UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
| |
(Mark One) |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JuneMarch 27, 20182019
OR
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| |
o | 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
SHAKE SHACK INC.
(Exact name of registrant as specified in its charter)
|
| |
Delaware | 47-1941186 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
225 Varick Street, Suite 301 New York, New York | 10014 |
(Address of principal executive offices) | (Zip Code) |
(646) 747-7200
(Registrant's telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report)
Indicate by check mark if 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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule-405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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.
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| | | | |
Large accelerated filer | þ | | Accelerated filer | o |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | o |
| | | Emerging growth company | o |
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No
Securities registered pursuant to Section 12(b) of the Act
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| | |
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Class A Common Stock, par value $0.001 | SHAK | New York Stock Exchange |
As of July 25, 2018,April 24, 2019, there were 29,214,07729,701,558 shares of Class A common stock outstanding and 7,818,9217,453,515 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. All statements other than statements of historical fact are forward-looking statements. Many of the forward-looking statements are located in Part I, Item 2 of this Form 10-Q under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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," "outlook," "potential," "project," "projection," "plan," "intend," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions.
While we believe that our assumptions are reasonable, it is very difficult to predict the impact of known factors, and it is impossible to anticipate all factors that could affect our actual results. 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 Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 27, 201726, 2018 filed with the U.S. Securities and Exchange Commission (the "SEC") under the heading "Risk Factors."
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 or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
SHAKE SHACK INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share amounts) | | | | June 27 2018 |
| | December 27 2017 |
| | March 27 2019 |
| | December 26 2018 |
|
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets: | Current assets: | | | | Current assets: | | | |
| Cash and cash equivalents | $ | 30,879 |
| | $ | 21,507 |
| Cash and cash equivalents | $ | 31,897 |
| | $ | 24,750 |
|
| Marketable securities | 61,399 |
| | 63,036 |
| Marketable securities | 47,659 |
| | 62,113 |
|
| Accounts receivable | 7,110 |
| | 5,641 |
| Accounts receivable | 8,862 |
| | 10,523 |
|
| Inventories | 1,238 |
| | 1,258 |
| Inventories | 1,626 |
| | 1,749 |
|
| Prepaid expenses and other current assets | 1,474 |
| | 1,757 |
| Prepaid expenses and other current assets | 2,312 |
| | 1,984 |
|
| Total current assets | 102,100 |
| | 93,199 |
| Total current assets | 92,356 |
| | 101,119 |
|
Property and equipment, net | Property and equipment, net | 216,763 |
| | 187,095 |
| Property and equipment, net | 265,016 |
| | 261,854 |
|
Operating lease assets | | Operating lease assets | 239,555 |
| | — |
|
Deferred income taxes, net | Deferred income taxes, net | 214,037 |
| | 185,914 |
| Deferred income taxes, net | 243,033 |
| | 242,533 |
|
Other assets | Other assets | 3,835 |
| | 4,398 |
| Other assets | 7,008 |
| | 5,026 |
|
TOTAL ASSETS | TOTAL ASSETS | $ | 536,735 |
| | $ | 470,606 |
| TOTAL ASSETS | $ | 846,968 |
| | $ | 610,532 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | Current liabilities: | | | | Current liabilities: | | | |
| Accounts payable | $ | 8,344 |
| | $ | 8,210 |
| Accounts payable | $ | 12,655 |
| | $ | 12,467 |
|
| Accrued expenses | 15,988 |
| | 11,649 |
| Accrued expenses | 20,462 |
| | 22,799 |
|
| Accrued wages and related liabilities | 6,815 |
| | 6,228 |
| Accrued wages and related liabilities | 7,627 |
| | 10,652 |
|
| Other current liabilities | 7,655 |
| | 7,937 |
| Operating lease liabilities, current | 22,280 |
| | — |
|
| Total current liabilities | 38,802 |
| | 34,024 |
| Other current liabilities | 16,153 |
| | 14,030 |
|
| | Total current liabilities | 79,177 |
| | 59,948 |
|
Deemed landlord financing | Deemed landlord financing | 18,340 |
| | 14,518 |
| Deemed landlord financing | — |
| | 20,846 |
|
Deferred rent | Deferred rent | 39,463 |
| | 36,596 |
| Deferred rent | — |
| | 47,864 |
|
Long-term operating lease liabilities | | Long-term operating lease liabilities | 269,367 |
| | — |
|
Liabilities under tax receivable agreement, net of current portion | Liabilities under tax receivable agreement, net of current portion | 176,427 |
| | 158,436 |
| Liabilities under tax receivable agreement, net of current portion | 199,544 |
| | 197,921 |
|
Other long-term liabilities | Other long-term liabilities | 7,256 |
| | 2,553 |
| Other long-term liabilities | 13,142 |
| | 10,498 |
|
Total liabilities | Total liabilities | 280,288 |
| | 246,127 |
| Total liabilities | 561,230 |
| | 337,077 |
|
Commitments and contingencies | Commitments and contingencies |
| |
| Commitments and contingencies |
| |
|
Stockholders' equity: | Stockholders' equity: | | | | Stockholders' equity: | | | |
| Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of June 27, 2018 and December 27, 2017. | — |
| | — |
| Preferred stock, no par value—10,000,000 shares authorized; none issued and outstanding as of March 27, 2019 and December 26, 2018. | — |
| | — |
|
| Class A common stock, $0.001 par value—200,000,000 shares authorized; 28,106,331 and 26,527,477 shares issued and outstanding as of June 27, 2018 and December 27, 2017, respectively. | 28 |
| | 27 |
| Class A common stock, $0.001 par value—200,000,000 shares authorized; 29,698,228 and 29,520,833 shares issued and outstanding as of March 27, 2019 and December 26, 2018, respectively. | 31 |
| | 30 |
|
| Class B common stock, $0.001 par value—35,000,000 shares authorized; 8,924,592 and 10,250,007 shares issued and outstanding as of June 27, 2018 and December 27, 2017, respectively. | 9 |
| | 10 |
| Class B common stock, $0.001 par value—35,000,000 shares authorized; 7,453,515 and 7,557,347 shares issued and outstanding as of March 27, 2019 and December 26, 2018, respectively. | 7 |
| | 8 |
|
| Additional paid-in capital | 177,650 |
| | 153,105 |
| Additional paid-in capital | 199,315 |
| | 195,633 |
|
| Retained earnings | 26,337 |
| | 16,399 |
| Retained earnings | 37,086 |
| | 30,404 |
|
| Accumulated other comprehensive income (loss) | — |
| | (49 | ) | Total stockholders' equity attributable to Shake Shack Inc. | 236,439 |
| | 226,075 |
|
| Total stockholders' equity attributable to Shake Shack Inc. | 204,024 |
| | 169,492 |
| |
Non-controlling interests | Non-controlling interests | 52,423 |
| | 54,987 |
| Non-controlling interests | 49,299 |
| | 47,380 |
|
Total equity | Total equity | 256,447 |
| | 224,479 |
| Total equity | 285,738 |
| | 273,455 |
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 536,735 |
| | $ | 470,606 |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 846,968 |
| | $ | 610,532 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share amounts)
| | | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | |
| | June 27 2018 |
| | June 28 2017 |
| | June 27 2018 |
| | June 28 2017 |
| | March 27 2019 |
| | March 28 2018 |
|
Shack sales | Shack sales | $ | 112,898 |
| | $ | 88,003 |
| | $ | 208,987 |
| | $ | 162,158 |
| Shack sales | $ | 128,569 |
| | $ | 96,089 |
|
Licensing revenue | Licensing revenue | 3,384 |
| | 3,313 |
| | 6,411 |
| | 5,907 |
| Licensing revenue | 4,040 |
| | 3,027 |
|
TOTAL REVENUE | TOTAL REVENUE | 116,282 |
| | 91,316 |
| | 215,398 |
| | 168,065 |
| TOTAL REVENUE | 132,609 |
| | 99,116 |
|
Shack-level operating expenses: | Shack-level operating expenses: | | | | | | | | Shack-level operating expenses: | | | |
| Food and paper costs | 31,678 |
| | 24,712 |
| | 58,633 |
| | 45,886 |
| Food and paper costs | 37,991 |
| | 26,955 |
|
| Labor and related expenses | 29,732 |
| | 22,426 |
| | 56,419 |
| | 42,886 |
| Labor and related expenses | 37,093 |
| | 26,687 |
|
| Other operating expenses | 12,281 |
| | 8,486 |
| | 23,040 |
| | 16,151 |
| Other operating expenses | 15,568 |
| | 10,759 |
|
| Occupancy and related expenses | 7,401 |
| | 7,043 |
| | 15,076 |
| | 13,219 |
| Occupancy and related expenses | 10,899 |
| | 7,675 |
|
General and administrative expenses | General and administrative expenses | 12,587 |
| | 9,678 |
| | 24,396 |
| | 18,148 |
| General and administrative expenses | 13,937 |
| | 11,809 |
|
Depreciation expense | Depreciation expense | 6,968 |
| | 5,258 |
| | 13,466 |
| | 10,006 |
| Depreciation expense | 8,966 |
| | 6,498 |
|
Pre-opening costs | Pre-opening costs | 2,421 |
| | 1,876 |
| | 4,450 |
| | 4,291 |
| Pre-opening costs | 2,642 |
| | 2,029 |
|
Loss on disposal of property and equipment | Loss on disposal of property and equipment | 196 |
| | 100 |
| | 386 |
| | 113 |
| Loss on disposal of property and equipment | 351 |
| | 190 |
|
TOTAL EXPENSES | TOTAL EXPENSES | 103,264 |
| | 79,579 |
| | 195,866 |
| | 150,700 |
| TOTAL EXPENSES | 127,447 |
| | 92,602 |
|
OPERATING INCOME | OPERATING INCOME | 13,018 |
| | 11,737 |
| | 19,532 |
| | 17,365 |
| OPERATING INCOME | 5,162 |
| | 6,514 |
|
Other income, net | Other income, net | 406 |
| | 198 |
| | 634 |
| | 393 |
| Other income, net | 564 |
| | 228 |
|
Interest expense | Interest expense | (613 | ) | | (366 | ) | | (1,178 | ) | | (669 | ) | Interest expense | (72 | ) | | (565 | ) |
INCOME BEFORE INCOME TAXES | INCOME BEFORE INCOME TAXES | 12,811 |
| | 11,569 |
| | 18,988 |
| | 17,089 |
| INCOME BEFORE INCOME TAXES | 5,654 |
| | 6,177 |
|
Income tax expense | Income tax expense | 2,240 |
| | 3,385 |
| | 3,438 |
| | 5,043 |
| Income tax expense | 2,047 |
| | 1,198 |
|
NET INCOME | NET INCOME | 10,571 |
| | 8,184 |
| | 15,550 |
| | 12,046 |
| NET INCOME | 3,607 |
| | 4,979 |
|
Less: net income attributable to non-controlling interests | Less: net income attributable to non-controlling interests | 2,967 |
| | 3,305 |
| | 4,438 |
| | 4,900 |
| Less: net income attributable to non-controlling interests | 1,061 |
| | 1,471 |
|
NET INCOME ATTRIBUTABLE TO SHAKE SHACK INC. | NET INCOME ATTRIBUTABLE TO SHAKE SHACK INC. | $ | 7,604 |
| | $ | 4,879 |
| | $ | 11,112 |
| | $ | 7,146 |
| NET INCOME ATTRIBUTABLE TO SHAKE SHACK INC. | $ | 2,546 |
| | $ | 3,508 |
|
Earnings per share of Class A common stock: | Earnings per share of Class A common stock: | | | | | | | | Earnings per share of Class A common stock: | | | |
| Basic | $ | 0.27 |
| | $ | 0.19 |
| | $ | 0.41 |
| | $ | 0.28 |
| Basic | $ | 0.09 |
| | $ | 0.13 |
|
| Diluted | $ | 0.26 |
| | $ | 0.19 |
| | $ | 0.39 |
| | $ | 0.27 |
| Diluted | $ | 0.08 |
| | $ | 0.13 |
|
Weighted-average shares of Class A common stock outstanding: | Weighted-average shares of Class A common stock outstanding: | | | | | | | | Weighted-average shares of Class A common stock outstanding: | | | |
| Basic | 27,796 |
| | 25,798 |
| | 27,418 |
| | 25,587 |
| Basic | 29,563 |
| | 27,039 |
|
| Diluted | 28,754 |
| | 26,312 |
| | 28,288 |
| | 26,133 |
| Diluted | 30,392 |
| | 27,822 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands)
| | | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | |
| | June 27 2018 |
| | June 28 2017 |
| | June 27 2018 |
| | June 28 2017 |
| | March 27 2019 |
| | March 28 2018 |
|
Net income | Net income | $ | 10,571 |
| | $ | 8,184 |
| | $ | 15,550 |
| | $ | 12,046 |
| Net income | $ | 3,607 |
| | $ | 4,979 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | |
Other comprehensive income, net of tax: | | Other comprehensive income, net of tax: | | | |
| Available-for-sale securities(1): | | | | | | | | Available-for-sale securities(1): | | | |
| | Change in net unrealized holding gains (losses) | — |
| | (8 | ) | | (3 | ) | | (17 | ) | | Change in net unrealized holding gains (losses) | — |
| | (3 | ) |
| | Less: reclassification adjustments for net realized losses included in net income | — |
| | 11 |
| | 16 |
| | 14 |
| | Less: reclassification adjustments for net realized losses included in net income | — |
| | 16 |
|
| | Net change | — |
| | 3 |
| | 13 |
| | (3 | ) | | Net change | — |
| | 13 |
|
OTHER COMPREHENSIVE INCOME | OTHER COMPREHENSIVE INCOME | — |
| | 3 |
| | 13 |
| | (3 | ) | OTHER COMPREHENSIVE INCOME | — |
| | 13 |
|
COMPREHENSIVE INCOME | COMPREHENSIVE INCOME | 10,571 |
| | 8,187 |
| | 15,563 |
| | 12,043 |
| COMPREHENSIVE INCOME | 3,607 |
| | 4,992 |
|
Less: comprehensive income attributable to non-controlling interest | Less: comprehensive income attributable to non-controlling interest | 2,967 |
| | 3,306 |
| | 4,441 |
| | 4,899 |
| Less: comprehensive income attributable to non-controlling interest | 1,061 |
| | 1,474 |
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAKE SHACK INC. | COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAKE SHACK INC. | $ | 7,604 |
| | $ | 4,881 |
| | $ | 11,122 |
| | $ | 7,144 |
| COMPREHENSIVE INCOME ATTRIBUTABLE TO SHAKE SHACK INC. | $ | 2,546 |
| | $ | 3,518 |
|
(1) Net of tax benefit (expense) of $0 for the thirteen and twenty-six weeks ended JuneMarch 27, 20182019 and JuneMarch 28, 2017.2018.See accompanying Notes to Condensed Consolidated Financial Statements.
