SHAK 10-Q
Shake Shack Inc. (SHAK)
10-Q
2023-11-03
For: 2023-09-27
View Original
Added on
April 12, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | |||||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 27, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from _______ to ______
Commission file number: 001-36823
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(646 ) 747-7200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule-405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☑ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☑ No
As of October 25, 2023, there were 39,467,861 shares of Class A common stock outstanding and 2,834,513 shares of Class B common stock outstanding.
SHAKE SHACK INC.
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q ("Form 10-Q") contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact included in this Form 10-Q are forward-looking statements, including, but not limited to, statements about the Company's growth, strategic plan, and liquidity. Forward-looking statements discuss the Company's current expectations and projections relating to its financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "potential," "project," "projection," "plan," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions.
All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Some of the factors which could cause results to differ materially from the Company's expectations include the continuing impact of the COVID-19 pandemic, including the potential impact of any COVID-19 variants, the Company's ability to develop and open new Shacks on a timely basis, increased costs or shortages or interruptions in the supply and delivery of products, increased labor costs or shortages, inflationary pressures, the Company's management of its digital capabilities and expansion into new channels, including drive-thru and multiple format investments, the Company's ability to maintain and grow sales at existing Shacks, and risks relating to the restaurant industry generally. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2022 as filed with the Securities and Exchange Commission (the "SEC").
The forward-looking statements included in this Form 10-Q are made only as of the date hereof. The Company undertakes no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
Shake Shack Inc. Form 10-Q | 1
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
| Page | |||||
2 | Shake Shack Inc. Form 10-Q
SHAKE SHACK INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share amounts)
| September 27 2023 | December 28 2022 | ||||||||||||||||
| ASSETS | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | $ | |||||||||||||||
| Marketable securities | |||||||||||||||||
| Accounts receivable, net | |||||||||||||||||
| Inventories | |||||||||||||||||
| Prepaid expenses and other current assets | |||||||||||||||||
| Total current assets | |||||||||||||||||
Property and equipment, net of accumulated depreciation of $ | |||||||||||||||||
| Operating lease assets | |||||||||||||||||
| Deferred income taxes, net | |||||||||||||||||
| Other assets | |||||||||||||||||
| TOTAL ASSETS | $ | $ | |||||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable | $ | $ | |||||||||||||||
| Accrued expenses | |||||||||||||||||
| Accrued wages and related liabilities | |||||||||||||||||
| Operating lease liabilities, current | |||||||||||||||||
| Other current liabilities | |||||||||||||||||
| Total current liabilities | |||||||||||||||||
| Long-term debt | |||||||||||||||||
| Long-term operating lease liabilities | |||||||||||||||||
| Liabilities under tax receivable agreement, net of current portion | |||||||||||||||||
| Other long-term liabilities | |||||||||||||||||
| Total liabilities | |||||||||||||||||
Commitments and contingencies (Note 13) | |||||||||||||||||
| Stockholders' equity: | |||||||||||||||||
| Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of September 27, 2023 and December 28, 2022. | |||||||||||||||||
| Class A common stock, $0.001 par value—200,000,000 shares authorized; 39,466,268 and 39,284,998 shares issued and outstanding as of September 27, 2023 and December 28, 2022, respectively. | |||||||||||||||||
| Class B common stock, $0.001 par value—35,000,000 shares authorized; 2,834,513 and 2,869,513 shares issued and outstanding as of September 27, 2023 and December 28, 2022, respectively. | |||||||||||||||||
| Additional paid-in capital | |||||||||||||||||
| Accumulated deficit | ( | ( | |||||||||||||||
| Accumulated other comprehensive loss | ( | ||||||||||||||||
| Total stockholders' equity attributable to Shake Shack Inc. | |||||||||||||||||
| Non-controlling interests | |||||||||||||||||
| Total equity | |||||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | |||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Shake Shack Inc. Form 10-Q | 3
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(in thousands, except per share amounts)
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | ||||||||||||||||||||||||||
| Shack sales | $ | $ | $ | $ | |||||||||||||||||||||||||
| Licensing revenue | |||||||||||||||||||||||||||||
| TOTAL REVENUE | |||||||||||||||||||||||||||||
| Shack-level operating expenses: | |||||||||||||||||||||||||||||
| Food and paper costs | |||||||||||||||||||||||||||||
| Labor and related expenses | |||||||||||||||||||||||||||||
| Other operating expenses | |||||||||||||||||||||||||||||
| Occupancy and related expenses | |||||||||||||||||||||||||||||
| General and administrative expenses | |||||||||||||||||||||||||||||
| Depreciation and amortization expense | |||||||||||||||||||||||||||||
| Pre-opening costs | |||||||||||||||||||||||||||||
| Impairment and loss on disposal of assets | |||||||||||||||||||||||||||||
| TOTAL EXPENSES | |||||||||||||||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | ( | ( | |||||||||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | ( | ( | |||||||||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | |||||||||||||||||||||||||||
| NET INCOME (LOSS) | ( | ( | |||||||||||||||||||||||||||
| Less: Net income (loss) attributable to non-controlling interests | ( | ( | |||||||||||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
| Earnings (loss) per share of Class A common stock: | |||||||||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
| Weighted average shares of Class A common stock outstanding: | |||||||||||||||||||||||||||||
| Basic | |||||||||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4 | Shake Shack Inc. Form 10-Q
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(in thousands)
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | ||||||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
Other comprehensive income (loss), net of tax(1): | |||||||||||||||||||||||||||||
| Change in foreign currency translation adjustment | ( | ( | |||||||||||||||||||||||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | ( | ( | |||||||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) | ( | ( | |||||||||||||||||||||||||||
| Less: Comprehensive income (loss) attributable to non-controlling interests | ( | ( | |||||||||||||||||||||||||||
| COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
(1)Net of tax expense of $0
See accompanying Notes to Condensed Consolidated Financial Statements.
Shake Shack Inc. Form 10-Q | 5
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except share amounts)
For the Thirteen Weeks Ended September 27, 2023 and September 28, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Non- Controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, JUNE 28, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net change in foreign currency translation adjustment | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Activity under stock compensation plans | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of LLC Interests | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions paid to non-controlling interest holders | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, SEPTEMBER 27, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, JUNE 29, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net change in foreign currency translation adjustment | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Activity under stock compensation plans | — | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of LLC Interests | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions paid to non-controlling interest holders | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, SEPTEMBER 28, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
6 | Shake Shack Inc. Form 10-Q
For the Thirty-Nine Weeks Ended September 27, 2023 and September 28, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In Capital | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Income (Loss) | Non- Controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, DECEMBER 28, 2022 | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net change in foreign currency translation adjustment | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Activity under stock compensation plans | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of LLC Interests | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions paid to non-controlling interest holders | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, SEPTEMBER 27, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, DECEMBER 29, 2021 | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net change in foreign currency translation adjustment | — | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Activity under stock compensation plans | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Redemption of LLC Interests | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis | — | — | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Distributions paid to non-controlling interest holders | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| BALANCE, SEPTEMBER 28, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
Shake Shack Inc. Form 10-Q | 7
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||
| September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| OPERATING ACTIVITIES | ||||||||||||||||||||||||||
| Net income (loss) (including amounts attributable to non-controlling interests) | $ | $ | ( | |||||||||||||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | ||||||||||||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||||||||||||
| Amortization of debt issuance costs | ||||||||||||||||||||||||||
| Amortization of cloud computing asset | ||||||||||||||||||||||||||
| Non-cash operating lease cost | ||||||||||||||||||||||||||
| Equity-based compensation | ||||||||||||||||||||||||||
| Deferred income taxes | ||||||||||||||||||||||||||
| Non-cash interest expense | ||||||||||||||||||||||||||
| Gain on sale of equity securities | ( | |||||||||||||||||||||||||
| Net amortization of discount on held-to-maturity securities | ( | |||||||||||||||||||||||||
| Impairment and loss on disposal of assets | ||||||||||||||||||||||||||
| Unrealized loss on equity securities | ||||||||||||||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||||||||
| Accounts receivable | ( | |||||||||||||||||||||||||
| Inventories | ( | ( | ||||||||||||||||||||||||
| Prepaid expenses and other current assets | ( | ( | ||||||||||||||||||||||||
| Other assets | ( | ( | ||||||||||||||||||||||||
| Accounts payable | ( | ( | ||||||||||||||||||||||||
| Accrued expenses | ( | ( | ||||||||||||||||||||||||
| Accrued wages and related liabilities | ||||||||||||||||||||||||||
| Other current liabilities | ( | |||||||||||||||||||||||||
| Operating lease liabilities | ( | ( | ||||||||||||||||||||||||
| Other long-term liabilities | ( | |||||||||||||||||||||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | ||||||||||||||||||||||||||
| INVESTING ACTIVITIES | ||||||||||||||||||||||||||
| Purchases of property and equipment | ( | ( | ||||||||||||||||||||||||
| Purchases of held-to-maturity securities | ( | |||||||||||||||||||||||||
| Purchases of equity securities | ( | ( | ||||||||||||||||||||||||
| Sales of equity securities | ||||||||||||||||||||||||||
| NET CASH USED IN INVESTING ACTIVITIES | ( | ( | ||||||||||||||||||||||||
| FINANCING ACTIVITIES | ||||||||||||||||||||||||||
| Payments on principal of finance leases | ( | ( | ||||||||||||||||||||||||
| Distributions paid to non-controlling interest holders | ( | ( | ||||||||||||||||||||||||
| Proceeds from stock option exercises | ||||||||||||||||||||||||||
| Employee withholding taxes related to net settled equity awards | ( | ( | ||||||||||||||||||||||||
| NET CASH USED IN FINANCING ACTIVITIES | ( | ( | ||||||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | ||||||||||||||||||||||||
| DECREASE IN CASH AND CASH EQUIVALENTS | ( | ( | ||||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | ||||||||||||||||||||||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | $ | ||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
8 | Shake Shack Inc. Form 10-Q
SHAKE SHACK INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
| Page | ||||||||
Shake Shack Inc. Form 10-Q | 9
NOTE 1: NATURE OF OPERATIONS
Shake Shack Inc. was formed on September 23, 2014 as a Delaware corporation for the purpose of facilitating an initial public offering and other related transactions in order to carry on the business of SSE Holdings, LLC and its subsidiaries ("SSE Holdings"). Shake Shack Inc. is the sole managing member of SSE Holdings and, as sole managing member, the Company operates and controls all of the business and affairs of SSE Holdings. As a result, the Company consolidates the financial results of SSE Holdings and reports a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. As of September 27, 2023 the Company owned 93.3 % of SSE Holdings. Unless the context otherwise requires, "we," "us," "our," "Shake Shack," the "Company" and other similar references, refer to Shake Shack Inc. and, unless otherwise stated, all of its subsidiaries, including SSE Holdings.
The Company operates and licenses Shake Shack restaurants ("Shacks"), which serve burgers, chicken, hot dogs, crinkle cut fries, shakes, frozen custard, beer, wine and more. As of September 27, 2023, there were 495 Shacks in operation system-wide, of which 280 were domestic Company-operated Shacks, 39 were domestic licensed Shacks and 176 were international licensed Shacks.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of Shake Shack Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and on a basis consistent in all material respects with the accounting policies described in its Annual Report on Form 10-K for the fiscal year ended December 28, 2022 ("2022 Form 10-K"). Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These interim Condensed Consolidated Financial Statements should be read in conjunction with the consolidated financial statements and related notes thereto included in its 2022 Form 10-K. In the Company's opinion, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the financial position and results of operation have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.
The Company has elected to reclassify certain marketing expenses for prior periods to conform with the presentation for the thirteen and thirty-nine weeks ended September 27, 2023. These reclassifications had no effect on previously reported Net Loss. For the thirteen and thirty-nine weeks ended September 28, 2022, the Company reclassified $286 and $764 , respectively from Other operating expenses to General and administrative expenses in the accompanying Condensed Consolidated Statements of Income (Loss).
SSE Holdings is considered a variable interest entity. Shake Shack Inc. is the primary beneficiary as the Company has the majority economic interest in SSE Holdings and, as the sole managing member, has decision making authority that significantly affects the economic performance of the entity, while the limited partners have no substantive kick-out or participating rights. As a result, the Company consolidates SSE Holdings. The assets and liabilities of SSE Holdings represent substantially all of the Company's consolidated assets and liabilities with the exception of certain deferred taxes and liabilities under the Tax Receivable Agreement. As of September 27, 2023 and December 28, 2022, the net assets of SSE Holdings were $384,222 and $362,571 , respectively. The assets of SSE Holdings are subject to certain restrictions in SSE Holdings' revolving credit agreement.
Fiscal Year
The Company operates on a 52/53 week fiscal year ending on the last Wednesday of December. Fiscal 2023 contains 52 weeks and ends on December 27, 2023. Fiscal 2022 contained 52 weeks and ended on December 28, 2022. Unless otherwise stated, references to years in this report relate to fiscal years.
