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July 31, 2020, 4:11 p.m. EDT

10-Q: SHAKE SHACK INC.

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(EDGAR Online via COMTEX) -- 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 2020, our expected operating performance for fiscal 2020, expected Shack construction and openings, expected same-Shack sales growth and trends in our business, including statements relating to the effects of COVID-19 and our mitigation efforts. 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 25, 2019 ("2019 Form 10-K") and Part II, Item 1A of this Quarterly Report on Form 10-Q. The following discussion should be read in conjunction with our 2019 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. OVERVIEW

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 June 24, 2020, there were 292 Shacks in operation system-wide, of which 171 were domestic company-operated Shacks, 22 were domestic licensed Shacks and 99 were international licensed Shacks.







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The following table presents fiscal monthly information about our current trends in Shack sales.







                                           First Quarter                         Second Quarter                                               Third Quarter
        (dollar amounts in thousands)         March 25            April 22           May 20            June 24           July 22
        Average weekly sales*             $        56            $     32          $     50          $     52          $     56
        Total year-over-year sales growth
        (decline)                                 (11)   %            (56) %            (32) %            (32) %            (23) %
        Same-Shack sales %                        (29)   %            (64) %            (42) %            (42) %            (39) %
        


*Average weekly sales is calculated by dividing total Shack sales by the number of operating weeks for all Shacks in operation during the period. For Shacks that are not open for the entire period, fractional adjustments are made to the number of operating weeks open such that it corresponds to the period of associated sales.

Our licensed business has shown gradual improvement across all regions as approximately 80% of licensed Shacks have reopened. All Shacks in Hong Kong, mainland China, Japan and Korea (with the exception of the Incheon Airport Shack) are now open although in most cases with limited hours and smaller capacity dining rooms. In the Middle East, the majority of Shacks have re-opened primarily for take-out and delivery with dining rooms slowly starting to open across the region. Approximately half the Shacks in the United Kingdom are fully reopened. Nearly all domestic stadium and event venues remain closed. Half of all airport locations are open but operating at severely reduced sales levels while air travel remains at a fraction of its volume prior to the COVID-19 outbreak. As an example of the dynamic and quickly evolving environment, the Shack located in Terminal 3 of the LAX airport will not reopen, as the airport has chosen to take this time to tear down and replace the terminal entirely.

The following table presents fiscal monthly information about our licensed sales trends.







                                            First Quarter                        Second Quarter                                              Third Quarter
        (dollar amounts in millions)          March 25            April 22           May 20           June 24           July 22
        Weekly licensed sales(1)           $        4.6          $    2.0          $   2.4          $    3.5          $    4.6
        Total year-over-year licensed                13  %            (65) %           (58) %            (47) %            (32) %
        sales growth (decline)
        Number of open licensed Shacks               96                56               59                91                98
        


* Weekly licensed sales is an operating measure and consists of sales from domestic licensed Shacks and international licensed Shacks. We do not recognize the sales from licensed Shacks as revenue. Of these amounts, revenue is limited to licensing revenue based on a percentage of sales from domestic and international licensed Shacks, as well as certain up-front fees such as territory fees and opening fees. Development Highlights

Shake Shack Inc. [[Image Removed: shak-20200624_g2.jpg]] Form 10-Q | 29

* Shack-level operating profit, adjusted EBITDA and adjusted pro forma net income (loss) are non-GAAP measures. Reconciliations of Shack-level operating profit to operating income (loss) and adjusted EBITDA to net income (loss), the most directly comparable financial measures presented in accordance with GAAP, are set forth in the schedules within "Non-GAAP Financial Measures," herein.

Given the substantial uncertainty and subsequent material economic impact caused by the COVID-19 pandemic, we have withdrawn our guidance for the fiscal year ending December 30, 2020.