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except share amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock | | | Class B Common Stock | | | Additional Paid-In Capital |
| | Retained Earnings |
| | Accumulated Other Comprehensive Income (Loss) |
| | Non- Controlling Interest |
| | Total Equity |
|
| | Shares |
| | Amount |
| | Shares |
| | Amount |
| | | | | |
BALANCE, DECEMBER 27, 2017 | 26,527,477 |
| | $ | 27 |
| | 10,250,007 |
| | $ | 10 |
| | $ | 153,105 |
| | $ | 16,399 |
| | $ | (49 | ) | | $ | 54,987 |
| | $ | 224,479 |
|
| Cumulative effect of accounting changes |
|
| |
|
| |
|
| |
|
| |
|
| | (1,174 | ) | | 39 |
| | (439 | ) | | (1,574 | ) |
| Net income |
|
| |
|
| |
|
| |
|
| |
|
| | 11,112 |
| |
|
| | 4,438 |
| | 15,550 |
|
| Other comprehensive income: | | | | | | | | | | | | | | | | | |
| Net change related to available-for-sale securities |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | 10 |
| | 3 |
| | 13 |
|
| Equity-based compensation |
| |
|
| |
|
| |
|
| | 2,873 |
| |
|
| |
|
| |
|
| | 2,873 |
|
| Activity under stock compensation plans | 253,439 |
| | — |
| |
|
| |
|
| | 2,103 |
| |
|
| |
|
| | 1,463 |
| | 3,566 |
|
| Redemption of LLC Interests | 1,325,415 |
| | 1 |
| | (1,325,415 | ) | | (1 | ) | | 7,359 |
| |
|
| |
|
| | (7,359 | ) | | — |
|
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis |
|
| |
|
| |
|
| |
|
| | 12,210 |
| |
|
| |
|
| |
|
| | 12,210 |
|
| Distributions paid to non-controlling interest holders | | | | | | | | | | | | | | | (670 | ) | | (670 | ) |
BALANCE, JUNE 27, 2018 | 28,106,331 |
| | $ | 28 |
| | 8,924,592 |
| | $ | 9 |
| | $ | 177,650 |
| | $ | 26,337 |
| | $ | — |
| | $ | 52,423 |
| | $ | 256,447 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock | | | Class B Common Stock | | | Additional Paid-In Capital |
| | Retained Earnings |
| | Accumulated Other Comprehensive Income (Loss) |
| | Non- Controlling Interest |
| | Total Equity |
|
| | Shares |
| | Amount |
| | Shares |
| | Amount |
| | | | | |
BALANCE, DECEMBER 26, 2018 | 29,520,833 |
| | $ | 30 |
| | 7,557,347 |
| | $ | 8 |
| | $ | 195,633 |
| | $ | 30,404 |
| | $ | — |
| | $ | 47,380 |
| | $ | 273,455 |
|
| Cumulative effect of accounting changes |
|
| |
|
| |
|
| |
|
| |
|
| | 4,136 |
| |
|
| | 1,059 |
| | 5,195 |
|
| Net income |
|
| |
|
| |
|
| |
|
| |
|
| | 2,546 |
| |
|
| | 1,061 |
| | 3,607 |
|
| Other comprehensive income: | | | | | | | | | | | | | | | | | |
| Net change related to available-for-sale securities |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | — |
|
| Equity-based compensation |
| |
|
| |
|
| |
|
| | 1,747 |
| |
|
| |
|
| |
|
| | 1,747 |
|
| Activity under stock compensation plans | 73,563 |
| | — |
| |
|
| |
|
| | 975 |
| |
|
| |
|
| | 502 |
| | 1,477 |
|
| Redemption of LLC Interests | 103,832 |
| | 1 |
| | (103,832 | ) | | (1 | ) | | 594 |
| |
|
| |
|
| | (594 | ) | | — |
|
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis |
| |
|
| |
|
| |
|
| | 366 |
| |
|
| |
|
| |
|
| | 366 |
|
| Distributions paid to non-controlling interest holders | | | | | | | | | | | | | | | (109 | ) | | (109 | ) |
BALANCE, MARCH 27, 2019 | 29,698,228 |
| | $ | 31 |
| | 7,453,515 |
| | $ | 7 |
| | $ | 199,315 |
| | $ | 37,086 |
| | $ | — |
| | $ | 49,299 |
| | $ | 285,738 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock | | | Class B Common Stock | | | Additional Paid-In Capital |
| | Retained Earnings |
| | Accumulated Other Comprehensive Income (Loss) |
| | Non- Controlling Interest |
| | Total Equity |
|
| | Shares |
| | Amount |
| | Shares |
| | Amount |
| | | | | |
BALANCE, DECEMBER 27, 2017 | 26,527,477 |
| | $ | 27 |
| | 10,250,007 |
| | $ | 10 |
| | $ | 153,105 |
| | $ | 16,399 |
| | $ | (49 | ) | | $ | 54,987 |
| | $ | 224,479 |
|
| Cumulative effect of accounting changes |
|
| |
|
| |
|
| |
|
| |
|
| | (1,174 | ) | | 39 |
| | (439 | ) | | (1,574 | ) |
| Net income |
|
| |
|
| |
|
| |
|
| |
|
| | 3,508 |
| |
|
| | 1,471 |
| | 4,979 |
|
| Other comprehensive income: | | | | | | | | | | | | | | | | | |
| Net change related to available-for-sale securities |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | 10 |
| | 3 |
| | 13 |
|
| Equity-based compensation |
| |
|
| |
|
| |
|
| | 1,455 |
| |
|
| |
|
| |
|
| | 1,455 |
|
| Activity under stock compensation plans | 70,305 |
| | — |
| |
|
| |
|
| | 866 |
| |
|
| |
|
| | 610 |
| | 1,476 |
|
| Redemption of LLC Interests | 1,029,771 |
| | 1 |
| | (1,029,771 | ) | | (1 | ) | | 5,558 |
| |
|
| |
|
| | (5,558 | ) | | — |
|
| Establishment of liabilities under tax receivable agreement and related changes to deferred tax assets associated with increases in tax basis |
|
| |
|
| |
|
| |
|
| | 2,388 |
| |
|
| |
|
| |
|
| | 2,388 |
|
| Distributions paid to non-controlling interest holders |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | (83 | ) | | (83 | ) |
BALANCE, MARCH 28, 2018 | 27,627,553 |
| | $ | 28 |
| | 9,220,236 |
| | $ | 9 |
| | $ | 163,372 |
| | $ | 18,733 |
| | $ | — |
| | $ | 50,991 |
| | $ | 233,133 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
SHAKE SHACK INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | |
| | June 27 2018 |
| | June 28 2017 |
| | March 27 2019 |
| | March 28 2018 |
|
OPERATING ACTIVITIES | OPERATING ACTIVITIES | | | | OPERATING ACTIVITIES | | | |
Net income (including amounts attributable to non-controlling interests) | Net income (including amounts attributable to non-controlling interests) | $ | 15,550 |
| | $ | 12,046 |
| Net income (including amounts attributable to non-controlling interests) | $ | 3,607 |
| | $ | 4,979 |
|
Adjustments to reconcile net income to net cash provided by operating activities | Adjustments to reconcile net income to net cash provided by operating activities | | | | Adjustments to reconcile net income to net cash provided by operating activities | | | |
| | Depreciation expense | 8,966 |
| | 6,498 |
|
| | Amortization of operating lease assets | 8,911 |
| | — |
|
| | Equity-based compensation | 1,692 |
| | 1,437 |
|
| Depreciation expense | 13,466 |
| | 10,006 |
| Deferred income taxes | 95 |
| | (305 | ) |
| Equity-based compensation | 2,834 |
| | 2,534 |
| Non-cash interest expense | — |
| | 72 |
|
| Deferred income taxes | 805 |
| | 2,561 |
| Loss on sale of marketable securities | — |
| | 16 |
|
| Non-cash interest expense | 72 |
| | 154 |
| Loss on disposal of property and equipment | 351 |
| | 190 |
|
| Loss on sale of marketable securities | 16 |
| | 15 |
| Unrealized (gain) loss on available-for-sale securities | (157 | ) | | 38 |
|
| Loss on disposal of property and equipment | 386 |
| | 113 |
| Other non-cash expense | 2 |
| | — |
|
| Unrealized loss on available-for-sale securities | 61 |
| | — |
| Net loss on sublease | — |
| | 672 |
|
| Net loss on sublease | 672 |
| | — |
| Changes in operating assets and liabilities: | | | |
| Changes in operating assets and liabilities: | | | | | Accounts receivable | 5,976 |
| | 3,111 |
|
| | Accounts receivable | 1,777 |
| | 3,964 |
| | Inventories | 123 |
| | 83 |
|
| | Inventories | 20 |
| | (162 | ) | | Prepaid expenses and other current assets | (474 | ) | | (110 | ) |
| | Prepaid expenses and other current assets | 105 |
| | 2,310 |
| | Other assets | (2,335 | ) | | 206 |
|
| | Other assets | (487 | ) | | (633 | ) | | Accounts payable | (61 | ) | | — |
|
| | Accounts payable | 188 |
| | 1,024 |
| | Accrued expenses | 880 |
| | 1,177 |
|
| | Accrued expenses | 2,590 |
| | 1,324 |
| | Accrued wages and related liabilities | (3,025 | ) | | (500 | ) |
| | Accrued wages and related liabilities | 587 |
| | (1,326 | ) | | Other current liabilities | 963 |
| | (528 | ) |
| | Other current liabilities | (661 | ) | | (1,390 | ) | | Deferred rent | — |
| | 291 |
|
| | Deferred rent | (71 | ) | | 603 |
| | Long-term operating lease liabilities | (8,324 | ) | | — |
|
| | Other long-term liabilities | 2,964 |
| | 587 |
| | Other long-term liabilities | 9 |
| | 1,806 |
|
NET CASH PROVIDED BY OPERATING ACTIVITIES | NET CASH PROVIDED BY OPERATING ACTIVITIES | 40,874 |
| | 33,730 |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 17,199 |
| | 19,133 |
|
INVESTING ACTIVITIES | INVESTING ACTIVITIES | | | | INVESTING ACTIVITIES | | | |
Purchases of property and equipment | Purchases of property and equipment | (36,364 | ) | | (24,986 | ) | Purchases of property and equipment | (24,985 | ) | | (17,718 | ) |
Purchases of marketable securities | Purchases of marketable securities | (570 | ) | | (5,993 | ) | Purchases of marketable securities | (389 | ) | | (277 | ) |
Sales of marketable securities | Sales of marketable securities | 2,144 |
| | 5,628 |
| Sales of marketable securities | 15,000 |
| | 2,144 |
|
NET CASH USED IN INVESTING ACTIVITIES | NET CASH USED IN INVESTING ACTIVITIES | (34,790 | ) | | (25,351 | ) | NET CASH USED IN INVESTING ACTIVITIES | (10,374 | ) | | (15,851 | ) |
FINANCING ACTIVITIES | FINANCING ACTIVITIES | | | | FINANCING ACTIVITIES | | | |
Proceeds from deemed landlord financing | Proceeds from deemed landlord financing | 559 |
| | 530 |
| Proceeds from deemed landlord financing | — |
| | 521 |
|
Payments on deemed landlord financing | Payments on deemed landlord financing | (167 | ) | | (101 | ) | Payments on deemed landlord financing | — |
| | (79 | ) |
Payments on principal of finance leases | | Payments on principal of finance leases | (339 | ) | | — |
|
Distributions paid to non-controlling interest holders | Distributions paid to non-controlling interest holders | (670 | ) | | (2,379 | ) | Distributions paid to non-controlling interest holders | (109 | ) | | (83 | ) |
Payments under tax receivable agreement | Payments under tax receivable agreement | — |
| | (1,471 | ) | Payments under tax receivable agreement | (707 | ) | | — |
|
Proceeds from stock option exercises | Proceeds from stock option exercises | 3,566 |
| | 6,187 |
| Proceeds from stock option exercises | 1,452 |
| | 1,476 |
|
Employee withholding taxes related to net settled equity awards | Employee withholding taxes related to net settled equity awards | — |
| | (316 | ) | Employee withholding taxes related to net settled equity awards | 25 |
| | — |
|
NET CASH PROVIDED BY FINANCING ACTIVITIES | NET CASH PROVIDED BY FINANCING ACTIVITIES | 3,288 |
| | 2,450 |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 322 |
| | 1,835 |
|
NET INCREASE IN CASH AND CASH EQUIVALENTS | NET INCREASE IN CASH AND CASH EQUIVALENTS | 9,372 |
| | 10,829 |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 7,147 |
| | 5,117 |
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 21,507 |
| | 11,607 |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 24,750 |
| | 21,507 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 30,879 |
| | $ | 22,436 |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 31,897 |
| | $ | 26,624 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
SHAKE SHACK INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
NOTE 1: NATURE OF OPERATIONS Shake Shack Inc. ("we," "us," "our," "Shake Shack" and the "Company") 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"). We are the sole managing member of SSE Holdings and, as sole managing member, we operate and control all of the business and affairs of SSE Holdings. As a result, we consolidate the financial results of SSE Holdings and report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. As of JuneMarch 27, 20182019 we owned 75.9%79.9% 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.
We operate and license Shake Shack restaurants ("Shacks"), which serve hamburgers, chicken sandwiches, hot dogs, chicken, crinkle-cut fries, shakes, frozen custard, beer, wine and more. As of JuneMarch 27, 20182019, there were 179218 Shacks in operation, system-wide, of which 100129 were domestic company-operated Shacks, 10Shacks,15 were domestic licensed Shacks and 6974 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 our Annual Report on Form 10-K for the fiscal year ended December 27, 201726, 2018 ("20172018 Form 10-K"). In our opinion, all adjustments, which are normal and recurring in nature, necessary for a fair presentation of our financial position and results of operation have been included. Certain reclassifications have been made to prior period amounts to conform to the current year presentation. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.
The accompanying Condensed Consolidated Balance Sheet as of December 27, 201726, 2018 has been derived from the audited financial statements at that date but does not include all of the disclosures required by GAAP. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in our 20172018 Form 10-K.
SSE Holdings is considered a variable interest entity. Shake Shack Inc. is the primary beneficiary as we have the majority economic interest in SSE Holdings and, as the sole managing member, have 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, we consolidate SSE Holdings. The assets and liabilities of SSE Holdings represent substantially all of our consolidated assets and liabilities with the exception of certain deferred taxes and liabilities under the Tax Receivable Agreement. As of JuneMarch 27, 20182019 and December 27, 2017,26, 2018, the net assets of SSE Holdings were $217,822$246,218 and $197,301,$232,711, respectively. The assets of SSE Holdings are subject to certain restrictions in SSE Holdings' revolving credit agreements. See Note 8 for more information.
Fiscal Year
We operate on a 52/53 week fiscal year ending on the last Wednesday in December. Fiscal 20182019 contains 52 weeks and ends on December 26, 2018.25, 2019. Fiscal 20172018 contained 52 weeks and ended on December 27, 2017.26, 2018. Unless otherwise stated, references to years in this report relate to fiscal years.
Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with GAAP requires us 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.
Recently Adopted Accounting Pronouncements
We adopted the Accounting Standards Updates (“ASUs”) summarized below in fiscal 2018.2019.
|
| | |
Accounting Standards Update (“ASU”) | Description | Date Adopted |
Revenue from Contracts with Customers and related standards
(ASU’s 2014-09, 2015-14, 2016-08, 2016-10, 2016-12, 2016-20)
| This standard supersedes the existing revenue recognition guidance and provides a new framework for recognizing revenue. The core principle of the standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The new standard also requires significantly more comprehensive disclosures than the existing standard. Guidance subsequent to ASU 2014-09 has been issued to clarify various provisions in the standard, including principal versus agent considerations, identifying performance obligations, licensing transactions, as well as various technical corrections and improvements.
See Note 3 for more information.
| December 28, 2017 |
Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU 2016-01)
| For public business entities, this standard requires: (i) certain equity investments to be measured at fair value with changes in fair value recognized in net income; (ii) a qualitative assessment to identify impairment of equity investments without readily determinable fair values; (iii) elimination of the requirement to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet; (iv) use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (v) separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vi) separate presentation of financial assets and liabilities by measurement category and form of financial asset in the financial statements; and (vii) an entity to evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
The adoption of this standard did not have a material impact to our consolidated financial statements.
| December 28, 2017 |
Statement of Cash Flows: Classification of Certain Cash Receipts and Payments
(ASU 2016-15)
| This standard provides guidance on eight specific cash flow issues with the objective of reducing diversity in practice.
The adoption of this standard did not have a material impact to our consolidated financial statements.
| December 28, 2017 |
Recently Issued Accounting Pronouncements
|
| | | |
Accounting Standards Update (“ASU”) | Description | Expected Impact | Effective Date |
Leases
(ASU's 2016-02, 2018-01, 2018-10, 2018-11) | This standard establishes a new lease accounting model, which introduces the recognition of lease assets and liabilities for those leases classified as operating leases under previous GAAP. It should bewas applied using a modified retrospective approach applied either at the beginning of the earliest period presented, or at the adoption date with the option to electelection of various practical expedients. Early adoption is permitted. | We are currently evaluating the provisions of the standard, including optional practical expedients. We are assessing the impact to our accounting policies, processes, disclosures and internal control over financial reporting.
We plan to adopt the standard on December 27, 2018. It is likely that the adoption will have a significant impact to our consolidated balance sheet given the number of real estate leases we have. We are still evaluating the expected impact to our consolidated statements of income and cash flows.See Note 9 Leases for more information.
| December 27, 2018
|
On December 28, 2017 we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts which were not completed as of December 28, 2017. We elected a practical expedient to aggregate the effect of all contract modifications that occurred before the adoption date, which did not have a material impact to our consolidated financial statements. Results for reporting periods beginning on or after December 28, 2017 are presented under Accounting Standards Codification Topic 606 ("ASC 606"). Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 605 ("ASC 605"), the accounting standard then in effect.
Upon transition, on December 28, 2017, we recorded a decrease to opening equity of $1,574, net of tax, of which $1,135 was recognized in retained earnings and $439 in non-controlling interest, with a corresponding increase of $1,769 in other long-term liabilities, a decrease of $68 in other current liabilities, and an increase of $100 to accounts receivable.
Revenue Recognition
Revenue 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 we expect to be entitled in exchange for those goods or services.
Revenue from Shack sales is presented net of discounts and recognized when food, beverage and retail products are sold. Sales tax collected from customers is excluded from Shack sales and the obligation is included in sales tax payable until the taxes are remitted to the appropriate taxing authorities. Revenue from our gift cards is deferred and recognized upon redemption.
Licensing revenues include 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 goods or services transferred to the licensee in our contracts, 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 licenses and considered as one performance obligation per Shack. We determine the transaction price for each contract, which is comprised of the initial territory fee, and an estimate of the total Shack opening fees we expect to be entitled to. The calculation of total Shack opening fees included in the transaction price requires judgment, as it is based on an estimate of the number of Shacks we expect the licensee to open. The transaction price is then allocated equally to each Shack expected to open. The performance obligations are satisfied over time, starting when a Shack opens, through the end of the term of the license granted to the Shack. Because we are transferring licenses to access our intellectual property during a contractual term, 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 licensing agreement, and payment for the restaurant opening fees are received either in advance of or upon opening the related restaurant. These payments are initially deferred and recognized as revenue as the performance obligations are satisfied, which occurs over a long-term period.
Revenue from sales-based royalties is recognized as the related sales occur.
Prior to the adoption of ASC 606, Shack opening fees were recorded as deferred revenue when received and proportionate amounts were recognized as revenue when a licensed Shack opened and all material services and conditions related to the fee were substantially performed. Territory fees were recorded as deferred revenue when received and recognized as revenue on a straight-line basis over the term of the license agreement, which generally began upon execution of the contract.
Revenue recognized for the thirteen and twenty-six weeks ended June 27, 2018 under ASC 606 and revenue that would have been recognized for the thirteen and twenty-six weeks ended June 27, 2018 had ASC 605 been applied is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Thirteen Weeks Ended June 27, 2018 | | | Twenty-Six Weeks Ended June 27, 2018 | |
| As reported under ASC 606 |
| | If reported under ASC 605 |
| | Increase (decrease) |
| | As reported under ASC 606 |
| | If reported under ASC 605 |
| | Increase (decrease) |
|
Shack sales | $ | 112,898 |
| | $ | 112,898 |
| | $ | — |
| | $ | 208,987 |
| | $ | 208,987 |
| | $ | — |
|
Licensing revenue | 3,384 |
| | 3,524 |
| | (140 | ) | | 6,411 |
| | 6,672 |
| | (261 | ) |
Total revenue | $ | 116,282 |
| | $ | 116,422 |
| | $ | (140 | ) | | $ | 215,398 |
| | $ | 215,659 |
| | $ | (261 | ) |
Revenue recognized during the thirteen and twenty-six weeks ended JuneMarch 27, 20182019 (under ASC 606) and thirteen and twenty-six weeks ended JuneMarch 28, 20172018 (under ASC 605), disaggregated by type is as follows:
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | Thirteen Weeks Ended | |
| June 27 2018 |
| | June 28 2017 |
| | June 27 2018 |
| | June 28 2017 |
| March 27 2019 |
| | March 28 2018 |
|
Shack sales | $ | 112,898 |
| | $ | 88,003 |
| | $ | 208,987 |
| | $ | 162,158 |
| $ | 128,569 |
| | $ | 96,089 |
|
Licensing revenue: | | | | | | | | | | |
Sales-based royalties | 3,319 |
| | 3,200 |
| | 6,291 |
| | 5,600 |
| 3,904 |
| | 2,972 |
|
Initial territory and opening fees | 65 |
| | 113 |
| | 120 |
| | 307 |
| 136 |
| | 55 |
|
Total revenue | $ | 116,282 |
| | $ | 91,316 |
| | $ | 215,398 |
| | $ | 168,065 |
| $ | 132,609 |
| | $ | 99,116 |
|
The aggregate amount of the transaction price allocated to performance obligations that are unsatisfied (or partially unsatisfied) as of JuneMarch 27, 20182019 is $10,557.$15,196. We expect to recognize this amount as revenue over a long-term period, as the license term for each Shack ranges from 105 to 20 years with renewals.years. This amount excludes any variable consideration related to sales-based royalties.
Contract Balances
Opening and closing balances of contract liabilities and receivables from contracts with customers is as follows:
| | | | June 27 2018 |
| | December 28 2017 |
| | March 27 2019 |
| | December 27 2018 |
|
Shack sales receivables | Shack sales receivables | $ | 2,496 |
| | $ | 2,184 |
| Shack sales receivables | $ | 3,053 |
| | $ | 2,550 |
|
Licensing receivables | Licensing receivables | 2,933 |
| | 1,522 |
| Licensing receivables | 2,348 |
| | 2,616 |
|
Gift card liability | Gift card liability | 1,334 |
| | 1,472 |
| Gift card liability | 1,683 |
| | 1,796 |
|
Deferred revenue, current | Deferred revenue, current | 305 |
| | 265 |
| Deferred revenue, current | 352 |
| | 307 |
|
Deferred revenue, long-term | Deferred revenue, long-term | 6,653 |
| | 3,742 |
| Deferred revenue, long-term | 10,009 |
| | 10,026 |
|
Revenue recognized during the thirteen and twenty-six weeks ended JuneMarch 27, 20182019 and March 28, 2018 that was included in their respective liability balances at the beginning of the period is as follows:
| | | | | | | Thirteen Weeks Ended | |
| Thirteen Weeks Ended June 27 2018 |
| | Twenty-Six Weeks Ended June 27 2018 |
| March 27 2019 |
| | March 28 2018 |
|
Gift card liability | $ | 102 |
| | $ | 408 |
| $ | 278 |
| | $ | 306 |
|
Deferred revenue, current | 63 |
| | 118 |
| 134 |
| | 55 |
|
NOTE 4: FAIR VALUE MEASUREMENTS Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis as of JuneMarch 27, 20182019 and December 27, 201726, 2018, and indicate the classification within the fair value hierarchy.
