Shake Shack(SHAK) - 2023 Q3 - Quarterly Report

Cautionary Note Regarding Forward-Looking Information This section outlines forward-looking statements, identifying terminology and risks, with a disclaimer on public update obligations Forward-Looking Statements Disclosure This disclosure identifies forward-looking statements by specific terminology, outlines risks, and disclaims public update obligations - Forward-looking statements are identified by words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "potential," "project," "projection," "plan," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," and their negatives[4] - Factors that could cause actual results to differ materially include the continuing impact of the COVID-19 pandemic, ability to develop and open new Shacks, increased costs or shortages in supply/labor, inflationary pressures, management of digital capabilities, expansion into new channels, and ability to maintain/grow sales at existing Shacks[5] - The Company undertakes no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law[6] PART I – FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis Item 1. Financial Statements (Unaudited) This section presents unaudited condensed consolidated financial statements and notes, prepared under GAAP - The financial statements are unaudited and prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP")[33] - The financial statements include Condensed Consolidated Balance Sheets, Statements of Income (Loss), Statements of Comprehensive Income (Loss), Statements of Stockholders' Equity, and Statements of Cash Flows[8] Condensed Consolidated Balance Sheets This section presents the company's condensed consolidated balance sheets, detailing assets, liabilities, and equity at specific reporting dates Condensed Consolidated Balance Sheets (in thousands) | Metric | Sep 27, 2023 | Dec 28, 2022 | | :--------------------------------------------------------------------------------------------- | :----------- | :----------- | | ASSETS | | | | Cash and cash equivalents | $190,020 | $230,521 | | Marketable securities | $94,957 | $80,707 | | Total current assets | $323,236 | $343,988 | | Property and equipment, net | $525,557 | $467,031 | | Operating lease assets | $397,870 | $367,488 | | TOTAL ASSETS | $1,564,856 | $1,494,862 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total current liabilities | $152,177 | $147,718 | | Long-term debt | $245,375 | $244,589 | | Long-term operating lease liabilities | $463,370 | $427,227 | | Liabilities under tax receivable agreement, net of current portion | $235,614 | $234,893 | | Total liabilities | $1,122,858 | $1,075,114 | | Total stockholders' equity attributable to Shake Shack Inc. | $416,354 | $395,116 | | Non-controlling interests | $25,644 | $24,632 | | Total equity | $441,998 | $419,748 | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $1,564,856 | $1,494,862 | Condensed Consolidated Statements of Income (Loss) This section presents the condensed consolidated statements of income (loss), detailing revenues, expenses, and net income (loss) for the periods Condensed Consolidated Statements of Income (Loss) (in thousands, except per share amounts) | Metric | Thirteen Weeks Ended Sep 27, 2023 | Thirteen Weeks Ended Sep 28, 2022 | Thirty-Nine Weeks Ended Sep 27, 2023 | Thirty-Nine Weeks Ended Sep 28, 2022 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Shack sales | $264,980 | $219,501 | $771,044 | $639,346 | | Licensing revenue | $11,227 | $8,313 | $30,246 | $22,611 | | TOTAL REVENUE | $276,207 | $227,814 | $801,290 | $661,957 | | INCOME (LOSS) FROM OPERATIONS | $5,657 | $(4,826) | $7,216 | $(20,580) | | NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | $7,627 | $(2,024) | $13,041 | $(13,374) | | Basic EPS | $0.19 | $(0.05) | $0.33 | $(0.34) | | Diluted EPS | $0.19 | $(0.05) | $0.31 | $(0.34) | Condensed Consolidated Statements of Comprehensive Income (Loss) This section presents the condensed consolidated statements of comprehensive income (loss), including net income and other comprehensive income items Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric | Thirteen Weeks Ended Sep 27, 2023 | Thirteen Weeks Ended Sep 28, 2022 | Thirty-Nine Weeks Ended Sep 27, 2023 | Thirty-Nine Weeks Ended Sep 28, 2022 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Net income (loss) | $8,136 | $(2,311) | $13,737 | $(14,896) | | Change in foreign currency translation adjustment | $1 | $— | $(3) | $(2) | | COMPREHENSIVE INCOME (LOSS) | $8,137 | $(2,311) | $13,734 | $(14,898) | | COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | $7,628 | $(2,024) | $13,038 | $(13,376) | Condensed Consolidated Statements of Stockholders' Equity This section presents the condensed consolidated statements of stockholders' equity, showing changes in equity components over time - Total equity increased from $419,748 thousand as of December 28, 2022, to $441,998 thousand as of September 27, 2023[11][22] - Accumulated deficit improved from $(20,537) thousand at December 28, 2022, to $(7,496) thousand at September 27, 2023, driven by net