What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-10-30 compared with 2020-07-31 · 283 added, 174 removed, 347 unchanged (57% of the section changed)

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.

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 any historical or current facts.

These statements may include words such as "aim," "anticipate," "believe," "estimate," "expect," "forecast," "future," "intend," "outlook," "potential," "project," "projection," "plan," "seek," "may," "could," "would," "will," "should," "can," "can have," "likely," the negatives thereof and other similar expressions.

All forward-looking statements are expressly qualified in their entirety by these cautionary statements.

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.

You should evaluate all forward-looking statements made in this Form 10-Q in the context of the risks and uncertainties disclosed in our Annual Report on Form 10-K for the fiscal year ended December 25, 2019 ("2019 Form 10-K") and Quarterly Report on Form 10-Q for the quarterly period ended June 24, 2020.

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.

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.

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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 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.

COVID-19 Update

We have experienced gradual improvement in the business during the second quarter of 2020, and third quarter to date.

The speed of our recovery has differed depending on the location of our Shacks, with those Shacks concentrated in urban areas, such as New York City, most impacted by the COVID-19 outbreak.

Urban Shacks represent approximately half the Shacks in the comparable base, yet accounted for approximately 60% of our same-Shack sales prior to the COVID-19 outbreak.

During the second quarter of 2020, same-Shack sales in our urban Shacks were down 57% and suburban Shacks were down 38% compared to the same period last year.

Subsequent to the second quarter of 2020, in fiscal July 2020, same-Shack sales for our urban Shacks were down 50% and suburban Shacks were down 24% compared to the same period last year.

As of July 22, approximately 95% of domestic company-operated Shacks were open.

As in-Shack ordering has increased over recent weeks, digital sales mix has continued to shift.

During the second quarter total digital sales represented 75% of total Shack sales and more than doubled compared to the first quarter of 2020.

Our native web and app channels more than tripled compared to the same period last year, and when combined, continued to be the fastest growing channels throughout Q2 and into July.

For fiscal July, digital sales represented 62% of total Shack sales, retaining over 90% of the digital sales that were achieved during fiscal May even as in-Shack sales have gradually returned.

In addition, we have welcomed over 800,000 first time purchasers via our own digital channels since early March, which is nearly four times higher than in the same period last year.

We expect digital channels to remain a significant component of sales and ongoing growth.

As of September 23, 2020, there were 298 Shacks in operation system-wide, of which 175 were domestic Company-operated Shacks, 22 were domestic licensed Shacks and 101 were international licensed Shacks.

Recent Developments and Trends

We have experienced steady recovery in the business during the third quarter of 2020, and through October 21 ("fiscal October"), all while continuing to support our Shack teams, our guests and the communities in which we operate during the COVID-19 global pandemic.

COVID-19 was officially declared a global pandemic by the World Health Organization in March 2020, and the virus has impacted all global economies, resulting in varying levels of restrictions and shutdowns implemented by national, state, and local authorities.

In response to the outbreak, in March 2020, we closed all dining rooms and temporarily shifted to a “to-go” only operating model in all of our domestic Company-operated Shacks.

With a prioritization on health and safety, we have steadily re-opened Shacks under modified operations to meet public health guidelines and evolving customer behaviors and expectations.

Nearly all domestic Company-operated Shacks were open as of the end of the third quarter 2020 and through fiscal October.

As of the end of fiscal October, approximately 80% of our domestic Company-operated Shacks had open dining rooms with varying capacity restrictions, with the majority of Shacks also utilizing outdoor patio space, whenever possible.

Same-Shack sales improved across all regions on a sequential basis, with performance driven by increases in in-Shack dining in both urban and suburban Shacks, combined with high levels of retention of digital sales since fiscal May.

Most notably, same-Shack sales have improved sequentially over every single one of the last six months.

During the third quarter of 2020, same-Shack sales were down 31.7% compared to the same period last year, with urban Shacks down 43% and suburban Shacks down 16% compared to the same period last year.

Our third quarter 2020 same-Shack sales reflect sequential improvement against the prior quarter, in which same-Shack sales were down 49.0%, with urban Shacks down 57% and suburban Shacks down 38%.

Subsequent to the third quarter of 2020, in fiscal October 2020, same-Shack sales were down 21%, with urban Shacks down 33% and suburban Shacks down 4% compared to the same period last year.

Urban Shacks represent approximately half the Shacks in the comparable base, yet accounted for approximately 60% of same-Shack sales prior to the COVID-19 outbreak.

As expected, urban locations are still acutely impacted by the pandemic and suburban locations continue to

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Form 10-Q | 29

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recover at a faster pace.

New York City, particularly Manhattan, continues to lag other regions and we expect this to be an ongoing trend until the city fully recovers.

New York City same-Shack sales have, however, shown continued sequential improvement, being down 49% in the third quarter 2020 compared to down 64% in the second quarter, and now down 40% in fiscal October, versus the same periods last year.

Manhattan will continue to have a material and outweighed impact on New York City’s results and those of the Company overall, with Manhattan still down 60% in same-Shack sales during the third quarter 2020, versus down 69% in the second quarter, and now down 51% in fiscal October.

During the third quarter of 2020, total digital sales, including orders placed on the Shake Shack app, website and third party delivery platforms, represented 60% of total Shack sales.

As in-Shack sales improved throughout the period, we also maintained a high level of digital retention, with more than 90% of digital sales retained in fiscal October compared to the high point in fiscal May.

During the third quarter and similar to second quarter trends, our native web and app channels, when combined, continued to be the fastest growing channel on a year-on-year basis, with sales more than three times the prior year levels.

In the second quarter 2020, we added over 800,000 first-time purchasers to the app and web channels between early March and the end of July.

This trend has continued through fiscal October, increasing to over 1.4 million first-time purchasers on those channels since early March.

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

Quarter Second

Quarter Third

Quarter Fourth

(dollar amounts in thousands) March 25 April 22 May 20 June 24 July 22 August 19 September 23 October 21

Average weekly sales* $ 56 $ 32 $ 50 $ 52 $ 56 $ 59 $ 61 $ 62

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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.

Our licensed business has shown gradual improvement.

