SELECTED BALANCE SHEET DATA:            
Cash and cash equivalents   $ 21,507     $ 11,607  
Total assets   $ 470,606     $ 538,194  
Total liabilities   $ 246,127     $ 336,841  
Total equity   $ 224,479     $ 201,353  
         
         
    Fiscal Quarter Ended

 

Fiscal Year Ended

   

December 27

 

December 28

 

December 27

 

December 28

   

2017

 

2016

 

2017

 

2016

SELECTED OPERATING DATA:                        
Same-Shack sales growth(1)   0.8 %   1.5 %   (1.2 )%   4.2 %
Shacks in the comparable base(1)   43     29     43     29  
                         
Shack system-wide sales(2)   $ 140,622     $ 107,063     $ 532,137     $ 402,791  
                         
Average weekly sales                        
Domestic company-operated   $ 85     $ 90     $ 88     $ 96  
                         
Average unit volumes:                        
Domestic company-operated   n/a     n/a     $4,598     $4,981  
International licensed   n/a     n/a     $3,176     $3,334  
                         
Shack-level operating profit(3)   $ 23,510     $ 18,047     $ 92,309     $ 73,292  
Shack-level operating profit margin(3)   25.2 %   25.4 %   26.6 %   28.3 %
                         
Adjusted EBITDA(3)   $ 14,944     $ 11,436     $ 64,664     $ 50,234  
Adjusted EBITDA margin(3)   15.5 %   15.6 %   18.0 %   18.7 %
                         
Capital expenditures   $ 20,354     $ 15,165     $ 61,533     $ 54,433  
                         
Shack counts (at end of period):                        
System-wide   159     114     159     114  
Domestic company-operated   90     64     90     64  
Domestic licensed   10     7     10     7  
International licensed   59     43     59     43  

_______________

(1)

 

Effective December 29, 2016, the Company changed its methodology for calculating same-Shack sales whereby Shacks enter the comparable base at the beginning of their 25th full fiscal month, whereas previously they entered at the beginning of their 105th full fiscal week. Prior period amounts have been restated to conform to the current period methodology. The change in methodology had an immaterial impact to the same-Shack sales growth for the thirteen and fifty-two weeks ended December 28, 2016.

(2)

 

Shack system-wide sales is an operating measure and consists of sales from the Company's domestic company-operated Shacks, domestic licensed Shacks and international licensed Shacks. The Company does not recognize the sales from licensed Shacks as revenue. Of these amounts, revenue is limited to Shack sales from domestic company-operated Shacks and licensing revenue based on a percentage of sales from domestic and international licensed Shacks.

(3)

 

Shack-level operating profit and adjusted EBITDA are non-GAAP measures. Reconciliations of Shack-level operating profit to operating income and adjusted EBITDA to net income (loss), 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.”

 

SHAKE SHACK INC.

NON-GAAP FINANCIAL MEASURES

(UNAUDITED)

To supplement the 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, Shack-level operating profit margin, 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").

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 the Company believes are useful measures to evaluate the performance and profitability of its Shacks. Additionally, Shack-level operating profit and Shack-level operating profit margin are key metrics used internally by management to develop internal budgets and forecasts, as well as assess the performance of its Shacks relative to budget and against prior periods. It is also used to evaluate employee compensation as it serves as a metric in certain performance-based employee bonus arrangements. The Company believes presentation of Shack-level operating profit and Shack-level operating profit margin provides investors with a supplemental view of its operating performance that can provide meaningful insights to the underlying operating performance of the Shacks, as these measures depict the operating results that are directly impacted by the Shacks and exclude items that may not be indicative of, or are unrelated to, the ongoing operations of the Shacks. It may also assist investors to evaluate the Company's performance relative to peers of various sizes and maturities and provides greater transparency with respect to how management evaluates the business, as well as the financial and operational decision-making.