income[11][22] - Equity-based compensation contributed $11,438 thousand to additional paid-in capital for the thirty-nine weeks ended September 27, 2023[22] Condensed Consolidated Statements of Cash Flows This section presents the condensed consolidated statements of cash flows, categorizing cash movements from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Thirty-Nine Weeks Ended Sep 27, 2023 | Thirty-Nine Weeks Ended Sep 28, 2022 | | :------------------------------------------------- | :----------------------------------- | :----------------------------------- | | Net cash provided by operating activities | $90,591 | $54,335 | | Net cash used in investing activities | $(126,264) | $(95,212) | | Net cash used in financing activities | $(4,825) | $(4,529) | | Effect of exchange rate changes on cash and cash equivalents | $(3) | $(2) | | DECREASE IN CASH AND CASH EQUIVALENTS | $(40,501) | $(45,408) | | CASH AND CASH EQUIVALENTS AT END OF PERIOD | $190,020 | $256,998 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanatory notes to the condensed consolidated financial statements, clarifying accounting policies and specific line items - The notes provide detailed explanations for the financial statements, covering areas such as Nature of Operations, Summary of Significant Accounting Policies, Revenue, Fair Value Measurements, Debt, Leases, Non-Controlling Interests, Equity-Based Compensation, Income Taxes, and Earnings (Loss) Per Share[30] Note 1: Nature of Operations This note describes the company's business, ownership structure, and system-wide Shack count - Shake Shack Inc. is the sole managing member of SSE Holdings, LLC, owning 93.3% of SSE Holdings as of September 27, 2023[31] - As of September 27, 2023, there were 495 Shacks in operation system-wide, comprising 280 domestic Company-operated, 39 domestic licensed, and 176 international licensed Shacks[32] Note 2: Summary of Significant Accounting Policies This note outlines the significant accounting policies used in preparing the unaudited condensed consolidated financial statements - The unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP and are consistent with the accounting policies described in the Annual Report on Form 10-K for the fiscal year ended December 28, 2022[33] - Certain marketing expenses for prior periods were reclassified from Other operating expenses to General and administrative expenses to conform with current presentation, with no effect on previously reported Net Loss[34] - Shake Shack Inc. consolidates SSE Holdings, LLC, as it is the primary beneficiary and sole managing member[35] Note 3: Revenue This note details the company's revenue recognition policies and disaggregates revenue by type - Revenue primarily consists of Shack sales (recognized at point of sale) and Licensing revenue (including initial territory fees, Shack opening fees, and ongoing sales-based royalty fees)[39][42][43] - Gift card breakage income for the thirty-nine weeks ended September 27, 2023, was $238 thousand, compared to $1,415 thousand in the prior year, which included a cumulative catch-up adjustment of $1,281 thousand[41] Revenue Disaggregated by Type (in thousands) | Metric | Thirteen Weeks Ended Sep 27, 2023 | Thirteen Weeks Ended Sep 28, 2022 | Thirty-Nine Weeks Ended Sep 27, 2023 | Thirty-Nine Weeks Ended Sep 28, 2022 | | :------------------------ | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Shack sales | $264,980 | $219,501 | $771,044 | $639,346 | | Sales-based royalties | $10,898 | $8,050 | $29,388 | $21,936 | | Initial territory and opening fees | $329 | $263 | $858 | $675 | | Total revenue | $276,207 | $227,814 | $801,290 | $661,957 | Note 4: Fair Value Measurements This note provides information on fair value measurements for financial instruments, including investments - The carrying values of Cash and cash equivalents, Accounts receivable, net, Accounts payable, and Accrued expenses approximate fair value due to their short-term nature[48] Investments (in thousands) | Metric | Sep 27, 2023 | Dec 28, 2022 | | :------------------------ | :----------- | :----------- | | Equity securities | $— | $80,707 | | Held-to-maturity securities | $94,957 | $— | | Total investments | $94,957 | $80,707 | - Held-to-maturity securities, primarily U.S. Treasuries, had an estimated fair value of $95,213 thousand as of September 27, 2023, with contractual maturities less than 12 months[50] Note 5: Supplemental Balance Sheet Information This note provides supplemental details for various balance sheet accounts, including prepaid expenses and other liabilities Prepaid expenses and other current assets (in thousands) | Metric | Sep 27, 2023 | Dec 28, 2022 | | :---------------------------------- | :----------- | :----------- | | Prepaid expenses | $6,689 | $3,815 | | Tenant allowance receivables | $12,128 | $10,121 | | Other | $945 | $763 | | Total | $19,762 | $14,699 | Other current liabilities (in thousands) | Metric | Sep 27, 2023 | Dec 28, 2022 | | :---------------------------------- | :----------- | :----------- | | Sales tax payable | $5,521 | $5,363 | | Gift card liability | $1,972 | $2,285 | | Current portion of financing equipment lease liabilities | $3,235 | $2,546 | | Legal reserve | $2,620 | $6,285 | | Other | $4,174 | $3,073 | | Total | $17,522 | $19,552 | Other long-term liabilities (in thousands) | Metric | Sep 27, 2023 | Dec 28, 2022 | | :---------------------------------- | :----------- | :----------- | | Deferred licensing revenue | $16,709 | $14,340 | | Long-term portion of financing equipment lease liabilities | $8,215 | $3,909 | | Other | $1,398 | $2,438 | | Total | $26,322 | $20,687 | Note 6: Debt This note details the company's debt instruments, including convertible senior notes and the revolving credit facility - The Company has $250,000 thousand aggregate principal amount of 0% Convertible Senior Notes due 2028, with a fair value of $181,408 thousand as of September 27, 2023[57][59] Long-term debt (in thousands) | Metric | Sep 27, 2023 | Dec 28, 2022 | | :------------------------------------ | :----------- | :----------- | | Convertible Notes | $250,000 | $250,000 | | Discount and debt issuance costs, net of amortization | $(4,625) | $(5,411) | | Long-term debt | $245,375 | $244,589 | - The Revolving Credit Facility permits borrowings up to $50,000 thousand (with an ability to increase to an additional $100,000 thousand) and matures on March 5, 2026[61] No amounts were outstanding as of September 27, 2023, and the Company was in compliance with all covenants[62] Note 7: Leases This note describes the company's lease arrangements, including operating and finance leases, and associated costs and liabilities - The Company leases all domestic Company-operated Shacks, the home office, and certain equipment under non-cancelable lease agreements expiring through 2044, with real estate leases classified as operating leases and most equipment leases as finance leases[64][65] Total Lease Cost (in thousands) | Metric | Thirteen Weeks Ended Sep 27, 2023 | Thirteen Weeks Ended Sep 28, 2022 | Thirty-Nine Weeks Ended Sep 27, 2023 | Thirty-Nine Weeks Ended Sep 28, 2022 | | :---------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Operating lease cost | $17,177 | $15,178 | $49,775 | $43,188 | | Finance lease cost | $1,099 | $805 | $2,681 | $2,437 | | Short-term lease cost | $206 | $264 | $719 | $395 | | Total lease cost | $22,970 | $20,134 | $66,115 | $57,014 | Future Minimum Lease Payments as of September 27, 2023 (in thousands) | Year | Operating Leases | Finance Leases | | :--------- | :--------------- | :------------- | | Total minimum payments | $657,357 | $12,917 | | Less: imputed interest | $158,505 | $1,467 | | Total lease liabilities | $498,852 | $11,450 | Note 8: Non-Controlling Interests This note explains the non-controlling interests in SSE Holdings, LLC, and their impact on consolidated financial results - Shake Shack Inc. consolidates SSE Holdings, LLC, and reports a non-controlling interest representing the economic interest held by other members of SSE Holdings[79] Ownership Interest in SSE Holdings as of September 27, 2023 | Holder | LLC Interests | Ownership % | | :------------------------------------------------- | :------------ | :---------- | | Number of LLC Interests held by Shake Shack Inc. | 39,466,268 | 93.3% | | Number of LLC Interests held by non-controlling interest holders | 2,834,513 | 6.7% | | Total LLC Interests outstanding | 42,300,781 | 100.0% | - Net income attributable to non-controlling interests for the thirty-nine weeks ended September 27, 2023, was $696 thousand, an improvement from a loss of $(1,522) thousand in the prior year[83] Note 9: Equity-Based Compensation This note details the company's equity-based compensation plans and the associated expense recognized Equity-Based Compensation Expense (in thousands) | Metric | Thirteen Weeks Ended Sep 27, 2023 | Thirteen Weeks Ended Sep 28, 2022 | Thirty-Nine Weeks Ended Sep 27, 2023 | Thirty-Nine Weeks Ended Sep 28, 2022 | | :------------------------ | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Performance stock units | $391 | $1,053 | $2,450 | $3,476 | | Restricted stock units | $3,095 | $2,462 | $8,770 | $6,679 | | Total expense | $3,486 | $3,515 | $11,220 | $10,155 | - The majority of equity-based compensation expense is recognized in General and administrative expenses, totaling $10,254 thousand for the thirty-nine weeks ended September 27, 2023[87] Note 10: Income Taxes This note provides information on the company's income tax expense, effective tax rates, and tax receivable agreement obligations - SSE Holdings is treated as a partnership for U.S. federal and most state/local income tax purposes, with Shake Shack Inc. subject to taxes on its allocable share of income/loss[88] Effective Income Tax Rates | Period | Sep 27, 2023 | Sep 28, 2022 | | :-------------------------------- | :----------- | :----------- | | Thirteen Weeks Ended | 6.1% | 39.5% | | Thirty-Nine Weeks Ended | 11.3% | 25.5% | - The total obligations under the Tax Receivable Agreement were $235,614 thousand as of September 27, 2023, representing 85% of expected tax benefits from increases in tax basis due to LLC Interest