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        RESULTS OF OPERATIONS
        The following table summarizes our results of operations for the thirteen and
        twenty-six weeks ended June 24, 2020 and June 26, 2019:
                                                                                                                               Thirteen Weeks Ended                                                                                   Twenty-Six Weeks Ended
                                                                                                                                            June 24                                                         June 26                                  June 24             June 26
        (dollar amounts in thousands)                                                                                                          2020                                                            2019                                     2020                2019
        Shack sales                                                                                           $  89,519         97.5  %             $ 147,876         96.8  %             $ 227,567         96.9  %             $ 276,445      96.9  %
        Licensing revenue                                                                                         2,267          2.5  %                 4,837          3.2  %                 7,389          3.1  %                 8,877       3.1  %
        TOTAL REVENUE                                                                                            91,786        100.0  %               152,713        100.0  %               234,956        100.0  %               285,322     100.0  %
        Shack-level operating expenses(1):
                                 Food and paper costs                                               30,027         33.5  %                42,899         29.0  %                69,591         30.6  %                80,890         29.3  %
                                 Labor and related expenses                                         30,933         34.6  %                40,197         27.2  %                72,699         31.9  %                77,290         28.0  %
                                 Other operating expenses                                           14,304         16.0  %                16,755         11.3  %                32,083         14.1  %                32,323         11.7  %
                                 Occupancy and related expenses                                     12,323         13.8  %                11,873          8.0  %                24,881         10.9  %                22,772          8.2  %
        General and administrative expenses                                                                      14,017         15.3  %                15,393         10.1  %                30,208         12.9  %                29,330      10.3  %
        Depreciation expense                                                                                     12,089         13.2  %                 9,799          6.4  %                23,857         10.2  %                18,765       6.6  %
        Pre-opening costs                                                                                         1,734          1.9  %                 3,549          2.3  %                 3,977          1.7  %                 6,191       2.2  %
        Impairment and loss on disposal of assets                                                                   434          0.5  %                   377          0.2  %                 2,522          1.1  %                   728       0.3  %
        TOTAL EXPENSES                                                                                          115,861        126.2  %               140,842         92.2  %               259,818        110.6  %               268,289      94.0  %
        OPERATING INCOME (LOSS)                                                                                 (24,075)       (26.2) %                11,871          7.8  %               (24,862)       (10.6) %                17,033       6.0  %
        Other income, net                                                                                           394          0.4  %                   447          0.3  %                   301          0.1  %                 1,011       0.4  %
        Interest expense                                                                                           (442)        (0.5) %                   (97)        (0.1) %                  (554)        (0.2) %                  (169)     (0.1) %
        INCOME (LOSS) BEFORE INCOME TAXES                                                                       (24,123)       (26.3) %                12,221          8.0  %               (25,115)       (10.7) %                17,875       6.3  %
        Income tax expense (benefit)                                                                             (6,092)        (6.6) %                 1,050          0.7  %                (6,005)        (2.6) %                 3,097       1.1  %
        NET INCOME (LOSS)                                                                                       (18,031)       (19.6) %                11,171          7.3  %               (19,110)        (8.1) %                14,778       5.2  %
        Less: net income (loss) attributable to non-controlling interests                                        (1,820)        (2.0) %                 2,141          1.4  %                (1,939)        (0.8) %                 3,202       1.1  %
        NET INCOME (LOSS) ATTRIBUTABLE TO SHAKE SHACK INC.                                                    $ (16,211)       (17.7) %             $   9,030          5.9  %             $ (17,171)        (7.3) %             $  11,576       4.1  %
        (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 months or longer.
                                                                                                Thirteen Weeks Ended                                                   Twenty-Six Weeks Ended
                                                                                                             June 24                June 26                    June 24                June 26
        (dollar amounts in thousands)                                                                           2020                   2019                       2020                   2019
        Shack sales                                                                                      $ 89,519              $ 147,876                 $  227,567              $ 276,445
                       Percentage of total revenue                                               97.5  %               96.8  %                   96.9  %                 96.9  %
                       Dollar change compared to prior year                                 $ (58,357)                                      $ (48,878)
        