10 | Shake Shack Inc. Form 10-Q
Use of Estimates
The preparation of these Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 3: REVENUE
Revenue Recognition
Revenue primarily consists of Shack sales and Licensing revenue. Generally, revenue is recognized as promised goods or services transfer to the guest or customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
Revenue from Shack sales is recognized when payment is tendered at the point of sale, net of discounts as the performance obligation has been satisfied at that time. Sales tax collected from guests is excluded from Shack sales and the obligation is included as sales tax payable until the taxes are remitted to the appropriate taxing authorities.
Delivery services are fulfilled by third-party delivery partners whether ordered through the Shack app and website ("Company-owned platforms") or through third-party delivery platforms. Revenue from orders through Company-owned platforms includes delivery fees and is recognized when the delivery partner transfers the order to the guest as the Company controls the delivery. For these sales, the Company receives payment directly from the guest at the time of sale. Revenue from orders through third-party delivery platforms is recognized when the order is transferred to the third-party delivery partner and excludes delivery fees collected by the delivery partner as the Company does not control the delivery. The Company receives payment from the delivery partner subsequent to the transfer of the order and the payment terms are short-term in nature. For all delivery sales, the Company is considered the principal and recognizes the revenue on a gross basis.
The Company sells gift cards which do not have expiration dates. Revenue from gift cards is recognized when gift cards are redeemed by the customer or, in the event a gift card is not expected to be redeemed, in proportion to actual redemptions of gift cards ("gift card breakage"). The gift card breakage rate is determined from historical gift card redemption patterns. Gift card breakage income for the thirteen weeks ended September 27, 2023 and September 28, 2022 was $60 and $47 , respectively. Gift card breakage income for the thirty-nine weeks ended September 27, 2023 and September 28, 2022 was $238 and $1,415 , respectively. The thirty-nine weeks ended September 28, 2022 included a cumulative catch-up adjustment of $1,281 . Gift card breakage income is included in Shack sales in the Condensed Consolidated Statements of Income (Loss).
Licensing revenue includes initial territory fees, Shack opening fees and ongoing sales-based royalty fees from licensed Shacks. Generally, the licenses granted to develop, open and operate each Shack in a specified territory are the predominant good or service transferred to the licensee and represent distinct performance obligations. Ancillary promised services, such as training and assistance during the initial opening of a Shack, are typically combined with the license and considered one performance obligation per Shack. The Company determines the transaction price for each contract, which is comprised of the initial territory fee and an estimate of the total Shack opening fees the Company expects to be entitled to. The calculation of total Shack opening fees included in the transaction price requires judgment, as it is based on an estimated number of Shacks the Company expects the licensee to open. The transaction price is then allocated equally to each Shack expected to open. The performance obligation is satisfied over time, starting when a Shack opens through the end of the license term for the related Shack, therefore revenue is recognized on a straight-line basis over the license term. Generally, payment for the initial territory fee is received upon execution of the license agreement and payment for the Shack opening fees is received either in advance of or upon
Shake Shack Inc. Form 10-Q | 11
opening the related Shack. These payments are initially deferred and recognized in revenue as the performance obligations are satisfied. Revenue from sales-based royalties is recognized as the related sales occur.
Revenue disaggregated by type was as follows:
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||
| September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | ||||||||||||||||||||
| Shack sales | $ | $ | $ | $ | |||||||||||||||||||
| Licensing revenue: | |||||||||||||||||||||||
| Sales-based royalties | |||||||||||||||||||||||
| Initial territory and opening fees | |||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | |||||||||||||||||||
The aggregate amount of the transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied as of September 27, 2023 was $23,608 . The Company expects to recognize this amount as revenue over a long-term period, as the license term for each Shack ranges from 5 to 20 years. This amount excludes any variable consideration related to sales-based royalties.
Contract Balances
Contract liabilities and receivables from contracts with customers were as follows:
| September 27 2023 | December 28 2022 | |||||||||||||
| Shack sales receivables | $ | $ | ||||||||||||
| Licensing receivables, net of allowance for doubtful accounts | ||||||||||||||
| Gift card liability | ||||||||||||||
| Deferred revenue, current | ||||||||||||||
| Deferred revenue, long-term | ||||||||||||||
Revenue recognized that was included in the respective liability balances at the beginning of the period was as follows:
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||
| September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | ||||||||||||||||||||
Gift card liability(1) | $ | $ | $ | $ | |||||||||||||||||||
| Deferred revenue | |||||||||||||||||||||||
(1)For the thirty-nine weeks ended September 28, 2022, amount includes the cumulative catch-up adjustment of $1,281 for gift card breakage income.
NOTE 4: FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The carrying values of the Company's Cash and cash equivalents, Accounts receivable, net, Accounts payable and Accrued expenses approximate fair value due to the short-term nature of these financial instruments.
12 | Shake Shack Inc. Form 10-Q
The Company's investments were as follows:
| September 27 2023 | December 28 2022 | ||||||||||||||||
| Equity securities | $ | $ | |||||||||||||||
| Held-to-maturity securities | |||||||||||||||||
| Total investments | $ | $ | |||||||||||||||
The Company classified its available-for-sale and held-to-maturity securities as Level 1 measurements within the fair value hierarchy. Refer to Note 6, Debt, for additional information relating to the fair value of the Company's outstanding debt instruments.
The Company's held-to-maturity securities were as follows:
| September 27, 2023 | ||||||||||||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | |||||||||||||||||||||||
| U.S. Treasuries | $ | $ | $ | $ | ||||||||||||||||||||||
As of September 27, 2023, the contractual maturities of held-to-maturity securities were less than 12 months. Any expected credit losses would not be material to the Condensed Consolidated Statements of Income (Loss).
A summary of other income (expense) from investments was as follows:
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||
| September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | ||||||||||||||||||||
| Income from investments | $ | $ | $ | $ | |||||||||||||||||||
| Realized gain on sale of equity securities | |||||||||||||||||||||||
| Unrealized gain (loss) on equity securities | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
NOTE 5: SUPPLEMENTAL BALANCE SHEET INFORMATION
The components of Prepaid expenses and other current assets were as follows:
| September 27 2023 | December 28 2022 | ||||||||||
Prepaid expenses | $ | $ | |||||||||
Tenant allowance receivables | |||||||||||
Other | |||||||||||
Prepaid expenses and other current assets | $ | $ | |||||||||
Shake Shack Inc. Form 10-Q | 13
The components of Other current liabilities were as follows:
| September 27 2023 | December 28 2022 | ||||||||||
| Sales tax payable | $ | $ | |||||||||
| Gift card liability | |||||||||||
| Legal reserve | |||||||||||
| Other | |||||||||||
| Other current liabilities | $ | $ | |||||||||
The components of Other long-term liabilities were as follows:
| September 27 2023 | December 28 2022 | ||||||||||
| Deferred licensing revenue | $ | $ | |||||||||
| Other | |||||||||||
| Other long-term liabilities | $ | $ | |||||||||
NOTE 6: DEBT
Convertible Notes
The Company's $250,000 aggregate principal amount of 0 % Convertible Senior Notes due 2028 (“Convertible Notes”) will mature on March 1, 2028, unless earlier converted, redeemed or repurchased in certain circumstances. Upon conversion, the Company pays or delivers, as the case may be, cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at the Company's election.
The Convertible Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding December 1, 2027, only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on June 30, 2021 (and only during such fiscal quarter), if the last reported sale price of the Company's Class A common stock, par value $0.001 per share, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price for the Convertible Notes on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per one thousand dollar principal amount of the Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of Class A common stock and the conversion rate for the Convertible Notes on each such trading day; (3) if the Company calls such Convertible Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the Convertible Notes called (or deemed called) for redemption; and (4) upon the occurrence of specified corporate events as set forth in the Indenture. On or after December 1, 2027, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders of the Convertible Notes may convert all or any portion of their Convertible Notes at any time, regardless of the foregoing circumstances.
The Convertible Notes had an initial conversion rate of 5.8679 shares of Class A common stock per one thousand dollar principal amount of Convertible Notes, which is equivalent to an initial conversion price of approximately $170.42 per share of Class A common stock. The fair value of the Convertible Notes was approximately $181,408 and $162,500 , respectively, as of September 27, 2023 and December 28, 2022, based on external pricing data, including available quoted market prices of these instruments, and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as a Level 2 measurement within the fair value hierarchy.
14 | Shake Shack Inc. Form 10-Q
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| Classification | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Amortization expense on Convertible Notes | Interest expense | $ | $ | $ | $ | ||||||||||||||||||||||||
| September 27 2023 | December 28 2022 | ||||||||||||||||
| Convertible Notes | $ | $ | |||||||||||||||
| Discount and debt issuance costs, net of amortization | ( | ( | |||||||||||||||
| Long-term debt | $ | $ | |||||||||||||||
Revolving Credit Facility
The Company maintains a revolving credit facility agreement ("Revolving Credit Facility") which permits borrowings up to $50,000 with the ability to increase available borrowings up to an additional $100,000 , subject to satisfaction of certain conditions. The Revolving Credit Facility has a maturity date of March 5, 2026.
During the thirteen weeks ended September 27, 2023, the Company entered into the fourth amendment to the Revolving Credit Facility ("Fourth Amendment"), which, among other things, modifies the benchmark interest rate to either: (i) the base rate plus applicable margin ranging from 0.0 % to 1.5 % or (ii) the Secured Overnight Financing Rate (“SOFR”) plus applicable margin ranging from 1.0 % to 2.5 %, in each case depending on the net lease adjusted leverage ratio. As of September 27, 2023 and December 28, 2022, no
The obligations under the Revolving Credit Facility are secured by a first-priority security interest in substantially all of the assets of SSE Holdings and the guarantors. The obligations under the Revolving Credit Facility are guaranteed by each of SSE Holdings' direct and indirect subsidiaries, with certain exceptions. The Revolving Credit Facility requires the Company to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios, as well as other customary affirmative and negative covenants. As of September 27, 2023, the Company was in compliance with all covenants.
The Revolving Credit Facility also permits the issuance of letters of credit upon our request of up to $15,000 . As of September 27, 2023, the Company had outstanding letters of credit of $3,348 in connection with the Revolving Credit Facility. The Company had outstanding letters of credit of $1,863 in connection with the Revolving Credit Facility as of December 28, 2022.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| Classification | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Interest expense on Revolving Credit Facility | Interest expense | $ | $ | $ | $ | ||||||||||||||||||||||||
| Classification | September 27 2023 | December 28 2022 | |||||||||||||||
| Unamortized deferred financing costs on Revolving Credit Facility | Other assets | $ | $ | ||||||||||||||
NOTE 7: LEASES
Nature of Leases
Shake Shack currently leases all of its domestic Company-operated Shacks, the home office and certain equipment under various non-cancelable lease agreements that expire on various dates through 2044. The Company evaluates contracts entered into to determine whether the contract involves the use of property or equipment, which is either explicitly or implicitly identified in
Shake Shack Inc. Form 10-Q | 15
the contract. The Company evaluates whether it controls the use of the asset, which is determined by assessing whether substantially all economic benefit from the use of the asset is obtained, and whether the Company has the right to direct the use of the asset. If these criteria are met, the Company has identified a lease within the contract, and therefore a right of use asset and lease liability are recorded on the Condensed Consolidated Balance Sheet. Upon possession of a leased asset, the Company determines whether the lease is an operating or finance lease. All of the Company's real estate leases are classified as operating leases and most equipment leases are classified as finance leases.
Generally, real estate leases have initial terms ranging from 10 to 15 years and typically include two five-year renewal options. Renewal options are generally not recognized as part of the right-of-use assets and lease liabilities as it is not reasonably certain at commencement date that the Company would exercise the renewal options. Real estate leases typically contain fixed minimum rent payments and/or contingent rent payments which are based upon sales in excess of specified thresholds. When the achievement of such sales thresholds are deemed to be probable, contingent rent is accrued in proportion to the sales recognized during the period.
For operating leases, fixed lease payments are recognized as operating lease costs on a straight-line basis over the lease term within the Condensed Consolidated Statements of Income (Loss) in the following line items. Lease expense incurred before a Shack opens is recorded in Pre-opening costs. Once a domestic Company-operated Shack opens, the straight-line lease expense and contingent rent, if applicable, are recorded in Occupancy and related expenses. Many of these leases also require the Company to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in Occupancy and related expenses. Finance leases are recognized in depreciation expense on a straight-line basis over the remaining lease term, along with recognition of interest expense associated with accretion of the lease liability.
For both operating and finance leases that contain lease and non-lease components, the components are combined and accounted for as a single lease component. Variable lease costs for both operating and finance leases, if any, are recognized as incurred. Leases with a term of 12 months or less are deemed short-term and are not recognized on the Condensed Consolidated Balance Sheets. Fixed lease payments for short-term leases are recognized on a straight-line basis over the lease term.