redemptions[97] Note 11: Earnings (Loss) Per Share This note presents the basic and diluted earnings (loss) per share calculations for Class A common stock Basic and Diluted EPS for Class A Common Stock | Metric | Thirteen Weeks Ended Sep 27, 2023 | Thirteen Weeks Ended Sep 28, 2022 | Thirty-Nine Weeks Ended Sep 27, 2023 | Thirty-Nine Weeks Ended Sep 28, 2022 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Basic EPS | $0.19 | $(0.05) | $0.33 | $(0.34) | | Diluted EPS | $0.19 | $(0.05) | $0.31 | $(0.34) | - Potentially dilutive securities, including stock options, performance stock units, restricted stock units, Class B common stock, and Convertible Notes, were excluded from diluted EPS computations when their effect would have been anti-dilutive[102] Note 12: Supplemental Cash Flow Information This note provides supplemental cash flow details, including cash paid for taxes and interest, and non-cash investing activities Supplemental Cash Flow Information (in thousands) for Thirty-Nine Weeks Ended | Metric | Sep 27, 2023 | Sep 28, 2022 | | :------------------------------------------------- | :----------- | :----------- | | Cash paid for income taxes, net of refunds | $3,147 | $2,904 | | Cash paid for interest, net of amounts capitalized | $343 | $179 | | Accrued purchases of property and equipment (non-cash investing) | $30,096 | $31,593 | | Establishment of liabilities under tax receivable agreement (non-cash financing) | $721 | $847 | Note 13: Commitments and Contingencies This note outlines the company's material commitments and contingencies, including lease obligations and the Tax Receivable Agreement - The Company is obligated under various operating leases for Shacks and its home office, with terms expiring through 2044[105] - Purchase obligations, including commitments for real estate, inventory, equipment, marketing, software, and services, are generally short-term in nature[106] - Total obligations under the Tax Receivable Agreement were $235,614 thousand as of September 27, 2023, contingent on future taxable income[108] Note 14: Related Party Transactions This note discloses transactions with related parties, including licensing revenue and operating expenses - The Company has related party transactions with Hudson Yards Sports and Entertainment (HYSE), Madison Square Park Conservancy (MSP Conservancy), Olo, Inc., and Block, Inc., due to shared board members or executive officers[109][112][114][116] Key Related Party Transactions (in thousands) for Thirty-Nine Weeks Ended Sep 27, 2023 | Related Party | Transaction Type | Amount | | :-------------------------------- | :-------------------------------- | :----- | | Hudson Yards Sports and Entertainment | Licensing revenue | $728 | | Madison Square Park Conservancy | Occupancy and related expenses | $672 | | Olo, Inc. | Other operating expenses | $423 | | Block, Inc. | Other operating expenses | $6,105 | - Distributions paid to non-controlling interest holders for the thirty-nine weeks ended September 27, 2023, were $131 thousand, down from $389 thousand in the prior year[121] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results, covering business, operations, non-GAAP measures, liquidity, and accounting policies - The discussion covers the Company's financial position, results of operations, plans, objectives, future performance, and business, emphasizing its 'fine casual' concept and 'Stand For Something Good' mission[122][125][126] Overview This section provides a high-level overview of the company's business, operational highlights, and key performance indicators for the period - As of September 27, 2023, there were 495 Shacks in operation system-wide, including 280 domestic Company-operated, 39 domestic licensed, and 176 international licensed Shacks[127] - Same-Shack sales increased 2.3% for the thirteen weeks ended September 27, 2023, driven by a 6.5% increase in price mix, partially offset by a 4.2% decrease in guest traffic[128] - System-wide sales increased 24.3% to $438.9 million for the thirteen weeks ended September 27, 2023[130] - Digital sales increased 5.4% to $83.2 million for the thirteen weeks ended September 27, 2023, representing 31.4% of Shack sales[130] - During Q3 2023, the Company opened 10 new domestic Company-operated Shacks, 4 new domestic licensed Shacks, and 11 new international licensed Shacks[131] Results of Operations This section provides a detailed analysis of the company's revenues and expenses, explaining period-over-period changes and their drivers Key Financial Highlights (in thousands) | Metric | Thirteen Weeks Ended Sep 27, 2023 | Thirteen Weeks Ended Sep 28, 2022 | Thirty-Nine Weeks Ended Sep 27, 2023 | Thirty-Nine Weeks Ended Sep 28, 2022 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | TOTAL REVENUE | $276,207 | $227,814 | $801,290 | $661,957 | | INCOME (LOSS) FROM OPERATIONS | $5,657 | $(4,826) | $7,216 | $(20,580) | | NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC. | $7,627 | $(2,024) | $13,041 | $(13,374) | Shack Sales This section analyzes the changes in Shack sales, attributing growth to new openings and