Our licensed airport and stadium business, however, continues to be deeply impacted, with only nine of the 22 domestic licensed Shacks open as of the end of fiscal October.

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

First Quarter Second

Quarter Third

Quarter Fourth

(dollar amounts in millions) March 25 April 22 May 20 June 24 July 22 August 19 September 23 October 21

Weekly licensed sales* $ 4.6 $ 2.0 $ 2.4 $ 3.5 $ 4.6 $ 5.4 $ 5.7 $ 5.9

$ 4.6 $ 2.0 $ 2.4 $ 3.5 $ 4.6

Total year-over-year licensed sales growth (decline) 13 % (65) % (58) % (47) % (32) % (23) % (9) % (10) %

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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.

Given the substantial uncertainty and resulting material economic impact caused by the COVID-19 pandemic, we are not providing full guidance for the fiscal year ending December 30, 2020.

While we are confident in a full, long term recovery, the timing of that return to pre-COVID levels is highly dependent upon the return of the high traffic areas that contributed to many of the strongest Shack sales, including those most reliant on travel, schools, offices and major gatherings, as well as ultimately, fully open dining rooms.

The timing of that recovery remains unknown today.

With the colder weather and the increasing number of reported COVID cases, it is expected that sales over the coming months will be pressured.

We have the benefit of a 53rd week in this fiscal year which will be accretive on an absolute dollar basis, but the underlying business continues to face a very challenging and volatile operating environment certainly through the end of this yea r.

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Development Highlights

During the second quarter ended June 24, 2020, we opened four new domestic Shacks with new locations in Topanga, Sacramento, Charlotte and St.

With gradual sales recovery, primarily across most markets outside of New York City, we have restarted new Shack development.

We expect to open between 6 and 11 additional domestic company-operated Shacks, back weighted towards the end of this year, for a total of 15 to 20 for the full year.

However, given the ongoing uncertainties around construction, local government restrictions, and the broader operating environment during COVID-19, this number may be subject to change as target dates potentially shift.

During the second quarter ended June 24, 2020, we opened one new international licensed Shack in China at the Shanghai Hongqiao International Airport.

In fiscal June, we expanded our partnership with licensee Maxim’s Caterers Limited which targets a development agreement of 15 Shacks in South China by 2030, including locations in Shenzhen, Guangzhou and more.

Through this expanded partnership, this agreement increases development targets for mainland China to 55 Shacks by 2030, of which five Shacks are open today.

During the third quarter 2020, we opened four new domestic Company-operated Shacks, five new international licensed Shacks, and one domestic licensed Shack.

These openings were partially offset by the COVID-related closure of three international licensed Shacks and one domestic licensed Shack, including the Shack located in Terminal 3 of the LAX airport.

Location Type Opening Date

Shanghai, China — Grand Gateway International Licensed 6/28/2020

Palm Beach Gardens, FL — Gardens Mall Domestic Company-Operated 7/7/2020

Dubai, United Arab Emirates — Deira City Centre International Licensed 7/8/2020

Daegu, South Korea — Daegu Dongseongro International Licensed 7/10/2020

Singapore — Orchard Road International Licensed 8/5/2020

Beijing, China — Taikoo Li Sanlitum International Licensed 8/12/2020

Salt Lake City, UT — Salt Lake City International Airport Domestic Licensed 9/15/2020

Seattle, WA — University Village Domestic Company-Operated 9/17/2020

Roseville, CA — Galleria at Roseville Domestic Company-Operated 9/21/2020

Santa Clara, CA — Valley Fair Domestic Company-Operated 9/22/2020

We expect to reach a total of 18 to 20 new Company-operated Shacks by the end of fiscal 2020.

Furthermore, we expect to open five to six new licensed Shacks in the fourth quarter 2020, ending the year with 12 to 14, net licensed Shacks in total for fiscal 2020.

Looking to the next fiscal year, we expect to open between 35 and 40 new Company-operated Shacks in fiscal 2021, a number of which should open in the first half of fiscal 2021.

Additionally, we expect to open 15 to 20 new licensed Shacks in fiscal 2021.

Liquidity Update

In March 2020, we drew down the full $50.0 million available under the Revolving Credit Facility, of which the full amount was repaid, plus interest, in fiscal June 2020.

In fiscal April 2020, we raised $135.9 million of proceeds, net of underwriting discounts and commissions, from the sale of 3,416,070 shares of its Class A common stock in an underwritten offering, and $9.8 million of proceeds, net of commissions, from the sale of 233,467 shares of its Class A common stock pursuant to an "at-the-market" equity offering program.

See “Liquidity and Capital Resources,” herein, for more information.

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Form 10-Q | 31

Financial Highlights for the Second Quarter 2020 compared to the Second Quarter 2019:

▪ Total revenue decreased 39.9% to $91.8 million.

▪ Shack sales decreased 39.5% to $89.5 million.

▪ Same-Shack sales decreased 49.0%.

▪ Licensed revenue decreased 53.1% to $2.3 million.

▪ Shack system-wide sales decreased 45.2% to $123.8 million.

▪ Operating loss of $24.1 million compared to operating income of $11.9 million in the prior year second quarter.

▪ Shack-level operating profit*, a non-GAAP measure, decreased 94.7% to $1.9 million, or 2.2% of Shack sales.

▪ Net loss was $18.0 million and adjusted EBITDA*, a non-GAAP measure, was a loss of $8.8 million, compared to net income of $11.2 million and adjusted EBITDA of $25.9 million in the prior year second quarter.

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Financial Highlights for the Third Quarter 2020

▪ Total revenue in the third quarter 2020 decreased 17.3% to $130.4 million versus the same period last year, showing sequential improvement when compared to a decline of 39.9% in the prior quarter.

Further improvement carried through fiscal October, with a decline of 5.7% versus the same period last year.

▪ Shack sales in the third quarter 2020 decreased 17.1% to $126.3 million versus the same period last year, showing sequential improvement when compared to a decline of 39.5% in the prior quarter.

Total Shack sales improved further in fiscal October with a decline of 5.3% versus the same period last year.