Cash, Cash Equivalents and Marketable Securities
The following tables summarize our cash, cash equivalents and marketable securities by significant investment categories as of JuneMarch 27, 20182019 and December 27, 2017:26, 2018:
| | | | June 27, 2018 | | | March 27, 2019 | |
| | Cost Basis |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Fair Value |
| | Cash and Cash Equivalents |
| | Marketable Securities |
| | Cost Basis |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Fair Value |
| | Cash and Cash Equivalents |
| | Marketable Securities |
|
Cash | Cash | $ | 25,875 |
| | $ | — |
| | $ | — |
| | $ | 25,875 |
| | $ | 25,875 |
| | $ | — |
| Cash | $ | 26,892 |
| | $ | — |
| | $ | — |
| | $ | 26,892 |
| | $ | 26,892 |
| | $ | — |
|
Level 1: | Level 1: | | | | | | | | | | | | Level 1: | | | | | | | | | | | |
| Money market funds | 5,004 |
| | — |
| | — |
| | 5,004 |
| | 5,004 |
| | — |
| Money market funds | 5,005 |
| | — |
| | — |
| | 5,005 |
| | 5,005 |
| | — |
|
| Mutual funds | 61,521 |
| | — |
| | (122 | ) | | 61,399 |
| | — |
| | 61,399 |
| Mutual funds | 47,624 |
| | 35 |
| | — |
| | 47,659 |
| | — |
| | 47,659 |
|
Level 2: | | | | | | | | | | | | |
| Corporate debt securities(1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Total | Total | $ | 92,400 |
| | $ | — |
| | $ | (122 | ) | | $ | 92,278 |
| | $ | 30,879 |
| | $ | 61,399 |
| Total | $ | 79,521 |
| | $ | 35 |
| | $ | — |
| | $ | 79,556 |
| | $ | 31,897 |
| | $ | 47,659 |
|
| | | | December 27, 2017 | | | December 26, 2018 | |
| | Cost Basis |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Fair Value |
| | Cash and Cash Equivalents |
| | Marketable Securities |
| | Cost Basis |
| | Gross Unrealized Gains |
| | Gross Unrealized Losses |
| | Fair Value |
| | Cash and Cash Equivalents |
| | Marketable Securities |
|
Cash | Cash | $ | 16,138 |
| | $ | — |
| | $ | — |
| | $ | 16,138 |
| | $ | 16,138 |
| | $ | — |
| Cash | $ | 19,746 |
| | $ | — |
| | $ | — |
| | $ | 19,746 |
| | $ | 19,746 |
| | $ | — |
|
Level 1: | Level 1: | | | | | | | | | | | | Level 1: | | | | | | | | | | | |
| Money market funds | 5,369 |
| | — |
| | — |
| | 5,369 |
| | 5,369 |
| | — |
| Money market funds | 5,004 |
| | — |
| | — |
| | 5,004 |
| | 5,004 |
| | — |
|
| Mutual funds | 60,985 |
| | — |
| | (61 | ) | | 60,924 |
| | — |
| | 60,924 |
| Mutual funds | 62,235 |
| | — |
| | (122 | ) | | 62,113 |
| | — |
| | 62,113 |
|
Level 2: | | | | | | | | | | | | |
| Corporate debt securities(1) | 2,125 |
| | 2 |
| | (15 | ) | | 2,112 |
| | — |
| | 2,112 |
| |
Total | Total | $ | 84,617 |
| | $ | 2 |
| | $ | (76 | ) | | $ | 84,543 |
| | $ | 21,507 |
| | $ | 63,036 |
| Total | $ | 86,985 |
| | $ | — |
| | $ | (122 | ) | | $ | 86,863 |
| | $ | 24,750 |
| | $ | 62,113 |
|
| |
(1) | Corporate debt securities were measured at fair value using a market approach utilizing observable prices for identical securities or securities with similar characteristics and inputs that are observable or can be corroborated by observable market data. |
On December 28, 2017, we adopted ASU 2016-01, which requires certain equity investments to be measured at fair value with changes in fair value recognized in net income. Net unrealized lossesgains on available-for-sale equity securities totaling $23$157 and $61net unrealized losses totaling $38 were included on the Condensed Consolidated Statements of Income during the thirteen and twenty-six weeks endedMarch 27, 2019 and June 27,March 28, 2018, respectively. Net unrealized losses on available-for-sale securities totaling $74 were included in accumulated other comprehensive income (loss) on the Condensed Consolidated Balance Sheet as of December 27, 2017.
The following tables summarize the gross unrealized losses and fair values for those investments that were in an unrealized loss position as of June 27, 2018 and December 27, 2017, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 27, 2018 | |
| | Less than 12 Months | | | 12 Months or Greater | | | Total | |
| Fair Value |
| | Unrealized Loss |
| | Fair Value |
| | Unrealized Loss |
| | Fair Value |
| | Unrealized Loss |
|
| Money market funds | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Mutual funds | 61,399 |
| | (122 | ) | | — |
| | — |
| | 61,399 |
| | (122 | ) |
| Corporate debt securities | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | $ | 61,399 |
| | $ | (122 | ) | | $ | — |
| | $ | — |
| | $ | 61,399 |
| | $ | (122 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 27, 2017 | |
| | Less than 12 Months | | | 12 Months or Greater | | | Total | |
| Fair Value |
| | Unrealized Loss |
| | Fair Value |
| | Unrealized Loss |
| | Fair Value |
| | Unrealized Loss |
|
| Money market funds | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Mutual funds | 60,924 |
| | (61 | ) | | — |
| | — |
| | 60,924 |
| | (61 | ) |
| Corporate debt securities | 1,675 |
| | (12 | ) | | 162 |
| | (3 | ) | | 1,837 |
| | (15 | ) |
Total | $ | 62,599 |
| | $ | (73 | ) | | $ | 162 |
| | $ | (3 | ) | | $ | 62,761 |
| | $ | (76 | ) |
A summary of other income from available-for-sale securities recognized during the thirteen and twenty-six weeks endedJuneMarch 27, 20182019 and JuneMarch 28, 20172018 is as follows:
| | | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | |
| | June 27 2018 |
| | June 28 2017 |
| | June 27 2018 |
| | June 28 2017 |
| | March 27 2019 |
| | March 28 2018 |
|
Available-for-sale securities: | Available-for-sale securities: | | | | | | | | Available-for-sale securities: | | | |
| Dividend income | $ | 329 |
| | $ | 191 |
| | $ | 604 |
| | $ | 369 |
| Dividend income | $ | 392 |
| | $ | 275 |
|
| Interest income | — |
| | 19 |
| | 7 |
| | 39 |
| Interest income | — |
| | 7 |
|
| Realized gain (loss) on sale of investments | — |
| | (12 | ) | | (16 | ) | | (15 | ) | Realized gain (loss) on sale of investments | (14 | ) | | (16 | ) |
| Unrealized gain (loss) on available-for-sale equity securities | (23 | ) | | — |
| | (61 | ) | | — |
| Unrealized gain (loss) on available-for-sale equity securities | 157 |
| | (38 | ) |
Total other income, net | Total other income, net | $ | 306 |
| | $ | 198 |
| | $ | 534 |
| | $ | 393 |
| Total other income, net | $ | 535 |
| | $ | 228 |
|
A summary of available-for-sale securities sold and gross realized gains and losses recognized during the thirteen and twenty-six weeks endedJuneMarch 27, 20182019 and JuneMarch 28, 20172018 is as follows:
|
| | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | |
| June 27 2018 |
| | June 28 2017 |
| | June 27 2018 |
| | June 28 2017 |
|
Available-for-sale securities: | | | | | | | |
| Gross proceeds from sales and redemptions | $ | — |
| | $ | 473 |
| | $ | 2,144 |
| | $ | 628 |
|
| Cost basis of sales and redemptions | — |
| | 484 |
| | 2,160 |
| | 642 |
|
| Gross realized gains included in net income | — |
| | — |
| | 2 |
| | — |
|
| Gross realized losses included in net income | — |
| | (12 | ) | | (18 | ) | | (15 | ) |
| Amounts reclassified out of accumulated other comprehensive loss | — |
| | 11 |
| | 16 |
| | 14 |
|
|
| | | | | | | | |
| | Thirteen Weeks Ended | |
| March 27 2019 |
| | March 28 2018 |
|
Available-for-sale securities: | | | |
| Gross proceeds from sales and redemptions | $ | 15,000 |
| | $ | 2,144 |
|
| Cost basis of sales and redemptions | 15,014 |
| | 2,160 |
|
| Gross realized gains included in net income | — |
| | 2 |
|
| Gross realized losses included in net income | (14 | ) | | (18 | ) |
| Amounts reclassified out of accumulated other comprehensive loss | — |
| | 16 |
|
Realized gains and losses are determined on a specific identification method and are included in other income, net on the Condensed Consolidated Statements of Income.
We periodically review our marketable securities for other-than-temporary impairment. We consider factors such as the duration, severity and the reason for the decline in value, the potential recovery period and our intent to sell. As of JuneMarch 27, 20182019 and December 27, 2017,26, 2018, the declines in the market value of our marketable securities investment portfolio were considered to be temporary in nature.
Other Financial Instruments
The carrying value of our other financial instruments, including accounts receivable, accounts payable, and accrued expenses as of JuneMarch 27, 20182019 and December 27, 201726, 2018 approximated their fair value due to the short-term nature of these financial instruments.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Assets and liabilities that are measured at fair value on a non-recurring basis include our long-lived assets and indefinite-lived intangible assets. There were no impairments recognized during the thirteen and twenty-six weeks ended June March 27, 20182019 and JuneMarch 28, 2017.2018.
Inventories as of JuneMarch 27, 20182019 and December 27, 201726, 2018 consisted of the following:
| | | June 27 2018 |
| | December 27 2017 |
| March 27 2019 |
| | December 26 2018 |
|
Food | $ | 873 |
| | $ | 874 |
| $ | 1,187 |
| | $ | 1,291 |
|
Wine | 66 |
| | 69 |
| 88 |
| | 83 |
|
Beer | 82 |
| | 85 |
| 98 |
| | 95 |
|
Beverages | 134 |
| | 111 |
| 198 |
| | 203 |
|
Retail merchandise | 83 |
| | 119 |
| 55 |
| | 77 |
|
Inventories | $ | 1,238 |
| | $ | 1,258 |
| $ | 1,626 |
| | $ | 1,749 |
|
NOTE 6: PROPERTY AND EQUIPMENT Property and equipment as of JuneMarch 27, 20182019 and December 27, 201726, 2018 consisted of the following:
| | | June 27 2018 |
| | December 27 2017 |
| March 27 2019 |
| | December 26 2018 |
|
Leasehold improvements | $ | 186,349 |
| | $ | 166,963 |
| $ | 240,611 |
| | $ | 228,453 |
|
Landlord funded assets | 12,117 |
| | 7,472 |
| — |
| | 15,595 |
|
Equipment | 34,709 |
| | 31,608 |
| 44,163 |
| | 40,716 |
|
Furniture and fixtures | 11,779 |
| | 10,128 |
| 14,704 |
| | 14,055 |
|
Computer equipment and software | 14,504 |
| | 12,721 |
| 19,597 |
| | 19,008 |
|
Construction in progress (includes landlord funded assets under construction) | 27,836 |
| | 16,458 |
| |
Financing equipment lease assets | | 4,840 |
| | — |
|
Construction in progress(1) | | 33,252 |
| | 29,474 |
|
Property and equipment, gross | 287,294 |
| | 245,350 |
| 357,167 |
| | 347,301 |
|
Less: accumulated depreciation | 70,531 |
| | 58,255 |
| 92,151 |
| | 85,447 |
|
Property and equipment, net | $ | 216,763 |
| | $ | 187,095 |
| $ | 265,016 |
| | $ | 261,854 |
|
(1) Construction in progress as of December 26, 2018 includes landlord funded assets under construction.
NOTE 7: SUPPLEMENTAL BALANCE SHEET INFORMATION The components of other current liabilities as of JuneMarch 27, 20182019 and December 27, 201726, 2018 are as follows:
| | | June 27 2018 |
| | December 27 2017 |
| March 27 2019 |
| | December 26 2018 |
|
Sales tax payable | $ | 3,139 |
| | $ | 1,813 |
| $ | 3,481 |
| | $ | 3,143 |
|
Current portion of liabilities under tax receivable agreement | 943 |
| | 937 |
| 5,097 |
| | 5,804 |
|
Gift card liability | 1,334 |
| | 1,472 |
| 1,683 |
| | 1,796 |
|
Current portion of financing equipment lease liabilities | | 1,821 |
| | — |
|
Other | 2,239 |
| | 3,715 |
| 4,071 |
| | 3,287 |
|
Other current liabilities | $ | 7,655 |
| | $ | 7,937 |
| $ | 16,153 |
| | $ | 14,030 |
|
The components of other long-term liabilities as of March 27, 2019 and December 26, 2018 are as follows: |
| | | | | | | |
| March 27 2019 |
| | December 26 2018 |
|
Deferred licensing revenue | $ | 10,009 |
| | $ | 10,026 |
|
Long-term portion of financing equipment lease liabilities | 2,681 |
| | — |
|
Other | 452 |
| | 472 |
|
Other long-term liabilities | $ | 13,142 |
| | $ | 10,498 |
|
In January 2015, we executed a Third Amended and Restated Credit Agreement, which became effective on February 4, 2015 (together with the prior agreements and amendments, and as further amended, the "Revolving Credit Facility"), which provides for a revolving total commitment amount of $50,000, of which $20,000 is available immediately. The Revolving Credit Facility will mature and all amounts outstanding will be due and payable five years from the effective date. The Revolving Credit Facility permits the issuance of letters of credit upon our request of up to $10,000. Borrowings under the Revolving Credit Facility bear interest at either: (i) LIBOR plus a percentage ranging from 2.3% to 3.3% or (ii) the prime rate plus a percentage ranging from 0.0% to 0.8%, depending on the type of borrowing made under the Revolving Credit Facility. As of JuneMarch 27, 20182019 and December 27, 2017,26, 2018, there were no amounts outstanding under the Revolving Credit Facility. As of JuneMarch 27, 2018,2019, we had $19,317 of availability under the Revolving Credit Facility, after giving effect to $683 in outstanding letters of credit.
The Revolving Credit Facility is 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' wholly-owned domestic subsidiaries (with certain exceptions).
The Revolving Credit Facility contains a number of covenants that, among other things, limit our ability to, subject to specified exceptions, incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves; pay dividends or make distributions; engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the Revolving Credit Facility contains certain cross-default provisions. We are required to maintain a specified consolidated fixed-charge coverage ratio and a specified funded net debt to adjusted EBITDA ratio, both as defined under the Revolving Credit Facility. As of JuneMarch 27, 2018,2019, we were in compliance with all covenants.
As of June 27,December 26, 2018 and December 27, 2017 we had deemed landlord financing liabilities of $18,340 and $14,518, respectively,$20,846, for certain leases where we arewere involved in the construction of leased assets and arewere considered the accounting owner of the construction project. Upon adoption of ASU 2016-02, Leases (Topic 842) on December 27, 2018, we are no longer considered to be the accounting owner of these construction projects and had no deemed landlord financing liabilities on the Condensed Consolidated Balance Sheets as of March 27, 2019. As of March 27, 2019 we had $291,647 of operating lease liabilities and $4,502 of finance lease liabilities on the Condensed Consolidated Balance Sheets, refer to Note 9 Leases for further details.
Total interest costs incurred were $655$72 and $1,264$609 for the thirteen and twenty-six weeks ended JuneMarch 27, 2018, respectively,2019 and $409 and $733 for the thirteen and twenty-six weeks ended JuneMarch 28, 2017,2018, respectively. Total amounts capitalized into property and equipment were $42 and $86$44 for the thirteen and twenty-six weeks ended June 27, 2018, respectively,March 28, 2018. No amounts were capitalized into property and $43 and $64equipment for the thirteen and twenty-six weeks ended June 28, 2017, respectively.March 27, 2019.
Effect of Standard Adoption
On December 27, 2018 we adopted ASU 2016-02, Leases (Topic 842), using a modified retrospective approach. We elected the package of practical expedients permitted under the transition guidance within Accounting Standards Codification Topic 842 ("ASC 842") which, among other items, allowed us to carry forward the historical lease classifications. As such, we applied the modified retrospective approach as of the adoption date to those lease contracts for which we have taken possession of the property as of December 26, 2018. As part of the transition, we derecognized all landlord funded assets and deemed landlord financing liabilities as of December 26, 2018 and determined the classification as either operating or finance leases.
In addition to the aforementioned practical expedient, we have also elected to:
Adopt the short-term lease exception for leases with terms of twelve months or less and account for them as if they were operating leases under ASC 840; and
Apply the practical expedient of combining lease and non-lease components.
Results for reporting periods beginning on or after December 27, 2018 are presented under ASC 842. Prior period amounts were not revised and continue to be reported in accordance with ASC Topic 840 ("ASC 840"), the accounting standard then in effect.
Upon transition, on December 27, 2018, we recorded the following increases (decreases) to the respective line items on the Condensed Consolidated Balance Sheet:
|
| | | |
| Adjustment as of December 27, 2018 |
|
Prepaid expenses and other current assets | $ | 6 |
|
Property and equipment, net | (11,448 | ) |
Operating lease assets | 229,885 |
|
Deferred income taxes, net | (121 | ) |
Deemed landlord financing | (20,846 | ) |
Deferred rent | (47,862 | ) |
Long-term operating lease liabilities | 277,224 |
|
Other long-term liabilities | 4,611 |
|
Retained earnings | 4,136 |
|
Non-controlling interests | 1,059 |
|
Nature of Leases
We lease all of our domestic company-operated Shacks, our Home Office and certain equipment under various non-cancelable lease agreements that expire on various dates through 2035. We evaluate contracts entered into to determine whether the contract involves the use of property or equipment, which is either explicitly or implicitly identified in the contract. We evaluate whether we control the use of the asset, which is determined by assessing whether we obtain substantially all economic benefits from the use of the asset, and whether we have the right to direct the use of the asset. If these criteria are met and we have identified a lease, we account for the contract under the requirements of ASC 842.
Upon the possession of a leased asset, we determine its classification as an operating or finance lease. Most of our real estate leases are classified as operating leases and most of our equipment leases are classified as finance leases. Generally, our 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 we would exercise the options to extend the lease. Our real estate leases typically provide for fixed minimum rent payments and/or contingent rent payments 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 that include rent holidays and rent escalation clauses, we recognize lease expense on a straight-line basis over the lease term from the date we take possession of the leased property. Lease expense incurred before a Shack opens is recorded in pre-opening costs. Once a domestic company-operated Shack opens, we record the straight-line lease expense and any contingent rent, if applicable, in occupancy and related expenses on the Consolidated Statements of Income. Many of our leases also require us to pay real estate taxes, common area maintenance costs and other occupancy costs which are included in occupancy and related expenses on the Consolidated Statements of Income.