menu price increases Shack Sales (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | % Change | | :-------------------------------- | :----------- | :----------- | :------- | | Thirteen Weeks Ended | $264,980 | $219,501 | +20.7% | | Thirty-Nine Weeks Ended | $771,044 | $639,346 | +20.6% | - The increase in Shack sales was primarily due to the opening of 48 new domestic Company-operated Shacks (contributing $40.7 million for 13 weeks and $86.7 million for 39 weeks) and increased menu prices (contributing $20.0 million for 13 weeks and $55.0 million for 39 weeks)[137] Licensing Revenue This section analyzes the growth in licensing revenue, driven by new licensed Shacks and higher sales at existing locations Licensing Revenue (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | % Change | | :-------------------------------- | :----------- | :----------- | :------- | | Thirteen Weeks Ended | $11,227 | $8,313 | +35.1% | | Thirty-Nine Weeks Ended | $30,246 | $22,611 | +33.8% | - The increases were primarily due to the opening of 45 net new licensed Shacks (contributing $1.9 million for 13 weeks and $4.1 million for 39 weeks) and higher sales at existing licensed Shacks, particularly domestic airports[139] Food and Paper Costs This section analyzes food and paper costs, including their percentage of Shack sales and key drivers like commodity prices Food and Paper Costs (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | % Change | % of Shack Sales (2023) | % of Shack Sales (2022) | | :-------------------------------- | :----------- | :----------- | :------- | :---------------------- | :---------------------- | | Thirteen Weeks Ended | $77,180 | $67,774 | +13.9% | 29.1% | 30.9% | | Thirty-Nine Weeks Ended | $224,752 | $193,645 | +16.1% | 29.1% | 30.3% | - The decrease as a percentage of Shack sales was primarily driven by menu price increases, partially offset by increased commodity costs, particularly in beef and fries[142] Labor and Related Expenses This section analyzes labor and related expenses, including their percentage of Shack sales and factors like wage increases and efficiencies Labor and Related Expenses (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | % Change | % of Shack Sales (2023) | % of Shack Sales (2022) | | :-------------------------------- | :----------- | :----------- | :------- | :---------------------- | :---------------------- | | Thirteen Weeks Ended | $76,233 | $64,638 | +17.9% | 28.8% | 29.4% | | Thirty-Nine Weeks Ended | $225,655 | $190,954 | +18.2% | 29.3% | 29.9% | - The decrease as a percentage of Shack sales was primarily due to labor efficiencies and sales leverage, partially offset by increased wages[145] Other Operating Expenses This section analyzes other operating expenses, including their percentage of Shack sales and drivers such as repair costs and delivery commissions Other Operating Expenses (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | % Change | % of Shack Sales (2023) | % of Shack Sales (2022) | | :-------------------------------- | :----------- | :----------- | :------- | :---------------------- | :---------------------- | | Thirteen Weeks Ended | $37,307 | $33,680 | +10.8% | 14.1% | 15.3% | | Thirty-Nine Weeks Ended | $108,352 | $96,002 | +12.9% | 14.1% | 15.0% | - The decrease as a percentage of Shack sales was primarily driven by decreased repair and maintenance expenses, lower delivery commissions due to a shift in channel mix, and sales leverage[148] Occupancy and Related Expenses This section analyzes occupancy and related expenses, including their percentage of Shack sales and factors like rent and common area maintenance Occupancy and Related Expenses (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | % Change | % of Shack Sales (2023) | % of Shack Sales (2022) | | :-------------------------------- | :----------- | :----------- | :------- | :---------------------- | :---------------------- | | Thirteen Weeks Ended | $20,300 | $17,337 | +17.1% | 7.7% | 7.9% | | Thirty-Nine Weeks Ended | $58,684 | $50,270 | +16.7% | 7.6% | 7.9% | - The decrease as a percentage of Shack sales was primarily driven by sales leverage and lower base rent, partially offset by an increase in common area maintenance charges for the thirty-nine-week period[151] General and Administrative Expenses This section analyzes general and administrative expenses, including their percentage of total revenue and drivers like wages and professional fees General and Administrative Expenses (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | % Change | % of Total Revenue (2023) | % of Total Revenue (2022) | | :-------------------------------- | :----------- | :----------- | :------- | :------------------------ | :------------------------ | | Thirteen Weeks Ended | $30,939 | $26,931 | +14.9% | 11.2% | 11.8% | | Thirty-Nine Weeks Ended | $93,726 | $87,804 | +6.7% | 11.7% | 13.3% | - The increase was primarily due to increased wages and other team costs, professional fees related to a non-recurring matter ($2.3 million for 39 weeks), and investments in marketing and technology initiatives[153] Depreciation