▪ Same-Shack sales sequentially improved every fiscal month since fiscal April, down 31.7% in the third quarter 2020 versus the same period last year, compared to down 49.0% in the prior quarter.

In fiscal October, Same-Shack sales continued to recover, with a decline of 21% versus the same period last year.

Within same-Shack sales:

◦ Suburban same-Shack sales were down 16% during the third quarter 2020 versus the same period last year, compared to down 38% in the prior quarter, and improving to down 4% in fiscal October.

◦ Urban same-Shack sales were down 43% during the third quarter 2020 versus the same period last year, compared to down 57% in the prior quarter, and improving to down 33% in fiscal October.

▪ Licensed revenue in the third quarter decreased 23.8% to $4.1 million versus the same period last year, showing sequential improvement when compared to a decline of 53.1% in the prior quarter.

▪ Shack system-wide sales in the third quarter decreased 18.4% to $195.1 million, versus the same period last year, showing sequential improvement when compared to down 45.2% in the prior quarter, and improving to down 7.1% in fiscal October.

▪ Operating loss in the third quarter was $6.8 million, compared to operating income of $8.2 million in the same period last year, showing sequential improvement when compared to an operating loss of $24.1 million in the prior quarter.

▪ Shack-level operating profit* , a non-GAAP measure, decreased 46.9% to $18.7 million, or 14.8% of Shack sales in the third quarter 2020, versus a Shack-level operating profit of $1.9 million, or 2.2% of Shack sales in the prior quarter.

▪ Net loss was $6.1 million and adjusted EBITDA*, a non-GAAP measure, was $8.2 million in the third quarter 2020, compared to net income of $11.4 million and adjusted EBITDA of $23.3 million in the same period last year.

▪ Net loss attributable to Shake Shack Inc.

was $16.2 million and adjusted pro forma net loss*, a non-GAAP measure, was $18.3 million, or a loss of $0.45 per fully exchanged and diluted share, compared to net income attributable to Shake Shack Inc.

of $9.0 million, adjusted pro forma net income of $10.2 million, or $0.27 per fully exchanged and diluted share, in the prior year second quarter.

▪ Five system-wide Shack openings, comprised of four domestic company-operated Shacks and one licensed Shack.

▪ As of June 24, 2020, we had $190.8 million in cash and marketable securities on hand.

* 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.

FISCAL 2020 OUTLOOK

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.

was $5.6 million and adjusted pro forma net loss*, a non-GAAP measure, was $4.4 million, or a loss of $0.11 per fully exchanged and diluted share in the third quarter 2020, compared to net income attributable to Shake Shack Inc.

of $10.3 million, adjusted pro forma net income of $10.0 million, or $0.26 per fully exchanged and diluted share, in the same period last year.

▪ Six system-wide Shack openings , comprised of four domestic Company-operated Shacks and two net licensed Shacks.

▪ Cash and marketable securities on hand was $191.8 million as of September 23, 2020.

* This represents a non-GAAP measure.

Reconciliations to the most directly comparable financial measures presented in accordance with GAAP are set forth in the schedules within “Non-GAAP Financial Measures,” herein.

See “Non-GAAP Financial Measures.”

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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

(dollar amounts in thousands) June 24

The following table summarizes our results of operations for the thirteen and thirty-nine weeks ended September 23, 2020 and September 25, 2019:

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Shack sales $ 126,288 96.8 % $ 152,366 96.6 % $ 353,855 96.9 % $ 428,811 96.8 %

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INCOME (LOSS) BEFORE INCOME TAXES (6,907) (5.3) % 8,279 5.2 % (32,022) (8.8) % 26,154 5.9 %

Income tax expense (benefit) (6,092) (6.6) % 1,050 0.7 % (6,005) (2.6) % 3,097 1.1 %

Benefit from income taxes (797) (0.6) % (3,144) (2.0) % (6,802) (1.9) % (47) — %

NET INCOME (LOSS) (6,110) (4.7) % 11,423 7.2 % (25,220) (6.9) % 26,201 5.9 %

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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

(dollar amounts in thousands) June 24

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Shack sales $ 126,288 $ 152,366 $ 353,855 $ 428,811

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Percentage change compared to prior year (17.1) % (17.5) %

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

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Form 10-Q | 33

week period from May 28th through June 10th.

These decreases were partially offset by the opening of 31 new domestic company-operated Shacks between June 26, 2019 and June 24, 2020.

Same-Shack sales decreased 49.0% in the second quarter of 2020 and 31.3% in the twenty-six weeks ended June 24, 2020, driven by the adverse impact of reduced traffic resulting from the COVID-19 pandemic, with Shacks located in typically dense urban locations acutely impacted by the outbreak.

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The decrease in Shack sales for the thirteen and thirty-nine weeks ended September 23, 2020 was primarily due to lost sales related to the impact from the COVID-19 pandemic.

These decreases were partially offset by the opening of 24 new domestic Company-operated Shacks between September 25, 2019 and September 23, 2020.

Same-Shack sales improved across all regions on a sequential basis, with performance driven by increases in in-Shack dining in both urban and suburban Shacks, combined with a high retention of digital sales from the high point since fiscal May.

Most notably, same-Shack sales have improved sequentially over each of the last six months.

The decrease in same-Shack sales for the quarter was driven by a 42.0% decrease in traffic partially offset by an increase in price mix of 10.3%.

This increase in price mix was driven by a 28% increase to total average check as a result of the significant shift into digital channels over the last few months, which have historically carried a higher average check than in-Shack.

The decrease in same-Shack sales for the twenty-six weeks ended June 24, 2020 was primarily driven by 38.0% decrease in guest traffic partially offset by an increase in price mix of 6.7%.

In the second quarter of 2020, same-Shack sales improved from a 64% decline in fiscal April 2020, to a 42% decline in each of fiscal May and June 2020.

As noted herein, fiscal June Shack sales were negatively impacted by nationwide protest activity and resulting curfews.

After adjusting for the impact of the protests, same-Shack sales showed sequential improvement, with a 39% decline in fiscal June 2020.

For the purpose of calculating same-Shack sales growth, Shack sales for 95 Shacks were included in the comparable Shack base.

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.