The Company calculates operating lease assets and lease liabilities as the present value of fixed lease payments over the reasonably certain lease term beginning at the commencement date. The Company uses its incremental borrowing rate ("IBR") in determining the present value of future lease payments as there are no explicit rates provided in the leases. The IBR used to measure the lease liability is derived from the average of the yield curves obtained from using the notching method and the recovery rate method. The most significant assumption in calculating the IBR is the Company's credit rating and is subject to judgment. The credit rating used to develop the IBR is determined by utilizing the credit ratings of other public companies with similar financial information as SSE Holdings.
The Company expends cash for leasehold improvements to build out and equip leased properties. Generally, a portion of the leasehold improvements and building costs are reimbursed by the landlords through landlord incentives pursuant to agreed-upon terms in the lease agreements. Landlord incentives usually take the form of cash, full or partial credits against future minimum or contingent rents otherwise payable by the Company, or a combination thereof. In most cases, landlord incentives are received after the Company takes possession of the property and as milestones are met during the construction of the property. The Company includes these amounts in the measurement of the initial operating lease liability, and lease asset.
16 | Shake Shack Inc. Form 10-Q
A summary of operating and finance lease assets and lease liabilities were as follows:
| Classification | September 27 2023 | December 28 2022 | ||||||||||||
| Operating leases | $ | $ | ||||||||||||
| Finance leases | ||||||||||||||
| Total right-of-use assets | $ | $ | ||||||||||||
| Operating leases: | ||||||||||||||
| Operating lease liabilities, current | $ | $ | ||||||||||||
| Long-term operating lease liabilities | ||||||||||||||
| Finance leases: | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Total lease liabilities | $ | $ | ||||||||||||
The components of lease expense were as follows:
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| Classification | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Operating lease cost | Occupancy and related expenses Pre-opening costs General and administrative expenses | $ | $ | $ | $ | ||||||||||||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||||||||
| Amortization of right-of-use assets | Depreciation and amortization expense | ||||||||||||||||||||||||||||
| Interest on lease liabilities | Interest expense | ||||||||||||||||||||||||||||
| Variable lease cost | Occupancy and related expenses Pre-opening costs General and administrative expenses | ||||||||||||||||||||||||||||
| Short-term lease cost | Occupancy and related expenses | ||||||||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | |||||||||||||||||||||||||
Shake Shack Inc. Form 10-Q | 17
As of September 27, 2023, future minimum lease payments for operating and finance leases consisted of the following:
| Operating Leases | Finance Leases | ||||||||||
2023(1) | $ | $ | |||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| 2026 | |||||||||||
| 2027 | |||||||||||
| Thereafter | |||||||||||
| Total minimum payments | |||||||||||
| Less: imputed interest | |||||||||||
| Total lease liabilities | $ | $ | |||||||||
(1)Operating leases are net of certain tenant allowance receivables that were reclassified to Other current assets as of September 27, 2023.
As of September 27, 2023 the Company had additional operating lease commitments of $129,245 for non-cancelable leases without a possession date, which commence in 2023 or later. These lease commitments are materially consistent with the leases that have been executed thus far.
A summary of lease terms and discount rates for operating and finance leases were as follows:
| September 27 2023 | December 28 2022 | |||||||||||||
| Weighted average remaining lease term (years): | ||||||||||||||
| Operating leases | ||||||||||||||
| Finance leases | ||||||||||||||
| Weighted average discount rate: | ||||||||||||||
| Operating leases | % | % | ||||||||||||
| Finance leases | % | % | ||||||||||||
Supplemental cash flow information related to leases was as follows:
| Thirty-Nine Weeks Ended | |||||||||||||||||
| September 27 2023 | September 28 2022 | ||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||
| Operating cash flows from operating leases | $ | $ | |||||||||||||||
| Operating cash flows from finance leases | |||||||||||||||||
| Financing cash flows from finance leases | |||||||||||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||||||||
| Operating leases | |||||||||||||||||
| Finance leases | |||||||||||||||||
NOTE 8: NON-CONTROLLING INTERESTS
18 | Shake Shack Inc. Form 10-Q
Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, the Company will receive a corresponding number of LLC Interests, increasing the total ownership interest in SSE Holdings. Changes in the ownership interest in SSE Holdings while the Company retains its controlling interest in SSE Holdings will be accounted for as equity transactions. As such, future redemptions or direct exchanges of LLC Interests in SSE Holdings by the other members of SSE Holdings will result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital.
The following table summarizes the ownership interest in SSE Holdings:
| September 27, 2023 | December 28, 2022 | ||||||||||||||||||||||
| LLC Interests | Ownership % | LLC Interests | Ownership % | ||||||||||||||||||||
| Number of LLC Interests held by Shake Shack Inc. | % | % | |||||||||||||||||||||
| Number of LLC Interests held by non-controlling interest holders | % | % | |||||||||||||||||||||
| Total LLC Interests outstanding | % | % | |||||||||||||||||||||
The weighted average ownership percentages for the applicable reporting periods are used to attribute Net income (loss) and Other comprehensive income (loss) to the non-controlling interest holders.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||
| September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||
| Non-controlling interest holders' weighted average ownership percentages | % | % | % | % | ||||||||||||||||||||||
The following table summarizes the effects of changes in ownership of SSE Holdings on the Company's equity:
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||
| September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||
| Net income (loss) attributable to Shake Shack Inc. | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||
| Unrealized gain (loss) on foreign currency translation adjustment | ( | ( | ||||||||||||||||||||||||
| Transfers (to) from non-controlling interests: | ||||||||||||||||||||||||||
| Increase in additional paid-in capital as a result of the redemption of LLC Interests | ||||||||||||||||||||||||||
| Decrease in additional paid-in capital as a result of activity under its stock compensation plan and the related income tax effects | ( | ( | ( | ( | ||||||||||||||||||||||
| Total effect of changes in ownership interest on equity (loss) attributable to Shake Shack Inc. | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
Shake Shack Inc. Form 10-Q | 19
The following table summarizes the LLC Interests activity:
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||
| September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||
| LLC Interests activity under the Company's stock compensation plan | ||||||||||||||||||||||||||
| Number of LLC Interests received by Shake Shack Inc. | ||||||||||||||||||||||||||
| Redemption and acquisition of LLC Interests | ||||||||||||||||||||||||||
| Number of LLC Interests redeemed by non-controlling interest holders | ||||||||||||||||||||||||||
| Number of LLC Interests received by Shake Shack Inc. | ||||||||||||||||||||||||||
| Issuance of Class A common stock | ||||||||||||||||||||||||||
| Shares of Class A common stock issued in connection with redemptions of LLC Interests | ||||||||||||||||||||||||||
| Cancellation of Class B common stock | ||||||||||||||||||||||||||
| Shares of Class B common stock surrendered and canceled | ||||||||||||||||||||||||||
NOTE 9: EQUITY-BASED COMPENSATION
A summary of equity-based compensation expense by award type was as follows:
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||
| September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||
| Performance stock units | $ | $ | $ | $ | ||||||||||||||||||||||
| Restricted stock units | ||||||||||||||||||||||||||
| Equity-based compensation expense | $ | $ | $ | $ | ||||||||||||||||||||||
| Total income tax benefit recognized related to equity-based compensation | $ | $ | $ | $ | ||||||||||||||||||||||
Equity-based compensation expense recognized was as follows:
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||
| September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||
| General and administrative expenses | $ | $ | $ | $ | ||||||||||||||||||||||
| Labor and related expenses | ||||||||||||||||||||||||||
| Equity-based compensation expense | $ | $ | $ | $ | ||||||||||||||||||||||
20 | Shake Shack Inc. Form 10-Q
NOTE 10: INCOME TAXES
Shake Shack is the sole managing member of SSE Holdings and, as a result, consolidates the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including the Company, on a pro rata basis. The Company is subject to U.S. federal income taxes, in addition to state and local income taxes with respect to its allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by Shake Shack Inc. The Company is also subject to withholding taxes in foreign jurisdictions.
The effective income tax rates for the thirteen weeks ended September 27, 2023 and September 28, 2022 were 6.1 % and 39.5 %, respectively. The decrease was primarily driven by the change in pre-tax income and the impact of permanent differences and discrete expense on pre-tax income for the period compared to pre-tax loss for the same period last year. The Company's ownership interest in SSE Holdings is directly related to its share of the taxable income (loss) of SSE Holdings. The weighted-average ownership interest in SSE Holdings was 93.3 % and 93.2 % for the thirteen weeks ended September 27, 2023 and September 28, 2022, respectively.
The effective income tax rates for the thirty-nine weeks ended September 27, 2023 and September 28, 2022 were 11.3 % and 25.5 %, respectively. The decrease was primarily driven by the change in pre-tax income and the effect of permanent differences, primarily tax credits, on pre-tax income for the period compared to pre-tax loss for the same period last year, as well as a decrease in expense due to tax benefits related to certain windfalls in equity-based compensation. The decrease was partially offset by an increase in the Company's ownership interest in SSE Holdings which increased its share of the taxable income (loss) of SSE Holdings. The Company's weighted-average ownership interest in SSE Holdings was 93.3 % and 93.1 % for the thirty-nine weeks ended September 27, 2023 and September 28, 2022, respectively.
Deferred Tax Assets and Liabilities
During the thirty-nine weeks ended September 27, 2023, the Company acquired an aggregate of 181,270 LLC Interests in connection with the redemption of LLC Interests and activity relating to its stock compensation plan. The Company recognized a deferred tax asset in the amount of $48 associated with the basis difference in its investment in SSE Holdings upon acquisition of these LLC Interests. As of September 27, 2023, the total deferred tax asset related to the basis difference in the Company's investment in SSE Holdings was $83,023 .
During the thirty-nine weeks ended September 27, 2023, the Company also recognized $200 of deferred tax assets related to additional tax basis increases generated from expected future payments under the Tax Receivable Agreement and related deductions for imputed interest on such payments. Refer to "Tax Receivable Agreement," herein for additional information.
The Company evaluates the realizability of its deferred tax assets on a quarterly basis and establishes valuation allowances when it is more likely than not that all or a portion of a deferred tax asset may not be realized. As of September 27, 2023, the Company concluded, based on the weight of all available positive and negative evidence, that all of its deferred tax assets (except for those deferred tax assets relating to certain state tax credits and net operating losses and certain foreign tax credits) are more likely than not to be realized. As such, no additional valuation allowance was recognized.
Tax Receivable Agreement
Pursuant to the Company's election under Section 754 of the Internal Revenue Code (the "Code"), the Company expects to obtain an increase in its share of the tax basis in the net assets of SSE Holdings when LLC Interests are redeemed or exchanged by the other members of SSE Holdings. The Company plans to make an election under Section 754 of the Code for each taxable year in which a redemption or exchange of LLC Interest occurs. The Company intends to treat any redemptions and exchanges of LLC Interests as direct purchases of LLC Interests for U.S. federal income tax purposes. These increases in tax basis may reduce the amounts that would otherwise be paid in the future to various tax authorities. They may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
On February 4, 2015, the Company entered into a tax receivable agreement with certain of the then-existing members of SSE Holdings (the "Tax Receivable Agreement") that provides for the payment by the Company of 85 % of the amount of any tax
Shake Shack Inc. Form 10-Q | 21
benefits that are actually realized, or in some cases are deemed to realize, as a result of (i) increases in the Company's share of the tax basis in the net assets of SSE Holdings resulting from any redemptions or exchanges of LLC Interests, (ii) tax basis increases attributable to payments made under the Tax Receivable Agreement, and (iii) deductions attributable to imputed interest pursuant to the Tax Receivable Agreement (the "TRA Payments"). The Company expects to benefit from the remaining 15 % of any tax benefits that may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in SSE Holdings or the Company. The rights of each member of SSE Holdings that is a party to the Tax Receivable Agreement, are assignable to transferees of their respective LLC Interests.
During the thirty-nine weeks ended September 27, 2023, the Company acquired an aggregate of 35,000 LLC Interests in connection with the redemption of LLC Interests, which resulted in an increase in the tax basis of its investment in SSE Holdings subject to the provisions of the Tax Receivable Agreement. The Company recognized an additional liability in the amount of $721 for the TRA Payments due to the redeeming members, representing 85 % of the aggregate tax benefits the Company expects to realize from the tax basis increases related to the redemption of LLC Interests, after concluding it was probable that such TRA Payments would be paid based on estimates of future taxable income. During the thirty-nine weeks ended September 27, 2023 and September 28, 2022, inclusive of interest, no 235,614 . Refer to Note 13, Commitments and Contingencies, for additional information relating to the liabilities under the Tax Receivable Agreement.