and Amortization Expense This section analyzes depreciation and amortization expense, including its percentage of total revenue and impact from new Shack openings and technology Depreciation and Amortization Expense (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | % Change | % of Total Revenue (2023) | % of Total Revenue (2022) | | :-------------------------------- | :----------- | :----------- | :------- | :------------------------ | :------------------------ | | Thirteen Weeks Ended | $23,130 | $18,647 | +24.0% | 8.4% | 8.2% | | Thirty-Nine Weeks Ended | $66,704 | $53,589 | +24.5% | 8.3% | 8.1% | - The increases were predominantly due to incremental depreciation of capital expenditures related to the opening of 48 new domestic Company-operated Shacks and technology projects placed into service[156] Pre-Opening Costs This section analyzes pre-opening costs, including their percentage of total revenue and factors like wages and legal costs for new Shacks Pre-Opening Costs (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | % Change | % of Total Revenue (2023) | % of Total Revenue (2022) | | :-------------------------------- | :----------- | :----------- | :------- | :------------------------ | :------------------------ | | Thirteen Weeks Ended | $4,969 | $3,041 | +63.4% | 1.8% | 1.3% | | Thirty-Nine Weeks Ended | $14,103 | $8,576 | +64.4% | 1.8% | 1.3% | - The increase was primarily due to increased wages and benefits for Shack teams, occupancy expense, legal costs, and smallwares related to the timing of Shack openings[159] Impairment and Loss on Disposal of Assets This section analyzes impairment and loss on disposal of assets, detailing changes due to abandoned projects and maturing Shacks Impairment and Loss on Disposal of Assets (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | % Change | | :-------------------------------- | :----------- | :----------- | :------- | | Thirteen Weeks Ended | $492 | $592 | -16.9% | | Thirty-Nine Weeks Ended | $2,098 | $1,697 | +23.6% | - The decrease for the thirteen-week period was due to a reduction in abandoned construction projects, while the increase for the thirty-nine-week period was due to the number of Shacks maturing in the base and disposal of home office assets[162] Other Income, Net This section analyzes other income, net, highlighting the significant increase driven by higher interest income from cash equivalents Other Income, Net (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | % Change | | :-------------------------------- | :----------- | :----------- | :------- | | Thirteen Weeks Ended | $3,441 | $1,482 | +132.2% | | Thirty-Nine Weeks Ended | $9,505 | $1,731 | +449.1% | - The increases were primarily due to a significant increase in income from cash equivalents ($1.2 million for 13 weeks and $6.2 million for 39 weeks) resulting from increased interest rates[164] Interest Expense This section analyzes interest expense, detailing changes influenced by sales tax audit assessments and finance lease charges Interest Expense (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | % Change | | :-------------------------------- | :----------- | :----------- | :------- | | Thirteen Weeks Ended | $(433) | $(475) | -8.8% | | Thirty-Nine Weeks Ended | $(1,241) | $(1,145) | +8.4% | - The decrease for the thirteen-week period was primarily due to decreased various sales tax audit assessment charges, partially offset by increased finance lease charges[166] The increase for the thirty-nine-week period was primarily due to increased finance lease charges[166] Income Tax Expense (Benefit) This section analyzes income tax expense (benefit) and effective tax rates, explaining changes due to pre-tax income shifts and permanent differences Income Tax Expense (Benefit) (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | % Change | | :-------------------------------- | :----------- | :----------- | :------- | | Thirteen Weeks Ended | $529 | $(1,508) | -135.1% | | Thirty-Nine Weeks Ended | $1,743 | $(5,098) | -134.2% | Effective Income Tax Rates | Period | Sep 27, 2023 | Sep 28, 2022 | | :-------------------------------- | :----------- | :----------- | | Thirteen Weeks Ended | 6.1% | 39.5% | | Thirty-Nine Weeks Ended | 11.3% | 25.5% | - The decrease in effective income tax rates was primarily driven by the change from pre-tax loss to income and the impact of permanent differences (primarily tax credits)[169][170] Net Income (Loss) Attributable to Non-Controlling Interests This section analyzes net income (loss) attributable to non-controlling interests, noting improvements due to net results and ownership changes Net Income (Loss) Attributable to Non-Controlling Interests (in thousands) | Period | Sep 27, 2023 | Sep 28, 2022 | | :-------------------------------- | :----------- | :----------- | | Thirteen Weeks Ended | $509 | $(287) | | Thirty-Nine Weeks Ended | $696 | $(1,522) | - The improvements were primarily due to an increase in net results compared to the same periods last year, partially offset by a decrease in the non-controlling interest holders' weighted