This increase in price mix was driven by a significant increase in average check, primarily from a higher digital sales mix combined with an overall increase in check, due to higher items per order since the start of the pandemic.

For the thirty-nine weeks ended September 23, 2020, same-Shack sales were down 31.5%, primarily driven by a 39.4% decrease in guest traffic partially offset by an increase in price mix of 7.9%, also driven by a higher total average check.

For the purpose of calculating same-Shack sales growth for the thirteen and thirty-nine weeks ended September 23, 2020, Shack sales for 102 Shacks were included in the comparable Shack base.

Subsequent to the third quarter of 2020, in fiscal October 2020, same-Shack sales were down 21%, with our urban Shacks down 33% and suburban Shacks down 4% compared to the same period last year.

Licensing Revenue

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License fees are calculated as a percentage of sales and territory fees are payments for the exclusive right to develop Shacks in a specific geographic area.

Thirteen Weeks Ended Twenty-Six Weeks Ended

(dollar amounts in thousands) June 24

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Licensing revenue $ 4,113 $ 5,396 $ 11,502 $ 14,273

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Percentage change compared to prior year (23.8) % (19.4) %

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.

The decreases in licensing revenue for the thirteen and thirty-nine weeks ended September 23, 2020 were primarily due to reduced sales related to the COVID-19 pandemic, partially offset by a net increase of 20 Shacks opened between September 25, 2019 and September 23, 2020.

Our licensed business has shown improvement, with our licensed airport and stadium business continuing to be the most deeply impacted, with only nine of the 22 domestic licensed Shacks open as of fiscal October.

Food and Paper Costs

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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

(dollar amounts in thousands) June 24

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Food and paper costs $ 37,903 $ 44,159 $ 107,494 $ 125,049

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Percentage change compared to prior year (14.2) % (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.

The decreases in food and paper costs for the thirteen and thirty-nine weeks ended September 23, 2020 were primarily due to a decline in sales volume related to the COVID-19 pandemic, partially offset by the opening of 24 new domestic company-operated Shacks between September 25, 2019 and September 23, 2020.

As a percentage of Shack sales, the increase in food and paper costs for the thirteen weeks ended September 23, 2020 was primarily due to higher paper and packaging costs, with all orders packaged as 'to go' orders.

34 | Shake Shack Inc.

As a percentage of Shack sales, the increase in food and paper costs for the thirteen and twenty-six weeks ended June 24, 2020 was primarily due to sales deleverage resulting from the impact of COVID-19, significant inflation in beef prices, increased paper and packaging costs, a number of incremental payroll costs and higher delivery commissions.

For the large part of the second quarter of 2020, we experienced significant inflation in beef, with cost nearly double that of last year for most of June.

Beef prices have since returned to more normalized levels, however this increase negatively impacted Food and Paper costs by approximately $2.5 million.

Furthermore, the Company had significantly higher paper and packaging costs, with all orders packaged in sealed bags, impacting Food and Paper costs by approximately $1.4 million.

For the twenty-six weeks ended June 24, 2020, as a percentage of Shack sales, the increase in food and paper costs were due to sales deleverage resulting from the COVID-19 pandemic, lower chicken costs primarily from lapping the promotional launch of Chick'n Bites, which carried higher costs, and was partially offset by significant inflation in beef prices, higher paper and packaging costs and a non-recurring inventory adjustment, as described in the "Non-GAAP Financial Measures" section, herein.

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For the thirty-nine weeks ended September 23, 2020, as a percentage of Shack sales, the increase in food and paper costs was primarily due to higher paper and packaging costs and significant inflation in beef prices, partially offset by lower chicken costs.

For the large part of the second quarter of 2020, we experienced significant inflation in beef, with costs nearly double that of last year for most of June.

Beef prices have since returned to more normalized levels in the third quarter of 2020.

Furthermore, we had increased paper and packaging costs as a result of packaging all orders as 'to go' orders during the second and third quarter of 2020.

Labor and Related Expenses

2 unchanged sentences

Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs, size and location of the Shack and the performance of our domestic Company-operated Shacks.

Thirteen Weeks Ended Twenty-Six Weeks Ended

(dollar amounts in thousands) June 24

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Labor and related expenses $ 37,898 $ 41,601 $ 110,597 $ 118,891

2 unchanged sentences

Percentage change compared to prior year (8.9) % (7.0) %

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 to hourly employees, guaranteed bonuses for Shack managers, and payments related to scheduling changes for hourly team members as teams navigated the challenging operating conditions caused by COVID-19, during the second quarter of 2020.

As a percentage of Shack sales, the increase in labor and related expenses for the thirteen and twenty-six weeks ended June 24, 2020 was primarily due to sales deleverage associated with the impact of COVID-19 and, to a lesser extent, increases in starting wages, partially offset by the reduction of labor hours.

The decreases in labor and related expenses for the thirteen and thirty-nine weeks ended September 23, 2020 were primarily due to reductions in staffing expenses across all Shacks associated with the impact of COVID-19.

These decreases were partially offset by the opening of 24 new domestic Company-operated Shacks between September 25, 2019 and September 23, 2020, and a number of incremental payroll costs to support our Shack employees.

These incremental payroll costs were related to a temporary 10% premium pay raise to hourly employees through the end of August, guaranteed bonuses for Shack teams, and payments related to scheduling changes for hourly team members as teams navigated the challenging operating conditions caused by COVID-19.

This investment in our teams had an incremental $2.1 million impact on our results of operations during the third quarter of 2020, and was in addition to the $2.4 million recognized during the second quarter of 2020.

As a percentage of Shack sales, the increase in labor and related expenses for the thirteen and thirty-nine weeks ended September 23, 2020 was primarily due to sales deleverage associated with the impact of COVID-19 and, to a lesser extent, increases in starting wages, partially offset by the reduction of labor hours.

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 and property insurance.

