Shake Shack Announces First Quarter 2018 Financial Results

Shake Shack Inc. (NYSE:last week SHAK)  reported its financial results for the first quarter ended March 28, 2018, a period that included 13 weeks.

Financial Highlights for the First Quarter 2018:

• Total revenue increased 29.1% to $99.1 million.
• Shack sales increased 29.6% to $96.1 million.
• Same-Shack sales increased 1.7%.
• Operating income increased 15.7% to $6.5 million, or 6.6% of total revenue.
• Shack-level operating profit*, a non-GAAP measure, increased 28.5% to $24.0 million, or 25.0% of Shack sales.
• Net income increased 28.9% to $5.0 million and net income attributable to Shake Shack Inc. was $3.5 million, or $0.13 per diluted share.
• Adjusted EBITDA*, a non-GAAP measure, increased 32.8% to $16.2 million.
• Adjusted pro forma net income*, a non-GAAP measure, increased 54.0% to $5.7 million, or $0.15 per fully exchanged and diluted share.
• Nine system-wide Shack openings, comprising five domestic company-operated Shacks and four 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 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, “2018 is off to a strong start as we built upon our fourth quarter momentum, reporting another quarter of robust top and bottom-line growth. We delivered year over year revenue growth of approximately 29%, including a 1.7% increase in same-Shack sales and grew adjusted EBITDA by over 30%. These results were supported by the continued evolution of our digital initiatives and the strength of new and existing Shacks as we executed on our development plans."

Garutti concluded, "Our team is executing the plan to open 32 to 35 new domestic company-operated Shacks in 2018, our biggest year of openings to date. Our domestic pipeline is stronger than ever as we build towards our goal of 200 domestic company-operated Shacks by the end of 2020 and our long-term target of 450. We expect 16 to 18 net new licensed Shacks for the year, with a focus on Asia including our first Shack in Hong Kong which opened on May 1st . Additionally, we are committed to digital innovation to better connect with our guests, delivering ongoing menu innovation, and investing in our people and infrastructure to execute on the significant long-term opportunity ahead."

Development Highlights

During the quarter, the Company opened five domestic company-operated Shacks, including its first Shack in the RINo District in downtown Denver, as well as additional Shacks in the existing markets of Houston, LA, South Florida and New Jersey. The Company also opened four international licensed Shacks; one in each of Saudi Arabia, South Korea and two in Japan.

Subsequent to the end of the quarter, the Company opened its first Shack in Charlotte, North Carolina and its first Shack in Hong Kong at the IFC Mall.

First Quarter 2018 Review

Total revenue, which includes Shack sales and licensing revenue, increased 29.1% to $99.1 million in the first quarter of 2018, from $76.7 million in the first quarter of 2017. Shack sales for the first quarter of 2018 were $96.1 million compared to $74.2 million in the same quarter last year, an increase of $21.9 million, or 29.6%, due primarily to the opening of 24 new domestic company-operated Shacks, as well as same-Shack sales growth. Licensing revenue for the first quarter was $3.0 million, an increase of 16.7% from $2.6 million in the same quarter last year, due primarily to the opening of new licensed Shacks, and the strong performance of the Company's newer Shacks in South Korea and Japan, balanced by continued softness in the Middle East.

Same-Shack sales increased 1.7% for the first quarter of 2018 versus a 2.5% decline in the first quarter last year. The increase in same-Shack sales, consisted of a combined increase in price and sales mix of 5.9% offset by a 4.2% decrease in guest traffic. Excluding all transactions associated with the free burger promotion in the prior year, same-Shack sales would have been 2.1% in the first quarter with traffic declining by only 2.2%. The comparable Shack base includes those restaurants open for 24 full fiscal months or longer. For the first quarter of 2018, the comparable Shack base included 44 Shacks versus 32 Shacks for the first quarter of 2017.

Average weekly sales for domestic company-operated Shacks decreased to $81,000 for the first quarter of 2018 compared to $86,000 for the same quarter last year, primarily due to the addition of Shacks at lower volumes to the system.

Operating income increased 15.7% to $6.5 million for the first quarter of 2018 from $5.6 million in the same quarter last year. Operating income margins decreased 70 basis points to 6.6%. Shack-level operating profit, a non-GAAP measure, increased 28.5% to $24.0 million for the first quarter of 2018 from $18.7 million in the same quarter last year. As a percentage of Shack sales, Shack-level operating profit margins decreased 20 basis points to 25.0%. These decreases were primarily due to increased labor and related expenses resulting from ongoing increases in minimum wages, prior year costs associated with the free burger promotion, offset in part by the menu price increase implemented at the end of the prior year. 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 $11.8 million for the first quarter of 2018 from $8.5 million in the same quarter last year. The increase was primarily due to the addition of headcount to support the Company's ongoing growth, technology development costs related to its digital products and costs associated with the Company's new Home Office. As a percentage of total revenue, general and administrative expenses increased to 11.9% for the first quarter of 2018 from 11.0% in the first quarter last year.

Net income attributable to Shake Shack Inc. was $3.5 million, or 3.5% of total revenue, for the first quarter of 2018, compared to $2.3 million, or 3.0% of total revenue, for the same period last year. Earnings per diluted share was $0.13 for the first quarter of 2018 compared to $0.09 for the same period last year.

Adjusted EBITDA, a non-GAAP measure, increased 32.8% to $16.2 million. As a percentage of total revenue, adjusted EBITDA margins increased approximately 40 basis points to 16.3% compared to 15.9% 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.”

Adjusted pro forma net income, a non-GAAP measure, increased 54.0% to $5.7 million, or $0.15 per fully exchanged and diluted share during the first quarter of 2018, compared to $3.7 million, or $0.10 per fully exchanged and diluted share during the first quarter of 2017. 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 2018 Outlook

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

• Total revenue between $446 million and $450 million (vs. $444 million to $448 million).
• Licensing revenue to be between $12 million and $13 million.
• Same-Shack sales to be 0% to 1% year over year (vs. flat).
• 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 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 between 26% and 27%.

About Shake Shack

Shake Shack is a modern day “roadside” burger stand known for its 100% all-natural Angus beef burgers and flat-top vienna beef dogs (no added hormones and no antibiotics ever), 100% all-natural cage-free chicken (no antibiotics ever), spun-fresh frozen custard, crinkle cut fries, craft beer and wine (available at select locations) 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. From its premium ingredients and caring hiring practices to its inspiring designs and deep community investment, Shake Shack’s mission is to Stand For Something Good®. Since the original Shack opened in 2004 in NYC’s Madison Square Park, the company has opened multiple locations in 22 states and the District of Columbia, as well as international locations including London, Istanbul, Dubai, Tokyo, Moscow, Seoul and more.

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 EBITDA margin, 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 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 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 the Company's GAAP financial results. A reconciliation of Shack-level operating profit to operating income, the most directly comparable GAAP financial measure, is set forth below.

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

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 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 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 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.

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 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 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 per fully exchanged and diluted share should not be considered alternatives to net income and earnings 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 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.