The decrease in Shack sales for the thirteen and twenty-six weeks ended June 24, 2020 was primarily due to lost sales related to the impact from the COVID-19 pandemic, Furthermore, Shack sales were negatively impacted by an estimated $3.2 million due to nationwide protests and resulting curfews causing temporary Shack closures and reduced operating hours during the two Shake Shack Inc. [[Image Removed: shak-20200624_g2.jpg]] Form 10-Q | 31

Average weekly sales for domestic company-operated Shacks decreased to $45,000 for the second quarter of 2020 compared to $85,000 for the same quarter last year, due to the impact of COVID-19. Average weekly sales have, however, experienced steady increases from $32,000 in fiscal April 2020, to $52,000 in fiscal June 2020 and $56,000 for fiscal July, representing an increase of 2.3 times the low point of the COVID-19 outbreak. Licensing Revenue







                                                                                            Thirteen Weeks Ended                                              Twenty-Six Weeks Ended
                                                                                                         June 24            June 26                    June 24               June 26
        (dollar amounts in thousands)                                                                       2020               2019                       2020                  2019
        Licensing revenue                                                                             $ 2,267            $ 4,837                $    7,389                $ 8,877
                       Percentage of total revenue                                             2.5  %             3.2  %                 3.1  %                    3.1  %
                       Dollar change compared to prior year                               $ (2,570)                                 $ (1,488)
                       Percentage change compared to prior year                              (53.1) %                                  (16.8) %
        The decreases in licensing revenue for the thirteen and twenty-six weeks ended
        June 24, 2020 were primarily due to lost sales related to the COVID-19 pandemic,
        partially offset by a net increase of 24 Shacks opened between June 26, 2019 and
        June 24, 2020. Licensing revenue showed gradual improvement, with a 65% decline
        in fiscal April 2020, a 47% decline in fiscal June 2020, and a 32% decline in
        fiscal July 2020.
        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, changing with sales volume, and are impacted by menu mix and
        fluctuations in commodity costs, as well as geographic scale and proximity.
                                                                                               Thirteen Weeks Ended                                                  Twenty-Six Weeks Ended
                                                                                                            June 24               June 26                     June 24               June 26
        (dollar amounts in thousands)                                                                          2020                  2019                        2020                  2019
        Food and paper costs                                                                            $ 30,027              $ 42,899                 $    69,591              $ 80,890
                       Percentage of Shack sales                                                33.5  %               29.0  %                  30.6  %                  29.3  %
                       Dollar change compared to prior year                                $ (12,872)                                     $ (11,299)
                       Percentage change compared to prior year                                (30.0) %                                       (14.0) %
        The decreases in food and paper costs for the second quarter of June 24, 2020
        were primarily due to a decline in sales volume related to the COVID-19
        pandemic, partially offset by the opening of 31 new domestic company-operated
        Shacks between June 26, 2019 and June 24, 2020.
        32 | Shake Shack Inc. [[Image Removed: shak-20200624_g2.jpg]] Form 10-Q
        --------------------------------------------------------------------------------
        








                                                                                              Thirteen Weeks Ended                                                 Twenty-Six Weeks Ended
                                                                                                           June 24               June 26                    June 24               June 26
        (dollar amounts in thousands)                                                                         2020                  2019                       2020                  2019
        Labor and related expenses                                                                     $ 30,933              $ 40,197                $    72,699              $ 77,290
                       Percentage of Shack sales                                               34.6  %               27.2  %                 31.9  %                  28.0  %
                       Dollar change compared to prior year                                $ (9,264)                                     $ (4,591)
                       Percentage change compared to prior year                               (23.0) %                                       (5.9) %
        The decreases in labor and related expenses for the thirteen and twenty-six
        weeks ended June 24, 2020 were primarily due to significant reductions in
        staffing expenses across all Shacks associated with the impact of COVID-19.
        These decreases were partially offset by the opening of 31 new domestic
        company-operated Shacks between June 26, 2019 and June 24, 2020, and incremental
        payroll costs of $2.4 million as a result of a temporary 10% premium pay raise
        . . .
        


Jul 31, 2020

COMTEX_368705904/2041/2020-07-31T16:11:12

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