Thirteen Weeks Ended Twenty-Six Weeks Ended

(dollar amounts in thousands) June 24

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Other operating expenses $ 18,743 $ 18,947 $ 50,826 $ 51,270

2 unchanged sentences

Percentage change compared to prior year (1.1) % (0.9) %

The decreases in other operating expenses for the thirteen and twenty-six weeks ended June 24, 2020 were primarily due to the reduction in expenses across all Shacks associated with the impact of COVID-19, partially offset by the opening of 31 new domestic company-operated Shacks between June 26, 2019 and June 24, 2020, and higher delivery expense associated with increased penetration of delivery sales during the quarter.

The decrease in other operating expenses for the thirteen and thirty-nine weeks ended September 23, 2020 was primarily due to the reduction in expenses across all Shacks associated with the impact of COVID-19, including reduced maintenance expenses within the Shacks which is not expected to continue as we enter the fourth quarter, partially offset by higher delivery expense as a result of digital growth, as well as the opening of 24 new domestic Company-operated Shacks between September 25, 2019 and September 23, 2020.

Shake Shack Inc.

Form 10-Q | 35

As a percentage of Shack sales, the increase in other operating expenses for the thirteen and twenty-six weeks ended June 24, 2020 was primarily due to higher delivery commission associated with increased delivery sales and sales deleverage associated with the impact of COVID-19, as described herein.

Table of Content

As a percentage of Shack sales, the increase in other operating expenses for the thirteen and thirty-nine weeks ended September 23, 2020 was primarily due to higher delivery commissions as a result of digital growth and sales deleverage associated with the impact of COVID-19.

For the thirteen weeks ended September 23, 2020, the increase was also partially offset by lower maintenance expenses.

Occupancy and Related Expenses

Occupancy and related expenses consist of Shack-level occupancy expenses (including rent, common area expenses and certain local taxes), and exclude occupancy expenses associated with unopened Shacks, which are recorded separately in pre-opening costs.

Thirteen Weeks Ended Twenty-Six Weeks Ended

(dollar amounts in thousands) June 24

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Occupancy and related expenses $ 13,093 $ 12,537 $ 37,974 $ 35,309

2 unchanged sentences

Percentage change compared to prior year 4.4 % 7.5 %

This increases in occupancy and related expenses for the thirteen and twenty-six weeks ended June 24, 2020 were primarily due to the opening of 31 new domestic company-operated Shacks between June 26, 2019 and June 24, 2020.

As a percentage of Shack sales, the increase in occupancy and related expenses for the thirteen and twenty-six weeks ended June 24, 2020 was primarily due to sales deleverage associated with the impact of COVID-19.

The increase in occupancy and related expenses for the thirteen and thirty-nine weeks ended September 23, 2020 was primarily due to the opening of 24 new domestic Company-operated Shacks between September 25, 2019 and September 23, 2020, partially offset by lower variable rent expense associated with lower revenue.

As a percentage of Shack sales, the increase in occupancy and related expenses for the thirteen and thirty-nine weeks ended September 23, 2020 was primarily due to sales deleverage associated with the impact of COVID-19, partially offset by lower variable rent expense associated with lower revenue.

General and Administrative Expenses

General and administrative expenses consist of costs associated with corporate and administrative functions that support Shack development and operations, as well as equity-based compensation expense.

Thirteen Weeks Ended Twenty-Six Weeks Ended

(dollar amounts in thousands) June 24

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

General and administrative expenses $ 14,962 $ 17,090 $ 45,170 $ 46,420

2 unchanged sentences

Percentage change compared to prior year (12.5) % (2.7) %

The decrease in general and administrative expenses for the thirteen and twenty-six weeks ended June 24, 2020 were primarily due to reduced staffing levels, and cuts across the majority of discretionary spend categories, partially offset by increased technology expense to support further digital enhancements, as well as higher professional fees of approximately $0.3 million related to the April equity offering and the implementation of the CARES Act, with additional costs expected in the third quarter of 2020.

As a percentage of total revenue, the increases in general and administrative expenses for the thirteen and twenty-six weeks ended June 24, 2020 were primarily due to sales deleverage associated with the impact of COVID-19.

The decreases in general and administrative expenses for the thirteen and thirty-nine weeks ended September 23, 2020 was primarily due to disciplined cost reduction across the majority of discretionary spend categories and reduced home office compensation expense, partially offset by increased expenses across marketing and technology to support digital initiatives.

As a percentage of total revenue, the increase in general and administrative expenses for the thirteen and thirty-nine weeks ended September 23, 2020 was primarily due to sales deleverage associated with the impact of COVID-19.

Depreciation Expense

Depreciation expense consists of the depreciation of fixed assets, including leasehold improvements and equipment.

Thirteen Weeks Ended Twenty-Six Weeks Ended

(dollar amounts in thousands) June 24

36 | Shake Shack Inc.

Table of Content

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Depreciation expense $ 12,376 $ 10,474 $ 36,233 $ 29,239

2 unchanged sentences

Percentage change compared to prior year 18.2 % 23.9 %

34 | Shake Shack Inc.

The increases in depreciation expense for the thirteen and twenty-six weeks ended June 24, 2020 were primarily due to incremental depreciation of capital expenditures related to the opening of 31 new domestic company-operated Shacks between June 26, 2019 and June 24, 2020.

As a percentage of total revenue, the increases in depreciation expense for the thirteen and twenty-six weeks ended June 24, 2020 were primarily due to sales deleverage associated with the impact of COVID-19.

The increase in depreciation expense for the thirteen and thirty-nine weeks ended September 23, 2020 was primarily due to incremental depreciation of capital expenditures related to the opening of 24 new domestic Company-operated Shacks between September 25, 2019 and September 23, 2020.

As a percentage of total revenue, the increase in depreciation expense for the thirteen and thirty-nine weeks ended September 23, 2020 was primarily due to sales deleverage associated with the impact of COVID-19.

Pre-Opening Costs

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Additionally, domestic Company-operated Shack openings in new geographic market areas may 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 incur lower travel and lodging costs for our training team.

Thirteen Weeks Ended Twenty-Six Weeks Ended

(dollar amounts in thousands) June 24

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Pre-opening costs $ 1,822 $ 4,487 $ 5,799 $ 10,678

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Percentage change compared to prior year (59.4) % (45.7) %

The decreases in pre-opening costs for the thirteen and twenty-six weeks ended June 24, 2020 were due to the lower number of new domestic company-operated Shacks opened during the current period compared to the prior-year period.