NOTE 11: EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share of Class A common stock is computed by dividing Net income (loss) attributable to Shake Shack Inc. by the weighted average number of shares of Class A common stock outstanding during the period. Diluted earnings (loss) per share of Class A common stock is computed by dividing Net income (loss) attributable to Shake Shack Inc. by the weighted average number of shares of Class A common stock outstanding, adjusted to give effect to potentially dilutive securities.
The following table sets forth reconciliations of the numerators and denominators used to compute basic and diluted earnings (loss) per share of Class A common stock (in thousands, except per share amounts):
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | ||||||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||||||||
| Net income (loss) attributable to Shake Shack Inc.—basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
| Reallocation of net income attributable to non-controlling interests from the assumed conversion of Class B shares | |||||||||||||||||||||||||||||
| Net income (loss) attributable to Shake Shack Inc.—diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
| Denominator: | |||||||||||||||||||||||||||||
| Weighted average shares of Class A common stock outstanding—basic | |||||||||||||||||||||||||||||
| Effect of dilutive securities: | |||||||||||||||||||||||||||||
| Stock options | |||||||||||||||||||||||||||||
| Performance stock units | |||||||||||||||||||||||||||||
| Restricted stock units | |||||||||||||||||||||||||||||
| Convertible Notes | |||||||||||||||||||||||||||||
| Shares of Class B common stock | |||||||||||||||||||||||||||||
| Weighted average shares of Class A common stock outstanding—diluted | |||||||||||||||||||||||||||||
| Earnings (loss) per share of Class A common stock—basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
| Earnings (loss) per share of Class A common stock—diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||
22 | Shake Shack Inc. Form 10-Q
The effect of potential share settlement of the Convertible Notes outstanding for the period is included as potentially dilutive shares of Class A common stock under application of the if-converted method in the computation of diluted earnings (loss) per share, except when the effect would be anti-dilutive. Refer to Note 6, Debt, for additional information.
Shares of Class B common stock do not share in the earnings or losses of Shake Shack and are therefore not participating securities. As such, separate presentation of basic and diluted earnings (loss) per share of Class B common stock under the two-class method has not been presented. However, shares of Class B common stock outstanding for the period are considered potentially dilutive shares of Class A common stock under application of the if-converted method and are included in the computation of diluted earnings (loss) per share, except when the effect would be anti-dilutive.
The following table presents potentially dilutive securities excluded from the computations of diluted earnings (loss) per share of Class A common stock:
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | ||||||||||||||||||||||||||
| Stock options | (2) | (2) | |||||||||||||||||||||||||||
| Performance stock units | (1) | (2) | (1) | (2) | |||||||||||||||||||||||||
| Restricted stock units | (2) | (2) | |||||||||||||||||||||||||||
| Shares of Class B common stock | (2) | (2) | |||||||||||||||||||||||||||
| Convertible notes | (2) | (2) | |||||||||||||||||||||||||||
(1)Number of securities outstanding at the end of the period that were excluded from the computation of diluted earnings (loss) per share of Class A common stock because the performance conditions associated with these awards were not met assuming the end of the reporting period was the end of the performance period.
(2)Number of securities outstanding at the end of the period that were excluded from the computation of diluted loss per share of Class A common stock because the effect would have been anti-dilutive.
NOTE 12: SUPPLEMENTAL CASH FLOW INFORMATION
The following table sets forth supplemental cash flow information:
| Thirty-Nine Weeks Ended | ||||||||||||||
| September 27 2023 | September 28 2022 | |||||||||||||
| Cash paid for: | ||||||||||||||
| Income taxes, net of refunds | $ | $ | ||||||||||||
| Interest, net of amounts capitalized | ||||||||||||||
| Non-cash investing activities: | ||||||||||||||
| Accrued purchases of property and equipment | ||||||||||||||
| Capitalized equity-based compensation | ||||||||||||||
| Non-cash financing activities: | ||||||||||||||
| Establishment of liabilities under tax receivable agreement | ||||||||||||||
Shake Shack Inc. Form 10-Q | 23
NOTE 13: COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company is obligated under various operating leases for Shacks and the home office space, expiring in various years through 2044. Under certain of these leases, the Company is liable for contingent rent based on a percentage of sales in excess of specified thresholds and typically responsible for its proportionate share of real estate taxes, common area maintenance costs and other occupancy costs. Refer to Note 7, Leases, for additional information.
Certain leases require the Company to obtain letters of credit. As of September 27, 2023, the Company held two letters of credit, one for $130 which expires in February 2026 and the second for $603 , which expires in August 2023 and renews automatically for one-year periods through January 2034.
Purchase Commitments
Purchase obligations include legally binding contracts, including commitments for the purchase, construction or remodeling of real estate and facilities, firm minimum commitments for inventory purchases, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. These obligations are generally short-term in nature and are recorded as liabilities when the related goods are received or services rendered. The Company also enters into long-term, exclusive contracts with certain vendors to supply food, beverages and paper goods, obligating the Company to purchase specified quantities.
Legal Contingencies
The Company is subject to various legal proceedings, claims and liabilities, involving employees and guests alike, which arise in the ordinary course of business and are generally covered by insurance. As of September 27, 2023, the amount of the ultimate liability with respect to these matters was not material.
Liabilities under Tax Receivable Agreement
NOTE 14: RELATED PARTY TRANSACTIONS
Union Square Hospitality Group
The Chairman of the Board of Directors serves as the Executive Chairman of Union Square Hospitality Group, LLC. As a result, Union Square Hospitality Group, LLC and its subsidiary, set forth below, are considered related parties.
24 | Shake Shack Inc. Form 10-Q
Hudson Yards Sports and Entertainment
In fiscal 2011, Shake Shack entered into a Master License Agreement (as amended, "MLA") with Hudson Yards Sports and Entertainment LLC ("HYSE") to operate Shake Shack branded limited menu concession stands in sports and entertainment venues within the United States. In February 2019, the agreement was assigned to Hudson Yards Catering ("HYC"), the parent of HYSE. The agreement expires in January 2027 and includes five consecutive five-year renewal options at HYC's option. As consideration for these rights, HYC pays the Company a license fee based on a percentage of net food sales, as defined in the MLA. HYC also pays a percentage of profits on sales of branded beverages, as defined in the MLA.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| Classification | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Amounts received from HYC | Licensing revenue | $ | $ | $ | $ | ||||||||||||||||||||||||
| Classification | September 27 2023 | December 28 2022 | |||||||||||||||
| Amounts due from HYC | Accounts receivable, net | $ | $ | ||||||||||||||
Madison Square Park Conservancy
The Chairman of the Board of Directors serves as a director of the Madison Square Park Conservancy ("MSP Conservancy"), with which Shake Shack has a license agreement and pays license fees to operate the Madison Square Park Shack. No
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| Classification | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Amounts paid to MSP Conservancy | Occupancy and related expenses | $ | $ | $ | $ | ||||||||||||||||||||||||
Olo, Inc.
The Chairman of the Board of Directors serves as a director of Olo, Inc. (formerly known as "Mobo Systems, Inc."), a platform the Company uses in connection with its mobile ordering application.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| Classification | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Amounts paid to Olo, Inc. | Other operating expenses | $ | $ | $ | $ | ||||||||||||||||||||||||
| Classification | September 27 2023 | December 28 2022 | |||||||||||||||
| Amounts due to Olo, Inc. | Accounts payable Accrued expenses | $ | $ | ||||||||||||||
Block, Inc.
The Company's Chief Executive Officer is a member of the board of directors of Block, Inc. (formerly known as "Square, Inc."). The Company currently uses certain point-of-sale applications, payment processing services, hardware and other enterprise platform services in connection with its kiosk technology, sales for certain off-site events and the processing of a limited amount of sales at certain locations.
Shake Shack Inc. Form 10-Q | 25
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| Classification | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Amounts paid to Block, Inc. | Other operating expenses | $ | $ | $ | $ | ||||||||||||||||||||||||
| Classification | September 27 2023 | December 28 2022 | |||||||||||||||
| Amounts due to Block, Inc. | Accounts payable Accrued expenses | $ | $ | ||||||||||||||
Tax Receivable Agreement
The Company entered into a Tax Receivable Agreement that provides for the payment by the Company of 85 % of the amount of any tax benefits that are actually realized, or in some cases are deemed to realize, as a result of certain transactions. Refer to Note 10, Income Taxes, for additional information. No
| Classification | September 27 2023 | December 28 2022 | |||||||||||||||
| Amounts due under the Tax Receivable Agreement | Other current liabilities Liabilities under Tax Receivable Agreement, net of current portion | $ | $ | ||||||||||||||
Distributions to Members of SSE Holdings
Under the terms of the SSE Holdings LLC Agreement, SSE Holdings is obligated to make tax distributions to its members. No tax distributions were payable to non-controlling interest holders as of September 27, 2023 and December 28, 2022, respectively.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| Classification | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Amounts paid to non-controlling interest holders | Non-controlling interests | $ | $ | $ | $ | ||||||||||||||||||||||||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This section and other parts of this Quarterly Report on Form 10-Q ("Form 10-Q") contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), which are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different from the statements made herein. All statements other than statements of historical fact are forward-looking statements including, but not limited to, statements about the Company's growth, strategic plan, and liquidity. Forward-looking statements discuss our current expectations and projections relating to our financial position, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "potential," "project," "projection," "plan," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions.
All forward-looking statements are expressly qualified in their entirety by these cautionary statements. You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2022 ("2022 Form 10-K").
26 | Shake Shack Inc. Form 10-Q
The forward-looking statements included in this Form 10-Q are made only as of the date hereof. We undertake no obligation to publicly update any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law. If we do update one or more forward-looking statements, no inference should be made that we will make additional updates with respect to those or other forward-looking statements.
The following discussion should be read in conjunction with our 2022 Form 10-K and the Condensed Consolidated Financial Statements and notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to our fiscal years and the associated quarters, months and periods of those fiscal years.
OVERVIEW
Shake Shack serves modern, fun and elevated versions of American classics using only the best ingredients. We are known for our made-to-order Angus beef burgers, crispy chicken, hand-spun milkshakes, house-made lemonades, beer, wine, and more. Our fine dining roots and commitment to community building, hospitality and the sourcing of premium ingredients is what we call "fine casual." Fine casual couples the ease, value and convenience of fast casual concepts with the high standards of excellence grounded in our fine dining roots — thoughtful ingredient sourcing and preparation, hospitality and quality.
Our mission is to Stand For Something Good in all aspects of our business, including the exceptional team we hire and train, the premium ingredients making up our menu, our community engagement and the design of our Shacks. Stand For Something Good is a call to action for all of our stakeholders — our team, guests, communities, suppliers and investors — and we actively invite them all to share in this philosophy with us. This commitment drives our integration into the local communities in which we operate and fosters a deep and lasting connection with our guests.
The following definitions apply to these terms as used herein:
"Average weekly sales" is calculated by dividing total Shack sales by the number of operating weeks for all Shacks in operation during the period. For Shacks that are not open for the entire period, fractional adjustments are made to the number of operating weeks open such that it corresponds to the period of associated sales.
"Same-Shack sales" represents Shack sales for the comparable Shack base, which is defined as the number of domestic Company-operated Shacks open for 24 full fiscal months or longer. For consecutive days that Shacks were temporarily closed, the comparative period was also adjusted.
“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 licensing revenue based on a percentage of sales from domestic and international licensed Shacks, as well as certain up-front fees, such as territory fees and opening fees.
As of September 27, 2023, there were 495 Shacks in operation system-wide, of which 280 were domestic Company-operated Shacks, 39 were domestic licensed Shacks and 176 were international licensed Shacks.
Recent Business Trends
Same-Shack sales for the thirteen weeks ended September 27, 2023 increased 2.3% compared to the same period last year, driven by a 6.5% increase in price mix partially offset by a 4.2% decrease in guest traffic. Compared to the same period last year, same-Shack sales at suburban Shacks increased 3.7% while urban Shacks increased 1.0%. Same-Shack sales during the thirteen weeks ended September 27, 2023 slowed when compared to the thirteen weeks ended June 28, 2023, driven by decreased guest traffic across urban and suburban Shacks partially offset by price mix. For the purpose of calculating same-Shack sales for the thirteen weeks ended September 27, 2023, Shack sales for 202 Shacks were included in the comparable Shack base.
Average weekly sales were $74,000 for the thirteen weeks ended September 27, 2023 compared to $73,000 in the same period last year, primarily driven by higher menu prices, partially offset by a decline in guest traffic. Average weekly sales decreased 3.9%, compared to the thirteen weeks ended June 28, 2023, driven by a decline in guest traffic across all domestic Company-operated Shacks partially offset by price mix.
Shake Shack Inc. Form 10-Q | 27
System-wide sales for the thirteen weeks ended September 27, 2023 increased 24.3% to $438.9 million compared to the same period last year and increased 2.9% compared to the thirteen weeks ended June 28, 2023.