average ownership (6.7% for 2023 vs. 6.8-6.9% for 2022)[173] NON-GAAP FINANCIAL MEASURES This section discusses the company's non-GAAP financial measures, including Shack-level operating profit, EBITDA, and adjusted pro forma net income - The Company uses non-GAAP financial measures, including Shack-level operating profit, EBITDA, adjusted EBITDA, adjusted pro forma net income (loss), and adjusted pro forma earnings (loss) per fully exchanged and diluted share, to supplement GAAP financial statements[174] - These measures are used internally by management for budgeting, forecasting, and assessing performance, and are believed to provide useful insights into the underlying operating performance of Shacks and the Company as a whole[176][182][189] Shack-Level Operating Profit This section defines and presents Shack-level operating profit and margin, a key non-GAAP measure of restaurant performance - Shack-level operating profit is defined as Shack sales less Shack-level operating expenses (Food and paper costs, Labor and related expenses, Other operating expenses, and Occupancy and related expenses)[175] Shack-Level Operating Profit and Margin (in thousands) | Metric | Thirteen Weeks Ended Sep 27, 2023 | Thirteen Weeks Ended Sep 28, 2022 | Thirty-Nine Weeks Ended Sep 27, 2023 | Thirty-Nine Weeks Ended Sep 28, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Shack-level operating profit | $53,960 | $36,072 | $153,601 | $108,475 | | Shack-level operating profit margin | 20.4% | 16.4% | 19.9% | 17.0% | EBITDA and Adjusted EBITDA This section defines and presents EBITDA and Adjusted EBITDA, non-GAAP measures used to assess overall company performance - EBITDA is Net income (loss) before Interest expense (net of interest income), Income tax expense (benefit), and Depreciation and amortization expense[180] Adjusted EBITDA further excludes equity-based compensation, impairment and loss on disposal of assets, amortization of cloud-based software implementation costs, and certain non-recurring items[180] - In Q1 2023, the definition of Adjusted EBITDA was revised to exclude deferred lease costs and executive transition costs, with prior periods restated for comparability[181] EBITDA and Adjusted EBITDA (in thousands) | Metric | Thirteen Weeks Ended Sep 27, 2023 | Thirteen Weeks Ended Sep 28, 2022 | Thirty-Nine Weeks Ended Sep 27, 2023 | Thirty-Nine Weeks Ended Sep 28, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | EBITDA | $30,950 | $15,303 | $82,020 | $34,740 | | Adjusted EBITDA | $35,784 | $19,807 | $100,399 | $53,141 | | Adjusted EBITDA margin | 13.0% | 8.7% | 12.5% | 8.0% | Adjusted Pro Forma Net Income (Loss) and Adjusted Pro Forma Earnings (Loss) Per Fully Exchanged and Diluted Share This section presents adjusted pro forma net income and EPS, assuming full exchange of LLC interests and adjusting for non-recurring items - Adjusted pro forma net income (loss) assumes the full exchange of all outstanding SSE Holdings, LLC membership interests for Class A common stock, adjusted for certain non-recurring items[187] Adjusted Pro Forma Net Income (Loss) (in thousands) | Metric | Thirteen Weeks Ended Sep 27, 2023 | Thirteen Weeks Ended Sep 28, 2022 | Thirty-Nine Weeks Ended Sep 27, 2023 | Thirty-Nine Weeks Ended Sep 28, 2022 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Adjusted pro forma net income (loss) | $7,537 | $(2,322) | $15,127 | $(10,349) | Adjusted Pro Forma Earnings (Loss) Per Fully Exchanged Share — Diluted | Metric | Thirteen Weeks Ended Sep 27, 2023 | Thirteen Weeks Ended Sep 28, 2022 | Thirty-Nine Weeks Ended Sep 27, 2023 | Thirty-Nine Weeks Ended Sep 28, 2022 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Adjusted pro forma earnings (loss) per fully exchanged share — diluted | $0.17 | $(0.06) | $0.34 | $(0.25) | LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's liquidity sources and uses, including cash flows, debt, and capital expenditure plans - Primary sources of liquidity include cash from operations, cash and cash equivalents ($190.0 million as of September 27, 2023), and availability under the Revolving Credit Facility[197] - Primary uses of liquidity are working capital needs, operating and finance lease obligations, capital expenditures (new Shacks, existing Shack investments, technology infrastructure), and general corporate needs[199] - The Company believes its existing cash and cash equivalents balances and cash from operations will be sufficient to fund its obligations for at least the next 12 months and the foreseeable future[201] Summary of Cash Flows This section summarizes cash flow activities from operations, investing, and financing, detailing changes period-over-period Summary of Cash Flows (in thousands) for Thirty-Nine Weeks Ended | Metric | Sep 27, 2023 | Sep 28, 2022 | | :------------------------------------------------- | :----------- | :----------- | | Net cash provided by operating activities | $90,591 | $54,335 | | Net cash used in investing activities | $(126,264) | $(95,212) | | Net cash used in financing activities | $(4,825) | $(4,529) | | Net decrease in Cash and cash