Impairment and Loss on Disposal of Property and Equipment

The decrease in pre-opening costs for the thirteen and thirty-nine weeks ended September 23, 2020 was due to the lower number of new domestic Company-operated Shacks opened during the current period compared to the prior-year period, as well as those expected to open.

Impairment and Loss on Disposal of Assets

Impairment and loss on disposal of assets include impairment charges related to our long-lived assets, which includes property and equipment, as well as operating and finance lease assets.

Additionally, impairment and loss on disposal of assets includes 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 Twenty-Six Weeks Ended

(dollar amounts in thousands) June 24

Impairment and loss on disposal of property and equipment $ 434 $ 377 $ 2,522 $ 728

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Impairment and loss on disposal of assets $ 402 $ 303 $ 2,924 $ 1,031

Percentage of total revenue 0.3 % 0.2 % 0.8 % 0.2 %

1 unchanged sentence

Percentage change compared to prior year 32.7 % 183.6 %

The increase in impairment and loss on disposal of property and equipment for the thirteen and twenty-six weeks ended June 24, 2020 was primarily due to the number of Shacks maturing in our base and renovations.

For the twenty-six weeks ended June 24, 2020, the increase was also due to an asset impairment charge of $1.1 million in the current period.

Other Income, Net

Other income, net consists of interest income, dividend income and net unrealized and realized gains and losses from the sale of marketable securities.

The increase in impairment and loss on disposal of assets for the thirteen and thirty-nine weeks ended September 23, 2020 was primarily due to the number of Shacks maturing in our base and renovations.

For the thirty-nine weeks ended September 23, 2020, the increase was also due to an asset impairment charge of $1.1 million recorded during the first quarter of 2020.

Shake Shack Inc.

Form 10-Q | 37

Thirteen Weeks Ended Twenty-Six Weeks Ended

(dollar amounts in thousands) June 24

Table of Content

Other Income, Net

Other income, net consists of interest income, dividend income and net unrealized and realized gains and losses from the sale of marketable securities.

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Other income, net $ 34 $ 248 $ 335 $ 1,259

Percentage of total revenue — % 0.2 % 0.1 % 0.3 %

1 unchanged sentence

Percentage change compared to prior year (86.3) % (73.4) %

The decrease in other income, net for the thirteen weeks ended June 24, 2020 was primarily due to a decrease in dividend income partially offset by unrealized gains related to our investments in marketable securities.

For the twenty-six weeks ended June 24, 2020, the decrease was primarily due to a decrease in dividend income and unrealized losses related to our investments in marketable securities.

The decrease in other income, net for the thirteen weeks ended September 23, 2020 was primarily due to a decrease in dividend income.

For the thirty-nine weeks ended September 23, 2020, the decrease was primarily due to a decrease in dividend income and unrealized losses related to our investments in marketable securities.

Interest Expense

Interest expense primarily consists of interest on the current portion of our liabilities under the Tax Receivable Agreement, imputed interest related to our financing equipment leases, amortization of deferred financing costs, imputed interest on deferred compensation, imputed interest on our deemed landlord financing liability, and interest and fees on our Revolving Credit Facility.

Thirteen Weeks Ended Twenty-Six Weeks Ended

(dollar amounts in thousands) June 24

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Interest expense $ (143) $ (133) $ (697) $ (302)

2 unchanged sentences

Percentage change compared to prior year 7.5 % 130.8 %

The increases in interest expense for the thirteen and twenty-six weeks ended June 24, 2020 was primarily due to an increase in interest and fees associated with our Revolving Credit Facility in the current year.

Income Tax Expense

The increases in interest expense for the thirteen and thirty-nine weeks ended September 23, 2020 was primarily due to an increase in interest and fees associated with our Revolving Credit Facility in the current year.

Income Tax Benefit

We are the sole managing member of SSE Holdings, which is treated as a partnership for U.S.

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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.

Thirteen Weeks Ended Twenty-Six Weeks Ended

(dollar amounts in thousands) June 24

Income tax expense $ (6,092) $ 1,050 $ (6,005) $ 3,097

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Income tax benefit $ (797) $ (3,144) $ (6,802) $ (47)

Percentage of total revenue (0.6) % (2.0) % (1.9) % — %

1 unchanged sentence

Percentage change compared to prior year (74.7) % 14,372.3 %

Our effective income tax rates for the thirteen weeks ended June 24, 2020 and June 26, 2019 were 25.3% and 8.6%, respectively.

Our effective income tax rates for the thirteen weeks ended September 23, 2020 and September 25, 2019 were 11.5% and (38.0)%, respectively.

The increase was primarily driven by lower pre-tax book income resulting in a loss, causing the tax credits to have an increasing effect on the tax rate, as well as the recognition of a valuation allowance against foreign tax credits that are not expected to be realized before the expiration of the carryforward period.

Additionally, an increase in our ownership interest in SSE Holdings increases our share of the taxable income (loss) of SSE Holdings.

Our weighted-average ownership interest in SSE Holdings was 92.3% and 81.0% for the thirteen weeks ended June 24, 2020 and June 26, 2019, respectively.

Our effective income tax rates for the twenty-six weeks ended June 24, 2020 and June 26, 2019 were 23.9% and 17.3%, respectively.

Our weighted-average ownership interest in SSE Holdings was 92.5% and 85.6% for the thirteen weeks ended September 23, 2020 and September 25, 2019, respectively.

38 | Shake Shack Inc.

expected to be realized before the expiration of the carryforward period.

These were partially offset by a reduction in the tax effect of changes related to the adoption of new accounting standards, for which there were none during the twenty-six weeks ended June 24, 2020.

Table of Content

Our effective income tax rates for the thirty-nine weeks ended September 23, 2020 and September 25, 2019 were 21.2% and (0.2)%, respectively.

These were partially offset by a reduction in the tax effect of changes related to the adoption of new accounting standards, for which there were none during the thirty-nine weeks ended September 23, 2020.

Additionally, as noted above, an increase in our ownership interest in SSE Holdings increases our share of the taxable income (loss) of SSE Holdings.