Digital sales for the thirteen weeks ended September 27, 2023 increased 5.4% to $83.2 million compared to the same period last year and decreased 4.3% compared to the thirteen weeks ended June 28, 2023. Total digital sales includes orders placed on the Shake Shack app, website and third-party delivery platforms, which represented 31.4% of Shack sales during the thirteen weeks ended September 27, 2023.
Development Highlights
During the third quarter of 2023, we opened 10 new domestic Company-operated Shacks, four new domestic licensed Shacks and 11 new international licensed Shacks. There was one permanent international licensed Shack closure in the third quarter of 2023.
| Location | Type | Opening Date | ||||||||||||
| New Baltimore, NY — New Baltimore Travel Plaza | Domestic Licensed | 6/29/2023 | ||||||||||||
| Culver City, CA — Downtown Culver City | Domestic Company-operated | 7/5/2023 | ||||||||||||
| North Wales, PA — Montgomeryville | Domestic Company-operated | 7/6/2023 | ||||||||||||
| Los Angeles, CA — Koreatown | Domestic Company-operated | 7/12/2023 | ||||||||||||
| Guangzhou, China — Taikoo Hui | International Licensed | 7/15/2023 | ||||||||||||
| Al Ahmadi, Kuwait — Ahmadi Park | International Licensed | 7/16/2023 | ||||||||||||
| Paradise Island, Bahamas — Atlantis | International Licensed | 7/20/2023 | ||||||||||||
| Hong Kong, China — Metroplaza | International Licensed | 7/22/2023 | ||||||||||||
| Houston, TX — Katy Freeway | Domestic Company-operated | 7/25/2023 | ||||||||||||
| San Marcos, TX — San Marcos | Domestic Company-operated | 7/27/2023 | ||||||||||||
| Shanghai, China — Raffles City | International Licensed | 7/28/2023 | ||||||||||||
| Chengdu, China — MixC | International Licensed | 7/28/2023 | ||||||||||||
| Cranston, RI — Garden City | Domestic Company-operated | 8/8/2023 | ||||||||||||
| Oceanside, NY — Oceanside | Domestic Company-operated | 8/13/2023 | ||||||||||||
| Incheon, South Korea — Incheon International Airport (Terminal 1) | International Licensed | 8/14/2023 | ||||||||||||
| Al Ahmadi, Kuwait — The Warehouse Mall | International Licensed | 8/16/2023 | ||||||||||||
| Beijing, China — Livat | International Licensed | 8/19/2023 | ||||||||||||
| New York, NY — Lower East Side | Domestic Company-operated | 8/25/2023 | ||||||||||||
| Manila, Philippines — Araneta | International Licensed | 8/25/2023 | ||||||||||||
| Union, NJ — Whitney Houston Travel Area | Domestic Licensed | 8/30/2023 | ||||||||||||
| Lynnwood, WA — Alderwood Mall | Domestic Company-operated | 9/5/2023 | ||||||||||||
| Riverton, UT — Mountain View Village | Domestic Company-operated | 9/11/2023 | ||||||||||||
| Cherry Hill, NJ — Walt Whitman Travel Plaza | Domestic Licensed | 9/14/2023 | ||||||||||||
| East Brunswick, NJ — Joyce Kilmer Travel Plaza | Domestic Licensed | 9/22/2023 | ||||||||||||
| Hainan, China — Sanya | International Licensed | 9/23/2023 | ||||||||||||
28 | Shake Shack Inc. Form 10-Q
RESULTS OF OPERATIONS
The following table summarizes our results of operations for the thirteen and thirty-nine weeks ended September 27, 2023 and September 28, 2022:
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | ||||||||||||||||||||||||||||||||||
| Shack sales | $ | 264,980 | 95.9 | % | $ | 219,501 | 96.4 | % | $ | 771,044 | 96.2 | % | $ | 639,346 | 96.6 | % | ||||||||||||||||||||||
| Licensing revenue | 11,227 | 4.1 | % | 8,313 | 3.6 | % | 30,246 | 3.8 | % | 22,611 | 3.4 | % | ||||||||||||||||||||||||||
| TOTAL REVENUE | 276,207 | 100.0 | % | 227,814 | 100.0 | % | 801,290 | 100.0 | % | 661,957 | 100.0 | % | ||||||||||||||||||||||||||
Shack-level operating expenses(1): | ||||||||||||||||||||||||||||||||||||||
| Food and paper costs | 77,180 | 29.1 | % | 67,774 | 30.9 | % | 224,752 | 29.1 | % | 193,645 | 30.3 | % | ||||||||||||||||||||||||||
Labor and related expenses(2) | 76,233 | 28.8 | % | 64,638 | 29.4 | % | 225,655 | 29.3 | % | 190,954 | 29.9 | % | ||||||||||||||||||||||||||
| Other operating expenses | 37,307 | 14.1 | % | 33,680 | 15.3 | % | 108,352 | 14.1 | % | 96,002 | 15.0 | % | ||||||||||||||||||||||||||
| Occupancy and related expenses | 20,300 | 7.7 | % | 17,337 | 7.9 | % | 58,684 | 7.6 | % | 50,270 | 7.9 | % | ||||||||||||||||||||||||||
General and administrative expenses(2) | 30,939 | 11.2 | % | 26,931 | 11.8 | % | 93,726 | 11.7 | % | 87,804 | 13.3 | % | ||||||||||||||||||||||||||
| Depreciation and amortization expense | 23,130 | 8.4 | % | 18,647 | 8.2 | % | 66,704 | 8.3 | % | 53,589 | 8.1 | % | ||||||||||||||||||||||||||
| Pre-opening costs | 4,969 | 1.8 | % | 3,041 | 1.3 | % | 14,103 | 1.8 | % | 8,576 | 1.3 | % | ||||||||||||||||||||||||||
| Impairment and loss on disposal of assets | 492 | 0.2 | % | 592 | 0.3 | % | 2,098 | 0.3 | % | 1,697 | 0.3 | % | ||||||||||||||||||||||||||
| TOTAL EXPENSES | 270,550 | 98.0 | % | 232,640 | 102.1 | % | 794,074 | 99.1 | % | 682,537 | 103.1 | % | ||||||||||||||||||||||||||
| INCOME (LOSS) FROM OPERATIONS | 5,657 | 2.0 | % | (4,826) | (2.1) | % | 7,216 | 0.9 | % | (20,580) | (3.1) | % | ||||||||||||||||||||||||||
| Other income, net | 3,441 | 1.2 | % | 1,482 | 0.7 | % | 9,505 | 1.2 | % | 1,731 | 0.3 | % | ||||||||||||||||||||||||||
| Interest expense | (433) | (0.2) | % | (475) | (0.2) | % | (1,241) | (0.2) | % | (1,145) | (0.2) | % | ||||||||||||||||||||||||||
| INCOME (LOSS) BEFORE INCOME TAXES | 8,665 | 3.1 | % | (3,819) | (1.7) | % | 15,480 | 1.9 | % | (19,994) | (3.0) | % | ||||||||||||||||||||||||||
| Income tax expense (benefit) | 529 | 0.2 | % | (1,508) | (0.7) | % | 1,743 | 0.2 | % | (5,098) | (0.8) | % | ||||||||||||||||||||||||||
| NET INCOME (LOSS) | 8,136 | 2.9 | % | (2,311) | (1.0) | % | 13,737 | 1.7 | % | (14,896) | (2.3) | % | ||||||||||||||||||||||||||
| Less: Net income (loss) attributable to non-controlling interests | 509 | 0.2 | % | (287) | (0.1) | % | 696 | 0.1 | % | (1,522) | (0.2) | % | ||||||||||||||||||||||||||
| NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | $ | 7,627 | 2.8 | % | $ | (2,024) | (0.9) | % | $ | 13,041 | 1.6 | % | $ | (13,374) | (2.0) | % | ||||||||||||||||||||||
(1)As a percentage of Shack sales.
(2)The Company elected to reclassify certain marketing expenses for prior periods to conform with the presentation for the thirteen and thirty-nine weeks ended September 27, 2023. These reclassifications had no effect on previously reported Net Loss. For the thirteen and thirty-nine weeks ended September 28, 2022, the Company reclassified $286 and $764, respectively, from Other operating expenses to General and administrative expenses in the accompanying Condensed Consolidated Financial Statements.
Shack Sales
Shack sales represent the aggregate sales of food, beverages and Shake Shack branded merchandise at our domestic Company-operated Shacks and gift card breakage income. Shack sales in any period are directly influenced by the number of operating weeks in such period and the total number of open Shacks.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Shack sales | $ | 264,980 | $ | 219,501 | $ | 771,044 | $ | 639,346 | |||||||||||||||||||||
| Percentage of Total revenue | 95.9 | % | 96.4 | % | 96.2 | % | 96.6 | % | |||||||||||||||||||||
| Dollar change compared to prior year | $ | 45,479 | $ | 131,698 | |||||||||||||||||||||||||
| Percentage change compared to prior year | 20.7 | % | 20.6 | % | |||||||||||||||||||||||||
Shake Shack Inc. Form 10-Q | 29
Shack sales for the thirteen weeks ended September 27, 2023 increased 20.7% to $265.0 million versus the same period last year. The increase was primarily due to the opening of 48 new domestic Company-operated Shacks between September 28, 2022 and September 27, 2023, which contributed $40.7 million, as well as increased menu prices, which contributed $20.0 million, partially offset by a decline in guest traffic.
Shack sales for the thirty-nine weeks ended September 27, 2023 increased 20.6% to $771.0 million versus the same period last year. The increase was primarily due to the opening of 48 new domestic Company-operated Shacks between September 28, 2022 and September 27, 2023, which contributed $86.7 million, as well as increased menu prices, which contributed $55.0 million, partially offset by a decrease in items per check.
Licensing Revenue
Licensing revenue is comprised of license fees, opening fees for certain licensed Shacks and territory fees. License fees are calculated as a percentage of sales and territory fees are payments for the exclusive right to develop Shacks in a specific geographic area.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Licensing revenue | $ | 11,227 | $ | 8,313 | $ | 30,246 | $ | 22,611 | |||||||||||||||||||||
| Percentage of Total revenue | 4.1 | % | 3.6 | % | 3.8 | % | 3.4 | % | |||||||||||||||||||||
| Dollar change compared to prior year | $ | 2,914 | $ | 7,635 | |||||||||||||||||||||||||
| Percentage change compared to prior year | 35.1 | % | 33.8 | % | |||||||||||||||||||||||||
Licensing revenue for the thirteen weeks ended September 27, 2023 increased 35.1% to $11.2 million versus the same period last year. Licensing revenue for the thirty-nine weeks ended September 27, 2023 increased 33.8% to $30.2 million versus the same period last year. The increases in Licensing revenue for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to the opening of 45 net new licensed Shacks between September 28, 2022 and September 27, 2023, which contributed $1.9 million and $4.1 million, respectively, as well as higher sales at existing licensed Shacks, particularly domestic airports.
Food and Paper Costs
Food and paper costs include the direct costs associated with food, beverage and packaging of our menu items. The components of Food and paper costs are variable by nature, change with sales volume, are impacted by menu mix, channel mix and fluctuations in commodity costs, as well as geographic scale and proximity.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Food and paper costs | $ | 77,180 | $ | 67,774 | $ | 224,752 | $ | 193,645 | |||||||||||||||||||||
| Percentage of Shack sales | 29.1 | % | 30.9 | % | 29.1 | % | 30.3 | % | |||||||||||||||||||||
| Dollar change compared to prior year | $ | 9,406 | $ | 31,107 | |||||||||||||||||||||||||
| Percentage change compared to prior year | 13.9 | % | 16.1 | % | |||||||||||||||||||||||||
Food and paper costs for the thirteen weeks ended September 27, 2023 increased 13.9% to $77.2 million versus the same period last year. Food and paper costs for the thirty-nine weeks ended September 27, 2023 increased 16.1% to $224.8 million versus the same period last year. The increases for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to the opening of 48 new domestic Company-operated Shacks between September 28, 2022 and September 27, 2023, which contributed approximately $12.2 million and $28.0 million, respectively.
As a percentage of Shack sales, the decreases in Food and paper costs for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily driven by menu price increases partially offset by increased commodity costs, particularly in beef and fries.
30 | Shake Shack Inc. Form 10-Q
Labor and Related Expenses
Labor and related expenses include domestic Company-operated Shack-level hourly and management wage rates, bonuses, payroll taxes, equity-based compensation, workers' compensation expense and medical benefits. As we expect with other variable expense items, labor costs should grow as our Shack sales grow. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs, size and location of the Shack and the performance of our domestic Company-operated Shacks.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Labor and related expenses | $ | 76,233 | $ | 64,638 | $ | 225,655 | $ | 190,954 | |||||||||||||||||||||
| Percentage of Shack sales | 28.8 | % | 29.4 | % | 29.3 | % | 29.9 | % | |||||||||||||||||||||
| Dollar change compared to prior year | $ | 11,595 | $ | 34,701 | |||||||||||||||||||||||||
| Percentage change compared to prior year | 17.9 | % | 18.2 | % | |||||||||||||||||||||||||
Labor and related expenses for the thirteen weeks ended September 27, 2023 increased 17.9% to $76.2 million versus the same period last year. Labor and related expenses for the thirty-nine weeks ended September 27, 2023 increased 18.2% to $225.7 million versus the same period last year. The increases for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to the opening of 48 new domestic Company-operated Shacks between September 28, 2022 and September 27, 2023.