equivalents | $(40,501) | $(45,408) | | Cash and cash equivalents at end of period | $190,020 | $256,998 | - Net cash provided by operating activities increased by $36.3 million, primarily due to a $43.4 million improvement in net results (excluding non-cash charges), partially offset by changes in working capital[204] - Net cash used in investing activities increased by $31.1 million, primarily due to a net increase in marketable securities activity and an $18.2 million increase in capital expenditures[205] Convertible Notes This section provides details on the company's 0% Convertible Senior Notes due 2028, including principal amount and conversion options - The Company issued $250.0 million aggregate principal amount of 0% Convertible Senior Notes due 2028, convertible into cash, Class A common stock, or a combination, at the Company's election[207] Revolving Credit Facility This section describes the company's revolving credit facility, including borrowing capacity, maturity, and compliance with covenants - The Revolving Credit Facility permits borrowings up to $50.0 million (with an ability to increase to $150.0 million) and matures in March 2026[208] - The Fourth Amendment modified the benchmark interest rate to either the base rate plus applicable margin (0.0% to 1.5%) or SOFR plus applicable margin (1.0% to 2.5%)[208] - No amounts were outstanding under the Revolving Credit Facility as of September 27, 2023, and the Company was in compliance with all covenants[208][209] Contractual Obligations This section outlines the company's material contractual obligations, such as lease liabilities, long-term debt, and purchase commitments - Material contractual obligations include operating and finance lease obligations, long-term debt, liabilities under the Tax Receivable Agreement, and purchase obligations[210] - The majority of purchase obligations are due within the next 12 months[212] CRITICAL ACCOUNTING POLICIES AND ESTIMATES This section confirms no significant changes to the company's critical accounting policies and estimates since the last annual report - There have been no significant changes to the Company's critical accounting policies and estimates as disclosed in its Annual Report on Form 10-K for the fiscal year ended December 28, 2022[213] Recently Issued Accounting Pronouncements This section refers to Note 2 for information on recently issued accounting pronouncements relevant to the financial statements - Refer to Note 2, Summary of Significant Accounting Policies, for information on recently issued accounting pronouncements[214] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section reports no material changes to the company's market risk exposure since the prior annual report - There have been no material changes to the Company's exposure to market risks as described in Part II, Item 7A of its Annual Report on Form 10-K for the fiscal year ended December 28, 2022[215] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 27, 2023[216] - There were no changes to internal control over financial reporting that occurred during the quarter ended September 27, 2023, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[217] PART II – OTHER INFORMATION This part contains other required information, including legal proceedings, risk factors, equity sales, defaults, and exhibits Item 1. Legal Proceedings This section refers to Note 13 for information on legal proceedings - Information required by this Item is incorporated by reference to Part I, Item 1, Note 13, Commitments and Contingencies[218] Item 1A. Risk Factors This section reports no material changes to the company's risk factors since the prior annual report - There have been no material changes to the risk factors disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2022[219] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities or use of proceeds for the period - None to report[219] Item 3. Defaults Upon Senior Securities This section reports no defaults upon senior securities for the period - None to report[219] Item 5. Other Information This section discloses a Rule 10b5-1 trading arrangement by the Chairman to sell Class A Common Stock - Daniel Meyer, Chairman of the Board of Directors, adopted a Rule 10b5-1 trading arrangement on August 8, 2023, to sell 100,000 shares of Class A Common Stock by April 30, 2024[221] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including organizational documents, agreements, and certifications - Exhibits include the Amended and Restated Certificate of Incorporation, Second Amended and Restated Bylaws, Letter Agreements, Fourth Amendment to Credit Agreement, and certifications (e.g., Section 302, Section 906)[223] SIGNATURES This section contains the official signatures of the Chief Executive Officer and Chief Financial Officer, certifying the report Report Signatures The report is officially signed by the Chief Executive Officer and Chief Financial Officer on November 3, 2023 - The report was signed by Randy Garutti, Chief Executive Officer, and Katherine I. Fogertey, Chief Financial Officer, on November 3, 2023[224]