Our weighted-average ownership interest in SSE Holdings was 92.0% and 80.3% for the twenty-six weeks ended June 24, 2020 and June 26, 2019, respectively.

Our weighted-average ownership interest in SSE Holdings was 92.1% and 82.1% for the thirty-nine weeks ended September 23, 2020 and September 25, 2019, respectively.

Net Income (Loss) Attributable to Non-Controlling Interests

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and the non-controlling interest holders.

Thirteen Weeks Ended Twenty-Six Weeks Ended

(dollar amounts in thousands) June 24

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Net income (loss) attributable to non-controlling interests $ (551) $ 1,079 $ (2,490) $ 4,281

2 unchanged sentences

Percentage change compared to prior year (151.1) % (158.2) %

The decreases in net income (loss) attributable to non-controlling interests for the thirteen and twenty-six weeks ended June 24, 2020 were primarily due to a decline in net results causing a loss for the period, and a decrease in the non-controlling interest holders' weighted average ownership, which was 7.7% and 19.0% for the thirteen weeks ended June 24, 2020 and June 26, 2019, respectively, and 8.0% and 19.7% for the twenty-six weeks ended June 24, 2020 and June 26, 2019, respectively.

The decreases in net income (loss) attributable to non-controlling interests for the thirteen and thirty-nine weeks ended September 23, 2020 were primarily due to a decline in net results causing a loss for the period, and a decrease in the non-controlling interest holders' weighted average ownership, which was 7.5% and 14.4% for the thirteen weeks ended September 23, 2020 and September 25, 2019, respectively, and 7.9% and 17.9% for the thirty-nine weeks ended September 23, 2020 and September 25, 2019, respectively.

NON-GAAP FINANCIAL MEASURES

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Form 10-Q | 39

Table of Content

Shack-Level Operating Profit

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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

(dollar amounts in thousands) June 24

A reconciliation of Shack-level operating profit to operating income (loss), the most directly comparable GAAP financial measure, is as follows.

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(dollar amounts in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Operating income (loss) $ (6,798) $ 8,164 $ (31,660) $ 25,197

3 unchanged sentences

Pre-opening costs 1,822 4,487 5,799 10,678

Loss on disposal of property and equipment 434 377 2,522 728

Impairment and loss on disposal of assets 402 303 2,924 1,031

Shack-level operating profit $ 18,651 $ 35,122 $ 46,964 $ 98,292

4 unchanged sentences

40 | Shake Shack Inc.

Table of Content

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 lease cost, losses on the disposal of property and equipment, amortization of cloud-based software implementation costs, 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.

EBITDA is defined as net income (loss) before interest expense (net of interest income), income tax expense (benefit) and depreciation and amortization expense.

Adjusted EBITDA is defined as EBITDA (as defined above) excluding equity-based compensation expense, deferred lease costs, impairment and loss on the disposal of assets, amortization of cloud-based software implementation costs, 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

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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 24

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(in thousands) September 23

2020 September 25

2019 September 23

2020 September 25

Net income (loss) $ (6,110) $ 11,423 $ (25,220) $ 26,201

1 unchanged sentence

Interest expense, net 143 133 697 302

Income tax expense (6,092) 1,050 (6,005) 3,097

Income tax benefit (797) (3,144) (6,802) (47)

EBITDA 5,612 18,886 4,908 55,695

1 unchanged sentence

Amortization of cloud-based software implementation costs (1)

458 107 1,086 107

Deferred lease costs (2)

258 743 407 2,043

Impairment and loss on disposal of property and equipment (3)

Impairment and loss on disposal of assets (3)

402 303 2,924 1,031

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Form 10-Q | 41

Table of Content

(1) Represents amortization of capitalized implementation costs related to cloud-based software arrangements that are included within General and Administrative expenses.

(2) Reflects the extent to which lease expense is greater than or less than contractual fixed base rent.

(3) For the twenty-six weeks ended June 24, 2020, this amount includes a non-cash impairment charge of $1.1 million related to one Shack.

(3) For the thirty-nine weeks ended September 23, 2020, this amount includes a non-cash impairment charge of $1.1 million related to one Shack.

(4) Represents fees paid in connection with the search and hiring of certain executive and key management positions.

(5) Represents consulting and advisory fees related to the our enterprise-wide system upgrade initiative called Project Concrete.

(5) Represents consulting and advisory fees related to our enterprise-wide system upgrade initiative called Project Concrete.

(6) Represents costs associated with establishing our first international office in Hong Kong.

(7) Represents incremental expenses incurred related to an inventory adjustment and certain employee-related expenses.

(8) Calculated as a percentage of total revenue, which was $91,786 and $234,956 for the thirteen and twenty-six weeks ended June 24, 2020, respectively, and $152,713 and $285,322 for the thirteen and twenty-six weeks ended June 26, 2019, respectively.

(8) Calculated as a percentage of total revenue, which was $130,401 and $365,357 for the thirteen and thirty-nine weeks ended September 23, 2020, respectively, and $157,762 and $443,084 for the thirteen and thirty-nine weeks ended September 25, 2019, respectively.

Adjusted Pro Forma Net Income (Loss) and Adjusted Pro Forma Earnings (Loss) Per Fully Exchanged and Diluted Share

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42 | Shake Shack Inc.

Thirteen Weeks Ended Twenty-Six Weeks Ended

(in thousands, except per share amounts) June 24

Table of Content

Thirteen Weeks Ended Thirty-Nine Weeks Ended

(in thousands, except per share amounts) September 23

2020 September 25

2019 September 23

2020 September 25

Net income (loss) attributable to Shake Shack Inc.

8 unchanged sentences

Tax effect of change in tax basis related to the adoption of new accounting standards (6)

Income tax expense (7)

Income tax (expense) benefit (7)

1,608 (2,765) 3,141 (4,478)

5 unchanged sentences

Adjusted pro forma earnings (loss) per fully exchanged share—diluted $ (0.11) $ 0.26 $ (0.55) $ 0.66

Thirteen Weeks Ended Twenty-Six Weeks Ended

Thirteen Weeks Ended Thirty-Nine Weeks Ended

2020 September 25

2019 September 23

2020 September 25

Earnings (loss) per share of Class A common stock - diluted $ (0.15) $ 0.31 $ (0.62) $ 0.70

9 unchanged sentences

(5) Represents incremental expenses incurred related to an inventory adjustment and certain employee-related expenses.