As a percentage of Shack sales, the decreases in Labor and related expenses for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to labor efficiencies and sales leverage partially offset by increased wages.
Other Operating Expenses
Other operating expenses consist of delivery commissions, Shack-level marketing expenses, repairs and maintenance, utilities and other operating expenses incidental to operating our domestic Company-operated Shacks, such as non-perishable supplies, credit card fees and property insurance.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Other operating expenses | $ | 37,307 | $ | 33,680 | $ | 108,352 | $ | 96,002 | |||||||||||||||||||||
| Percentage of Shack sales | 14.1 | % | 15.3 | % | 14.1 | % | 15.0 | % | |||||||||||||||||||||
| Dollar change compared to prior year | $ | 3,627 | $ | 12,350 | |||||||||||||||||||||||||
| Percentage change compared to prior year | 10.8 | % | 12.9 | % | |||||||||||||||||||||||||
Other operating expenses for the thirteen weeks ended September 27, 2023 increased 10.8% to $37.3 million versus the same period last year. Other operating expenses for the thirty-nine weeks ended September 27, 2023 increased 12.9% to $108.4 million versus the same period last year. The increases for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily driven by higher facilities costs, mainly utilities, due to the opening of 48 new domestic Company-operated Shacks between September 28, 2022 and September 27, 2023 as well as increased transaction costs associated with higher sales.
As a percentage of Shack sales, the decrease in Other operating expenses for the thirteen weeks ended September 27, 2023 was primarily driven by decreased repair and maintenance expenses, lower delivery commissions due to a shift in channel mix and sales leverage. As a percentage of Shack sales, the decrease in Other operating expenses for the thirty-nine weeks ended September 27, 2023 was primarily driven by lower delivery commissions as a result of a shift in channel mix, lower repair and maintenance expenses and sales leverage.
Shake Shack Inc. Form 10-Q | 31
Occupancy and Related Expenses
Occupancy and related expenses consist of Shack-level occupancy expenses (including rent, common area expenses and certain local taxes), and exclude occupancy expenses associated with unopened Shacks, which are recorded separately in Pre-opening costs.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Occupancy and related expenses | $ | 20,300 | $ | 17,337 | $ | 58,684 | $ | 50,270 | |||||||||||||||||||||
| Percentage of Shack sales | 7.7 | % | 7.9 | % | 7.6 | % | 7.9 | % | |||||||||||||||||||||
| Dollar change compared to prior year | $ | 2,963 | $ | 8,414 | |||||||||||||||||||||||||
| Percentage change compared to prior year | 17.1 | % | 16.7 | % | |||||||||||||||||||||||||
Occupancy and related expenses for the thirteen weeks ended September 27, 2023 increased 17.1% to $20.3 million versus the same period last year. Occupancy and related expenses for the thirty-nine weeks ended September 27, 2023 increased 16.7% to $58.7 million versus the same period last year. The increases for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to the opening of 48 new domestic Company-operated Shacks between September 28, 2022 and September 27, 2023, which contributed $2.4 million and $5.4 million, respectively.
As a percentage of Shack sales, the decrease in Occupancy and related expenses for the thirteen weeks ended September 27, 2023 was primarily driven by a decrease in base rent and sales leverage. As a percentage of Shack sales, the decrease in Occupancy and related expenses for the thirty-nine weeks ended September 27, 2023 was primarily due to sales leverage and lower base rent, partially offset by an increase in common area maintenance charges.
General and Administrative Expenses
General and administrative expenses consist of costs associated with corporate and administrative functions that support Shack development and operations, as well as equity-based compensation expense.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| General and administrative expenses | $ | 30,939 | $ | 26,931 | $ | 93,726 | $ | 87,804 | |||||||||||||||||||||
| Percentage of Total revenue | 11.2 | % | 11.8 | % | 11.7 | % | 13.3 | % | |||||||||||||||||||||
| Dollar change compared to prior year | $ | 4,008 | $ | 5,922 | |||||||||||||||||||||||||
| Percentage change compared to prior year | 14.9 | % | 6.7 | % | |||||||||||||||||||||||||
General and administrative expenses for the thirteen weeks ended September 27, 2023 increased 14.9% to $30.9 million versus the same period last year. General and administrative expenses for the thirty-nine weeks ended September 27, 2023 increased 6.7% to $93.7 million versus the same period last year. The increase in General and administrative expenses for the thirteen weeks ended September 27, 2023 was primarily due to increased wages and other team costs as well as investments in marketing and technology initiatives. The increase in General and administrative expenses for the thirty-nine weeks ended September 27, 2023 was primarily due to increased wages and other team costs, professional fees related to a non-recurring matter of $2.3 million as well as investments in marketing and technology initiatives, partially offset by lower legal expenses compared to the prior year period.
As a percentage of Total revenue, the decreases in General and administrative expenses for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to sales leverage partially offset by the aforementioned items.
32 | Shake Shack Inc. Form 10-Q
Depreciation and Amortization Expense
Depreciation and amortization expense primarily consists of the depreciation of fixed assets, including leasehold improvements and equipment.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Depreciation and amortization expense | $ | 23,130 | $ | 18,647 | $ | 66,704 | $ | 53,589 | |||||||||||||||||||||
| Percentage of Total revenue | 8.4 | % | 8.2 | % | 8.3 | % | 8.1 | % | |||||||||||||||||||||
| Dollar change compared to prior year | $ | 4,483 | $ | 13,115 | |||||||||||||||||||||||||
| Percentage change compared to prior year | 24.0 | % | 24.5 | % | |||||||||||||||||||||||||
Depreciation and amortization expense for the thirteen weeks ended September 27, 2023 increased 24.0% to $23.1 million versus the same period last year. Depreciation and amortization expense for the thirty-nine weeks ended September 27, 2023 increased 24.5% to $66.7 million versus the same period last year. The increases in Depreciation and amortization expense for the thirteen and thirty-nine weeks ended September 27, 2023 were predominantly due to incremental depreciation of capital expenditures related to the opening of 48 new domestic Company-operated Shacks and technology projects placed into service between September 28, 2022 and September 27, 2023.
As a percentage of Total revenue, the increases in Depreciation and amortization expense for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to the aforementioned items.
Pre-Opening Costs
Pre-opening costs consist primarily of occupancy, manager and team member wages, cookware, travel and lodging costs for our opening training team and other supporting team members, marketing expenses, legal fees and inventory costs incurred prior to the opening of a Shack. All such costs incurred prior to the opening of a domestic Company-operated Shack are expensed in the period in which the expense was incurred. Pre-opening costs can fluctuate significantly from period to period, based on the number and timing of domestic Company-operated Shack openings and the specific pre-opening costs incurred for each domestic Company-operated Shack. Additionally, domestic Company-operated Shack openings in new geographic markets may initially experience higher pre-opening costs than our established geographic markets, such as the New York City metropolitan area, where we have greater economies of scale and incur lower travel and lodging costs for our training team.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Pre-opening costs | $ | 4,969 | $ | 3,041 | $ | 14,103 | $ | 8,576 | |||||||||||||||||||||
| Percentage of Total revenue | 1.8 | % | 1.3 | % | 1.8 | % | 1.3 | % | |||||||||||||||||||||
| Dollar change compared to prior year | $ | 1,928 | $ | 5,527 | |||||||||||||||||||||||||
| Percentage change compared to prior year | 63.4 | % | 64.4 | % | |||||||||||||||||||||||||
Pre-opening costs for the thirteen weeks ended September 27, 2023 increased 63.4% to $5.0 million versus the same period last year. Pre-opening costs for the thirty-nine weeks ended September 27, 2023 increased 64.4% to $14.1 million versus the same period last year. The increase in Pre-opening costs for the thirteen weeks ended September 27, 2023 was primarily due to increased wages and benefits for our Shack teams related to the timing of Shack openings throughout the year, legal costs and travel costs, partially offset by a decrease in occupancy expense related to the timing of Shack openings throughout the year, compared to the prior-year period. The increase in Pre-opening costs for the thirty-nine weeks ended September 27, 2023 was primarily due to increases in wages and benefits for our Shack teams and occupancy expense related to the timing of Shack openings throughout the year, legal costs and smallwares compared to the prior-year period.
Impairment and Loss on Disposal of Assets
Impairment and loss on disposal of assets consist of impairment charges related to our long-lived assets, which includes property and equipment, as well as operating and finance lease assets. Additionally, Impairment and loss on disposal of assets includes
Shake Shack Inc. Form 10-Q | 33
the net book value of assets that have been retired which primarily consists of furniture, equipment and fixtures that were replaced in the normal course of business.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Impairment and loss on disposal of assets | $ | 492 | $ | 592 | $ | 2,098 | $ | 1,697 | |||||||||||||||||||||
| Percentage of Total revenue | 0.2 | % | 0.3 | % | 0.3 | % | 0.3 | % | |||||||||||||||||||||
| Dollar change compared to prior year | $ | (100) | $ | 401 | |||||||||||||||||||||||||
| Percentage change compared to prior year | (16.9) | % | 23.6 | % | |||||||||||||||||||||||||
Impairment and loss on disposal of assets for the thirteen weeks ended September 27, 2023 decreased 16.9% to $0.5 million versus the same period last year. Impairment and loss on disposal of assets for the thirty-nine weeks ended September 27, 2023 increased 23.6% to $2.1 million versus the same period last year. The decrease in Impairment and loss on disposal of assets for the thirteen weeks ended September 27, 2023 was primarily due to a reduction in abandoned construction projects in the current year compared to the prior year. The increase in Impairment and loss on disposal of assets for the thirty-nine weeks ended September 27, 2023 was primarily due to the number of Shacks maturing in our base as well as disposal of home office assets.
Other Income, Net
Other income, net consists primarily of interest income, adjustments to liabilities under our tax receivable agreement, dividend income and net unrealized and realized gains and losses from marketable securities.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Other income, net | $ | 3,441 | $ | 1,482 | $ | 9,505 | $ | 1,731 | |||||||||||||||||||||
| Percentage of Total revenue | 1.2 | % | 0.7 | % | 1.2 | % | 0.3 | % | |||||||||||||||||||||
| Dollar change compared to prior year | $ | 1,959 | $ | 7,774 | |||||||||||||||||||||||||
| Percentage change compared to prior year | 132.2 | % | 449.1 | % | |||||||||||||||||||||||||
Other income, net for the thirteen weeks ended September 27, 2023 increased to $3.4 million from $1.5 million. Other income, net for the thirty-nine weeks ended September 27, 2023 increased to $9.5 million from $1.7 million. The increases in Other income, net for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to an increase in income from cash equivalents of $1.2 million and $6.2 million, respectively, from increased interest rates.
Interest Expense
Interest expense generally consists of interest on the current portion of our liabilities under the Tax Receivable Agreement, imputed interest related to our financing equipment leases, amortization of deferred financing costs, interest and fees on our Revolving Credit Facility and amortization of debt issuance costs.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Interest expense | $ | (433) | $ | (475) | $ | (1,241) | $ | (1,145) | |||||||||||||||||||||
| Percentage of Total revenue | (0.2) | % | (0.2) | % | (0.2) | % | (0.2) | % | |||||||||||||||||||||
| Dollar change compared to prior year | $ | 42 | $ | (96) | |||||||||||||||||||||||||
| Percentage change compared to prior year | (8.8) | % | 8.4 | % | |||||||||||||||||||||||||
Interest expense for the thirteen weeks ended September 27, 2023 decreased 8.8% to $0.4 million versus the same period last year. Interest expense for the thirty-nine weeks ended September 27, 2023 increased 8.4% to $1.2 million versus the same period last year. The decrease in Interest expense for the thirteen weeks ended September 27, 2023 was primarily due to decreased various sales tax audit assessment charges, partially offset by increased finance lease charges. The increase in Interest expense for the thirty-nine weeks ended September 27, 2023 was primarily due to increased finance lease charges.
34 | Shake Shack Inc. Form 10-Q
Income Tax Expense (Benefit)
We are the sole managing member of SSE Holdings and, as a result, consolidate the financial results of SSE Holdings. SSE Holdings is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, SSE Holdings is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by SSE Holdings is passed through to and included in the taxable income or loss of its members, including us, on a pro rata basis. We are subject to U.S. federal income taxes, in addition to state and local income taxes with respect to our allocable share of any taxable income or loss of SSE Holdings, as well as any stand-alone income or loss generated by us. We are also subject to withholding taxes in foreign jurisdictions.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Income tax expense (benefit) | $ | 529 | $ | (1,508) | $ | 1,743 | $ | (5,098) | |||||||||||||||||||||
| Percentage of Total revenue | 0.2 | % | (0.7) | % | 0.2 | % | (0.8) | % | |||||||||||||||||||||
| Dollar change compared to prior year | $ | 2,037 | $ | 6,841 | |||||||||||||||||||||||||
| Percentage change compared to prior year | (135.1) | % | (134.2) | % | |||||||||||||||||||||||||
Our effective income tax rates for the thirteen weeks ended September 27, 2023 and September 28, 2022 were 6.1% and 39.5%, respectively. The decrease was primarily driven by the change in pre-tax income and the impact of permanent differences and discrete expense on pre-tax income for the period compared to pre-tax loss for the same period last year. The Company's ownership interest in SSE Holdings is directly related to its share of the taxable income (loss) of SSE Holdings. Our weighted average ownership interest in SSE Holdings was 93.3% and 93.2% for the thirteen weeks ended September 27, 2023 and September 28, 2022, respectively.
Our effective income tax rates for the thirty-nine weeks ended September 27, 2023 and September 28, 2022 were 11.3% and 25.5%, respectively. The decrease was primarily driven by the change in pre-tax income and the effect of permanent differences, primarily tax credits, on pre-tax income for the period compared to pre-tax loss for the same period last year, as well as a decrease in expense due to tax benefits related to certain windfalls in equity-based compensation. The decrease was partially offset by an increase in the Company's ownership interest in SSE Holdings which increased its share of the taxable income (loss) of SSE Holdings. Our weighted average ownership interest in SSE Holdings was 93.3% and 93.1% for the thirty-nine weeks ended September 27, 2023 and September 28, 2022, respectively.
Net Income (Loss) Attributable to Non-Controlling Interests
We are the sole managing member of SSE Holdings and have the sole voting power in, and control the management of, SSE Holdings. Accordingly, we consolidate the financial results of SSE Holdings and report a non-controlling interest on our Condensed Consolidated Statements of Income (Loss), representing the portion of net income (loss) attributable to the other members of SSE Holdings. The Third Amended and Restated Limited Liability Company Agreement of SSE Holdings provides that holders of LLC Interests may, from time to time, require SSE Holdings to redeem all or a portion of their LLC Interests for newly-issued shares of Class A common stock on a one-for-one basis. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest in SSE Holdings. The weighted average ownership percentages for the applicable reporting periods are used to attribute net income (loss) and other comprehensive income (loss) to Shake Shack Inc. and the non-controlling interest holders.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Net income (loss) attributable to non-controlling interests | $ | 509 | $ | (287) | $ | 696 | $ | (1,522) | |||||||||||||||||||||
| Percentage of Total revenue | 0.2 | % | (0.1) | % | 0.1 | % | (0.2) | % | |||||||||||||||||||||
Net income (loss) attributable to non-controlling interests for the thirteen weeks ended September 27, 2023 improved to income of $0.5 million from a loss of $0.3 million in the same period last year. Net income (loss) attributable to non-controlling interests for the thirty-nine weeks ended September 27, 2023 improved to income of $0.7 million from a loss of $1.5 million in the same period last year. The improvements in Net income (loss) attributable to non-controlling interests for the thirteen and thirty-nine weeks ended September 27, 2023 were primarily due to an increase in net results compared to the same periods last year, partially offset by a decrease in the non-controlling interest holders' weighted average ownership, which was 6.7% for the thirteen
Shake Shack Inc. Form 10-Q | 35
and thirty-nine weeks ended September 27, 2023 and 6.8% and 6.9%, respectively for the thirteen and thirty-nine weeks ended September 28, 2022.
NON-GAAP FINANCIAL MEASURES
To supplement the Condensed Consolidated Financial Statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"), we use 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 (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share (collectively the "non-GAAP financial measures").
Shack-Level Operating Profit
Shack-level operating profit, also referred to as restaurant 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 we believe are useful measures to evaluate the performance and profitability of our Shacks. Additionally, Shack-level operating profit and Shack-level operating profit margin are key metrics used internally by our management to develop internal budgets and forecasts, as well as assess the performance of our Shacks relative to budget and against prior periods. It is also used to evaluate team member compensation as it serves as a metric in certain of our performance-based team member bonus arrangements. We believe presentation of Shack-level operating profit and Shack-level operating profit margin provides investors with a supplemental view of our operating performance that can provide meaningful insights to the underlying operating performance of our Shacks, as these measures depict the operating results that are directly impacted by our Shacks and exclude items that may not be indicative of, or are unrelated to, the ongoing operations of our Shacks. It may also assist investors to evaluate our performance relative to peers of various sizes and maturities and provides greater transparency with respect to how our management evaluates our business, as well as our 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 our Shacks. Therefore, this measure may not provide a complete understanding of the operating results of our Company 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 Income (loss) from Operations, the most directly comparable GAAP financial measure, is as follows.
36 | Shake Shack Inc. Form 10-Q
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | ||||||||||||||||||||||
| Income (loss) from operations | $ | 5,657 | $ | (4,826) | $ | 7,216 | $ | (20,580) | ||||||||||||||||||
| Less: | ||||||||||||||||||||||||||
| Licensing revenue | 11,227 | 8,313 | 30,246 | 22,611 | ||||||||||||||||||||||
| Add: | ||||||||||||||||||||||||||
General and administrative expenses(1) | 30,939 | 26,931 | 93,726 | 87,804 | ||||||||||||||||||||||
| Depreciation and amortization expense | 23,130 | 18,647 | 66,704 | 53,589 | ||||||||||||||||||||||
| Pre-opening costs | 4,969 | 3,041 | 14,103 | 8,576 | ||||||||||||||||||||||
| Impairment and loss on disposal of assets | 492 | 592 | 2,098 | 1,697 | ||||||||||||||||||||||
| Shack-level operating profit | $ | 53,960 | $ | 36,072 | $ | 153,601 | $ | 108,475 | ||||||||||||||||||
| Total revenue | $ | 276,207 | $ | 227,814 | $ | 801,290 | $ | 661,957 | ||||||||||||||||||
| Less: Licensing revenue | 11,227 | 8,313 | 30,246 | 22,611 | ||||||||||||||||||||||
| Shack sales | $ | 264,980 | $ | 219,501 | $ | 771,044 | $ | 639,346 | ||||||||||||||||||
Shack-level operating profit margin(2,3) | 20.4 | % | 16.4 | % | 19.9 | % | 17.0 | % | ||||||||||||||||||
(1)The Company has elected to reclassify certain marketing expenses from Other operating expenses to General and administrative expenses in the accompanying Condensed Consolidated Financial Statements for prior periods to be comparable with the classification for the thirteen and thirty-nine weeks ended September 27, 2023.
(2)For the thirty-nine weeks ended September 28, 2022, Shack-level operating profit margin includes a $1,281 cumulative catch-up adjustment for gift card breakage income, recognized in Shack sales.
(3)As a percentage of Shack sales.
EBITDA and Adjusted EBITDA
EBITDA is defined as Net income (loss) before Interest expense (net of interest income), Income tax expense (benefit) and Depreciation and amortization expense. Adjusted EBITDA is defined as EBITDA (as defined above) excluding equity-based compensation expense, Impairment and loss on disposal of assets, amortization of cloud-based software implementation costs, as well as certain non-recurring items that we do not believe directly reflect our core operations and may not be indicative of our recurring business operations.
In the first quarter of 2023, the Company revised its definition of Adjusted EBITDA to exclude deferred lease costs and executive transition costs as adjustments to the measure. The Company believes excluding both of these items improves the usefulness of Adjusted EBITDA as these items are characteristic of the Company’s ongoing operations and such presentation is consistent with other companies in the restaurant industry. Previously reported periods have been revised to conform to the current period presentation.
How These Measures Are Useful
When used in conjunction with GAAP financial measures, EBITDA and adjusted EBITDA are supplemental measures of operating performance that we believe are useful measures to facilitate comparisons to historical performance and competitors' operating results. Adjusted EBITDA is a key metric used internally by our management to develop internal budgets and forecasts and also serves as a metric in our performance-based equity incentive programs and certain of our bonus arrangements. We believe presentation of EBITDA and adjusted EBITDA provides investors with a supplemental view of our operating performance that facilitates analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance.
Shake Shack Inc. Form 10-Q | 37
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 our performance and should be reviewed in conjunction with our GAAP financial measures. A reconciliation of EBITDA and adjusted EBITDA to Net income (loss), the most directly comparable GAAP measure, is as follows.
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||
| (dollar amounts in thousands) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | ||||||||||||||||||||||
| Net income (loss) | $ | 8,136 | $ | (2,311) | $ | 13,737 | $ | (14,896) | ||||||||||||||||||
| Depreciation and amortization expense | 23,130 | 18,647 | 66,704 | 53,589 | ||||||||||||||||||||||
| Interest expense, net | (845) | 475 | (164) | 1,145 | ||||||||||||||||||||||
| Income tax expense (benefit) | 529 | (1,508) | 1,743 | (5,098) | ||||||||||||||||||||||
| EBITDA | 30,950 | 15,303 | 82,020 | 34,740 | ||||||||||||||||||||||
| Equity-based compensation | 3,691 | 3,515 | 11,425 | 10,155 | ||||||||||||||||||||||
| Amortization of cloud-based software implementation costs | 440 | 397 | 1,320 | 1,080 | ||||||||||||||||||||||
| Impairment and loss on disposal of assets | 492 | 592 | 2,098 | 1,697 | ||||||||||||||||||||||
| Legal settlements | — | — | 1,004 | 6,750 | ||||||||||||||||||||||
Severance | 211 | — | 211 | — | ||||||||||||||||||||||
| Gift card breakage cumulative catch-up adjustment | — | — | — | (1,281) | ||||||||||||||||||||||
Other(1) | — | — | 2,321 | — | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 35,784 | $ | 19,807 | $ | 100,399 | $ | 53,141 | ||||||||||||||||||
Adjusted EBITDA margin(2) | 13.0 % | 8.7 % | 12.5 % | 8.0 % | ||||||||||||||||||||||
(1)Related to professional fees for a non-recurring matter.
(2)Calculated as a percentage of Total revenue, which was $276.2 million and $801.3 million for the thirteen and thirty-nine weeks ended September 27, 2023, respectively, and $227.8 million and $662.0 million for the thirteen and thirty-nine weeks ended September 28, 2022, respectively.
Adjusted Pro Forma Net Income (Loss) and Adjusted Pro Forma Earnings (Loss) Per Fully Exchanged and Diluted Share
Adjusted pro forma net income (loss) 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 we do not believe are directly related to our core operations and may not be indicative of our recurring business operations. Adjusted pro forma earnings (loss) per fully exchanged and diluted share is calculated by dividing adjusted pro forma net income (loss) 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.
In the first quarter of 2023, the Company revised its definition of Adjusted Pro Forma Net Income to exclude executive transition costs as an adjustment to the measure. Previously reported periods have been revised to conform to the current period presentation. See "EBITDA and Adjusted EBITDA" above for additional information.
How These Measures Are Useful
When used in conjunction with GAAP financial measures, adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share are supplemental measures of operating performance that we believe are useful measures to evaluate our performance period over period and relative to our competitors. By assuming the full exchange of all outstanding LLC Interests, we believe 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 (loss) attributable to Shake Shack Inc. driven by increases in our ownership of SSE Holdings, which are unrelated to
38 | Shake Shack Inc. Form 10-Q
our operating performance, and excludes items that are non-recurring or may not be indicative of our ongoing operating performance.
Limitations of the Usefulness of These Measures
Adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) 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 (loss) and adjusted pro forma earnings (loss) 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 our performance, they do not account for the earnings attributable to the non-controlling interest holders and therefore do not provide a complete understanding of the Net income (loss) attributable to Shake Shack Inc. Adjusted pro forma net income (loss) and adjusted pro forma earnings (loss) per fully exchanged and diluted share should be evaluated in conjunction with our GAAP financial results. A reconciliation of adjusted pro forma net income (loss) to Net income (loss) attributable to Shake Shack Inc., the most directly comparable GAAP measure, and the computation of adjusted pro forma earnings (loss) per fully exchanged and diluted share are set forth below.