Limitations of the Usefulness of this Measure

Shack-level operating profit and Shack-level operating profit margin are not necessarily equivalent to similarly titled measures used by other companies due to different methods of calculation. Presentation of Shack-level operating profit and Shack-level operating profit margin is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Shack-level operating profit excludes certain costs, such as general and administrative expenses and pre-opening costs, which are considered normal, recurring cash operating expenses and are essential to support the operation and development of the Company's Shacks. Therefore, this measure may not provide a complete understanding of the Company's operating results as a whole and Shack-level operating profit and Shack-level operating profit margin should be reviewed in conjunction with our GAAP financial results. A reconciliation of Shack-level operating profit to operating income, the most directly comparable GAAP financial measure, is set forth below.

    Fiscal Quarter Ended   Fiscal Year Ended
   

December 27

 

December 28

 

December 27

 

December 28

(dollar amounts in thousands)  

2017

 

2016

 

2017

 

2016

Operating income   $ 5,838     $ 4,988     $ 33,813     $ 27,805  
Less:                
Licensing revenue   3,006     2,351     12,422     9,125  
Add:                
General and administrative expenses   11,651     8,291     39,003     30,556  
Depreciation expense   6,094     4,273     21,704     14,502  
Pre-opening costs   2,642     2,812     9,603     9,520  
Loss on disposal of property and equipment   291     34     608     34  
Shack-level operating profit   $ 23,510     $ 18,047     $ 92,309     $ 73,292  
                 
Total revenue   $ 96,136     $ 73,271     $ 358,810     $ 268,475  
Less: licensing revenue   3,006     2,351     12,422     9,125  
Shack sales   $ 93,130     $ 70,920     $ 346,388     $ 259,350  
                 
Shack-level operating profit margin   25.2 %   25.4 %   26.6 %   28.3 %
 

SHAKE SHACK INC.

NON-GAAP FINANCIAL MEASURES

(UNAUDITED)

EBITDA and Adjusted EBITDA

EBITDA is defined as net income before net interest, income tax expense and depreciation and amortization expense. Adjusted EBITDA is defined as EBITDA (as defined above) excluding equity-based compensation expense, deferred rent expense, losses on the disposal of property and equipment, as well as certain non-recurring items that the Company does not believe directly reflect its core operations and may not be indicative of the Company's 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 the Company believes are useful measures to facilitate comparisons to historical performance and competitors' operating results. Adjusted EBITDA is a key metric used internally by management to develop internal budgets and forecasts and also serves as a metric in its performance-based equity incentive programs and certain bonus arrangements. The Company believes presentation of EBITDA and Adjusted EBITDA provides investors with a supplemental view of the Company's operating performance that facilitates analysis and comparisons of its ongoing business operations because they exclude items that may not be indicative of the Company's ongoing operating performance.

Limitations of the Usefulness of These Measures

EBITDA and Adjusted EBITDA are not necessarily comparable to 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 the Company's performance and should be reviewed in conjunction with the GAAP financial measures. A reconciliation of EBITDA and Adjusted EBITDA to net income, the most directly comparable GAAP measure, is set forth below.

    Fiscal Quarter Ended   Fiscal Year Ended
   

December 27

 

December 28

 

December 27

 

December 28

(in thousands)  

2017

 

2016

 

2017

 

2016

Net income (loss)   $ (12,977 )   $ 5,457     $ 6,939     $ 22,146  
Depreciation expense   6,094     4,273     21,704     14,502  
Interest expense, net   479     87     1,565     285  
Income tax expense   145,817     292     153,354     6,350  
EBITDA   139,413     10,109     183,562     43,283  
                 
Equity-based compensation   1,800     1,537     5,623     5,354  
Deferred rent   216     444     983     2,251  
Loss on disposal of property and equipment   291     34     608     34  
Executive transition costs(1)           664      
Project Concrete(2)   181         181      
Home Office relocation expenses(3)   264         264      
Other income related to the adjustment of liabilities under tax receivable agreement   (1,362 )   (688 )   (1,362 )   (688 )
Other income related to the remeasurement of liabilities under tax receivable agreement due to the enactment of the TCJA   (125,859 )       (125,859 )    
ADJUSTED EBITDA   $ 14,944     $ 11,436     $ 64,664     $ 50,234  
                 
Adjusted EBITDA margin   15.5 %   15.6 %   18.0 %   18.7 %

_______________

(1)

 

Represents fees paid to an executive recruiting firm, a non-recurring signing bonus and certain other benefits paid upon the hiring of the Company's chief financial officer.