As there were no explicit rates provided in our leases, we used our incremental borrowing rate in determining the present value of future lease payments. The discount rate used to measure the lease liability at the transition date was 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 incremental borrowing rate is our credit rating and subject to judgment. We determined our credit rating based on a comparison of the financial information of SSE Holdings to 800 other public companies and then used their respective credit ratings to develop our own.
We expend cash for leasehold improvements to build out and equip our leased premises. Generally, a portion of the leasehold improvements and building costs are reimbursed by our landlords as landlord incentives pursuant to agreed-upon terms in our lease agreements. If obtained, landlord incentives usually take the form of cash, full or partial credits against our future minimum or
contingent rents otherwise payable by us, or a combination thereof. In most cases, the tenant improvement allowances are received after we take possession of the property, as we meet required milestones during the construction of the property. Tenant improvement allowances are recorded as part of the lease liability on the Condensed Consolidated Balance Sheet and are amortized on a straight-line basis over the lease term as a reduction to occupancy and related expenses.
A summary of finance and operating lease right-of-use assets and liabilities as of March 27, 2019 is as follows:
|
| | | | | |
| Classification | | March 27 2019 |
|
Finance leases | Property and equipment, net | | $ | 4,507 |
|
Operating leases | Operating lease assets | | 239,555 |
|
Total right-of-use assets | | | $ | 244,062 |
|
| | | |
Finance leases | Other current liabilities Other long-term liabilities | | $ | 4,502 |
|
Operating leases | Operating lease liabilities, current Long-term operating lease liabilities | | 291,647 |
|
Total lease liabilities | | | $ | 296,149 |
|
The components of lease expense for the thirteen weeks ended March 27, 2019 were as follows:
|
| | | | | | |
| | Classification | | March 27 2019 |
|
Finance lease cost: | | | |
| Amortization of right-of-use assets | Depreciation expense | | $ | 334 |
|
| Interest on lease liabilities | Interest expense | | 41 |
|
Operating lease cost | Occupancy and related expenses General and administrative expenses Pre-opening costs | | 8,910 |
|
Short-term lease cost | Occupancy and related expenses | | 17 |
|
Variable lease cost | Occupancy and related expenses General and administrative expenses Pre-opening costs | | 3,462 |
|
Total lease cost | | | $ | 12,764 |
|
As of March 27, 2019, future minimum lease payments for finance and operating leases consisted of the following:
|
| | | | | | | |
| Finance Leases |
| | Operating Leases |
|
2019 | $ | 1,340 |
| | $ | 27,545 |
|
2020 | 1,329 |
| | 37,837 |
|
2021 | 752 |
| | 40,170 |
|
2022 | 520 |
| | 40,830 |
|
2023 | 441 |
| | 40,695 |
|
Thereafter | 342 |
| | 212,290 |
|
Total minimum payments | 4,724 |
| | 399,367 |
|
Less: imputed interest | 222 |
| | 107,720 |
|
Total lease liabilities | $ | 4,502 |
| | $ | 291,647 |
|
As of March 27, 2019 we had additional operating lease commitments of $65,050 for non-cancelable leases without a possession date, which will begin to commence in 2019. These lease commitments are consistent with the leases that we have executed thus far and include a number of real estates leases where we are involved in the construction and design.
A summary of lease terms and discount rates for finance and operating leases as of March 27, 2019 is as follows:
|
| | | |
| | March 27 2019 |
|
Weighted-average remaining lease term (years): | |
| Finance leases | 5.6 |
|
| Operating leases | 9.9 |
|
Weighted-average discount rate: | |
| Finance leases | 5.3 | % |
| Operating leases | 6.0 | % |
Supplemental cash flow information related to leases as of March 27, 2019 is as follows:
|
| | | | |
| | March 27 2019 |
|
Cash paid for amounts included in the measurement of lease liabilities: | |
| Operating cash flows from finance leases | $ | 41 |
|
| Operating cash flows from operating leases | 8,324 |
|
| Financing cash flows from finance leases | 339 |
|
Right-of-use assets obtained in exchange for lease obligations: | |
| Finance leases | 230 |
|
| Operating leases | 14,789 |
|
NOTE 9:10: NON-CONTROLLING INTERESTS We are the sole managing member of SSE Holdings and, as a result, consolidate the financial results of SSE Holdings. We report a non-controlling interest representing the economic interest in SSE Holdings held by the other members of SSE Holdings. The Third Amended and Restated Limited Liability Company Agreement, as further amended, (the "LLC 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. Changes in our ownership interest in SSE Holdings while we retain our 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 as of JuneMarch 27, 20182019 and December 27, 2017.26, 2018.
| | | June 27, 2018 | | | December 27, 2017 | | March 27, 2019 | | | December 26, 2018 | |
| LLC Interests |
| | Ownership% |
| | LLC Interests |
| | Ownership % |
| LLC Interests |
| | Ownership% |
| | LLC Interests |
| | Ownership % |
|
Number of LLC Interests held by Shake Shack Inc. | 28,106,331 |
| | 75.9 | % | | 26,527,477 |
| | 72.1 | % | 29,698,228 |
| | 79.9 | % | | 29,520,833 |
| | 79.6 | % |
Number of LLC Interests held by non-controlling interest holders | 8,924,592 |
| | 24.1 | % | | 10,250,007 |
| | 27.9 | % | 7,453,515 |
| | 20.1 | % | | 7,557,347 |
| | 20.4 | % |
Total LLC Interests outstanding | 37,030,923 |
| | 100.0 | % | | 36,777,484 |
| | 100.0 | % | 37,151,743 |
| | 100.0 | % | | 37,078,180 |
| | 100.0 | % |
The weighted average ownership percentages for the applicable reporting periods are used to attribute net income and other comprehensive income to Shake Shack Inc. and the non-controlling interest holders. The non-controlling interest holders' weighted average ownership percentage for the thirteen and twenty-six weeks endedJuneMarch 27, 2019 and March 28, 2018 was 24.8%20.3% and 25.6%, respectively. The non-controlling interest holders' weighted average ownership percentage for the thirteen and twenty-six weeks ended June 28, 2017 was 29.6% and 30.0%26.5%, respectively.
The following table summarizes the effects of changes in ownership of SSE Holdings on our equity during the thirteen and twenty-six weeks ended June March 27, 20182019 and JuneMarch 28, 2017.2018.
| | | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | |
| | June 27 2018 |
| | June 28 2017 |
| | June 27 2018 |
| | June 28 2017 |
| | March 27 2019 |
| | March 28 2018 |
|
Net income attributable to Shake Shack Inc. | Net income attributable to Shake Shack Inc. | $ | 7,604 |
| | $ | 4,879 |
| | $ | 11,112 |
| | $ | 7,146 |
| Net income attributable to Shake Shack Inc. | $ | 2,546 |
| | $ | 3,508 |
|
Other comprehensive income (loss): | | | | | | | | |
Other comprehensive income: | | Other comprehensive income: | | | |
| Net change related to available-for-sale securities | — |
| | 2 |
| | 10 |
| | (2 | ) | Net change related to available-for-sale securities | — |
| | 10 |
|
Transfers (to) from non-controlling interests: | Transfers (to) from non-controlling interests: | | | | | | | | Transfers (to) from non-controlling interests: | | | |
| Increase in additional paid-in capital as a result of the redemption of LLC Interests | 1,801 |
| | 720 |
| | 7,359 |
| | 2,042 |
| Increase in additional paid-in capital as a result of the redemption of LLC Interests | 594 |
| | 5,558 |
|
| Increase in additional paid-in capital as a result of activity under stock compensation plans | 1,237 |
| | 632 |
| | 2,103 |
| | 3,502 |
| Increase in additional paid-in capital as a result of activity under stock compensation plans | 975 |
| | 866 |
|
Total effect of changes in ownership interest on equity attributable to Shake Shack Inc. | Total effect of changes in ownership interest on equity attributable to Shake Shack Inc. | $ | 10,642 |
| | $ | 6,233 |
| | $ | 20,584 |
| | $ | 12,688 |
| Total effect of changes in ownership interest on equity attributable to Shake Shack Inc. | $ | 4,115 |
| | $ | 9,942 |
|
During the twenty-sixthirteen weeks ended JuneMarch 27, 20182019 and JuneMarch 28, 2017,2018, an aggregate of 1,325,415103,832 and 482,6001,029,771 LLC Interests, respectively, were redeemed by non-controlling interest holders for newly-issued shares of Class A common stock, and we received 1,325,415103,832 and 482,6001,029,771 LLC Interests in connection with these redemptions for the twenty-sixthirteen weeks ended JuneMarch 27, 20182019 and JuneMarch 28, 2017,2018, respectively, increasing our total ownership interest in SSE Holdings.
During the twenty-sixthirteen weeks ended JuneMarch 27, 20182019 and JuneMarch 28, 2017,2018, we received an aggregate of 253,43973,563 and 305,88270,305 LLC Interests, respectively, in connection with the activity under our stock compensation plan.
NOTE 10:11: EQUITY-BASED COMPENSATION A summary of equity-based compensation expense recognized during the thirteen and twenty-six weeks ended June March 27, 20182019 and JuneMarch 28, 20172018 is as follows:
| | | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | |
| | June 27 2018 |
| | June 28 2017 |
| | June 27 2018 |
| | June 28 2017 |
| | March 27 2019 |
| | March 28 2018 |
|
Stock options | Stock options | $ | 773 |
| | $ | 863 |
| | $ | 1,600 |
| | $ | 1,827 |
| Stock options | $ | 682 |
| | $ | 827 |
|
Performance stock units | Performance stock units | 464 |
| | 399 |
| | 918 |
| | 684 |
| Performance stock units | 712 |
| | 454 |
|
Restricted stock units | Restricted stock units | 160 |
| | 23 |
| | 316 |
| | 23 |
| Restricted stock units | 298 |
| | 156 |
|
Equity-based compensation expense | Equity-based compensation expense | $ | 1,397 |
| | $ | 1,285 |
| | $ | 2,834 |
| | $ | 2,534 |
| Equity-based compensation expense | $ | 1,692 |
| | $ | 1,437 |
|
| | | | | |
Total income tax benefit recognized related to equity-based compensation | Total income tax benefit recognized related to equity-based compensation | $ | 42 |
| | $ | 44 |
| | $ | 80 |
| | $ | 95 |
| Total income tax benefit recognized related to equity-based compensation | $ | 42 |
| | $ | 38 |
|
Amounts areEquity-based compensation expense is included in general and administrative expenseexpenses and labor and related expenses on the Condensed Consolidated Statements of Income.Income during the thirteen weeks ended March 27, 2019 and March 28, 2018 as follows:
|
| | | | | | | | |
| | Thirteen Weeks Ended | |
| | March 27 2019 |
| | March 28 2018 |
|
General and administrative expenses | $ | 1,642 |
| | $ | 1,400 |
|
Labor and related expenses | 50 |
| | 37 |
|
Equity-based compensation expense | $ | 1,692 |
| | $ | 1,437 |
|
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 Shake Shack Inc. We are also subject to withholding taxes in foreign jurisdictions.
Income Tax Expense
A reconciliation of income tax expense computed at the U.S. federal statutory income tax rate to the recognized income tax expense is as follows:
| | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | Thirteen Weeks Ended | |
| June 27 2018 | | | June 28 2017 | | | June 27 2018 | | | June 28 2017 | | March 27 2019 | | | March 28 2018 | |
Expected U.S. federal income taxes at statutory rate | $ | 2,690 |
| 21.0 | % | | $ | 4,050 |
| 35.0 | % | | $ | 3,987 |
| 21.0 | % | | $ | 5,982 |
| 35.0 | % | $ | 1,188 |
| 21.0 | % | | $ | 1,297 |
| 21.0 | % |
State and local income taxes, net of federal benefit | 830 |
| 6.5 | % | | 659 |
| 5.7 | % | | 1,242 |
| 6.5 | % | | 1,008 |
| 5.9 | % | 418 |
| 7.4 | % | | 412 |
| 6.7 | % |
Foreign withholding taxes | 271 |
| 2.1 | % | | 227 |
| 2.0 | % | | 802 |
| 4.2 | % | | 413 |
| 2.4 | % | 342 |
| 6.0 | % | | 531 |
| 8.6 | % |
Tax credits | (920 | ) | (7.2 | )% | | (248 | ) | (2.1 | )% | | (1,197 | ) | (6.3 | )% | | (378 | ) | (2.2 | )% | (376 | ) | (6.6 | )% | | (277 | ) | (4.5 | )% |
Non-controlling interest | (731 | ) | (5.7 | )% | | (1,303 | ) | (11.3 | )% | | (1,185 | ) | (6.2 | )% | | (1,982 | ) | (11.6 | )% | (323 | ) | (5.7 | )% | | (454 | ) | (7.3 | )% |
Tax effect of change in basis related to the adoption of ASC 842 | | 1,161 |
| 20.5 | % | — |
| — |
| — | % |
Change in valuation allowance | | (365 | ) | (6.5 | )% | — |
| — |
| — | % |
Other | 100 |
| 0.8 | % | | — |
| — | % | | (211 | ) | (1.1 | )% | | — |
| — | % | 2 |
| 0.1 | % | | (311 | ) | (5.0 | )% |
Income tax expense | $ | 2,240 |
| 17.5 | % | | $ | 3,385 |
| 29.3 | % | | $ | 3,438 |
| 18.1 | % | | $ | 5,043 |
| 29.5 | % | $ | 2,047 |
| 36.2 | % | | $ | 1,198 |
| 19.4 | % |
Our effective income tax rates for the thirteen weeks ended JuneMarch 27, 20182019 and JuneMarch 28, 20172018 were 17.5%36.2% and 29.3%19.4%, respectively. The decreaseincrease was primarily driven by the reductiontax effect of the U.S. federal corporate incomea change in tax rate from 35% to 21% duebasis relating to the enactmentadoption of the Tax Cuts and Jobs Act of 2017 (the "TCJA"), partially offset by theASC 842 on December 27, 2018 as well as an increase in our ownership interest in SSE Holdings, which increases our share of the taxable income of SSE Holdings, and higher foreign withholding taxes.Holdings. Our weighted-average ownership interest in SSE Holdings was 75.2%79.7% and 70.4%73.5% for the thirteen weeks ended JuneMarch 27, 20182019 and JuneMarch 28, 2017, respectively.
Our effective income tax rates for twenty-six weeks ended June 27, 2018, and June 28, 2017 were 18.1% and 29.5%, respectively. The decrease was primarily driven by the reduction of the U.S. federal corporate income tax rate from 35% to 21% due to the enactment of the TCJA, partially offset by the increase in our ownership interest in SSE Holdings, which increases our share of the taxable income of SSE Holdings, and higher foreign withholding taxes. Our weighted-average ownership interest in SSE Holdings was 74.4% and 70.0% for the twenty-six weeks ended June 27, 2018 and June 28, 2017, respectively.
Deferred Tax Assets and Liabilities
During the twenty-sixthirteen weeks ended JuneMarch 27, 20182019, we acquired an aggregate of 1,578,854177,395 LLC Interests in connection with the redemption of LLC Interests and activity relating to our stock compensation plan. We recognized a deferred tax asset in the amount of $16,831of $1,708 associated with the basis difference in our investment in SSE Holdings upon acquisition of these LLC Interests. As of JuneMarch 27, 20182019, the total deferred tax asset related to the basis difference in our investment in SSE Holdings was $160,314.$169,877. However, a portion of the total basis difference will only reverse upon the eventual sale of our interest in SSE Holdings, which we expect would result in a capital loss. As of JuneMarch 27, 20182019, the total valuation allowance established against the deferred tax asset to which this portion relates was $10,649.$6,010.
During the twenty-sixthirteen weeks ended JuneMarch 27, 20182019, we also recognized $4,972$459 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. See "—Tax Receivable Agreement" for more information.
We evaluate the realizability of our deferred tax assets on a quarterly basis and establish 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 JuneMarch 27, 20182019, we concluded, based on the weight of all available positive and negative evidence, that all of our deferred tax assets (except for those deferred tax assets described above relating to basis differences that are expected to result in a capital loss upon the eventual sale of our interest in SSE Holdings) are more likely than not to be realized. As such, no additional valuation allowance was recognized.
Uncertain Tax Positions
No uncertain tax positions existed as of JuneMarch 27, 20182019. Shake Shack Inc. was formed in September 2014 and did not engage in any operations prior to the IPO and related organizational transactions. Shake Shack Inc. first filed tax returns for tax year 2014, which is the first tax year subject to examination by taxing authorities for U.S. federal and state income tax purposes. Additionally, although SSE Holdings is treated as a partnership for U.S. federal and state income taxes purposes, it is still required to file an annual U.S. Return of Partnership Income, which is subject to examination by the Internal Revenue Service ("IRS"). The statute of limitations has expired for tax years through 20132014 for SSE Holdings.
Tax Receivable Agreement
Pursuant to our election under Section 754 of the Internal Revenue Code (the "Code"), we expect to obtain an increase in our 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. We plan to make an election under Section 754 of the Code for each taxable year in which a redemption or exchange of LLC Interest occurs. We intend 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 we would otherwise pay 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, we 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 us of 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of (i) increases in our 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"). We expect to benefit from the remaining 15% of any tax benefits that we may actually realize. The TRA Payments are not conditioned upon any continued ownership interest in SSE Holdings or us. 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 twenty-sixthirteen weeks ended JuneMarch 27, 20182019, we acquired an aggregate of 1,325,415103,832 LLC Interests in connection with the redemption of LLC Interests, which resulted in an increase in the tax basis of our investment in SSE Holdings subject to the provisions of the Tax Receivable Agreement. We recognized an additional liability in the amount of $17,992$1,636 for the TRA Payments due to the
redeeming members, representing 85% of the aggregate tax benefits we expect 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 our estimates of future taxable income. During the thirteen weeks endedMarch 27, 2019, payments of $707, inclusive of interest, were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement. No payments were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement during the twenty-sixthirteen weeks ended June 27,March 28, 2018. During the twenty-six weeks endedJune 28, 2017, payments of $1,471, inclusive of interest, were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement. As of JuneMarch 27, 20182019, the total amount of TRA Payments due under the Tax Receivable Agreement, was $177,370,$204,641, of which $943$5,097 was included in other current liabilities on the Condensed Consolidated Balance Sheet. See Note 1415 for more information relating to our liabilities under the Tax Receivable Agreement.