Shake Shack Inc. Form 10-Q | 39
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| (in thousands, except per share amounts) | September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | |||||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||||||||
| Net income (loss) attributable to Shake Shack Inc. | $ | 7,627 | $ | (2,024) | $ | 13,041 | $ | (13,374) | |||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||
Reallocation of Net income (loss) attributable to non-controlling interests from the assumed exchange of LLC Interests(1) | 509 | (287) | 696 | (1,522) | |||||||||||||||||||||||||
| Legal settlements | — | — | 1,004 | 6,750 | |||||||||||||||||||||||||
| Gift card breakage cumulative catch-up adjustment | — | — | — | (1,281) | |||||||||||||||||||||||||
Severance | 211 | — | 211 | — | |||||||||||||||||||||||||
Other(2) | — | — | 2,321 | — | |||||||||||||||||||||||||
Tax impact of above adjustments(3) | (810) | (11) | (2,146) | (922) | |||||||||||||||||||||||||
| Adjusted pro forma net income (loss) | $ | 7,537 | $ | (2,322) | $ | 15,127 | $ | (10,349) | |||||||||||||||||||||
| Denominator: | |||||||||||||||||||||||||||||
| Weighted average shares of Class A common stock outstanding—diluted | 43,978 | 39,274 | 43,884 | 39,221 | |||||||||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||||||||
Assumed exchange of LLC Interests for shares of Class A common stock(1) | — | 2,871 | — | 2,899 | |||||||||||||||||||||||||
| Adjusted pro forma fully exchanged weighted average shares of Class A common stock outstanding—diluted | 43,978 | 42,145 | 43,884 | 42,120 | |||||||||||||||||||||||||
| Adjusted pro forma earnings (loss) per fully exchanged share—diluted | $ | 0.17 | $ | (0.06) | $ | 0.34 | $ | (0.25) | |||||||||||||||||||||
| Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||||||||||||||||||
| September 27 2023 | September 28 2022 | September 27 2023 | September 28 2022 | ||||||||||||||||||||||||||
| Earnings (loss) per share of Class A common stock—diluted | $ | 0.19 | $ | (0.05) | $ | 0.31 | $ | (0.34) | |||||||||||||||||||||
Assumed exchange of LLC Interests for shares of Class A common stock(1) | — | — | — | (0.01) | |||||||||||||||||||||||||
Non-GAAP adjustments(4) | (0.02) | (0.01) | 0.03 | 0.10 | |||||||||||||||||||||||||
| Adjusted pro forma earnings (loss) per fully exchanged share—diluted | $ | 0.17 | $ | (0.06) | $ | 0.34 | $ | (0.25) | |||||||||||||||||||||
(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 (loss) attributable to non-controlling interests. Refer to Note 11, Earnings (Loss) per Share, in the accompanying Condensed Consolidated Financial Statements, for additional information.
(2)Related to professional fees for a non-recurring matter.
(3)Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 15.1% and 20.5% for the thirteen and thirty-nine weeks ended September 27, 2023, respectively, and 39.2% and 28.8% for the thirteen and thirty-nine weeks ended September 28, 2022, 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.
(4)Represents the per share impact of non-GAAP adjustments for each period. Refer to the reconciliation of Adjusted Pro Forma Net Income (Loss) above, for additional information.
40 | Shake Shack Inc. Form 10-Q
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, and availability under our Revolving Credit Facility. As of September 27, 2023, we maintained a Cash and cash equivalents balance of $190.0 million. In March 2021, we issued 0% Convertible Senior Notes (“Convertible Notes”), and received $243.8 million of proceeds, net of discounts. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information.
On June 7, 2021, we filed a Registration Statement on Form S-3 with the SEC which permits us to issue a combination of securities described in the prospectus in one or more offerings from time to time. To date, we have not experienced difficulty accessing the capital markets; however, future volatility in the capital markets may affect our ability to access those markets or increase the costs associated with issuing debt or equity instruments.
Our primary requirements for liquidity are to fund our working capital needs, operating and finance lease obligations, capital expenditures and general corporate needs. Our requirements for working capital are generally not significant because our guests pay for their food and beverage purchases in cash or on debit or credit cards at the time of the sale and we are able to sell many of our inventory items before payment is due to the supplier of such items. Our ongoing capital expenditures are principally related to opening new Shacks, existing Shack capital investments (both for remodels and maintenance), as well as investments in our corporate technology infrastructure to support our home office, Shake Shack locations, and digital strategy.
In addition, we are obligated to make payments to certain members of SSE Holdings under the Tax Receivable Agreement. As of September 27, 2023, such obligations totaled $235.6 million. Amounts payable under the Tax Receivable Agreement are contingent upon, among other things, (i) generation of future taxable income over the term of the Tax Receivable Agreement and (ii) future changes in tax laws. If we do not generate sufficient taxable income in the aggregate over the term of the Tax Receivable Agreement to utilize the tax benefits, then we would not be required to make the related payments under the Tax Receivable Agreement. Although the amount of any payments that must be made under the Tax Receivable Agreement may be significant, the timing of these payments will vary and will generally be limited to one payment per member per year. The amount of such payments are also limited to the extent we utilize the related deferred tax assets. The payments that we are required to make will generally reduce the amount of overall cash flow that might have otherwise been available to us or to SSE Holdings, but we expect the cash tax savings we will realize from the utilization of the related deferred tax assets to fund the required payments.
We believe our existing cash and cash equivalents balances and cash from operations will be sufficient to fund our operating and finance lease obligations, capital expenditures, Tax Receivable Agreement obligations and working capital needs for at least the next 12 months and the foreseeable future.
Summary of Cash Flows
The following table presents a summary of our cash flows from operating, investing and financing activities.
| Thirty-Nine Weeks Ended | |||||||||||
| (in thousands) | September 27 2023 | September 28 2022 | |||||||||
| Net cash provided by operating activities | $ | 90,591 | $ | 54,335 | |||||||
| Net cash used in investing activities | (126,264) | (95,212) | |||||||||
| Net cash used in financing activities | (4,825) | (4,529) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (3) | (2) | |||||||||
| Net decrease in Cash and cash equivalents | (40,501) | (45,408) | |||||||||
| Cash and cash equivalents at beginning of period | 230,521 | 302,406 | |||||||||
| Cash and cash equivalents at end of period | $ | 190,020 | $ | 256,998 | |||||||
Shake Shack Inc. Form 10-Q | 41
Operating Activities
For the thirty-nine weeks ended September 27, 2023, net cash provided by operating activities was $90.6 million compared to $54.3 million for the thirty-nine weeks ended September 28, 2022, an increase of $36.3 million. The increase was primarily driven by a $43.4 million improvement in net results after excluding non-cash charges, partially offset by changes in working capital of $7.2 million. The changes in working capital included an increase in payments on lease liabilities, net of tenant improvement receipts and the timing and payments of legal settlements, partially offset by a decrease in the construction in progress accruals due to the timing of shack openings this period compared to the same period last year.
Investing Activities
For the thirty-nine weeks ended September 27, 2023, net cash used in investing activities was $126.3 million compared to $95.2 million for the thirty-nine weeks ended September 28, 2022, an increase of $31.1 million. This increase was primarily due to a net increase in marketable securities activity as a result of the purchase of held-to-maturity debt securities of $94.0 million partially offset by the sale of equity securities of $81.5 million, and an increase of $18.2 million in capital expenditures to support our real estate development.
Financing Activities
For the thirty-nine weeks ended September 27, 2023, net cash used in financing activities was $4.8 million compared to $4.5 million for the thirty-nine weeks ended September 28, 2022, an increase of $0.3 million. This increase was primarily due to an increase in withholding taxes related to the vesting of equity awards, partially offset by an increase in proceeds from stock option exercises and a decrease in distributions paid to non-controlling interest holders.
Convertible Notes
In March 2021, we issued $250.0 million aggregate principal amount of 0% Convertible Senior Notes due 2028 in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. The Convertible Notes will mature on March 1, 2028, unless earlier converted, redeemed or repurchased in certain circumstances. Upon conversion, we pay or deliver, as the case may be, cash, shares of Class A common stock or a combination of cash and shares of Class A common stock, at our election. Refer to Note 6, Debt, in the accompanying Condensed Consolidated Financial Statements, for additional information.
Revolving Credit Facility
In August 2019, we entered into a Revolving Credit Facility, which matures in March 2026 and permits borrowings up to $50.0 million, with the ability to increase available borrowings up to an additional $100.0 million, subject to satisfaction of certain conditions. The Revolving Credit Facility also permits the issuance of letters of credit upon our request of up to $15.0 million.
During the thirteen weeks ended September 27, 2023, the Company entered into the fourth amendment to the Revolving Credit Facility ("Fourth Amendment"), which, among other things, modifies the benchmark interest rate to either: (i) the base rate plus applicable margin ranging from 0.0% to 1.5% or (ii) the Secured Overnight Financing Rate (“SOFR”) plus applicable margin ranging from 1.0% to 2.5%, in each case depending on the net lease adjusted leverage ratio. As of September 27, 2023 and December 28, 2022, no amounts were outstanding under the Revolving Credit Facility.
The obligations under the Revolving Credit Facility are secured by a first-priority security interest in substantially all of the assets of SSE Holdings and the guarantors. The obligations under the Revolving Credit Facility are guaranteed by each of SSE Holdings' direct and indirect subsidiaries, with certain exceptions.
The Revolving Credit Facility requires us to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios, as well as other customary affirmative and negative covenants. As of September 27, 2023, we were in compliance with all covenants.
Contractual Obligations
Material contractual obligations arising in the normal course of business primarily consist of operating and finance lease obligations, long-term debt, liabilities under the Tax Receivable Agreement and purchase obligations. The timing and nature of these commitments are expected to have an impact on our liquidity and capital requirements in future periods. Refer to Note 6,
42 | Shake Shack Inc. Form 10-Q
Debt and Note 7, Leases, in the accompanying Condensed Consolidated Financial Statements included in Part I, Item 1 for additional information relating to our long-term debt and operating and financing leases.
Liabilities under the Tax Receivable Agreement include amounts to be paid to the non-controlling interest holders, assuming we will have sufficient taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. Refer to Note 10, Income Taxes, and Note 13, Commitments and Contingencies, in the accompanying Condensed Consolidated Financial Statements included in Part I, Item 1, for additional information relating to our Tax Receivable Agreement and related liabilities.
Purchase obligations include all legally binding contracts, including commitments for the purchase, construction or remodeling of real estate and facilities, firm minimum commitments for inventory purchases, equipment purchases, marketing-related contracts, software acquisition/license commitments and service contracts. The majority of our purchase obligations are due within the next 12 months.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our consolidated financial condition and results of operations is based upon the accompanying Condensed Consolidated Financial Statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of the Condensed Consolidated Financial Statements requires us to make estimates, judgments and assumptions, which we believe to be reasonable, based on the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. Variances in the estimates or assumptions used to actual experience could yield materially different accounting results. On an ongoing basis, we evaluate the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider appropriate under the facts and circumstances. There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 28, 2022.
Recently Issued Accounting Pronouncements
Refer to Note 2, Summary of Significant Accounting Policies under Part I, Item 1 of this Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to our exposure to market risks as described in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 28, 2022.
Item 4. Controls and Procedures.
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of such date. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Shake Shack Inc. Form 10-Q | 43
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes to our internal control over financial reporting that occurred during the quarter ended September 27, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
44 | Shake Shack Inc. Form 10-Q
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
The information required by this Item is incorporated by reference to Part I, Item 1, Note 13, Commitments and Contingencies.
Item 1A. Risk Factors.
There have been no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 5. Other Information.
Pursuant to Item 408(a) of Regulation S-K, our directors and officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated a “Rule 10b5-1 trading arrangement” during the thirteen weeks ended September 27, 2023 as follows:
| Name | Position | Action | Adoption Date | Expiration Date | Aggregate Numbers of Class A Common Stock to be Purchased/Sold | ||||||||||||
| Adoption | 4/30/2024 | ||||||||||||||||
Other than as disclosed above, no other officer or director adopted or terminated
Shake Shack Inc. Form 10-Q | 45
Item 6. Exhibits.
Exhibit Number | Incorporated by Reference | Filed Herewith | ||||||||||||||||||||||||||||||
| Exhibit Description | Form | Exhibit | Filing Date | |||||||||||||||||||||||||||||
| 8-K | 3.1 | 2/10/2015 | ||||||||||||||||||||||||||||||
| 8-K | 3.1 | 10/4/2019 | ||||||||||||||||||||||||||||||
| S-1/A | 4.1 | 1/28/2015 | ||||||||||||||||||||||||||||||
| 8-K | 10.1 | 7/10/2023 | ||||||||||||||||||||||||||||||
| 8-K | 10.1 | 8/3/2023 | ||||||||||||||||||||||||||||||
10-Q | 10.7 | 8/4/2023 | ||||||||||||||||||||||||||||||
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46 | Shake Shack Inc. Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Shake Shack Inc. | ||||||||
| (Registrant) | ||||||||
| Date: November 3, 2023 | By: | /s/ Randy Garutti | ||||||
| Randy Garutti | ||||||||
| Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer) | ||||||||
| Date: November 3, 2023 | By: | /s/ Katherine I. Fogertey | ||||||
| Katherine I. Fogertey | ||||||||
| Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) | ||||||||
Shake Shack Inc. Form 10-Q | 47