(2)

 

Represents consulting and advisory fees related to the Company's operational and financial systems upgrade initiative called Project Concrete.

(3)

 

Costs incurred in connection with the Company's planned relocation to a new home office, including duplicative non-cash deferred rent and legal costs.

 

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 the Company doesn't believe directly reflect its core operations and may not be indicative of 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 equity-based awards.

How These Measures Are Useful

When used in conjunction with GAAP financial measures, adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share are supplemental measures of operating performance that the Company believes are useful measures to evaluate performance period over period and relative to its competitors. By assuming the full exchange of all outstanding LLC Interests, the Company believes 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 to Shake Shack Inc. driven by increases in its ownership of SSE Holdings, which are unrelated to the Company's operating performance, and excludes items that are non-recurring or may not be indicative of ongoing operating performance.

Limitations of the Usefulness of These Measures

Adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share are not necessarily comparable to 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 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 the Company's 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 to Shake Shack Inc. Adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share should be evaluated in conjunction with GAAP financial results. 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.

    Fiscal Quarter Ended   Fiscal Year Ended
   

December 27

 

December 28

 

December 27

 

December 28

(in thousands, except per share amounts)  

2017

 

2016

 

2017

 

2016

Numerator:                
Net income (loss) attributable to Shake Shack Inc.   $ (14,408 )   $ 3,920     $ (2,265 )   $ 12,446  
Adjustments:                
Reallocation of net income attributable to non-controlling interests from the assumed exchange of LLC Interests(1)   1,431     1,537     9,204     9,700  
Executive transition costs(2)           664      
Project Concrete(3)   181         181      
Home Office relocation expenses(4)   264         264      
Other income related to the adjustment of liabilities under tax receivable agreement   (1,362 )   (688 )   (1,362 )   (688 )
Other income related to the remeasurement of liabilities under tax receivable agreement resulting from the enactment of the TCJA   (125,859 )       (125,859 )    
Remeasurement of deferred tax assets   138,636     (1,526 )   138,636     (1,526 )
Income tax expense(5)   5,016     7     1,568     (3,164 )
Adjusted pro forma net income   $ 3,899     $ 3,250     $ 21,031     $ 16,768  
Denominator:                
Weighted-average shares of Class A common stock outstanding—diluted   26,305     36,858     25,876     23,449  
Adjustments:                
Assumed exchange of LLC Interests for shares of Class A common stock(1)   10,445         10,773     13,360  
Dilutive effect of stock options   676         555      
Adjusted pro forma fully exchanged weighted-average shares of Class A common stock outstanding—diluted   37,426     36,858     37,204     36,809  
Adjusted pro forma earnings per fully exchanged share—diluted   $ 0.10     $ 0.09     $ 0.57     $ 0.46  

_______________

(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 attributable to non-controlling interests.

(2)

 

Represents fees paid to an executive recruiting firm, a non-recurring signing bonus and certain other benefits paid upon the hiring of the Company's chief financial officer.

(3)

 

Represents consulting and advisory fees related to the Company's operational and financial systems upgrade initiative called Project Concrete.

(4)

 

Costs incurred in connection with the Company's planned relocation to a new home office, including duplicative non-cash deferred rent and legal costs.

     

(5)

 

Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 35.7% and 38.5% for the fiscal quarter and year ended December 27, 2017, respectively, and 35.8% and 39.7% for the fiscal quarter and year ended December 28, 2016, respectively. Amounts include provisions for U.S. federal income taxes, certain LLC entity-level taxes and foreign withholding taxes, assuming the highest statutory rates apportioned to each applicable state, local and foreign jurisdiction.



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