NOTE 12:13: EARNINGS PER SHARE Basic earnings per share of Class A common stock is computed by dividing net income attributable to Shake Shack Inc. by the weighted-average number of shares of Class A common stock outstanding during the period. Diluted earnings per share of Class A common stock is computed by dividing net income 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 per share of Class A common stock for the thirteen and twenty-six weeks ended JuneMarch 27, 20182019 and JuneMarch 28, 2017.2018.
| | | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | |
| | | June 27 2018 |
| | June 28 2017 |
| | June 27 2018 |
| | June 28 2017 |
| | | March 27 2019 |
| | March 28 2018 |
|
Numerator: | Numerator: | | | | | | | | Numerator: | | | |
| Net income | $ | 10,571 |
| | $ | 8,184 |
| | $ | 15,550 |
| | $ | 12,046 |
| Net income | $ | 3,607 |
| | $ | 4,979 |
|
| Less: net income attributable to non-controlling interests | 2,967 |
| | 3,305 |
| | 4,438 |
| | 4,900 |
| Less: net income attributable to non-controlling interests | 1,061 |
| | 1,471 |
|
| Net income attributable to Shake Shack Inc. | $ | 7,604 |
| | $ | 4,879 |
| | $ | 11,112 |
| | $ | 7,146 |
| Net income attributable to Shake Shack Inc. | $ | 2,546 |
| | $ | 3,508 |
|
Denominator: | Denominator: | | | | | | | | Denominator: | | | |
| Weighted-average shares of Class A common stock outstanding—basic | 27,796 |
| | 25,798 |
| | 27,418 |
| | 25,587 |
| Weighted-average shares of Class A common stock outstanding—basic | 29,563 |
| | 27,039 |
|
| Effect of dilutive securities: | | | | | | | | Effect of dilutive securities: | | | |
| | Stock options | 867 |
| | 494 |
| | 785 |
| | 523 |
| | Stock options | 731 |
| | 702 |
|
| | Performance stock units | 68 |
| | 20 |
| | 68 |
| | 23 |
| | Performance stock units | 76 |
| | 70 |
|
| | Restricted stock units | 23 |
| | — |
| | 17 |
| | — |
| | Restricted stock units | 22 |
| | 11 |
|
| Weighted-average shares of Class A common stock outstanding—diluted | 28,754 |
| | 26,312 |
| | 28,288 |
| | 26,133 |
| Weighted-average shares of Class A common stock outstanding—diluted | 30,392 |
| | 27,822 |
|
| | | | | | | | | | | | | | |
Earnings per share of Class A common stock—basic | Earnings per share of Class A common stock—basic | $ | 0.27 |
| | $ | 0.19 |
| | $ | 0.41 |
| | $ | 0.28 |
| Earnings per share of Class A common stock—basic | $ | 0.09 |
| | $ | 0.13 |
|
Earnings per share of Class A common stock—diluted | Earnings per share of Class A common stock—diluted | $ | 0.26 |
| | $ | 0.19 |
| | $ | 0.39 |
| | $ | 0.27 |
| Earnings per share of Class A common stock—diluted | $ | 0.08 |
| | $ | 0.13 |
|
Shares of our 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 per share of Class B common stock under the two-class method has not been presented.
The following table presents potentially dilutive securities excluded from the computations of diluted earnings per share of Class A common stock for the thirteen and twenty-six weeks ended JuneMarch 27, 20182019 and JuneMarch 28, 2017.2018.
| | | | Thirteen Weeks Ended | Twenty-Six Weeks Ended | | Thirteen Weeks Ended |
| | | June 27 2018 |
| | June 28 2017 |
| | June 27 2018 |
| | June 28 2017 |
| | | March 27 2019 |
| | March 28 2018 |
| |
Stock options | Stock options | — |
| | 6,258 |
| (1) | — |
| | 6,258 |
| (1) | Stock options | 3,785 |
| (1) | — |
| |
Performance stock units | Performance stock units | 60,437 |
| (2) | 84,755 |
| (2) | 60,437 |
| (2) | 84,755 |
| (2) | Performance stock units | 69,772 |
| (2) | — |
| |
Shares of Class B common stock | Shares of Class B common stock | 8,924,592 |
| (3) | 10,770,992 |
| (3) | 8,924,592 |
| (3) | 10,770,992 |
| (3) | Shares of Class B common stock | 7,453,515 |
| (3) | 9,220,236 |
| (3) |
(1) ExcludedNumber of securities excluded from the computation of diluted earnings per share of Class A common stock because the exercise price of the stock options exceeded the average market price of our Class A common stock during the period ("out-of-the-money").
(2) Excluded from the computation of diluted earnings 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.
(3) Shares of our Class B common stock outstanding as of the end of the period are considered potentially dilutive shares of Class A common stock. Amounts have been excluded from the computations of diluted earnings per share of Class A common stock because the effect would have been anti-dilutive under the if-converted and two-class methods.
NOTE 13:14: SUPPLEMENTAL CASH FLOW INFORMATION The following table sets forth supplemental cash flow information for the twenty-sixthirteen weeks ended JuneMarch 27, 20182019 and JuneMarch 28, 2017:2018:
| | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | |
| | June 27 2018 |
| | June 28 2017 |
| | March 27 2019 |
| | March 28 2018 |
|
Cash paid for: | Cash paid for: | | | | Cash paid for: | | | |
| Income taxes, net of refunds | $ | 1,436 |
| | $ | 1,595 |
| Income taxes, net of refunds | $ | 617 |
| | $ | 854 |
|
| Interest, net of amounts capitalized | 1,067 |
| | 357 |
| Interest, net of amounts capitalized | 72 |
| | 563 |
|
Non-cash investing activities: | Non-cash investing activities: | | | | Non-cash investing activities: | | | |
| Accrued purchases of property and equipment | 10,692 |
| | 7,690 |
| Accrued purchases of property and equipment | 15,763 |
| | 7,302 |
|
| Capitalized landlord assets for leases where we are deemed the accounting owner | 3,307 |
| | 7,634 |
| Capitalized landlord assets for leases where we are deemed the accounting owner | — |
| | 2,327 |
|
| Accrued purchases of marketable securities | — |
| | 80 |
| Capitalized equity-based compensation | 27 |
| | 18 |
|
| Capitalized equity-based compensation | 39 |
| | 78 |
| |
Non-cash financing activities: | Non-cash financing activities: | | | | Non-cash financing activities: | | | |
| Class A common stock issued in connection with the redemption of LLC Interests | 1 |
| | — |
| Class A common stock issued in connection with the redemption of LLC Interests | 1 |
| | 1 |
|
| Cancellation of Class B common stock in connection with the redemption of LLC Interests | (1 | ) | | — |
| Cancellation of Class B common stock in connection with the redemption of LLC Interests | (1 | ) | | (1 | ) |
| Establishment of liabilities under tax receivable agreement | 17,992 |
| | 9,413 |
| Establishment of liabilities under tax receivable agreement | 1,636 |
| | 12,680 |
|
NOTE 14:15: COMMITMENTS AND CONTINGENCIES Lease Commitments
We are obligated under various operating leases for Shacks and our home office space, expiring in various years through 2035. Under certain of these leases, we are liable for contingent rent based on a percentage of sales in excess of specified thresholds and are typically responsible for our proportionate share of real estate taxes, common area maintenance charges and utilities. See Note 9, Leases.
As security under the terms of severalone of our leases, we are obligated under lettersa letter of credit totaling $160$130 as of JuneMarch 27, 2018. The letters of credit expire2019, which expires in April 2019 and February 2026. In addition, we entered into two irrevocable standby letters of credit: (i) in December 2013, we entered into an irrevocable standbya letter of credit in conjunction with our home officeprevious Home Office lease in the amount of $80. The letter of credit$80, which expires in September 20182019 and renews automatically for one-year periods through September 2019. In(ii) in September 2017, we entered into an irrevocable standbya letter of credit in conjunction with our new home officeHome Office lease in the amount of $603. The letter of credit$603, which expires in August 20182019 and renews automatically for one-year periods through January 31, 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. We also enter into long-term, exclusive contracts with certain vendors to supply us with food, beverages and paper goods, obligating us to purchase specified quantities.
Legal Contingencies
In February 2018, a claim was filed against Shake Shack in California state court alleging certain violations of the California Labor Code. At a mediation between the parties, we agreed to settle the matter with the plaintiff and all other California employees who elect to participate in the settlement for $1,200. As of March 27, 2019, an accrual in the amount of $1,200 was recorded for this matter and related expenses.
We are subject to various legal and regulatory proceedings, claims and liabilities, such as employment-related claims and slip and fall cases, which arise in the ordinary course of business and are generally covered by insurance. As of JuneMarch 27, 2018,2019, the amount of the ultimate liability with respect to these matters was not material.
Liabilities under Tax Receivable Agreement
As described in Note 11,12, we are a party to the Tax Receivable Agreement under which we are contractually committed to pay certain of the members of SSE Holdings 85% of the amount of any tax benefits that we actually realize, or in some cases are deemed to realize, as a result of certain transactions. We are not obligated to make any payments under the Tax Receivable Agreement until the tax benefits associated with the transactions that gave rise to the payments are realized. 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 TRA Payments. During the twenty-sixthirteen weeks ended JuneMarch 27, 20182019 and JuneMarch 28, 2017,2018, we recognized liabilities totaling $17,992$1,636 and $9,413,$12,680, respectively, relating to our obligations under the Tax Receivable Agreement, after concluding that it was probable that we would have sufficient future taxable income over the term of the Tax Receivable Agreement to utilize the related tax benefits. As of JuneMarch 27, 20182019 and December 27, 2017,26, 2018, our total obligations under the Tax Receivable Agreement including accrued interest, were $177,370$204,641 and $159,373,$203,725, respectively. There were no transactions subject to the Tax Receivable Agreement for which we did not recognize the related liability, as we concluded that we would have sufficient future taxable income to utilize all of the related tax benefits.
NOTE 15:16: RELATED PARTY TRANSACTIONS Union Square Hospitality Group
The Chairman of our Board of Directors serves as the Chief Executive Officer of Union Square Hospitality Group, LLC. As a result, Union Square Hospitality Group, LLC and its subsidiaries, set forth below, are considered related parties.
USHG, LLC
Effective January 2015, we entered into an Amended and Restated Management Services Agreement with USHG, LLC ("USHG"), in which USHG provides reduced management services to SSE Holdings comprised of executive leadership from members of its senior management, advisory and development services and limited leadership development and human resources services. The initial term of the Amended and Restated Management Services Agreement is through December 31, 2019, with renewal periods.
No amounts were paid to USHG for general corporate expenses for the thirteen weeks ended June 27, 2018. Amounts paid to USHG for general corporate expenses were $2 for the twenty-six weeks endedJune 27, 2018. Amounts paid to USHG for general corporate expenses were $1 and $6 for the thirteen and twenty-six weeks ended June 28, 2017, respectively. These amounts are included in general and administrative expenses on the Condensed Consolidated Statements of Income.
Noamounts were payable to USHG as of June 27, 2018 and December 27, 2017. No amounts were due from USHG as of June 27, 2018 and December 27, 2017.
Hudson Yards Sports and Entertainment
In fiscal 2011, we 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 HYSE'sHYC's option. As consideration for these rights, HYSEHYC pays us a license fee based on a percentage of net food sales, as defined in the MLA. HYSEHYC also pays us a percentage of profits on sales of branded beverages, as defined in the MLA. Amount paid to us by the HYSE for the thirteen and twenty-six weeks endedJune 27, 2018 were $64 and $111, respectively. Amounts paid to us by HYSE for the thirteen and twenty-six weeks ended June 28, 2017 were $115 and $135, respectively. These amounts are included in licensing revenue on the Condensed Consolidated Statements of Income. Total amounts due from HYSE as of June 27, 2018 and December 27, 2017 were $114 and $18, respectively, which are included in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
| Classification | | March 27 2019 |
| | March 28 2018 |
|
Amounts received from HYC | Licensing revenue | | $ | 66 |
| | $ | 47 |
|
|
| | | | | | | | | |
| Classification | | March 27 2019 |
| | December 26 2018 |
|
Amounts due from HYC | Prepaid expenses and other current assets | | $ | 25 |
| | $ | 37 |
|
Madison Square Park Conservancy
The Chairman of our Board of Directors serves as a director of the Madison Square Park Conservancy ("MSP Conservancy"), with which we have a license agreement and pay license fees to operate our Madison Square Park Shack. Amounts paid to MSP Conservancy as rent amounted to $203 and $470 for the thirteen and twenty-six weeks ended June 27, 2018, respectively. Amounts paid to MSP Conservancy as rent amounted to $133 and $332 for the thirteen and twenty-six weeks ended June 28, 2017, respectively. These amounts are included in occupancy and related expenses on the Condensed Consolidated Statements of Income. No amounts were due to MSP Conservancy as of June 27, 2018 and December 27, 2017.
No amounts were paid to us from MSP Conservancy during the thirteen and twenty-six weeks ended June 27, 2018. No amounts were paid to us from MSP Conservancy during the thirteen weeks ended June 28, 2017. Amounts paid to us during the twenty-six weeks ended June 28, 2017 totaled $200. No amounts were due to us from MSP Conservancy as of June 27, 2018 and December 27, 2017. |
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
| Classification | | March 27 2019 |
| | March 28 2018 |
|
Amounts paid to MSP Conservancy | Occupancy and related expenses | | $ | 278 |
| | $ | 267 |
|
|
| | | | | | | | | |
| Classification | | March 27 2019 |
| | December 26 2018 |
|
Amounts due to MSP Conservancy | Accrued expenses | | $ | — |
| | $ | 70 |
|
Share Our Strength
The Chairman of our Board of Directors serves as a director of Share Our Strength, for which Shake Shack holds the "Great American Shake Sale" every year during the month of May to raise money and awareness for childhood hunger. During the Great American Shake Sale, we encourage guests to donate money to Share Our Strength's No Kid Hungry campaign in exchange for a coupon for a free cake-themed shake. All of the guest donations we collect go directly to Share Our Strength.
During No amounts have been raised for the thirteen and twenty-six weeks ended JuneMarch 27, 20182019 and JuneMarch 28, 2017 the Great American Shake Sale raised $343 and $631, respectively, for Share Our Strength. All proceeds were remitted to Share Our Strength in the respective years. We incurred costs of approximately $53 for both the thirteen and twenty-six weeks endedJune 27, 2018, and $119 for both the thirteen and twenty-six weeks ended June 28, 2017. These costs represents the cost of the free shakes redeemed and are included in general and administrative expenses on the Condensed Consolidated Statements of Income. respectively.
Mobo Systems, Inc.
The Chairman of our Board of Directors serves as a director of Mobo Systems, Inc. (also known as "Olo"), a platform we use in connection with our mobile ordering application. Amounts paidNo amounts were due to Olo during the thirteen and twenty-six weeks endedas of JuneMarch 27, 2018 were $27 and $52, respectively. Amounts paid to Olo during the thirteen and twenty-six weeks ended June 28, 2017 were $20 and
$38, respectively. These amounts are included in other operating expenses on the Condensed Consolidated Statements of Income. No amounts were payable to Olo as of June 27, 20182019 and December 27, 2017.26, 2018, respectively.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
| Classification | | March 27 2019 |
| | March 28 2018 |
|
Amounts paid to Olo | Other operating expenses | | $ | 38 |
| | $ | 25 |
|
Square, Inc.
In July 2017, ourOur Chief Executive Officer joinedis a member of the Board of Directors of Square, Inc. ("Square"). We currently use certain point-of-sale applications, payment processing services, hardware and other enterprise platform services in connection with the processing of a limited amount of sales at certain of our Shacks,locations, sales for certain off-site events and in connection with our kiosk technology. Additionally, we partnered with Caviar, Square’s food ordering delivery service, to allow guests to order Shake Shack in select markets as well as participated in Square’s new Boost offers, providing assets and permission for delivery services, in a numberSquare to run select offers to their cash card users. No amounts were due to Square as of cities for limited-time delivery promotions.March 27, 2019 and December 26, 2018, respectively.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
| Classification | | March 27 2019 |
| | March 28 2018 |
|
Amounts paid to Square | Other operating expenses | | $ | 266 |
| | $ | 43 |
|
Tax Receivable Agreement
As described in Note 11,12, we entered into a tax receivable agreement with certain members of SSE Holdings that provides for the payment by us of 85% of the amount of tax benefits, if any, that Shake Shack actually realizes or in some cases is deemed to realize as a result of certain transactions. No payments were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement during the thirteen and twenty-six weeks ended June 27, 2018. No payments were paid to the members during the thirteen weeks ended June 28, 2017. During the twenty-six weeks endedJune 28, 2017, payments totaling $1,471, inclusive of interest, were made to the members of SSE Holdings pursuant to the Tax Receivable Agreement. As of June 27, 2018 and December 27, 2017, total amounts due under the Tax Receivable Agreement were $177,370 and $159,373, respectively.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
| Classification | | March 27 2019 |
| | March 28 2018 |
|
Amounts paid to members (inclusive of interest) | Other current liabilities | | $ | 707 |
| | $ | — |
|
|
| | | | | | | | | |
| Classification | | March 27 2019 |
| | December 26 2018 |
|
Amounts due under the Tax Receivable Agreement | Other current liabilities Liabilities under tax receivable agreement, net of current portion | | $ | 204,641 |
| | $ | 203,725 |
|
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. During the thirteen and twenty-six weeks ended June 27, 2018 distributions paid to non-controlling interest holders were $587 and $670, respectively. During the thirteen and twenty-six weeks ended June 28, 2017 distributions paid non-controlling interest holder were $2,024 and $2,379, respectively. No tax distributions were payable to non-controlling interest holders as of JuneMarch 27, 20182019 and December 27, 201726, 2018., respectively.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
| Classification | | March 27 2019 |
| | March 28 2018 |
|
Amounts paid to non-controlling interest holders | Net income attributable to non-controlling interests | | $ | 109 |
| | $ | 83 |
|
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. All statements other than statements of historical fact are forward-looking statements. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact, such as our expected financial outlook for fiscal 2018,2019, expected Shack openings, expected same-Shack sales growth and trends in our business. Forward-looking statements can also be identified by words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "plan," "potential," "predict," "project," "seek," "may," "can," "will," "would," "could," "should," the negatives thereof and other similar expressions. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. All forward-looking statements are expressly qualified in their entirety by these cautionary statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 27, 201726, 2018 ("20172018 Form 10-K") and Part II, Item 1A of this Form 10-Q. The following discussion should be read in conjunction with our 20172018 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. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Shake Shack is a modern day "roadside" burger stand serving a classic American menu of premium burgers, chicken sandwiches, hot dogs, crinkle cut fries, shakes, frozen custard, beer and wine. As of JuneMarch 27, 2018,2019, there were 179218 Shacks in operation, system-wide, of which 100129 were domestic company-operated Shacks, 1015 were domestic licensed Shacks and 6974 were international licensed Shacks.
Development Highlights
During the quarter, we opened five domestic company-operated Shacks, including our first Shacks in North Carolina at Charlotte's Park Road Shopping Center; in Ohio at Pinecrest, Cleveland's premier shopping, dining, entertainment and residential development; and at the Staten Island Mall in New York; as well as additional Shacks in the existing markets of Orlando and Connecticut. We also opened six international licensed Shacks, which included our first Shack in Hong Kong at the Central IFC Mall, as well as additionalProvidence, Rhode Island. We opened four international licensed Shacks, which included an international licensed Shack in the existing marketsCity of South Korea, JapanShanghai, our first Shack to open in mainland China. Additionally, we opened three domestic licensed Shacks at Dallas Fort Worth Airport, Phoenix Sky Harbor International Airport and the Middle East.Cleveland Hopkins International Airport, further executing on our growth strategy within airports.
Financial Highlights for the SecondFirst Quarter 2019 compared to the First Quarter 2018:
| |
▪ | Total revenue increased 27.3%33.8% to $116.3$132.6 million. |
| |
▪ | Shack sales increased 28.3%33.8% to $112.9$128.6 million. |
| |
▪ | Same-Shack sales increased 1.1%3.6%. |
| |
▪ | Shack system-wide sales increased 33.5% to $195.2 million. |
| |
▪ | Operating income increased 10.9% to $13.0was $5.2 million, or 11.2%3.9% of total revenue.revenue, which included the impact of costs associated with Project Concrete and other one-time items totaling $0.5 million, resulting in a decrease of 20.8%. |
| |
▪ | Shack-level operating profit*, a non-GAAP measure, increased 25.5%12.5% to $31.8$27.0 million, or 28.2%21.0% of Shack sales. Excluding the impact from a one-time benefit to deferred rent related to certain historical leases with co-tenancy provisions, Shack-level operating profit would have been 27.5%. |
| |
▪ | Net income increased 29.2% to $10.6was $3.6 million and net income attributable to Shake Shack Inc. was $7.6 million, or $0.26 per diluted share. |
| |
▪ | Adjustedadjusted EBITDA*, a non-GAAP measure, increased 12.9%10.4% to $21.9$17.8 million. |
| |
▪ | Adjusted pro forma net income*, a non-GAAP measure, increased 50.8% to $11.0 million, or $0.29 per fully exchanged and diluted share. |
| |
▪ | ElevenTwelve system-wide Shack openings, comprisingcomprised of five domestic company-operated Shacks and sixseven licensed Shacks. |
* Shack-level operating profit, adjusted EBITDA and adjusted pro forma net income are non-GAAP measures. See "—Non-GAAP Financial Measures" for reconciliations of Shack-level operating profit to operating income, adjusted EBITDA to net income, and adjusted pro forma net income to net income attributable to Shake Shack Inc., the most directly comparable financial measures presented in accordance with GAAP.
We continued to execute on our strategic growth strategiesplan in 20182019 and the secondfirst quarter was positively impacted by (i) the incremental sales from the 2534 new domestic company-operated Shacks opened between JuneMarch 28, 2017 and June 27, 2018 and (ii) growth in same-Shack sales of 1.1%. These wereMarch 27, 2019, partially offset byby: (i) increased food and paper costs due to expenses related to our promotional launch of Chick'n Bites, higher commodity costs and an increase in packaging costs associated with our digital channel growth; (ii) increased labor and related expenses resulting from ongoing increases in minimum wages, regulatory factors, such as the Fair Workweek legislation in New York City, as well as higher labor costs from the Shacks that opened at the end of fiscal 2018, which typically carry higher labor costs during the first few months of operations and were exacerbated with a compressed opening schedule; (iii) delivery commissions paid as part of certain third-party delivery pilots and higher repair and maintenance costsour digital growth; (iv) impact related to some mature, high-volume Shacks.the adoption of the new lease accounting standard; and (v) the addition of new Shacks at a broader range of average unit volumes.
Net income attributable to Shake Shack Inc. was $7.6$2.5 million, or $0.26$0.08 per diluted share, for the secondfirst quarter of 2018,2019, compared to $4.9$3.5 million, or $0.19$0.13 per diluted share, for the same period last year. On an adjusted pro forma basis, which excludes certain non-recurring and other items and also assumes that all outstanding LLC Interests were exchanged for shares of Class A common stock as of the beginning of the period, we would have recognized net income of $11.0$4.9 million, or $0.29$0.13 per fully exchanged and diluted share, for the secondfirst quarter of 20182019 compared to $7.3$5.7 million, or $0.20$0.15 per fully exchanged and diluted share for the secondfirst quarter of 2017, an increase2018, a decrease of 50.8%12.5%.
These forward-looking projections are subject to known and unknown risks, uncertainties and other important factors that may cause actual results to be materially different. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A of our Form 10-K for the fiscal year ended December 26, 2018 under the heading “Risk Factors.” These forward-looking projections should be reviewed in conjunction with the consolidated financial statements and the section titled “Trends in Our Business” which forms the basis of our assumptions used to prepare these forward-looking projections. You should not attribute undue certainty to these projections and we undertake no obligation to revise or update any forward-looking information, except as required by law.
For the fiscal year ending December 26, 2018,25, 2019, we have revised our financial outlook to the following:following with changes from the previous outlook in bold:
|
| | | |
| Current Outlook | | Previous Outlook |
Total revenue (inclusive of licensing revenue) | $446576 million to $450$582 million | | $446570 million to $450$576 million |
Licensing revenue | $1215 million to $13$16 million | | $1215 million to $13$16 million |
Same-Shack sales growth (%)(1) | 0%1% to 1%2% | | 0% to 1% |
Domestic company-operated Shack openings | 3236 to 3540 | | 3236 to 3540 |
Licensed Shack openings, net | 16 to 18 | | 16 to 18 |
Average annual sales volume for domestic company-operated Shacks | $4.14.0 million to $4.2$4.1 million | | $4.14.0 million to $4.2$4.1 million |
Shack-level operating profit margin (%)(2)(3) | 24.5%23.0% to 25.5%24.0% | | 24.5%23.0% to 25.5%24.0% |
GeneralTotal general and administrative expenses(1)
| $4966.4 million to $51$68.2 million | | $4966.4 million to $51$68.2 million |
Core general and administrative | $56 million to $57 million | | $56 million to $57 million |
Equity-based compensation | $7.4 million to $7.7 million | | $7.4 million to $7.7 million |
One-time costs related to Project Concrete | $3.0 million to $3.5 million | | $3.0 million to $3.5 million |
Project Concrete capital spend | approximately $4 million | | approximately $4 million |
Depreciation expense | $3141 million to $32$42 million | | $3241 million to $42 million |
Pre-opening costs | approximately $13$13 million to $14 million | | $1213 million to $13$14 million |
Interest expense | approximately $2.5$0.3 million to $0.4 million | | $20.3 million to $2.2$0.4 million |
Adjusted pro forma effective tax rate (%)(4) | 26%26.5% to 27%27.5% | | 26%26.5% to 27%27.5% |
| |
(1) | Includes approximately 1.5% of menu price increases taken in December 2018. |
(1) Excludes(2) Includes approximately $6 to $8 million50 bps of estimated costs, acrossimpact from the remainderadoption of this year and well into 2019, related to Project Concrete, our enterprise-wide system upgrade initiative.the new lease accounting standard.
| |
(3) | Shack-level operating profit margin is a non-GAAP measure. A reconciliation to the most directly comparable GAAP measure, operating income, has not been provided as we cannot project certain reconciling items, such as gains or losses on disposal of property and equipment, without unreasonable effort given the uncertainty around the timing and amount of such losses or gains. Losses on disposal of property and equipment were less than $1 million for each of the fiscal years 2018, 2017 and 2016. |
| |
(4) | Adjusted pro forma effective tax rate is a non-GAAP measure. A reconciliation to the most directly comparable GAAP measure, income tax expense, has not been provided as we cannot project income tax expense without unreasonable effort due to our inability to predict changes in our ownership interest in SSE Holdings resulting from redemptions of LLC Interests by non-controlling interest holders and equity-based award activity. Income tax expense for fiscal years 2018, 2017 and 2016 was $8.9 million, $151.4 million and $6.4 million, respectively. |
The following table summarizes our results of operations for the thirteen and twenty-six weeks ended JuneMarch 27, 20182019 and JuneMarch 28, 2017:2018:
| | | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | (dollar amounts in thousands) | June 27 2018 | June 28 2017 | June 27 2018 | June 28 2017 | | (dollar amounts in thousands) | March 27 2019 | | | March 28 2018 | |
Shack sales | Shack sales | $ | 112,898 |
| 97.1 | % | | $ | 88,003 |
| 96.4 | % | | $ | 208,987 |
| 97.0 | % | | $ | 162,158 |
| 96.5 | % | Shack sales | $ | 128,569 |
| 97.0 | % | | $ | 96,089 |
| 96.9 | % |
Licensing revenue | Licensing revenue | 3,384 |
| 2.9 | % | | 3,313 |
| 3.6 | % | | 6,411 |
| 3.0 | % | | 5,907 |
| 3.5 | % | Licensing revenue | 4,040 |
| 3.0 | % | | 3,027 |
| 3.1 | % |
TOTAL REVENUE | TOTAL REVENUE | 116,282 |
| 100.0 | % | | 91,316 |
| 100.0 | % | | 215,398 |
| 100.0 | % | | 168,065 |
| 100.0 | % | TOTAL REVENUE | 132,609 |
| 100.0 | % | | 99,116 |
| 100.0 | % |
Shack-level operating expenses(1): | Shack-level operating expenses(1): | | | | | | | | | | | | Shack-level operating expenses(1): | | | | | |
| Food and paper costs | 31,678 |
| 28.1 | % | | 24,712 |
| 28.1 | % | | 58,633 |
| 28.1 | % | | 45,886 |
| 28.3 | % | Food and paper costs | 37,991 |
| 29.5 | % | | 26,955 |
| 28.1 | % |
| Labor and related expenses | 29,732 |
| 26.3 | % | | 22,426 |
| 25.5 | % | | 56,419 |
| 27.0 | % | | 42,886 |
| 26.4 | % | Labor and related expenses | 37,093 |
| 28.9 | % | | 26,687 |
| 27.8 | % |
| Other operating expenses | 12,281 |
| 10.9 | % | | 8,486 |
| 9.6 | % | | 23,040 |
| 11.0 | % | | 16,151 |
| 10.0 | % | Other operating expenses | 15,568 |
| 12.1 | % | | 10,759 |
| 11.2 | % |
| Occupancy and related expenses | 7,401 |
| 6.6 | % | | 7,043 |
| 8.0 | % | | 15,076 |
| 7.2 | % | | 13,219 |
| 8.2 | % | Occupancy and related expenses | 10,899 |
| 8.5 | % | | 7,675 |
| 8.0 | % |
General and administrative expenses | General and administrative expenses | 12,587 |
| 10.8 | % | | 9,678 |
| 10.6 | % | | 24,396 |
| 11.3 | % | | 18,148 |
| 10.8 | % | General and administrative expenses | 13,937 |
| 10.5 | % | | 11,809 |
| 11.9 | % |
Depreciation expense | Depreciation expense | 6,968 |
| 6.0 | % | | 5,258 |
| 5.8 | % | | 13,466 |
| 6.3 | % | | 10,006 |
| 6.0 | % | Depreciation expense | 8,966 |
| 6.8 | % | | 6,498 |
| 6.6 | % |
Pre-opening costs | Pre-opening costs | 2,421 |
| 2.1 | % | | 1,876 |
| 2.1 | % | | 4,450 |
| 2.1 | % | | 4,291 |
| 2.6 | % | Pre-opening costs | 2,642 |
| 2.0 | % | | 2,029 |
| 2.0 | % |
Loss on disposal of property and equipment | Loss on disposal of property and equipment | 196 |
| 0.2 | % | | 100 |
| 0.1 | % | | 386 |
| 0.2 | % | | 113 |
| 0.1 | % | Loss on disposal of property and equipment | 351 |
| 0.3 | % | | 190 |
| 0.2 | % |
TOTAL EXPENSES | TOTAL EXPENSES | 103,264 |
| 88.8 | % | | 79,579 |
| 87.1 | % | | 195,866 |
| 90.9 | % | | 150,700 |
| 89.7 | % | TOTAL EXPENSES | 127,447 |
| 96.1 | % | | 92,602 |
| 93.4 | % |
OPERATING INCOME | OPERATING INCOME | 13,018 |
| 11.2 | % | | 11,737 |
| 12.9 | % | | 19,532 |
| 9.1 | % | | 17,365 |
| 10.3 | % | OPERATING INCOME | 5,162 |
| 3.9 | % | | 6,514 |
| 6.6 | % |
Other income, net | Other income, net | 406 |
| 0.3 | % | | 198 |
| 0.2 | % | | 634 |
| 0.3 | % | | 393 |
| 0.2 | % | Other income, net | 564 |
| 0.4 | % | | 228 |
| 0.2 | % |
Interest expense | Interest expense | (613 | ) | (0.5 | )% | | (366 | ) | (0.4 | )% | | (1,178 | ) | (0.5 | )% | | (669 | ) | (0.4 | )% | Interest expense | (72 | ) | (0.1 | )% | | (565 | ) | (0.6 | )% |
INCOME BEFORE INCOME TAXES | INCOME BEFORE INCOME TAXES | 12,811 |
| 11.0 | % | | 11,569 |
| 12.7 | % | | 18,988 |
| 8.8 | % | | 17,089 |
| 10.2 | % | INCOME BEFORE INCOME TAXES | 5,654 |
| 4.3 | % | | 6,177 |
| 6.2 | % |
Income tax expense | Income tax expense | 2,240 |
| 1.9 | % | | 3,385 |
| 3.7 | % | | 3,438 |
| 1.6 | % | | 5,043 |
| 3.0 | % | Income tax expense | 2,047 |
| 1.5 | % | | 1,198 |
| 1.2 | % |
NET INCOME | NET INCOME | 10,571 |
| 9.1 | % | | 8,184 |
| 9.0 | % | | 15,550 |
| 7.2 | % | | 12,046 |
| 7.2 | % | NET INCOME | 3,607 |
| 2.7 | % | | 4,979 |
| 5.0 | % |
Less: net income attributable to non-controlling interests | 2,967 |
| 2.6 | % | | 3,305 |
| 3.6 | % | | 4,438 |
| 2.1 | % | | 4,900 |
| 2.9 | % | |
Less: net loss attributable to non-controlling interests | | Less: net loss attributable to non-controlling interests | 1,061 |
| 0.8 | % | | 1,471 |
| 1.5 | % |
NET INCOME ATTRIBUTABLE TO SHAKE SHACK INC. | NET INCOME ATTRIBUTABLE TO SHAKE SHACK INC. | $ | 7,604 |
| 6.5 | % | | $ | 4,879 |
| 5.3 | % | | $ | 11,112 |
| 5.2 | % | | $ | 7,146 |
| 4.3 | % | NET INCOME ATTRIBUTABLE TO SHAKE SHACK INC. | $ | 2,546 |
| 1.9 | % | | $ | 3,508 |
| 3.5 | % |
| |
(1) | As a percentage of Shack sales. |
Shack Sales
Shack sales represent the aggregate sales of food, beverages and Shake Shack branded merchandise at our domestic company-operated Shacks. Shack sales in any period are directly influenced by the number of operating weeks in such period, the number of open Shacks and same-Shack sales. Same-Shack sales means, for any reporting period, sales for the comparable Shack base, which we define as the number of domestic company-operated Shacks open for 24 full fiscal months or longer.
Shack sales were $112.9 million for the thirteen weeks ended June 27, 2018 compared to $88.0 million for the thirteen weeks ended June 28, 2017, an increase of $24.9 million or 28.3%. |
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Shack sales | $ | 128,569 |
| | $ | 96,089 |
|
| Percentage of total revenue | 97.0 | % | | 96.9 | % |
| Dollar change compared to prior year | $ | 32,480 |
| | |
| Percentage change compared to prior year | 33.8 | % | | |
The growth in Shack sales was primarily driven by the opening of 2534 new domestic company-operated Shacks between JuneMarch 28, 20172018 and JuneMarch 27, 2018.2019. Same-Shack sales increased $0.7$2.6 million, or 1.1%3.6%. The increase in same-Shack sales consisted of an increase in guest traffic of 1.6% and a combined increase in price and sales mix of 3.7% offset by a 2.6% decrease in guest traffic. For purposes of calculating same-Shack sales growth, Shack sales for 50 Shacks were included in the comparable Shack base.
Shack sales were $209.0 million for the twenty-six weeks ended June 27, 2018 compared to $162.2 million for the twenty-six weeks ended June 28, 2017, an increase of $46.8 million or 28.9%. The increase is primarily due to the opening of 25 new domestic company-operated Shacks between June 28, 2017 and June 27, 2018. Same-Shack sales increased $1.5 million, or 1.3%. The increase in same-Shack sales, consisted of a combined increase in price and sales mix of 4.6% offset by a 3.3% decrease in guest
traffic. Excluding all transactions associated with the free burger promotion in the prior year, our same-Shack sales would have been 1.5% for the twenty-six weeks ended June 27, 2018, with traffic declining by 2.4%2.0%. For purposes of calculating same-Shack sales growth, Shack sales for 5066 Shacks were included in the comparable Shack base.
Licensing Revenue
Licensing revenue is comprised of licensesales-based royalty fees and amortization of certain upfront fees, including opening fees for certain licensed Shacks and territory fees. License fees are calculated as a percentage of sales andinitial territory fees are paymentsreceived for the exclusive right to develop Shacks in a specific geographic area.
Licensing revenue was $3.4 million for the thirteen weeks ended June 27, 2018 compared to $3.3 million for the thirteen weeks ended June 28, 2017, an increase of $0.1 million or 2.1%. Licensing revenue was $6.4 million for the twenty-six weeks ended June 27, 2018 compared to $5.9 million for the twenty-six weeks ended June 28, 2017, an increase of $0.5 million or 8.5%. |
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Licensing revenue | $ | 4,040 |
| | $ | 3,027 |
|
| Percentage of total revenue | 3.0 | % | | 3.1 | % |
| Dollar change compared to prior year | $ | 1,013 |
| | |
| Percentage change compared to prior year | 33.5 | % | | |
The increase for the thirteen week periodin licensing revenue was primarily driven by 20 new licenseda net increase of 16 Shacks openedopening between JuneMarch 28, 20172018 and JuneMarch 27, 2018, with strong performance in the Shacks throughout Asia, balanced by continued softness in the Middle East.2019.
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, changingchange with sales volume, and are impacted by menu mix and fluctuationsare subject to increases or decreases in commodity costs.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Food and paper costs | $ | 37,991 |
| | $ | 26,955 |
|
| Percentage of Shack sales | 29.5 | % | | 28.1 | % |
| Dollar change compared to prior year | $ | 11,036 |
| | |
| Percentage change compared to prior year | 40.9 | % | | |
The increase in food and paper costs were $31.7 million for the thirteen weeks ended JuneMarch 27, 2018 compared to $24.7 million for the thirteen weeks ended June 28, 2017, an increase of $7.0 million or 28.2%. Food and paper costs were $58.6 million for thetwenty-six weeks ended June 27, 2018 compared to $45.9 million for the twenty-six weeks ended June 28, 2017, an increase of $12.7 million or 27.8%. The increases for the thirteen and twenty-six week periods were2019 was primarily due to the opening of 2534 new domestic company-operated Shacks between JuneMarch 28, 20172018 and JuneMarch 27, 2018.
As2019. The increase in food and paper costs as a percentage of Shack sales food and paper costs remained constant at 28.1% for the thirteen weeks ended JuneMarch 27, 2018 and June 28, 2017, which was a result of higher beef costs, offset by sponsorship receipts for our biennial leadership retreat. As a percentage of Shack sales, food and paper costs decreased to 28.1% from 28.3% for the twenty-six weeks ended June 27, 2018 and June 28, 2017, respectively. This decrease2019 was the result of a number of factors including efficiencies in our remaining basket of food, the menu price increase we implemented in December 2017 and sponsorship receipts for our biennial leadership retreat, offset by rising beef costs andincluding: (i) increased costs associated with the free burger promotion related to theour promotional launch of Chick'n Bites; (ii) higher commodity costs, in particular beef; (iii) and an increase in packaging costs associated with our mobile app.digital channel growth.
Labor and Related Expenses
Labor and related expenses include domestic company-operated Shack-level hourly and management wages, bonuses, payroll taxes, equity-based compensation, workers'workers’ compensation expense and medical benefits. As we expect with other variable expense items, we expect labor costs to grow as our Shack sales grow. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs and the performance of our domestic company-operated Shacks.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Labor and related expenses | $ | 37,093 |
| | $ | 26,687 |
|
| Percentage of Shack sales | 28.9 | % | | 27.8 | % |
| Dollar change compared to prior year | $ | 10,406 |
| | |
| Percentage change compared to prior year | 39.0 | % | | |
The increase in labor and related expenses were $29.7 million for the thirteen weeks ended JuneMarch 27, 2018 compared to $22.4 million for the thirteen weeks ended June 28, 2017, an increase of $7.3 million or 32.6%. Labor and related expenses were $56.4 million for the twenty-six weeks ended June 27, 2018 compared to $42.9 million for the twenty-six weeks ended June 28, 2017, an increase of $13.5 million or 31.6%. These increases for the thirteen and twenty-six week periods were2019 was primarily due to the opening of 2534 new domestic company-operated Shacks between JuneMarch 28, 20172018 and JuneMarch 27, 2018.
2019. As a percentage of Shack sales, the
increase in labor and related expenses increased to 26.3% and 27.0% for the thirteen and twenty-six weeks ended JuneMarch 27, 2018, respectively, compared to 25.5% and 26.4% for the thirteen and twenty-six weeks ended June 28, 2017, respectively. The increases for the thirteen and twenty-six week periods were2019 was primarily due to increased labor and related expenses resulting from ongoing increases to hourlyin minimum wages and regulatory factors, such as the entry of lower volume Shacks into the system,Fair Workweek legislation in New York City, as well as higher labor costs from the timingShacks that opened at the end of new Shack openingsfiscal 2018, which typically carry higher labor costs initially.
during the first few months of operations and were exacerbated with a compressed opening schedule.
Other Operating Expenses
Other operating expenses consist of 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, property insurancedelivery commissions and the costs of repairs and maintenance.business insurance.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Other operating expenses | $ | 15,568 |
| | $ | 10,759 |
|
| Percentage of Shack sales | 12.1 | % | | 11.2 | % |
| Dollar change compared to prior year | $ | 4,809 |
| | |
| Percentage change compared to prior year | 44.7 | % | | |
The increase in other operating expenses were $12.3 million for the thirteen weeks ended JuneMarch 27, 2018 compared to $8.5 million for the thirteen weeks ended June 28, 2017, an increase of $3.8 million or 44.7%. Other operating expenses were $23.0 million for the twenty-six weeks ended June 27, 2018 compared to $16.2 million for the twenty-six weeks ended June 28, 2017, an increase of $6.8 million or 42.7%. The increases for the thirteen and twenty-six week periods were2019 was primarily due to the opening of 2534 new domestic company-operated Shacks between JuneMarch 28, 20172018 and JuneMarch 27, 2018.
2019. As a percentage of Shack sales, the increase in other operating expenses increased to 10.9% and 11.0% for the thirteen and twenty-six weeks ended JuneMarch 27, 2018, respectively, compared to 9.6% and 10.0% for the thirteen and twenty-six weeks ended June 28, 2017, respectively. The increase2019 was primarily due to higher repair and maintenance costs related to some mature, high-volume Shacks and delivery commissions paid as part of the integrated pilots during the year.our digital growth.
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 Shacksexcluding pre-opening costs, which are recorded separately in pre-opening costs.
Occupancyseparately. We adopted the new lease accounting standard on December 27, 2018, refer to "Note 9: Leases" under Part I, Item 1 of this Form 10-Q for further details on the impact to occupancy and related expenses.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Occupancy and related expenses | $ | 10,899 |
| | $ | 7,675 |
|
| Percentage of Shack sales | 8.5 | % | | 8.0 | % |
| Dollar change compared to prior year | $ | 3,224 |
| | |
| Percentage change compared to prior year | 42.0 | % | | |
The increase in occupancy and related expenses were $7.4 million for the thirteen weeks ended JuneMarch 27, 2018 compared to $7.0 million for the thirteen weeks ended June 28, 2017, an increase of $0.4 million or 5.1%. Occupancy and related expenses were $15.1 million for the twenty-six weeks ended June 27, 2018 compared to $13.2 million for the twenty-six weeks ended June 28, 2017, an increase of $1.9 million or 14.0%. The increases for the thirteen and twenty-six week periods were2019 was primarily due to the opening of 2534 new domestic company-operated Shacks between JuneMarch 28, 20172018 and JuneMarch 27, 2018, offset by the impact from a one-time benefit to deferred rent related to certain historical leases with co-tenancy provisions.
2019. As a percentage of Shack sales, the increase in occupancy and related expenses decreased to 6.6% and 7.2% for the thirteen and twenty-six weeks ended JuneMarch 27, 2018, respectively, compared to 8.0% and 8.2% for the thirteen and twenty-six weeks ended June 28, 2017, respectively. The decreases2019 was primarily due to the increased number of leases where we are deemed to be the accounting owner and for which less rent expense is recognized and the impact from a one-time benefit to deferred rent related to certain historical leases with co-tenancy provisions, partially offset by the introduction of Shacks at various volumes into the system.new accounting lease standard adopted in fiscal 2019.
General and Administrative Expenses
General and administrative expenses consist of costs associated with corporateHome Office and administrative functions that support Shack development and operations, as well as equity-based compensation expense.
General
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
General and administrative expenses | $ | 13,937 |
| | $ | 11,809 |
|
| Percentage of total revenue | 10.5 | % | | 11.9 | % |
| Dollar change compared to prior year | $ | 2,128 |
| | |
| Percentage change compared to prior year | 18.0 | % | | |
The increase in general and administrative expenses were $12.6 million for the thirteen weeks ended JuneMarch 27, 2018 compared2019 was primarily due to $9.7 million for the thirteen weeks ended June 28, 2017, an increase in investment across all areas of $2.9 million or 30.1%. General and administrative expenses were $24.4 million for the twenty-six weeks ended June 27, 2018 compared to $18.1 million for the twenty-six weeks ended June 28, 2017, an increase of $6.3 million or 34.4%. The increase for the thirteen week period was primarily driven by higher payroll expenses from increased headcount at our Home Officebusiness including foundational infrastructure upgrades to support our ongoing growth. The increase for the twenty-six week period was primarily driven by the aforementionedgrowth initiatives, with costs as well as costsof $0.5 million related to the relocation of our new Home Office, including duplicative non-cash deferred rent, a net loss on the sublease of our old Home OfficeProject Concrete and the disposal of certain fixed assets.
other one-time charges. As a percentage of total revenue, the decrease in general and administrative expenses increased to 10.8% and 11.3% for the thirteen and twenty-six weeks ended JuneMarch 27, 2018, respectively, from 10.6% and 10.8% for the thirteen and twenty-six weeks ended June 28, 2017, respectively. These increases were2019 was primarily due to the aforementioned items.increased levels of Shack sales.
Depreciation Expense
Depreciation expense consists of the depreciation of fixed assets, including leasehold improvements and equipment.equipment, as well as financing equipment lease assets beginning upon the new lease accounting standard adoption on December 27, 2018.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Depreciation expense | $ | 8,966 |
| | $ | 6,498 |
|
| Percentage of total revenue | 6.8 | % | | 6.6 | % |
| Dollar change compared to prior year | $ | 2,468 |
| | |
| Percentage change compared to prior year | 38.0 | % | | |
The increase in depreciation expense was $7.0 million for the thirteen weeks ended JuneMarch 27, 2018 compared to $5.3 million for the thirteen weeks ended June 28, 2017, an increase of $1.7 million or 32.5%. Depreciation expense2019 was $13.5 million for the twenty-six weeks ended June 27, 2018 compared to $10.0 million for the twenty-six weeks ended June 28, 2017, an increase of $3.5 million or 34.6%. The
increases for the thirteen and twenty-six week periods were primarily due to incremental depreciation of capital expenditures related to the opening of 2534 new domestic company-operated Shacks between JuneMarch 28, 20172018 and JuneMarch 27, 2018.
2019. As a percentage of total revenue, the increase in depreciation expense increased to 6.0% and 6.3% for the thirteen and twenty-six weeks ended JuneMarch 27, 2018, respectively, compared to 5.8% and 6.0% for the thirteen and twenty-six weeks ended June 28, 2017, respectively,2019 were primarily due to the entry of Shacks at various volumes into the system.system and the impact of the new lease accounting standard adopted in fiscal 2019.
Pre-Opening Costs
Pre-opening costs consist primarily of legal fees, rent, managers' salaries,of: (i) rent; (ii) managers’ salaries; (iii) training costs,costs; (iv) employee payroll and related expenses,expenses; (iv) all costs to relocate and compensate Shack management teams prior to an opening andopening; (v) wages, travel and lodging costs for our opening training team and other supportingsupport team members.members; (vi) marketing costs; (vii) attorney fees; and (viii) permits and licensing. All such costs incurred prior to the opening of a domestic company-operated Shack are expensed in the period in which the expense wasis 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 incurredrecognized for each domestic company-operated Shack. Additionally, domestic company-operated Shack openings in new geographic market areas maywill initially experience higher pre-opening costs than our established geographic market areas, such as the New York City metropolitan area, where we have greater economies of scale and typically incur lower travel and lodging costs for our training team.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Pre-opening costs | $ | 2,642 |
| | $ | 2,029 |
|
| Percentage of total revenue | 2.0 | % | | 2.0 | % |
| Dollar change compared to prior year | $ | 613 |
| | |
| Percentage change compared to prior year | 30.2 | % | | |
The increase in pre-opening costs were $2.4 million for the thirteen weeks ended JuneMarch 27, 2018 compared to $1.9 million for the thirteen weeks ended June 28, 2017, an increase of $0.5 million or 29.1%. Pre-opening costs were $4.5 million for the twenty-six weeks ended June 27, 2018 compared to $4.3 million for the twenty-six weeks ended June 28, 2017, an increase of $0.2 million or 3.7%. These increases were2019 was due to the timing and total number of new domestic company-operated Shacks expected to open.
Loss on Disposal of Property and Equipment
Loss on disposal of property and equipment represents the net book value of assets that have been retired and consists primarily of furniture, equipment and fixtures that were replaced in the normal course of business.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Loss on disposal of property and equipment | $ | 351 |
| | $ | 190 |
|
| Percentage of total revenue | 0.3 | % | | 0.2 | % |
| Dollar change compared to prior year | $ | 161 |
| | |
| Percentage change compared to prior year | 84.7 | % | | |
The loss on disposal of property and equipment for the thirteen and twenty-six weeks ended JuneMarch 27, 2019 and March 28, 2018 was $0.2 million and $0.4 million, respectively, compared to $0.1 million for the thirteen and twenty-six weeks ended June 28, 2017.not material.
Other Income, Netnet
Other income net consists of interest income, dividend income, adjustments to liabilities under our tax receivable agreement and net realized and unrealized gains and losses from the sale of marketable securities.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Other income, net | $ | 564 |
| | $ | 228 |
|
| Percentage of total revenue | 0.4 | % | | 0.2 | % |
| Dollar change compared to prior year | $ | 336 |
| | |
| Percentage change compared to prior year | 147.4 | % | | |
The increase in other income, net for the thirteen and twenty-six weeks ended JuneMarch 27, 20182019 was $0.4 million and $0.6 million, respectively, comparedprimarily related to $0.2 million and $0.4 million for the thirteen and twenty-six weeks ended June 28, 2017, respectively, which primarily consisted of dividend income and unrealized gains related to theour investments in marketable securities.
Interest Expense
Interest expense primarily consists of amortization of deferred financing costs, imputed interest on deferred compensation, interest on the current portion of our liabilities under the Tax Receivable Agreement, interest and fees on our Revolving Credit Facility, interest expense related to finance leases, as well as the imputed interest on our deemed landlord financing liability as well asfor periods before the new lease accounting standard adopted on December 27, 2018.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Interest expense | $ | (72 | ) | | $ | (565 | ) |
| Percentage of total revenue | (0.1 | )% | | (0.6 | )% |
| Dollar change compared to prior year | $ | 493 |
| | |
| Percentage change compared to prior year | (87.3 | )% | | |
The decrease in interest and fees on our Revolving Credit Facility.
Interest expense for the thirteen and twenty-six weeks ended June 27, 2018 was $0.6 million and $1.2 million, respectively, compared to $0.4 million and $0.7 million for the thirteen and twenty-six weeks ended June 28, 2017, respectively. These increases were primarily due to the increased number of leases where we arewere deemed to be the accounting owner.owner in the prior year, but are no longer considered to be after the adoption of the new lease accounting standard.
Income Tax Expense
We are the sole managing member of SSE Holdings, which 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 generated by SSE Holdings.
In December 2017, the TCJA was enacted into law. |
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Income tax expense | $ | 2,047 |
| | $ | 1,198 |
|
| Percentage of total revenue | 1.5 | % | | 1.2 | % |
| Dollar change compared to prior year | $ | 849 |
| | |
| Percentage change compared to prior year | 70.9 | % | | |
The TCJA provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended, including the reduction of the U.S. federal corporateincrease in income tax rate from 35% to 21%, among other provisions.
Income tax expense was $2.2 million for the thirteen weeks ended JuneMarch 27, 2018 compared to $3.4 million for the thirteen weeks ended June 28, 2017. Our effective income tax rate decreased to 17.5% for the thirteen weeks ended June 27, 2018 from 29.3% for the thirteen weeks ended June 28, 2017. The decrease in income tax expense is2019 was primarily driven by the aforementioned rate reduction resulting from the enactmentimpact of the TCJA, partially offset byof the new lease accounting standard adopted on December 27, 2018, as well as the increase in our ownership interest in SSE Holdings, which increases our share of the taxable income of SSE Holdings, and higher foreign withholding taxes.
Income tax expense was $3.4 million for the twenty-six weeks ended June 27, 2018 compared to $5.0 million for the twenty-six weeks ended June 28, 2017. Our effective income tax rate decreased to 18.1% for the twenty-six weeks ended June 27, 2018 from 29.5% for the twenty-six weeks ended June 28, 2017.
Holdings. As our ownership interest in SSE Holdings increases, our share of the taxable income of SSE Holdings will also increase. When compared to consolidated pre-tax income, this will result in increases to our effective income tax rate.increases. Our weighted-average ownership interest in SSE Holdings increased to 75.2% and 74.4%79.7% from 73.5%for the thirteen and twenty-six weeks ended March 27, 2019 and March 28, 2018, respectively. Our effective income tax rate increased to 36.2% June 27, 2018from , respectively, 19.4%compared to 70.4% and 70.0% for the thirteen and twenty-six weeks ended June March 27, 2019 and March 28, 2017, respectively.2018, respectively, primarily due to the aforementioned items.
Net Income 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, representing the portion of net income 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.
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Net income attributable to non-controlling interests | $ | 1,061 |
| | $ | 1,471 |
|
| Percentage of total revenue | 0.8 | % | | 1.5 | % |
| Dollar change compared to prior year | $ | (410 | ) | | |
| Percentage change compared to prior year | (27.9 | )% | | |
The The weighted average ownership percentages for the applicable reporting periods are used to attributedecrease in net income and other comprehensive income to Shake Shack Inc. and the non-controlling interest holders.
Net income attributable to non-controlling interests was $3.0 million and $3.3 millionfor the thirteen weeks ended JuneMarch 27, 2018 and June 28, 2017, respectively, a decrease of $0.3 million or 10.2%. This decrease2019 was primarily driven by the decreasean increase in the non-controllingour weighted-average ownership interest holders' weighted average ownership, which was 24.8% and 29.6% in SSE Holdings to 79.7% from 73.5%for the thirteen weeks ended June 27,March 28, 2018 and June 28, 2017, respectively.as a result of redemptions of LLC Interests.
Net income attributable to non-controlling interests was $4.4 million and $4.9 million for the twenty-six weeks ended June 27, 2018 and June 28, 2017, respectively, a decrease of $0.5 million or 9.4%. This decrease was primarily driven by a decrease in the non-controlling interest holders' weighted average ownership, which was 25.6% and 30.0% for the twenty-six weeks ended June 27, 2018 and June 28, 2017, respectively.
NON-GAAP FINANCIAL MEASURES
To supplement the consolidated financial statements, which are prepared and presented in accordance with U.S. generally accepted accounting principles (“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 and adjusted pro forma earnings per fully exchanged and diluted share (collectively the "non-GAAP financial measures").
Shack-Level Operating Profit
Shack-level operating profit is defined as Shack sales less Shack-level operating expenses including food and paper costs, labor and related expenses, other operating expenses and occupancy and related expenses.
How This Measure Is Useful
When used in conjunction with GAAP financial measures, Shack-level operating profit and Shack-level operating profit margin are supplemental measures of operating performance that 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 employee compensation as it serves as a metric in certain of our performance-based employee 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 operating income, the most directly comparable GAAP financial measure, is as follows.
| | | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | |
(dollar amounts in thousands) | (dollar amounts in thousands) | June 27 2018 |
| | June 28 2017 |
| | June 27 2018 |
| | June 28 2017 |
| (dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Operating income | Operating income | $ | 13,018 |
| | $ | 11,737 |
| | $ | 19,532 |
| | $ | 17,365 |
| Operating income | $ | 5,162 |
| | $ | 6,514 |
|
Less: | Less: | | | | | | | | Less: | | | |
| Licensing revenue | 3,384 |
| | 3,313 |
| | 6,411 |
| | 5,907 |
| Licensing revenue | 4,040 |
| | 3,027 |
|
Add: | Add: | | | | | | | | Add: | | | |
| General and administrative expenses | 12,587 |
| | 9,678 |
| | 24,396 |
| | 18,148 |
| General and administrative expenses | 13,937 |
| | 11,809 |
|
| Depreciation expense | 6,968 |
| | 5,258 |
| | 13,466 |
| | 10,006 |
| Depreciation expense | 8,966 |
| | 6,498 |
|
| Pre-opening costs | 2,421 |
| | 1,876 |
| | 4,450 |
| | 4,291 |
| Pre-opening costs | 2,642 |
| | 2,029 |
|
| Loss on disposal of property and equipment | 196 |
| | 100 |
| | 386 |
| | 113 |
| Loss on disposal of property and equipment | 351 |
| | 190 |
|
Shack-level operating profit | Shack-level operating profit | $ | 31,806 |
| | $ | 25,336 |
| | $ | 55,819 |
| | $ | 44,016 |
| Shack-level operating profit | $ | 27,018 |
| | $ | 24,013 |
|
| | | | | | | | | | | | |
Total revenue | Total revenue | $ | 116,282 |
| | $ | 91,316 |
| | $ | 215,398 |
| | $ | 168,065 |
| Total revenue | $ | 132,609 |
| | $ | 99,116 |
|
Less: licensing revenue | Less: licensing revenue | 3,384 |
| | 3,313 |
| | 6,411 |
| | 5,907 |
| Less: licensing revenue | 4,040 |
| | 3,027 |
|
Shack sales | Shack sales | $ | 112,898 |
| | $ | 88,003 |
| | $ | 208,987 |
| | $ | 162,158 |
| Shack sales | $ | 128,569 |
| | $ | 96,089 |
|
| | | | | | | | | | | | |
Shack-level operating profit margin | Shack-level operating profit margin | 28.2 | % | | 28.8 | % | | 26.7 | % | | 27.1 | % | Shack-level operating profit margin | 21.0 | % | | 25.0 | % |
EBITDA and Adjusted EBITDA
EBITDA is defined as net income before interest expense (net of interest income), income tax expense and depreciation and amortization expense. Adjusted EBITDA is defined as EBITDA (as defined above) excluding equity-based compensation expense, deferred rent expense,lease costs, losses on the disposal of property and equipment, as well as certain non-recurring items that we don't believe directly reflect our core operations and may not be indicative of our recurring business operations.
How These Measures Are Useful
When used in conjunction with GAAP financial measures, EBITDA and adjusted EBITDA are supplemental measures of operating performance that 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.
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, the most directly comparable GAAP measure, is as follows.
|
| | | | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | |
(in thousands) | June 27 2018 |
| | June 28 2017 |
| | June 27 2018 |
| | June 28 2017 |
|
Net income | $ | 10,571 |
| | $ | 8,184 |
| | $ | 15,550 |
| | $ | 12,046 |
|
Depreciation expense | 6,968 |
| | 5,258 |
| | 13,466 |
| | 10,006 |
|
Interest expense, net | 613 |
| | 347 |
| | 1,171 |
| | 630 |
|
Income tax expense | 2,240 |
| | 3,385 |
| | 3,438 |
| | 5,043 |
|
EBITDA | 20,392 |
| | 17,174 |
| | 33,625 |
| | 27,725 |
|
| | | | | | | | |
Equity-based compensation | 1,303 |
| | 1,285 |
| | 2,740 |
| | 2,534 |
|
Deferred rent | (361 | ) | | 302 |
| | (292 | ) | | 527 |
|
Loss on disposal of property and equipment | 196 |
| | 100 |
| | 386 |
| | 113 |
|
Executive and management transition costs(1) | 248 |
| | 517 |
| | 248 |
| | 651 |
|
Project Concrete(2) | 77 |
| | — |
| | 316 |
| | — |
|
Costs related to relocation of Home Office(3) | 19 |
| | — |
| | 1,017 |
| | — |
|
Adjusted EBITDA | $ | 21,874 |
| | $ | 19,378 |
| | $ | 38,040 |
| | $ | 31,550 |
|
| | | | | | | | |
Adjusted EBITDA margin | 18.8 | % | | 21.2 | % | | 17.7 | % | | 18.8 | % |
|
| | | | | | | | |
| Thirteen Weeks Ended | |
(dollar amounts in thousands) | March 27 2019 |
| | March 28 2018 |
|
Net income | $ | 3,607 |
| | $ | 4,979 |
|
Depreciation expense | 8,966 |
| | 6,498 |
|
Interest expense, net | 72 |
| | 558 |
|
Income tax expense | 2,047 |
| | 1,198 |
|
EBITDA | 14,692 |
| | 13,233 |
|
| | | |
Equity-based compensation | 1,720 |
| | 1,437 |
|
Deferred lease costs(1) | 585 |
| | 69 |
|
Loss on disposal of property and equipment | 351 |
| | 190 |
|
Other income related to adjustment of liabilities under tax receivable agreement | (14 | ) | | — |
|
Executive transition costs (2) | 38 |
| | — |
|
Project concrete (3) | 472 |
| | 239 |
|
Costs related to relocation of Home Office (4) | — |
| | 998 |
|
ADJUSTED EBITDA | $ | 17,844 |
| | $ | 16,166 |
|
| | | |
Adjusted EBITDA margin(5) | 13.5 | % | | 16.3 | % |
| |
(1) | ForReflects the thirteen and twenty-six weeks ended Juneextent to which lease expense is greater than or less than cash lease payments. As a result of adoption of the new lease accounting standard on December 27, 2018, representsthese lease costs may also include certain additional lease components, such as common area maintenance costs and property taxes, that were previously not included in lease expense for prior periods. |
| |
(2) | Represents fees paid in connection with the search for certain of our open executive and key management positions, and other transition costs, including related equity-based compensation. For the thirteen and twenty-six weeks ended June 28, 2017, represents fees paid to an executive recruiting firm and a non-recurring signing bonus paid upon the hiring of our chief financial officer.positions. |
(2)(3) Represents consulting and advisory fees related to our enterprise-wide system upgrade initiative called Project Concrete.
(3)(4) Costs incurred in connection with our relocation to a new Home Office, which is comprised of: (i) $326Office.
(5) Calculated as a percentage of duplicative non-cash deferred rent, (ii) $672 net loss on the sublease of our prior Home Office, including the write-off of certain fixed assets and (iii) $19 of administrative cost.total revenue.
Adjusted Pro Forma Net Income and Adjusted Pro Forma Earnings Per Fully Exchanged and Diluted Share
Adjusted pro forma net income represents net income attributable to Shake Shack Inc. assuming the full exchange of all outstanding SSE Holdings, LLC membership interests ("LLC Interests") for shares of Class A common stock, adjusted for certain non-recurring items that we don't believe directly reflect our core operations and may not be indicative of our recurring business operations. Adjusted pro forma earnings per fully exchanged and diluted share is calculated by dividing adjusted pro forma net income by the weighted-average shares of Class A common stock outstanding, assuming the full exchange of all outstanding LLC Interests, after giving effect to theany dilutive effect ofsecurities such as outstanding equity-based awards.
How These Measures Are Useful
When used in conjunction with GAAP financial measures, adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share are supplemental measures of operating performance that 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 attributable to Shake Shack Inc. driven by increases in our ownership of SSE Holdings, which are unrelated to 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 and adjusted pro forma earnings per fully exchanged and diluted share may differ fromare not necessarily comparable to similarly titled measures used by other companies due to different methods of calculation. Presentation of adjusted pro forma net income and adjusted pro forma earnings per fully exchanged and diluted share should not be considered alternatives to net
income and earnings per share, as determined under GAAP. While these measures are useful in evaluating our performance, it does not account for the earnings attributable to the non-controlling interest holders and therefore does not provide a complete understanding of the net income attributable to Shake Shack Inc. Adjusted pro forma net income and adjusted pro forma earnings per fully exchanged
and diluted share should be evaluated in conjunction with our GAAP financial results. A reconciliation of adjusted pro forma net income to net income attributable to Shake Shack Inc., the most directly comparable GAAP measure, and the computation of adjusted pro forma earnings per fully exchanged and diluted share are set forth below.
| | | | Thirteen Weeks Ended | | | Twenty-Six Weeks Ended | | | Thirteen Weeks Ended | |
(in thousands, except per share amounts) | (in thousands, except per share amounts) | June 27 2018 |
| | June 28 2017 |
| | June 27 2018 |
| | June 28 2017 |
| (in thousands, except per share amounts) | March 27 2019 |
| | March 28 2018 |
|
Numerator: | Numerator: | | | | | | | | Numerator: | | | |
| Net income attributable to Shake Shack Inc. | $ | 7,604 |
| | $ | 4,879 |
| | $ | 11,112 |
| | $ | 7,146 |
| Net income attributable to Shake Shack Inc. | $ | 2,546 |
| | $ | 3,508 |
|
| Adjustments: | | | | | | | | Adjustments: | | | |
| | Reallocation of net income attributable to non-controlling interests from the assumed exchange of LLC Interests(1) | 2,967 |
| | 3,305 |
| | 4,438 |
| | 4,900 |
| | Reallocation of net income attributable to non-controlling interests from the assumed exchange of LLC Interests(1) | 1,061 |
| | 1,471 |
|
| | Executive and management transition costs(2) | 248 |
| | 517 |
| | 248 |
| | 651 |
| | Executive transition costs(2) | 38 |
| | — |
|
| | Project Concrete(3) | 77 |
| | — |
| | 316 |
| | — |
| | Project Concrete(3) | 472 |
| | 239 |
|
| | Costs related to relocation of Home Office(4) | 19 |
| | — |
| | 1,017 |
| | — |
| | Costs related to relocation of Home Office(4) | — |
| | 998 |
|
| | Tax effect of change in tax basis related to the adoption of ASC 606 | — |
| | — |
| | (311 | ) | | — |
| | Other income related to adjustment of liabilities under tax receivable agreement | (14 | ) | | — |
|
| | Income tax expense(5) | 47 |
| | (1,432 | ) | | (199 | ) | | (1,753 | ) | | Tax effect of change in tax basis related to the adoption of new accounting pronouncements(5) | 1,161 |
| | (311 | ) |
| Adjusted pro forma net income | $ | 10,962 |
| | $ | 7,269 |
| | $ | 16,621 |
| | $ | 10,944 |
| | Income tax expense(6) | (315 | ) | | (246 | ) |
| | | | | | | | | Adjusted pro forma net income | $ | 4,949 |
| | $ | 5,659 |
|
Denominator: | Denominator: | | | | | | | | Denominator: | | | |
| Weighted-average shares of Class A common stock outstanding—diluted | 28,754 |
| | 26,312 |
| | 28,288 |
| | 26,133 |
| Weighted-average shares of Class A common stock outstanding—diluted | 30,392 |
| | 27,822 |
|
| Adjustments: | | | | | | | | Adjustments: | | | |
| | Assumed exchange of LLC Interests for shares of Class A common stock(1) | 9,144 |
| | 10,869 |
| | 9,452 |
| | 10,977 |
| | Assumed exchange of LLC Interests for shares of Class A common stock(1) | 7,539 |
| | 9,761 |
|
| Adjusted pro forma fully exchanged weighted-average shares of Class A common stock outstanding—diluted | 37,898 |
| | 37,181 |
| | 37,740 |
| | 37,110 |
| Adjusted pro forma fully exchanged weighted-average shares of Class A common stock outstanding—diluted | 37,931 |
| | 37,583 |
|
| | | | | | | | | |
Adjusted pro forma earnings per fully exchanged share—diluted | Adjusted pro forma earnings per fully exchanged share—diluted | $ | 0.29 |
| | $ | 0.20 |
| | $ | 0.44 |
| | $ | 0.29 |
| Adjusted pro forma earnings per fully exchanged share—diluted | $ | 0.13 |
| | $ | 0.15 |
|
|
| | | | | | | | | |
| | | Thirteen Weeks Ended | |
| March 27 2019 |
| | March 28 2018 |
|
Earnings per share of Class A common stock - diluted | $ | 0.08 |
| | $ | 0.13 |
|
| Assumed exchange of LLC Interests for shares of Class A common stock(1) | 0.01 |
| | 0.01 |
|
| Non-GAAP adjustments(7) | 0.04 |
| | 0.01 |
|
Adjusted pro forma earnings per fully exchanged share—diluted | $ | 0.13 |
| | $ | 0.15 |
|
| |
(1) | Assumes the exchange of all outstanding LLC Interests for shares of Class A common stock, resulting in the elimination of the non-controlling interest and recognition of the net income attributable to non-controlling interests. |
| |
(2) | For the thirteen and twenty-six weeks ended June 27, 2018, represents fees paidRepresents costs incurred in connection with theour executive search, for our open executive and key management positions, and other transition costs, including related equity-based compensation. For the thirteen and twenty-six weeks ended June 28, 2017, represents fees paid to an executive recruiting firm and a non-recurring signing bonus paid upon the hiring of our chief financial officer.firm. |
(3) Represents consulting and advisory fees related to our enterprise-wide system upgrade initiative called Project Concrete.
(4) Costs incurred in connection with our relocation to a new Home Office, which is comprised of: (i) $326Office.
(5) Represents tax effect of duplicative non-cash deferred rent, (ii) $672 net loss onchange in tax basis related to the subleaseadoption of our prior Home Office, including the write-off of certain fixed assetsnew lease accounting standard for the thirteen weeks ended March 27, 2019 and (iii) $19 of administrative costs.the revenue recognition standard for the thirteen weeks ended March 28, 2018.
| |
(5)(6) | Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 16.7%19.5% and 19.2% for thirteen and twenty-six weeks ended June 27, 2018, respectively, and 39.9% and 38.3%23.7% for the thirteen and twenty-six weeks ended JuneMarch 27, 2019 and March 28, 2017,2018, respectively. Amounts include provisions for U.S. federal and certain state and local income taxes, assuming the highest statutory rates apportioned to each applicable state and local jurisdiction. |
(7) Represents the per share impact of non-GAAP adjustments for each period. Refer to the reconciliation of Adjusted Pro Forma Net Income above for further details.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand, short-term investments and availability under our Revolving Credit Facility. As of JuneMarch 27, 2018,2019, we maintained a cash and cash equivalents balance of $30.9$31.9 million, a short-term investments balance of $61.4$47.7 million and had $19.3 million of availability under our Revolving Credit Facility.
Our primary requirements for liquidity are to fund our working capital needs, operating and finance lease obligations, capital expenditures deemed landlord financing obligations and general corporate needs. Our requirements for working capital are 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 infrastructure.
In addition, we are obligated to make payments to certain members of SSE Holdings under the Tax Receivable Agreement. As of JuneMarch 27, 2018,2019, such obligations totaled $177.4 million.$204.6 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 TRA Payments. 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 that cash provided by operating activities, cash on hand and availability under the Revolving Credit Facility will be sufficient to fund our operating lease obligations, capital expenditures, deemed landlord financing 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.
| | | Twenty-Six Weeks Ended | | Thirteen Weeks Ended | |
(in thousands) | June 27 2018 |
| | June 28 2017 |
| March 27 2019 |
| | March 28 2018 |
|
Net cash provided by operating activities | $ | 40,874 |
| | $ | 33,730 |
| $ | 17,199 |
| | $ | 19,133 |
|
Net cash used in investing activities | (34,790 | ) | | (25,351 | ) | (10,374 | ) | | (15,851 | ) |
Net cash provided by financing activities | 3,288 |
| | 2,450 |
| 322 |
| | 1,835 |
|
Increase in cash | 9,372 |
| | 10,829 |
| 7,147 |
| | 5,117 |
|
Cash at beginning of period | 21,507 |
| | 11,607 |
| 24,750 |
| | 21,507 |
|
Cash at end of period | $ | 30,879 |
| | $ | 22,436 |
| $ | 31,897 |
| | $ | 26,624 |
|
Operating Activities
For the twenty-sixthirteen weeks ended JuneMarch 27, 20182019 net cash provided by operating activities was $40.9$17.2 million compared to $33.7$19.1 million for the twenty-sixthirteen weeks ended JuneMarch 28, 2017, an increase2018, a decrease of $7.2$1.9 million. This increasedecrease was primarily driven by the opening of 25 new domestic company-operated Shacks.a decline in Shack-level operating profit margins combined with additional spending on investments including foundational infrastructure upgrades to support our ongoing growth initiatives.
Investing Activities
For the twenty-sixthirteen weeks ended JuneMarch 27, 20182019 net cash used in investing activities was $34.8$10.4 million compared to $25.4$15.9 million for the twenty-sixthirteen weeks ended JuneMarch 28, 2017, an increase2018, a decrease of $9.4$5.5 million. This increasedecrease was primarily due to an increase in capital expenditures partiallyof $12.9
million of proceeds from sales of marketable securities offset by an increase of $7.3 million in net salescapital expenditures, with the opening of marketable securities.
34 new domestic company-operated Shacks.
Financing Activities
For the twenty-sixthirteen weeks ended JuneMarch 27, 20182019 net cash provided by financing activities was $3.3$0.3 million compared to $2.5$1.8 million for the twenty-sixthirteen weeks ended JuneMarch 28, 2017,2018, an increasea decrease of $0.8$1.5 million. This increasedecrease is primarily due to lowerincreased payments of $0.7 million made under the Tax Receivable Agreement and distributions to our non-controlling interest holders in current quarterduring the thirteen weeks ended March 27, 2019, as comparedwell as the impact from adopting the new lease accounting standard, where we no longer receive proceeds or make payments related to prior year, partiallydeemed landlord financing, as we are not deemed to be the accounting owner, offset by lower proceeds frompayments on the exerciseprincipal of employee stock options.our financing leases.
Revolving Credit Facility
We maintain a Revolving Credit Facility that provides for a revolving total commitment amount of $50.0 million, of which $20.0 million is available immediately. The Revolving Credit Facility will mature and all amounts outstanding will be due and payable in February 2020. The Revolving Credit Facility permits the issuance of letters of credit upon our request of up to $10.0 million. Borrowings under the Revolving Credit Facility bear interest at either: (i) LIBOR plus a percentage ranging from 2.3% to 3.3% or (ii) the prime rate plus a percentage ranging from 0.0% to 0.8%, depending on the type of borrowing made under the Revolving Credit Facility. As of JuneMarch 27, 2018,2019, there were no amounts outstanding under the Revolving Credit Facility. We had $19.3 million of availability, as of JuneMarch 27, 2018,2019, after giving effect to $0.7 million in outstanding letters of credit.
The Revolving Credit Facility is 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' wholly-owned domestic subsidiaries (with certain exceptions).
The Revolving Credit Facility contains a number of covenants that, among other things, restrict our ability to, subject to specified exceptions, incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves; pay dividends or make distributions; engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the Revolving Credit Facility contains certain cross-default provisions. We are required to maintain a specified consolidated fixed-charge coverage ratio and a specified funded net debt to adjusted EBITDA ratio, both as defined under the Revolving Credit Facility. As of JuneMarch 27, 2018,2019, we were in compliance with all covenants.
There have been no material changes to the contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2017,26, 2018, other than those made in the ordinary course of business.
OFF-BALANCE SHEET ARRANGEMENTS There have been no other material changes to our off-balance sheet arrangements as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2017.26, 2018.
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 27, 201726, 2018, except for those made in connection with the adoption of ASC 606.842. See "Note 3: Revenue"9: Leases" under Part I, Item 1 of this Form 10-Q.
Recently Issued Accounting Pronouncements
See "Note 2: Summary of Significant Accounting Policies—Recently Issued Accounting Pronouncements” 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 27, 2017.26, 2018.
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.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There were no changes to our internal control over financial reporting that occurred during the quarter ended JuneMarch 27, 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
The information required by this Item is incorporated by reference to Part I, Item 1, Note 14:15: Commitments and Contingencies—Legal Contingencies.
Item 1A. Risk Factors.
There have been no material changes with respect to the risk factors disclosed in our Annual Report on Form 10-K for the fiscal year ended December 27, 2017.26, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
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 | | 3.2 | | 2/10/2015 | | |
| | | | S-1/A | | 4.1 | | 1/28/2015 | | |
| | | | | | | | | | * |
| | | | | | | | | | * |
| | | | | | | | | | # |
101.INS | | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | * |
101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | * |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | * |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | * |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | * |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | * |
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| | | | | | | | | | |
Exhibit Number | | | | Incorporated by Reference | | Filed Herewith |
| Exhibit Description | | Form | | Exhibit | | Filing Date | |
| | | | 8-K | | 3.1 | | 2/10/2015 | | |
| | | | 8-K | | 3.2 | | 2/10/2015 | | |
| | | | S-1/A | | 4.1 | | 1/28/2015 | | |
| | | | | | | | | | * |
| | | | | | | | | | * |
| | | | | | | | | | * |
| | | | | | | | | | # |
101.INS | | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | * |
101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | * |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | * |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | * |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | * |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | * |
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: AugustMay 6, 20182019 | By: | /s/ Randy Garutti |
| | Randy Garutti |
| | Chief Executive Officer (Principal Executive Officer and Duly Authorized Officer) |
| | |
Date: AugustMay 6, 20182019 | By: | /s/ Tara Comonte |
| | Tara Comonte |
| | Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) |
45 | Shake Shack Inc. Form 10-Q | 41