(6) Represents tax effect of change in tax basis related to the adoption of the new lease accounting standard for the thirteen and twenty-six weeks ended June 26, 2019.

(7) Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 24.1% and 30.2% for the thirteen and twenty-six weeks ended June 24, 2020, respectively, and 19.3% and 19.4% for the thirteen and twenty-six weeks ended June 26, 2019, respectively.

Additionally, the thirteen and twenty-six weeks ended June 24, 2020 includes the establishment of a valuation allowance.

(6) Represents tax effect of change in tax basis related to the adoption of the new lease accounting standard for the thirteen and thirty-nine weeks ended September 25, 2019.

(7) Represents the tax effect of the aforementioned adjustments and pro forma adjustments to reflect corporate income taxes at assumed effective tax rates of 35.3% and 31.3% for the thirteen and thirty-nine weeks ended September 23, 2020, respectively, and (3.9)% and 11.5% for the thirteen and thirty-nine weeks ended September 25, 2019, respectively.

(8) Represents the per share impact of non-GAAP adjustments for each period.

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Form 10-Q | 43

Table of Content

LIQUIDITY AND CAPITAL RESOURCES

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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 June 24, 2020, we maintained a cash and cash equivalents balance of $174.0 million and a short-term investments balance of $16.8 million.

As of September 23, 2020, we maintained a cash and cash equivalents balance of $174.9 million and a short-term investments balance of $16.9 million within Marketable securities.

On June 8, 2018, we filed a Registration Statement on Form S-3 with the SEC which permits us to issue a combination of securities described in the prospectus in one or more offerings from time to time.

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In addition, we are obligated to make payments to certain members of SSE Holdings under the Tax Receivable Agreement.

As of June 24, 2020, such obligations totaled $228.1 million.

As of September 23, 2020, such obligations totaled $228.2 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.

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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.

COVID-19 Pandemic

In response to the uncertain market conditions resulting from the COVID-19 pandemic, we have taken the following actions.

COVID-19 Update

In response to the uncertain market conditions resulting from the COVID-19 pandemic, we have taken the following actions in the thirty-nine weeks ended September 23, 2020.

• On April 17, 2020, we announced an ATM Program, under which we may offer and sell shares of our Class A common stock having an aggregate price of up to $75.0 million from time to time.

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We repaid this amount in full, plus interest, in June 2020.

As of June 24, 2020, we were in compliance with all covenants.

As of September 23, 2020, we were in compliance with all covenants.

We believe our existing cash and marketable securities balances, combined with the actions we have taken in response to COVID-19, will be sufficient to fund our operating and finance lease obligations, capital expenditures, tax receivable agreement obligations and working capital needs for at least the next 12 months and the foreseeable future.

44 | Shake Shack Inc.

Table of Content

Summary of Cash Flows

The following table presents a summary of our cash flows from operating, investing and financing activities.

Twenty-Six Weeks Ended

(in thousands) June 24

Thirty-Nine Weeks Ended

(in thousands) September 23

2020 September 25

Net cash provided by operating activities $ 28,498 $ 73,043

Net cash used in investing activities (27,316) (54,874)

Net cash provided by (used in) financing activities 136,797 (1,195)

Net cash provided by financing activities 136,602 1,586

Increase in cash 137,784 19,755

2 unchanged sentences

Operating Activities

For the twenty-six weeks ended June 24, 2020 net cash provided by operating activities was $18.0 million compared to $35.9 million for the twenty-six weeks ended June 26, 2019, a decrease of $17.9 million.

This decrease was primarily driven by a decrease in Shack-level operating profit due to the impact of COVID-19, as well as higher general and administrative costs including higher annual bonus payments.

For the thirty-nine weeks ended September 23, 2020 net cash provided by operating activities was $28.5 million compared to $73.0 million for the thirty-nine weeks ended September 25, 2019, a decrease of $44.5 million.

This decrease was primarily driven by a decrease in Shack-level operating profit due to the impact of COVID-19, partially offset by lower pre-opening costs.

Investing Activities

For the twenty-six weeks ended June 24, 2020 net cash used in investing activities was $17.9 million compared to $29.7 million used in investing activities for the twenty-six weeks ended June 26, 2019, a decrease of $11.8 million.

For the thirty-nine weeks ended September 23, 2020 net cash used in investing activities was $27.3 million compared to $54.9 million for the thirty-nine weeks ended September 25, 2019, a decrease of $27.6 million.

This decrease was primarily due to a decrease of $33.9 million in capital expenditures, as well as a decrease of $7.0 million of proceeds from sales of marketable securities.

Financing Activities

For the twenty-six weeks ended June 24, 2020 net cash provided by financing activities was $136.8 million compared to net cash used in financing activities of $1.2 million for the twenty-six weeks ended June 26, 2019, an increase of $138.0 million.

This increase is primarily due to $145.7 million in net cash proceeds from the issuance of Class A common stock, partially offset by increased payments made under the Tax Receivable Agreement and distributions to our non-controlling interest holders.

For the thirty-nine weeks ended September 23, 2020 net cash provided by financing activities was $136.6 million compared to $1.6 million for the thirty-nine weeks ended September 25, 2019, an increase of $135.0 million.

This increase was primarily due to $145.0 million in net cash proceeds from the issuance of Class A common stock, partially offset by increased payments made under the Tax Receivable Agreement and distributions to our non-controlling interest holders.

Revolving Credit Facility

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and prohibits us, with certain exceptions, from engaging in any line of business not related to our current line of business.

As of June 24, 2020, we were in compliance with all covenants.

As of September 23, 2020, we were in compliance with all covenants.

Shake Shack Inc.

Form 10-Q | 45

Table of Content

In March 2020, we drew down the full $50.0 million available under the Revolving Credit Facility to enhance liquidity and financial flexibility given the uncertain market conditions created by the COVID-19 pandemic.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis